Accounting / Bookkeeping Basics: An Introduction To Bookkeeping

Why Bookkeeping is Essential to Your Business
Most small business owners employ accountants to work for them. The accountant assists the bookkeeper in establishing sound bookkeeping habits, and regularly reviews his or her work. 

Understanding Bookkeeping
Bookkeeping relates to managing and maintaining financial records like ledgers, reports, financial statements, income tax records, and more. Bookkeeping, also called record-keeping, is the accounting component that documents receipts, expenses, and some other business activities in the accounting system. Bookkeeping serves to provide the material required when creating financial statements. In other words, bookkeeping is the process through which data is placed into an accounting system. This can be achieved either manually on a physical ledger or digitally through accounting software like QuickBooks. While the benefits of bookkeeping are vast, it is a job that is often boring, difficult, and despised by many.

The Role of a Bookkeeper
Bookkeepers are responsible for maintaining a company's books that map out their financial transactions. Most bookkeepers depend largely on cost-effective tools to arrange and monitor information. A bookkeeper's primary duties can vary depending on the size and form of the business.

Bookkeeping Tasks
Basically, bookkeeping implies documenting and monitoring figures closely linked with the business's financial side. It is crucial for large and small businesses, but what exactly does it entail? The following are a few features of bookkeeping:
- Business Revenue and Expenditures: Bookkeeping tracks profits realized and expenses incurred by the company. Keeping records of business profits and expenditure is undoubtedly one of bookkeeping's core (and time-consuming) elements because it is the cornerstone on which all other bookkeeping and accounting practices are centered. Considering the importance of such records, and the possibility of human error, most businesses opt for computerized bookkeeping tools to lower the level of manual tracking required.
- Maintaining the General Ledger: A business general ledger serves as the framework of the data-collection process employed by accountants to archive and coordinate financial information used to produce financial statements for the company. It consists of a sub-ledger which may contain any number of journals.
- Keeping Track of Accounts Payable and Receivables: Accounts payable are the amounts of money your business owes to retailers, manufacturers, government, etc. while accounts receivable is the money that your clients owe you for goods or services purchased.
- Handling Bank Reconciliations: One inevitable bookkeeping fact is that there are occasions in which the bank accounts barely corroborate the transfers reported. In such situations, reconciliations are required, which involve reconciling bank statements with bookkeeping documents and finding the cause of irregularities. It is nothing to worry about if you know the right procedure.
- Providing Financial Statements: As stated earlier, bookkeeping entails the preparation of financial statements like the following:
a. Balance Sheet: A balance sheet is simply defined as a report of a company's financial status. It essentially outlines the assets, liabilities, and equity of the owner(s) at a given date. Put simply, the balance sheet shows the net worth of the company.
b. The Income Statement: This is often called the profit and loss statement. It is a company management report showing the revenue, expenditures, and net earnings over a specific period.
c. Cash Flow Statement: Cash is everything. A cash flow statement is a measure of how funds are collected and spent within a given period. This is probably one of the most critical indicators for business owners, as it depicts the income you really make.
d. The Statement of Changes in Equity: Every business prepares this statement annually as part of the annual stockholders’ report. For this reason, it is not regarded as a compulsory component of the monthly financial statements. This statement reconciles the equity of a business during an accounting period.

Why Bookkeeping is Important
Bookkeeping – the formal documentation and arrangement of a corporation's financial transactions – plays a vital role in the financial viability of any enterprise, but especially that of small business owners. A solid grasp of the finances empowers small business owners to make educated guesses and decreases the risk of misappropriating funds. Bookkeeping, financial statement preparation, cash flow management, and tax enforcement are inextricably related; detailed bookkeeping establishes a solid basis for interpretation and corroboration with the rest. 

The following are some essential benefits of bookkeeping that may explain why it is the most sought-after skill in small businesses.
- Professional Documentation: A detail-oriented and committed bookkeeper will, at all times, keep accurate and detailed records. This full documentation helps manage your business finances and is of great benefit if you need your financial statements — or when the company is audited — because the information is already in place.
- Bookkeeping Offers Crucial Insights into a Company's Overall Health: Bookkeeping helps businesses to generate financial statements that provide financial details and give a simple description of how the business is progressing. These reports enable you to monitor the cash inflow and outflow of the business (the cash that flows into the business and leaves the business at any given time). This is called a business’s cash flow. Cash flow estimates are critical to attracting new investors and reassuring current ones. The ability to understand the financial performance of your business makes plans regarding recruiting, growth, and day-to-day activities simpler. Financial statements like your balance sheet provide you with essential facts for making critical business decisions from an objective viewpoint instead of taking chances.
- Bookkeeping Makes Tax Processing Less Difficult: When tax season comes around, and you have to provide your accountant with the appropriate paperwork to report corporate taxes, having clean records dramatically decreases the amount of time needed to file these tax forms. Instead of trawling through your company records, the accountant will concentrate on identifying potential tax exemptions, saving time and essential business resources.
- Efficient Tax Compliance: Tax assessments are designed to evaluate the tax owed to Federal and local governments. Tax reports can only be completed when financial transactions are compiled. Efficient bookkeeping can keep tax matters in order and make it easier for companies to determine the actual amount of taxes owed. The information that has to be reported in tax returns must be correct and duly delivered. The inability to keep tax matters current will result in severe consequences including hefty fines and lawsuits. Bookkeeping plays a crucial role in presenting the correct details in a well-presented format and on a timely basis to avoid these fines and lawsuits.
- Bookkeeping Lowers the Discomfort of an Audit: Businesses run the risk of being audited at some time. It's not anything to look forward to, and planning for it is worthwhile. Getting your books coordinated and in one location makes it easier to present financial details at the right time, which will help prevent fines or unnecessary penalties.

Single-Entry vs. Double-Entry Bookkeeping
You will have to choose between single-entry and double-entry accounting when trying to set up your books. This is a problem that is sometimes daunting to many business owners, particularly those that do not have much expertise in bookkeeping and are looking to handle the books themselves. Single-entry bookkeeping means recording all corporate activities in a single ledger. This is exactly how most small businesses start, mainly because it is very simple to do. Double-entry accounting records any transaction as two transactions, reporting the sums as 'debits' and 'credits', and defines how the assets are moved into or out of an account. This depicts where your investments come from, and where they're heading. Although double-entry accounting requires serious work, it offers a far more detailed view of a company's financial details.

Basic Steps of Bookkeeping
No doubt, bookkeeping tasks can be daunting sometimes, but a logical series of procedures will make bookkeeping easier. The following are some basic procedures of bookkeeping:
- Preparing Source Documents: The source documents are the reference point for bookkeeping operations. A company will receive a sales invoice from the manufacturer when it orders goods. If a company borrows money from the bank, it signs a promissory note, a copy of which the company retains. On the other hand, if a buyer uses a credit card to order a specific product or service, the company collects the credit card slip as validation of the sale. Each of these business forms serves as information sources that are inevitable in every bookkeeping procedure; in other words, they serve as essential details that the bookkeeper uses to document the financial impact of the company operations.
- Documenting the Financial Implication of Business Activity in Source Documents: Sales and purchases (transactions) have financial consequences that need to be documented; as a result of their consummation, the company becomes better off, worse off, or at least "indifferent." Other instances of business transactions affecting the company are hiring staff, making retail purchases, borrowing money from the bank, and purchasing direct-selling goods. The process of bookkeeping starts with the identification of pertinent details of each transaction. The Chief Accountant of the company sets out rules and methods to measure the financial implications of these transactions. Most likely, certain laws and procedures will be observed by the bookkeeper.
- Make Original Entries of Financial Transactions: Utilizing the source document(s) for each transaction, the bookkeeper makes the initial entries into the journal and then into the company accounts. A journal is a systematic list of transactions in the order in which they occurred. An account is a different record, one regarding a specific type of business activity. Two or more accounts are influenced by one transaction. When recording a transaction, it is important that you employ the business’s established chart(s) of accounts.
- Carry Out End-of-Period Operations: This is an essential step to maintaining updated accounting documents and making them available for the filing of management accounting reports, tax returns, and financial statements.
- Compiling the Adjusted Trial Balance for the Accountant: After all the end-of-period activities have been carried out, the bookkeeper collates a detailed rundown of all accounts, commonly known as the adjusted trial balance. Small and medium-sized businesses manage hundreds of accounts for their varying investments, liabilities, equity, profits, and expenditures. Larger companies hold thousands of accounts, while massive corporations can keep more than ten thousand accounts. On the other hand, tax returns, external financial statements, and internal accounting notes to executives contain a relatively limited number of accounts. For instance, the average external balance sheet documents just twenty-five to thirty accounts (perhaps even less), and the standard income tax return includes a relatively low number of accounts. The accounting officer will take the adjusted trial balance and merge related accounts into a summarized sum recorded in the financial statements or tax return. For instance, a business can hold hundreds of different inventory accounts, each included in the adjusted trial balance. These accounts are broken down by the accountant into one summarized inventory report, displayed in the company's official balance sheet. The accounting officer will adhere to defined financial reporting guidelines and income tax provisions when sorting the accounts.
- Closing the Books: 'Books' is the traditional word for a full collection of business accounts. A business transaction is a continuous flood of events that rarely stops precisely on the last day of the year, and will affect the preparation of annual statements and tax returns. The company will draw a simple distinct line between the operations for the just- concluded year (usually 12-month accounting period) and the preceding year by closing the books for the year and starting with new accounts for the following year.