Everything You Need to Know About Bookkeeping
What is bookkeeping?
Booking keeping is the process that ensures that your business has systematic and accurate records of financial activity. As a business owner, your finances are a top priority and your process of bookkeeping too.
Let us understand the Basics of Bookkeeping:
In many traditional businesses, bookkeeping involved recording day-to-day transactions physically in a daybook or in a journal and consequently the name “bookkeeping” has emerged. As businesses grew, expanded and markets became highly dynamic and extremely competitive, businesses had a hard time focusing on keeping track of finances and focusing on business growth. So, businesses started onboarding experts on keeping track of their finance “bookkeeping”, so that businesses can focus on running the core business. Now Bookkeeping is the backbone of any financial and accounting system. The accurate financial reports can be generated when you keep your transactions updated that ultimately helps to measure your business performance and in the event of any tax audit, detailed records are required.
Methods of Bookkeeping:
As a business owner you must decide what method you are going to follow in bookkeeping. It all depends on the amount of revenue you earn on the volume of daily transactions your business has. Any complex method of bookkeeping for small businesses may result in complications and less complex methods of bookkeeping may not serve the purpose for the larger enterprises.
Different Methods of Bookkeeping:
Single-Entry Bookkeeping – Single-entry account bookkeeping is a method where for each transaction, one entry is made in your books. The transactions are generally maintained in a cash book which will help to track the outgoing expenses and incoming revenue. This single-entry method is very much suitable for sole proprietorships and small private companies that hold very small amounts of inventory, and do not sell or buy anything on credit.
Double-Entry Bookkeeping – Double-entry bookkeeping is a system that follows the principle that every transaction affects two accounts which are recorded as credits and debits. For example, if your enterprise makes any sale for $100, your sales account will be credited $100 and your cash account will be debited for $100 and your books are balanced when this happens. If your enterprise buys and sells on credit, public or large, using double-entry method bookkeeping is much suitable.
Accrual-Based or Cash-Based:
Accrual-Based – As per this method, revenue is recognized only when it is earned and in the same context, expenses are recorded only when they are incurred.
Cash-Based – In this cash basis, expenses are recognized when they are paid for and revenue is recognized when the business receives cash. Sales or purchases that are made on credit will not go in the books until and unless the cash exchanges.
Recording Entries in Bookkeeping
It starts with the source documents such as invoices, bills, cash register tapes, sales orders and purchase. After gathering all these documents you can now record the transactions using journals, ledgers and the trial balance.
Cash Registers – An electronic machine is used to calculate and register the transactions. These cash registers are used to store the transaction receipts that can be recorded in the sales journal. These cash registers are found in businesses of all sizes. This cash based system of book keeping is much suitable for small retail single store businesses.
The Journal – It is well known as a book of the original entries. It is the place where the enterprise records its transactions for the first time and it may be in the form of digital or physical and it specifies the accounts debited or credited and also the the date of each transaction. This is useful for double entry book keeping.
The Ledger – It is a compilation of accounts. After entering transactions in a journal, the transactions are classified into separate accounts and transferred to the ledger. Ledgers are often audited and if the total credit is more than the total debits there is a credit balance and if the total debits are more than total credits it’s called debit balance. Ledger is vital in the double-entry bookkeeping.
Trial Balance – Trial balance is made for the summarized and compiled ledger entries. On the trial balance, any imbalances between credits and debits are easy to spot.
Financial Statements – These include income statement, cash flow statement and balance sheet and these three are the major financial reports that every business must know that help in providing business insights.
The Balance Sheet – It reports business liabilities, assets and shareholder’s equity. It is a snapshot of a business financial position for only a particular date.
4i Advisory has years of experience of delivering remote bookkeeping services to enterprises across industries. Our outsourcing services are focused at helping clients with all accounting and reporting requirements and reducing the operating costs of their finance department. Reach out to our experts – https://www.4iadvisory.com/accounting-bookkeeping/