The Basics of Bookkeeping

When it comes to bookkeeping, there are many imperative things that you need to know.

What does bookkeeping mean?

First, bookkeeping is the process of tracking all of a company’s financial transactions so you can see exactly how the business is spending money, where the revenue is coming from, and which tax deductions should be claimed.

Good bookkeeping will move your business forward. It is the basic accounting process, and growing your business without bookkeeping may be a huge struggle. And as simple as it may seem, implementing the wrong system for your business can cause challenges.

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Why is bookkeeping important?

• Tax Deductions - When you record and categorize every transaction in your business, you will be able to see which expenses are tax-deductible.
• Getting a business loan - Banks are going to need to see financial statements when you apply for a loan. Many lenders will look for a statement to show your expenses and revenue, otherwise known as an income statement. This is a document that you can easily get through bookkeeping.
• Catching financial mistakes - When bookkeeping, you are keeping a close eye on the transaction in your business, which means you will be able to catch things like; bank errors, invoicing mistakes like paying somebody twice, and sneaky subscription fees for services that you forgot to cancel.
• Provides a clear picture of where your money is going - Bookkeeping enables you to keep track of your expenses so you can budget better. It helps to understand your cash flow and to track how your business is growing over time and what months are busy or slow.

What are the bookkeeping steps?

To start your bookkeeping, you should perform the following steps: 

Step 1

First, separate your business and personal expenses to know what your business is earning, spending, and your bottom line net profits.

Step 2

Choose between single entry or double-entry accounting.

Double-entry tracks where your money comes from, and where it is going. Essential, you will be recording every transaction twice, picking assets from your credit, and putting somewhere called the debit. Your books are balanced when credit and debit equal each other.

The single entry method is recording your transactions once as they happen. Note that double-entry bookkeeping is more effective for large businesses, while the single entry method is preferable for small businesses.

Step 3

Choose between the accrual and cash method of accounting.

On a cash basis, you only recognize revenue when you receive it, but on the accrual method, you recognize revenue when it is earned, that is when you have completed a project and have written the invoice. Both the accrual and cash method can work with single and double-entry bookkeeping, however, the single entry is the basis for cash-based-bookkeeping.

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Step 4

Choose a bookkeeping method.

You can do your bookkeeping in a variety of ways, including manually by using Excel, paper, or any bookkeeping software.

Step 5

Categorize your transactions.

You should categorize your transactions to understand what you are spending. Adding categories can help you understand what your tax deductions are, as not all transactions are equally tax-deductible. Using categories will help when you want to know what you are spending on office supplies, as opposed to what you are spending on meals.

Step 6

Organize and store your documents.

It is vital to note that bookkeeping is not the same as accounting, in that, while the latter is responsible for reporting, analyzing, and summarizing financial data, the former is responsible for the recording of financial transactions.

Before you begin bookkeeping, you must decide what method you are going to follow. When choosing a method, consider the amount of revenue you earn, because a small business with a complex bookkeeping method may cause unnecessary complications, and less robust methods will not be sufficient for large businesses.

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What are the basic bookkeeping terms?

Liability

Liabilities are the debts owed by a business. It includes loans, and account payable balance owed to vendors.

Assets

Assets imply the valuables belonging to your business. It encompasses business items such as computer sets, furniture, and account receivables owed by customers and payable to your business.

Revenue

Revenue often used interchangeably with income refers to your business earnings through sales. Sales take different forms. Revenue could be made through product sales or payments for services rendered.

Expenses

Expenses refer to purchases, utility bills, salaries, travels, lunch with clients, and tons of other purchases.

Equity

Equity is the subtraction of liabilities from assets. The result is regarded as equity.  Equity shows the interest (financially) of a business.

How to: Bookkeeping?

In bookkeeping, it's imperative to choose a mode of keeping records. Some use the traditional method of pencil and paper, while some opt for computer-based records. There are no hard and fast rules regarding the type of recording option to use. However, if you have lots of transactions, it's best to employ the use of a computer to ensure accuracy and prevent loss of record.