Bookkeeping practices ensure every financial transaction within a business enterprise is recorded, classified, and organized. While it differs from accounting, there is a great overlap as the books maintained by a bookkeeper are used by accountants to formulate accounting statements at the end of a fiscal year and meet tax obligations.
Are you interested in bookkeeping? This beginner’s guide will review what it means, what it entails, and the prospects it holds as a career choice.
What Is Bookkeeping?
Bookkeeping refers to the practice of tracking all the financial transactions made within a business organization by referring to supporting documentation like invoices, receipts, and purchase orders. Depending on the size of operation of the business, this process can be completed by hand in a bookkeeping journal, on Microsoft Excel (or similar spreadsheet programs), or on specialized bookkeeping programs. It can also be done as single or double-entry.
For a bookkeeper to keep accurate records of the transactions within a company, they must be familiar with its charts of accounts.
What Is the Importance of Bookkeeping?
The most important reason any business – big or small – should implement bookkeeping is for tax compliance. Recording your transaction allows you to file your taxes every fiscal year and apply for all applicable deductions, saving your company money you could have otherwise lost. Additionally, it allows you to maintain compliance with the IRS, protecting you from penalties and possible charges.
Difference Between Bookkeeping and Accounting
As already mentioned, bookkeeping and accounting often overlap, although they are different processes. A bookkeeper records the financial transactions within a business, classifies them as debit or credit, and organizes them based on the company chart of account.
When the bookkeeper is done, they then hand over these records to an accountant who reviews, analyzes, and interprets the data. The accountant then prepared a financial statement at the end of the appropriate period. Basically, a bookkeeper must do their job before an accountant can close the books.
Essentials to Set Up Bookkeeping for Your Business
1. Single-Entry Vs. Double-Entry
The first decision you should make when setting up your bookkeeping practices is whether you will use single-entry or double-entry bookkeeping. The former works well for small firms that transact at low volumes and only requires that you record exchanges when you meet your costs and deposit money into the business account.
Double-entry bookkeeping, on the other hand, caters to bigger firms. You make two entries for every transaction (debit and credit).
2. Accounting System
There are two accounting systems you can use for bookkeeping: cash accounting or accrual accounting. Cash accounting is suited to any business, no matter the size, where all transactions involve cash. Typically, you record a transaction only when money changes hands. This is different from the accrual accounting system, where transactions are recorded immediately, including before cash changes hands. It is recommended for a business that may operate on credit.
Most bookkeeping is done on computerized systems for speed, efficiency, and proper recordkeeping. Once you have settled on a bookkeeping and accounting system, you should set up your software. Go for a simple spreadsheet if you own a small business and more complex software if your firm is larger.
4. Chart of Accounts
The chart of accounts is central to bookkeeping, and it lists all the accounts and subaccounts your company should have, alongside their names and numbers.
Assets, Liabilities, and Equity
As defined in the previous section, the chart of accounts lists all the accounts and subaccounts a firm out to have. These accounts (which make up the balance sheet) comprise of the following:
Assets refer to what a business owns. Examples include account receivables, inventory, and fixed assets like the company itself, its land, and the equipment. Normally, these accounts are arranged in the balance sheet in order of liquidity as follows:
- Liquid assets, i.e., cash account
- Tangible assets, e.g., receivables and inventory
- Intangible assets, e.g., customer goodwill
Liabilities refer to what the business owes to other parties, including individuals (suppliers) and institutions (banks). They are listed as current or long-term in the following way:
- Current liabilities (accruals and accounts payable) – Debts owed to suppliers or credit cards.
- Long-term liabilities – Debts with a maturity of longer than one year, e.g., mortgage loans.
Equity refers to the investment made by the company owner or other investments in the business. Generally, it comprises any claims the ownership of the company has against the company.
Note: The accounting equation is a formula used by bookkeepers to balance the books at the end of a fiscal year. It reads as follows: Assets = Liabilities + Equity and means that everything a firm owns must balance against all the claims against it.
Income Statement and Bookkeeping: Revenue, Expenses, and Costs
Every financial transaction within a firm must be recorded in an accounting journal as revenue, expenses, or costs. This information represents the company’s income statement, which tells the full financial story of the fiscal year. To help you understand the content of this statement, here is a definition of the three included concepts:
- Revenue – Refers to all the income earned by a business through the provision of goods or services.
- Expenses – Refers to all the finances directed toward the running of the company but not exclusive to the goods or services provided by the business.
- Costs – Refers to the funds used by a business to produce or obtain the goods or services it sells.
Frequently Asked Questions
What are the basics of bookkeeping?
Bookkeeping is a broad field, but its most essential basics are inventory, cash, accounts receivable, sales, purchases, loans payable, owners’ equity, payroll equity, and retained earnings.
Is bookkeeping easy to learn?
As with any skill, the answer to this question is relative. You must be willing to study all the basics of bookkeeping, taxation, and accounting to make a good bookkeeper.
Should I do my own bookkeeping?
It depends. If you have the time and expertise to record your own transactions, there is no rule against doing your own bookkeeping. However, it is advisable to hire a bookkeeper of keeping your own records will draw you away from the purpose of your business.
Is it worth being a bookkeeper?
Yes. Bookkeeping is one of the most lucrative jobs you can do from the comfort of your home. If you are interested in accounting but don’t wish to go through the hassle of being an accountant, bookkeeping is also as good as it gets.
Do bookkeepers do taxes?
Not exactly. A bookkeeper ensures the records of your company’s financial transactions are up to date and accurate. You or your accountant can then use these records to do your taxes. That said, there is nothing stopping a bookkeeper from doing this if they are qualified.
How much does a bookkeeper charge per hour?
If a bookkeeper is new to the business, they will charge an average hourly rate of $19 to $20. This translated to annual earnings of $40,000 for 40-hour workweeks.
Bookkeeping is the practice of recording all the financial transactions within a business, from opening to closing. A good bookkeeper must have a firm grasp of a company’s chart of accounts, the most basic of which are assets, equity, liabilities, revenue, costs, and expenses. Through the work done by a bookkeeper, an accountant can analyze a firm’s accounts and prepare the statements for the respective fiscal year. Bookkeeping also makes filing taxes possible.