What is Bookkeeping?
Bookkeeping involves the recording, on a daily basis, of a company’s financial transactions. With proper bookkeeping, companies are able to track all information on its books to make key operating, investing, and financing decisions.
Bookkeepers are individuals who manage all financial data for companies. Without bookkeepers, companies would not be aware of their current financial position, as well as the transactions that occur within the company.
Accurate bookkeeping is also crucial to external users, which includes investors, financial institutions, or the government – people or organizations that need access to reliable information to make better investments or lending decisions. Simply put, the entire economy relies on accurate and reliable bookkeeping for both internal and external users.
Importance of Bookkeeping
Proper bookkeeping gives companies a reliable measure of their performance. It also provides information on general strategic decisions and a benchmark for its revenue and income goals. In short, once a business is up and running, spending extra time and money on maintaining proper records is critical.
Many small companies don’t actually hire full-time accountants to work for them because of the cost. Instead, small companies generally hire a bookkeeper or outsource the job to a professional firm. One important thing to note here is that many people who intend to start a new business sometimes overlook the importance of matters such as keeping records of every penny spent.
Tracking the financial activities of a business is the truest purpose of bookkeeping, meaning it allows you to keep an up-to-date record of the current incoming and outgoing amounts, amounts owed by customers and by the business, and more.
Single-entry vs. Double-entry Book keeping
When you’re first setting up your books, you’ll have to decide whether you want to use single-entry or double-entry accounting. This is a question that’s often intimidating for small business owners—especially those who may not have a ton of bookkeeping experience—looking to manage the books themselves.
What Is Bookkeeping: Types
There are two main types of bookkeeping:
This is a simple and easy bookkeeping solution for very small, start-up businesses or sole traders using printed papers or Excel type spreadsheets.
Single-entry bookkeeping involves tracking all business transactions (i.e. payroll, expenses, revenue) in one ledger. This is how most small businesses, especially freelancers, start, as it’s very easy to do.
The minimum requirement that a business must have is a cash book (which reflects the bank account activities of receipts and payments) and many small businesses can stick with just a cashbook to do their bookkeeping.
The most basic of bookkeeping records should enable people to see all the income earned and all the expenses paid resulting in a difference (income minus expenses) for a period of time like one month or the whole year.
This type of basic bookkeeping is acceptable for sole proprietors to handle.
Cash books are typically only for the cash basis of accounting.
Double-entry bookkeeping tracks every transaction as two entries, entering the amounts as “debits” and “credits,” which describes if funds are transferred to or from an account. This helps you see where your finances are coming from, as well as where they’re going. While double-entry accounting is more work, it provides a much more comprehensive view of your business’ financials. A more complicated bookkeeping system found within developed software like QuickBooks or Xero which includes cash books, accounts payable and receivable, tracking of loans, inventory, payroll, journal entries, ledgers and trial balances.
Reports from these systems can be for either the cash basis of accounting or the accrual basis of accounting.
What’s the difference between an accountant and a bookkeeper?
It’s common to confuse the role of a bookkeeper and that of an accountant. They both, after all, offer critical support for the financial health of a business and share similar goals. While both play essential roles, they focus on different details and processes.
Bookkeepers are responsible for the initial stages in the financial cycle, involving record-keeping, whereas accountants play a more subjective and analytical role, providing insights on the information compiled during bookkeeping.
Bookkeepers, for instance, deal with consistently recording daily transactions and organizing financial information. Accountants, on the other hand, use this information to easily discern a company’s financial standing.