This is Part 1 in our “All About Bookkeeping” series.
We hear from business owners often:
“What is Bookkeeping?”
“Why do I need to do bookkeeping in my business?”
Most do not understand the true value that bookkeeping can bring to your business so we are set out on a mission to explain to you through a multi part series what you need to know about bookkeeping and why it is vital in your business.
1. What Is Bookkeeping? Simplified Definition
Bookkeeping is the process of keeping track of (or recording) every financial transaction within your business. This is then used to create financial statements. Every business needs bookkeeping.
Types of Transactions:
- Bank and Credit Card Transactions: Every transaction (spend money or receive money) that goes through your bank account or credit card needs to be assigned to an account or category. Ex: $150 credit card transaction to Apple for a new keyboard would increase your credit card balance and increase your office expense account.
- Invoices: Although not required to complete bookkeeping, many businesses send invoices to their clients to ensure they get paid. Ex: Client XYZ owes you $500 for services, you would create an invoice for $500 and send that to XYZ.
- Bills: Although not required to complete bookkeeping, many businesses enter bills to keep track of who they owe and when it is due. Ex: You owe money for an electricity bill, payroll, or accounting services, you would create a bill to record the amount due and when it is due.
- Non-Cash or Credit Card: This could be something like an asset purchase or a loan your business took out. Ex: You purchase a new Ford F-150 and take a loan out. You would record a new asset (vehicle) and corresponding loan related to the purchase.
2. What Is a Bookkeeper Responsible For?
Completing the bookkeeping process (transaction recording) to create financials that can be used to help the business.
- Gather Supporting Documents: A bookkeeper will often gather necessary supporting documents for business transactions. This could include: bills, invoices, receipts, purchase orders, statements, etc.
- Record/Classify Transactions: A bookkeeper will take the transaction types listed above and assign them to their respective accounts (or categories) and record them in the bookkeeping software.
- Reconcile Accounts: Once the recording is done the bookkeeper will complete a reconciliation. A reconciliation is basically just taking the data that was recorded and ensure it matches the actual balances. Think of it like a check book. You need to ensure that the balance you have recorded in the “books” matches the actual bank, credit card or loan statement/balance. If they do not match that indicates something may have been missed or entered wrong.
- Create Financial Statements: Finally, based on the activity recorded and reconciled we can create financial statements that can be used to help your business. Type of financial statements include: Income Statement (Profit & Loss), Balance Sheet, Statement of Cash Flows, and more.
3. Why Do I Need Bookkeeping?
I could go on for days on why every business NEEDS bookkeeping but here are some of the major items to consider.
- Ensure Correct/Accurate Tax Filings: Tax time does not need to be stressful!
- Clarity: Helps you understand how your business is performing. Judging performance simply by cash in the bank is the wrong way to do it.
- Track Profit (or Loss) and Liabilities Outstanding
- Cash Flow Assistance
- Cost Cutting: With so much activity going on within your business there may be items that are unnecessary or setup on recurring terms. Bookkeeping helps you analyze that and see where you can cut costs.
- Better Decision Making
- Easy Reporting to Investors/Bankers (or other third parties)
- Peace of Mind: Breathe easy knowing you’re doing things the right way and have good record keeping of everything going on within your business.
- Avoid/Win An Audit
Earlier this year we did an article on the Top 4 Bookkeeping Rules to Follow. Be sure to check out that article (and Podcast episode) for more information there.
This is just the start of our series, be sure to check back for future posts!
If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.