8 Basics of Bookkeeping You Can’t Afford to Miss

As a businessman, by learning the fundamentals of small business bookkeeping, you can set your company up for financial success. Proper bookkeeping will enable you to understand your business’s financial health, prepare for potential growth, and ease the tax season’s stress. To learn the basics of bookkeeping let’s first understand what is bookkeeping and how it’s a beneficial service for all small businesses running in the USA.

What is Bookkeeping?

Bookkeeping is the process of recording financial transactions, it is a part of the accounting process. It involves preparing source documents for all transactions, operations, and other functions of a business. Transactions involve purchases, sales, receipts, and payments by a person or an organization/corporation. There are various standard methods of bookkeeping, that include single-entry and double-entry bookkeeping methods. Bookkeepers are people for businesses that handle all financial details. Companies will not be aware of their current financial status without bookkeepers. Not only this, but accurate bookkeeping is also important to external users like investors, financial institutions, and the government. They need access to credible information to make better investments or lending decisions.

Read more about the Importance of bookkeeping in small businesses.

How is a Bookkeeper different from an Accountant? 

A bookkeeper manages the documentation for all financial transactions, records the transactions in the accounting journal, lists every transaction as one or more debits and one or more credits. And also organizes the transactions according to the business charts of the account.

The financial transactions are all recorded, but they have to be summarized at the end of specific time periods. Some firms require quarterly reports. Other smaller firms require reports only at the end of the year in preparation for doing taxes. The accountant takes over and analyses, evaluates, interprets, and records financial details for the company firm at the end of the relevant time span. Year-end financial statements and the correct accounts for the business are also compiled by the accountant. The year-end reports compiled by the accountant must comply with the requirements set by the Financial Accounting Standards Board (FASB). These guidelines are called General Accepted Principles of Accounting (GAAP). That’s a basic difference between accountant services and bookkeeper services.

Basics of Bookkeeping

1. Learn about various charts of accounts

Financial transactions have to be segregated into different charts of accounts. You must make sure to create numerous accounts to fit the need of your business. A few essential forms of account are:

• Receivables: Includes details of the money due from your customers for the given service.
• Payables: Includes details of the money that you have to provide.
• Inventory: Bookkeeping Account for all the unsold products.
• Sales: Includes the record for all the sales made monthly and annually.
• Purchases: Includes the record for all your purchases.

2. Keeping your Business & Personal Expenses accounts Separate 

It’s necessary to permanently separate your business finances from personal to efficiently check and track business transactions. You will thank bookkeepers when it’s time to reconcile bank statements, and you have to determine whether all the activities you make in business should be counted as a personal expense or business expense. For sorting all the transactions, you need a bookkeeper, who can guide you with all transaction differentiation. So, it’s recommended to take professional bookkeeping services.

3. Select your Bookkeeping System: Single or Double entry systems

The single-entry method and the double-entry method are the two main bookkeeping methods. Here, there is no correct answer to which is the right method. For your business, you have to decide the right method and implement it consistently.

Transactions are reported only one time with the single-entry process, either as an income or an expense. If you run a simple company with no equipment or inventory and do your own bookkeeping, this might be the right method for you. On the other hand, a more detailed and stable approach is the double-entry method. You insert all business transactions into an acceptable journal here, and each transaction is reported as a debit and a credit entry in the ledger.

At first, the double-entry approach can seem complex, but this can be used to help you manage your records efficiently with the help of a professional bookkeeping service provider.

4. Analyzing and Comparing Transactions with Bank Statements 

Comparing your transactions with your bank statements every month is essential. This will allow you to identify any missing transactions and check the amounts mentioned in your journal. This habit will become highly helpful while matching transactions after a month or a year.

5. Creating financial reports 

You need to take a closer look at what those books mean now that you’ve balanced your books. Summarizing the flow of money in each account provides an impression of the financial health of your business. You can then use the financial reports as a source to make decisions about your business’s future.

In bookkeeping, here are the vital financial reporting analysis lists:

• Balance Sheet– This document lists the assets, liabilities, and equity of your company for a single period of time. The number of all liabilities and equity accounts should equal your total assets. The balance sheet gives a look at the company’s current health and whether it has the potential to grow or needs to reserve cash.
• Profit and Loss (P&L) Statement– This report, sometimes called an income statement, breaks down company sales, expenditures, and expenses over a period of time (e.g., quarter). The P&L helps you compare and make estimates for your sales and expenses.
• Cash flow Statement– The cash flow statement is equivalent to P&L, but does not contain any non-cash items such as depreciation. Cash flow statements help to illustrate where the company receives and spends cash and the immediate profitability and ability to pay its bills.

6. Balance your books and sets better budgets for your business

In bookkeeping, the last step is to balance the books and close them. This is known as reconciling of accounts and if this doesn’t match you have to spend a lot of time analyzing all the transactions. You can always take the help of professionals to take care of your bookkeeping from the start to avoid such account mismatch.

Having recorded for a time period will help you understand your finance to some extent and you can set these as the foundation for your budget. Conduct budget and forecasting for your business, take professional guidance if required.

7. Select the right Software that fits your business requirement

To ease the process of bookkeeping, there is various software which is introduced for small businesses like Xero, ZohoBooks, FreshBooks, etc. This online software can automate your process of bookkeeping and keep you updated with your business financial health. It’s a good idea to talk to your accountant or bookkeeper when selecting software, as they can help you determine your needs and they may prefer working with some programs more than others.

Approximately 60% of small business owners are not very experienced in bookkeeping and finance. As a provider of online bookkeeping services, we know that bookkeeping is an extremely important part of any organization, and performing it correctly is vital only this can help you understand your business’s financial standing in the true sense.

We at Whiz Consulting can assist you with the bookkeeping and accounting process. We provide businesses with the best online bookkeeping services in the USA. Also, you can talk to our experts at (1)-214-329-9080 else you can drop a mail at [email protected] for any query related to online bookkeeping services or accounting services.