Bookkeeping is integral to every company. It focuses on maintaining clean and sound accounting books and records and updating them with time for real-time data visibility. Bookkeeping services providers ensure mess-free bookkeeping by following accounting principles and guidelines. Moreover, they prepare a daily, monthly, and weekly checklist of duties and facilitate timely completion for seamless processing. Small businesses rely on these facilities for quick, reliable, and helpful financial statement preparation. Also, they can comply well with the tax and legal regulations and auditing procedures. Thus, staying on top of its finances is possible only when small businesses invest in talented human resources and technology.
Since accounting and bookkeeping hold utmost significance for small businesses, let us delve into its basics and understand how to tackle them easily:
1 Opening a separate bank account:
The first step in bookkeeping is to open a bank account separate from the owner’s account. A dedicated business bank account will only involve cash inflows and outflows related to business transactions. It will make the bookkeepers’ work a lot easier and more convenient. Moreover, it will bring accurate visibility into the firm’s financial process. Reconciliation becomes highly challenging when a company relies on a single account for personal and business transactions. Outlining which inflow or outflow pertains to business transactions at a later date will be time-consuming and error-prone for the bookkeeper.
2 Selecting a bookkeeping entry and accounting method:
Next, businesses need to define the entry and accounting methods for bookkeeping. The data entry methods in bookkeeping are as follows:
- Single entry bookkeeping is suitable for freelancers or micro-businesses with one or two transactions per month. It involves recording the entries only once in the books.
- The more prevalent system is double-entry bookkeeping. It classifies every transaction as two sides that must get recorded in relevant places. For example, goods purchased in cash lead to cash reduction while increasing the inventory levels. Thus, it gets recorded twice.
Single-entry bookkeeping is less accurate and detailed than double-entry. Since businesses make entries twice, finding discrepancies becomes more straightforward in the latter. Choosing among the two allows companies to manage finances and determine the bookkeeping processing.
Next, the bookkeeping must define the accounting method to implement. It affects the accounting entries and management. The two methods available are as follows:
- Cash-based accounting: Under this method, businesses only record transactions in the books when there is an actual cash inflow or outflow.
- Accrual accounting basis: It enables recording transactions as soon as they are recognized, despite no cash flow. This process includes receivables and payables management.
Cash-based accounting provides a simpler alternative to managing accounts. It is suitable for companies that rarely or don’t deal in credit. However, it does not offer in-depth insights into a firm’s financial position when dealing with credit and cash. It prompts businesses to choose the accrual accounting method.
3 Setting up the bookkeeping system:
Businesses need to define their aims and objectives regarding accounting and bookkeeping. It influences their decisions and plans about the accounting and bookkeeping process. Companies have the following options to set up their bookkeeping system:
- Software- If the company chooses to do the bookkeeping themselves, they must invest in quality accounting and bookkeeping software. It will help them convert tedious and monotonous processes. The decision about which software to choose depends upon the firm’s needs and objectives. It must automate recurring transactions and activities.
- Outsourcing- Small businesses have limited resources, and thus, they need to make an optimal decision about resource allocation. It might prompt them to outsource the bookkeeping services to a professional vendor. These firms have all the accounting knowledge, qualifications, technological resources, and expertise to carry out the activities. Small businesses get a cost-effective alternative by customizing the service package and eliminating unnecessary costs.
- In-house accounting: A firm must hire in-house personnel when it feels they can handle the rising transactions and get direct visibility into its financial position.
4 General ledger setting:
The bookkeeping process begins with recording financial transactions in the books of accounts, specifically the general ledger. While it was a physical book earlier, today, companies can set this virtually on accounting and bookkeeping software. Whenever a company makes a sale, purchase, expense, overheads, or revenue, it must record the transaction in this book. The transaction entered is named as a journal entry. Spreadsheets are used for virtual general ledger processes. However, companies can also invest in accounting software to automate this function.
5 Estalishing business accounts:
Companies must create different accounts where the general ledger entries will get posted. A specific account covers transactions for one activity dedicatedly. For instance, a sales account only covers sales and returns; a creditors account covers dues owed and paid. The five basic accounts type is as follows:
- Asset accounts record the resources owned by firms (for example- property, inventory, cash, etc.)
- Liability accounts reflect the dues and obligations owed by the business (Example- accounts payable, bank loan, monthly rent payments, etc.)
- Revenue or income accounts highlight the earnings of the business (Example- sales, interests on advances, etc.)
- Expense accounts cover outflows to keep the business running (Example- employee salaries, rent, utilities, etc.)
- Equity accounts show the business owners’ interest held in the business (Example- shares)
Appropriate software and hiring bookkeeping services can help firms provide effective and efficient accounting. The accounting software classifies the different accounts used by a particular business in a list for seamless management. This classification is known as the ‘chart of accounts.’ Bookkeeping involves categorizing activities to record transactions correctly.
The accounting and bookkeeping basics help businesses understand these activities more clearly. The list of bookkeeping basics is never-ending, and the points mentioned above are just a handful. Small business owners must ensure proper maintenance and knowledge of these processes to avoid mess and chaos. Consulting with a personalized CPA and financial bookkeeper helps implement bookkeeping systems successfully.