What is Bookkeeping
The distinctions between accounting and bookkeeping are subtle yet essential. Bookkeepers record a business's day-to-day financial transactions. Accountants focus more on the big picture.
Bookkeeping requires shifting focus easily and catching tiny, hidden mistakes in a budget or
invoice.
Common examples of bookkeeping include:
- Recording financial transactions
- Posting debits and credits to a journal
- Preparing financial statements
- Processing payroll
Simply put, bookkeeping is more transactional and administrative, concerned with recording
financial transactions. Accounting is more subjective, giving you insights into your business’s
financial health based on bookkeeping information.
Common examples of accounting include:
- Reviewing and analyzing financial statements
- Preparing adjusting entries
- Performing audits
- Filing relevant tax returns
- Aiding the business owner in understanding the impact of financial decisions
Without bookkeeping, accountants would be
unable to successfully provide business owners with the insight they
need to make informed financial decisions.
The function of bookkeeping
Daily bookkeeping can make or break the success of your business. Bookkeeping can help a growing
business get funded, manage cash flow, stay tax compliant, and organize business operations.
Whether you outsource the work to a professional bookkeeper or do it yourself, you’ll be able to
reap a variety of benefits.
1. Access to detailed records of all transactions
By logging and keeping track of all financial transactions, you will have easy access to any financial information you might need.
When it’s finally time to audit all of your transactions, bookkeepers can produce accurate reports that give an inside look into how your company used its capital.
The two key reports that bookkeepers provide are the balance sheet and the income statement. The
goal of both reports is to be easy to comprehend so that all readers can grasp how well the
business is doing.
2. Ability to make informed decisions
Because bookkeeping involves the creation of financial reports, you will have access to information that provides accurate indicators of measurable success. By having access to this data, businesses of all sizes and ages can make strategic plans and develop realistic objectives.
Examples of financial statements that can help with decision-making include:
- Balance sheets
- Income statements
- Cash flow statements
Not only can this help you set goals, but it can also help you identify problems in your business.
With an accurate record of all transactions, you can easily discover any discrepancies between
financial statements and what’s been recorded. This will allow you to quickly catch any errors
that could become an issue down the road.
3. Better tax preparation
As annoying as it is, businesses have to file their taxes at the end of the tax year. With a bookkeeping process in place, you’ll have financial information ready for paying taxes.
By staying up to date with your bookkeeping throughout the year, you can help alleviate some of the stress that comes with filing your taxes. So, when the government demands a financial statement from your business for tax reasons, bookkeeping regularly means you’ll be able to predict the outcome more accurately with detailed balance sheets over time.
4. Easier to See Business Targets
Every business wants to grow, but poor financial records can stop that from happening at the speed you want. With no accurate number or data to analyse, it’s not easy to set yourself any growth goals.
Again, it’s going to be because you’re guessing everything so you’ll be quite disappointed that you didn’t hit the targets you set out previously. By staying on top of your books and keeping regular financial records, you can map out your business goals more accurately and achieve growth.
Double-entry bookkeeping
Double-entry bookkeeping is the practice where every business transaction is represented by at least two entries. Entries are described as a “debit” or a “credit,” that increases or decreases the balance of an account.
For example, if a business provides a service for $5,000 in cash, the cash (asset) account is
debited to $5,000 and the sales account is credited $5000. This means cash and sales are now
affected by the same amount.
Advantages of Double-Entry System of Bookkeeping
Every business needs to have a bookkeeping system. Though small companies might opt for a single-entry system of bookkeeping, it is necessary for the companies with more than one employee or that has debts, inventory or several accounts to have a double-entry bookkeeping system. The advantages of the double-entry system of bookkeeping are as follows:
Complete financial picture
The business whose transactions are huge should maintain a double-entry bookkeeping system. This
is because double-entry bookkeeping helps to prepare crucial financial reports like an income
statement and balance sheet. It gives complete information about all the transactions compared to
the single-entry system, as every transaction consists of a source and destination.
Better financial decisions
The double-entry system helps companies maintain their accounts in detail, which helps control the business. In addition, it shows how profitable and financially strong various parts of the business are and thus helps to make better financial decisions.
The detailed records of accounts maintained under the double-entry system can also be used for comparison purposes. The details of the previous year can be compared with the details of the current year, and any deviations found during comparison can be worked on.
Reduces bookkeeping errors
The assets and liabilities plus equity in the balance sheet of the double-entry bookkeeping system should be equal. If they are not equal, the entries in the books are wrong and indicate that the journal entries are wrong. Thus, the double-entry system ensures accuracy in the books of accounts and the final balance sheet. In addition, it helps accountants to reduce mistakes by being accurate.
Preferred by funders and banks
The double-entry system is more transparent and complete. It helps businesses to gain investors and obtain credit easily. The reports prepared by the double-entry system of bookkeeping allow banks and investors to get a complete and accurate picture of the business’s financial health.
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