Bookkeeping is the task of recording all business transactions—amounts, dates, and sources of all business revenue, gain, expense, and loss transactions.
Bookkeeping is the starting point of the accounting process. Having accurate financial records helps managers and business owners answer important questions.
- Is the business making money, or losing it? How much?
- Is the business on sound financial ground,
- Are troubling trends in cash flow pointing to an instability of some kind?
The Bookkeeping System
A sound bookkeeping system is the foundation for gathering the information necessary to answer these questions.
A bookkeeping system – which could be paper-based, software you own, or online – involves keeping track of a business’s financial transactions
You make entries to your businesses Chart of Accounts using the debit and credit system. Each entry represents a different business transaction.
There is usually at least one account for every item on a company’s balance sheet and income statement. In theory, there is no limit to the number of accounts that can be created, although the total number of accounts is usually determined by management’s need for information.
The Bookkeeping Process
The process of bookkeeping involves four basic steps:
- analyzing financial transactions and assigning them to specific accounts;
- writing original journal entries that credit and debit the appropriate accounts;
- posting entries to ledger accounts; and
- adjusting entries at the end of each accounting period.
Bookkeeping is based on two basic principles.
- One is that every debit must have an equal credit.
- If $x dollars arrives in the bank account, a client who paid it has his balance reduce by $x
- If $x dollars leaves the bank, a supplier who was paid is no longer owed $x.
- Following from this, all accounts must balance.
Books of accounts
Journal entries assign each transaction to a specific account and record changes in those accounts using debits and credits. Information contained in the journal entries is then posted to ledger accounts. A ledger is a collection of related accounts for example an Accounts Payable Ledger, Accounts Receivable Ledger, or a General Ledger. Posting is the process by which account balances in the appropriate ledger are changed.
Reconciling bank statements is critical in the management of cash flow, another important task for the bookkeeper.
Other aspects of bookkeeping include making adjusting entries that modify account balances so that they more accurately reflect the actual situation at the end of an accounting period.
How well do you understand bookkeeping?
Many people do not understand what bookkeeping is. It’s a complex field, and errors can bankrupt your business, while incurring debts, fines and legal penalties.
Bookkeeping is one of the most affordable, easiest business tasks to outsource. Because accounting systems are now available online, you can stay in full control of your business, while allowing someone else to worry about the weekly and monthly work.
Focus your energy on your growing business, contact us to help you set up an efficient, affordable accounting system and process.