A business with a clear record of what it receives and spends will be more likely to succeed compared to a business that does not have records of any transactions. It helps the business owner know whether they are making more money than they spend. Additionally, the more information you have regarding your business, the easier it becomes to plan, budget, and take effective decisions. Bookkeeping is a crucial aspect of a business’s ability to keep all these records and organize them accordingly.

Why is it called bookkeeping? Because all the records and tasks are managed with the help of books and ledgers, when bookkeeping started in the business sector, the records were kept in daybooks, cashbooks, or journals and then transferred to a ledger. However, there is some software available on the market that can help you do bookkeeping without the need for physical books. The following article will look into the details of bookkeeping: why is it important? Understanding the basics of bookkeeping, organizing financial records, tracking income and expenses, preparing financial statements, tax obligations, and more.

The importance of bookkeeping

As mentioned above, bookkeeping is one of the essentials for the success of a business. It helps the business owner to know exactly the state of their business. Additionally, bookkeeping avoids incorrect transactions and payments, which can badly cost your business. Most importantly, it helps to regulate tax transactions and helps you work easily with lenders, investors, and accountants. Last, but not least, it is essential for making informed business decisions and complying with tax regulations.

Understanding the basics of bookkeeping

The process of recording, organizing, and maintaining a company’s financial transactions is called bookkeeping. It involves all financial activities like sales, purchases, payments, and receipts. Without these records, it is very hard for a business to be successful. Additionally, there are some important components of bookkeeping for beginners.

Accounts receivable

This is the amount the business is yet to receive from customers for goods or services that have been delivered but not yet paid for.

Accounts payable

This is the money the company owes to suppliers or vendors for goods or services received but not yet paid for.

Cash receipts

All the money that is received by the company, whether in the form of sales revenue or other sources of income, refers to cash receipts.

Cash disbursements

Disbursement means the distribution of all the payments made by the company in the form of expenses, purchases, and salaries.

General ledger

This is a record of all financial transactions in the company’s accounting system. It is used to prepare financial statements and monitor the company’s financial performance.

Double-entry bookkeeping

Balancing credits and debts is essential for a business. If a business does not differentiate between the two, there are more chances of failure. To avoid failure, double-entry bookkeeping is used for each transaction made by the company. This entry is made in at least two different accounts, credit and debt. This system ensures accuracy in financial records by creating a balance between debits and credits.

Different methods of bookkeeping

There are several methods of bookkeeping, some of which are given below.

Manual bookkeeping

When a business is small and has a low volume of transactions, manual bookkeeping is used because it does not require complex financial reporting. Manual bookkeeping involves recording financial transactions in a physical journal or ledger.

Computerized bookkeeping

However, if the records are above average, the financial reporting is complex, and it becomes hard to do manual bookkeeping, then the software is used for financial records. Accounting software can automate many bookkeeping tasks, such as creating financial statements and tracking inventory. It also provides real-time financial information, allowing business owners to make informed decisions about their finances.

How to do bookkeeping

For a successful business, recording, and reconciling are must-do tasks. They help small businesses be more accurate in their decision-making. To know more about these tasks, let’s explain them separately.

Recording every financial transaction

Before recording your sales, you need to decide on the system for recording each transaction. If you have large business transactions, the software is highly recommended; otherwise, a simple cashbook or spreadsheet can do the work for you. You will need to download all the sales data into the software to keep track of every transaction. No matter how big or small your transaction is, you need to note it down because it will help you with taxation.

Additionally, each transaction should have its own appropriate account, such as accounts receivable, accounts payable, or inventory. A double-entry bookkeeping system is highly recommended by experts for small businesses because it balances debits and credits and ensures that the financial records are accurate.

Reconciling your transaction

Sometimes the transaction you made and your bank statement do not match, leading to discrepancies. To avoid such errors, you need to reconcile bank and credit card statements. This involves comparing the transactions recorded in the accounting system to the transactions listed on the bank or credit card statement to ensure that they match. If they did not match each other, there must be something wrong that needed to be resolved. Reconciling bank and credit card statements also helps identify any errors or fraudulent activity, such as unauthorized charges or duplicate payments.

The biggest question asked by many bookkeepers is how many times a person should do bank reconciliation. It depends. Some people do bank reconciliation daily, others do it weekly, and some do it every month. However, it should be noted that you should reconcile your booking before submitting tax because if there is any error or imbalance, it might hit your business hard.

Manage accounts receivable and accounts payable.

The improvement of the financial health of a business depends on the effective management of both accounts receivable and accounts payable. Both of them are crucial to the success of a business. To manage accounts receivable, you need to establish clear payment terms with the customers. This includes specifying payment due dates, late payment fees, and accepted payment methods. Additionally, businesses should have a process for following up on overdue payments, which can include sending reminders, making phone calls, or engaging a collection agency.

On the other hand, to manage accounts payable, you should negotiate payment terms with vendors or suppliers to optimize cash flow. This can include negotiating discounts for early payments or extending payment terms to defer expenses. Furthermore, you should keep track of payment due dates to avoid late fees or penalties. This can be easily done by using a spreadsheet or an accounting software program. The most important thing is prioritizing the payment. You should prioritize payments based on their due dates and the importance of the vendor or supplier.