Bookkeeping-Definition

Bookkeeping records each day's financial transactions for your business in designated accounts. It may also refer to the many recording methods that companies can use. Bookkeeping is an essential phase in the accounting process for various reasons. You may create reliable financial reports that help you assess the performance of your business by updating transaction data. Additionally, thorough records will be useful if there is a tax audit.

This article will guide you through the various bookkeeping techniques, how transactions are recorded, and the key financial statements involved.

Methods of Bookkeeping

Your business must determine which approach it will use before you start bookkeeping. Consider your business's daily transaction volume and revenue before making a decision. If your company is tiny, using a sophisticated bookkeeping system for large corporations may lead to unneeded issues. On the other hand, major organizations will only be able to get by with more reliable bookkeeping techniques.

In light of this, let's dissect these strategies so you can select the best one for your company.

1. Single-entry bookkeeping

A single entry is made in your books for each transaction using the simple single-entry accounting method. Transactions are often recorded in a cash book to maintain track of incoming revenue and outgoing expenses. With the single-entry method, formal accounting training is optional. Small private businesses and sole proprietorships that do not buy or sell on credit, own few to no tangible assets, and keep tiny amounts of inventory will benefit from the single-entry technique.

2. Double-entry bookkeeping

A stronger method of bookkeeping is double entry. Every transaction must have an impact on at least two accounts to be recorded, and it adheres to this rule. For instance, if you sell something for $10, the same amount will be credited to your sales account and deducted from your cash account. The double-entry system's total credits and total debits must always be equal. If this occurs, your books are "balanced."

Keeping your books using the double-entry system makes more sense if your company is large, publicly traded, or performs purchases and sales using credit. Because there is less possibility for error with the double-entry approach, businesses frequently choose it. It essentially "double-checks" your books because each transaction is recorded as two matching but contrasting accounts.

3. Cash-based or accrual-based

A cash-based accounting system records revenue as money enters your business. When they are paid for, expenses are recognized. Put another way, every time cash flows into or out of your accounts; it is recorded in the books. This means that credit-based purchases or sales will appear on your books once the cash is exchanged.

Revenue is recognized when it is earned under the accrual approach. Similar to how revenues are typically documented simultaneously as expenses, so are they. For a transaction to be recorded, physical cash does not need to enter or leave, and you may immediately mark your sales and credit-based purchases.

A cash or accrual basis can be used with either single-entry or double-entry bookkeeping. However, the single-entry approach typically serves as the basis for cash-based bookkeeping, and cash flowing in or going out is recorded as a single entry for each transaction. The double-entry system performs better when using the accrual basis.

How to Record Entries in Bookkeeping

You may better understand and assess your firm's performance by creating financial statements, including balance sheets, income, and cash flow statements. You must have properly documented records of your transactions for these reports to represent your firm accurately. Keeping these data as up-to-date as feasible when balancing your accounts is also beneficial.

Source papers such as purchase and sales orders, checks, invoices, and cash register tapes are the first step in the transaction recording process. Journals, ledgers, and the trial balance can be used to record the transactions once you have gathered these supporting papers. If your business is small, you might only require a cash register. Financial statements can then be created by consolidating the information.

Cash Registers

An electronic cash register is used to compute and record transactions. Cash registers are typically used to track cash flow in retail establishments. The cashier collects a sale's cash and then gives the customer the remaining money. Single-entry cash accounts are used to record both the money that was collected and the money that was returned. Transaction receipts are also stored in cash registers, making entering them in your sales diary simple.

Businesses of all sizes frequently use cash registers and a single-entry, cash-based bookkeeping system. Thus they are only sometimes the main way to record transactions, and they are, therefore, practical for extremely small firms but too basic for larger ones.

The Journal

The journal may also be known as the "book of original entries." It is where a business first keeps track of all its transactions in time order. A journal can be physical (like a book or diary) or digital (like data in accounting software or spreadsheets). It provides:

• The date.
• The credited or debited accounts.
• The dollar amount for each transaction.

Each journal entry affects the ledger, even if it is not customary to review the journal's balance at the end of the fiscal year. As we will see, the ledger needs to be balanced; thus, keeping an accurate journal is a good habit. Double-entry bookkeeping is useful for this form.

The Ledger

A ledger is a record of financial transactions and goes by the name "Book of the second entry." After being recorded in a journal, transactions are divided into various accounts before being transferred into the ledger. The accounts are presented under Assets, Liabilities, Equity, Income, and Expenses in the chronological sequence they appear in the records. The ledger can be a paper record or an electronic spreadsheet like a journal.

A ledger's chart of accounts, a list of all the accounts' names and numbers, can be found there. The chart typically follows the transcribed records' order of accounts.

Ledgers must always be balanced after the fiscal year because, unlike the journal, they are audited. A debit balance exists when all the debits exceed all the credits, and there is a credit balance if the overall credits exceed the total debits. In double-entry accounting, the ledger is crucial when each transaction modifies at least two sub-ledger accounts.

Trial balance

The ledger entries are collated and summarised to provide the trial balance. A test to see if your books are balanced is similar to the trial balance. The accounts for trial balance are listed below: Assets, Liabilities, Equity, Revenue, Expenses, and the Ending Account Balance.

An accountant typically creates the trial balance to determine the state of your company and how well your accounts are balanced. Then, ledgers and journals can be cross-checked against this. The trial balance makes it simple to see any imbalances between debits and credits. However, it is sometimes faultless. An improper trial balance might result from any inaccurately calculated or incorrectly transcribed journal entry in the ledger. Instead of waiting for the trial balance at the end of the fiscal year, it is preferable to keep an eye out for errors and fix them immediately on the ledger.

Financial statements

Creating financial statements is the next and most crucial stage in bookkeeping. These statements are created by combining data from the daily entries that you have made, and they show you where you need to make improvements by giving you insight into your company's performance over time. The cash flow statement, the balance sheet, and the income statement are the three primary financial reports that every organization must be familiar with and understand.

The Cash Flow Statement

What it says on the tin, the cash flow statement, is precisely that. It is a financial report that keeps tabs on the money flowing into and leaving your company. It enables you to assess how effectively your business manages debt and expenses and those of investors. By analyzing this data in summary, you may determine if you are earning enough money to operate a lucrative, sustainable business.

The Balance Sheet

A company's assets, liabilities, and shareholder equity are listed on the balance sheet at any time. It outlines your company's assets, liabilities, and shareholder investment. The balance sheet, however, only provides a snapshot of a company's financial situation as of a certain date. Additionally, balance sheets from different times must be compared. Through analyses like the current ratio, asset turnover ratio, inventory turnover ratio, and debt-to-equity ratio, the balance sheet enables you to comprehend your company's liquidity and financial structure.

The Income Statement

The income statement, commonly known as the profit and loss statement, is concerned with the money made and money a company spends over time. A typical income statement has two components. The operating income is listed in the upper half, and expenses are listed in the lower half. These are tracked throughout the statement, for example, in the final quarter of the fiscal year. It demonstrates how your company's net sales are transformed into earnings, producing profit or loss. The income statement needs to emphasize receipts or financial information.

Bank Reconciliation

Finding consistency between the transactions in your bank account and your bookkeeping records is known as bank reconciliation. Because it is the final stage in identifying anomalies in your records after everything else has been noted, reconciling your bank accounts is a crucial step in bookkeeping. By using bank reconciliation, you may ensure everything is correct with your finances.

Why is it mandatory?

The need for bank Reconciliation arises from the following:

1. It gives you a clear picture of your company's financial status
2. Accurately tracks cash flow
3. Aids in the detection of fraud or bank errors

Stay on Top of Your Bookkeeping

Your company's success is driven by accurate bookkeeping. It is a basic accounting procedure; without it, it would not be easy to develop plans to enhance your company's core competencies. Even though bookkeeping is crucial, problems might arise if the wrong system is implemented for your business. Some businesses still have access to manual processes like paper journals and physical diaries. But as technology develops more, even smaller businesses may benefit from going digital.

You can maintain reliable financial records for your company using different companies. It offers quicker and simpler solutions for financial statement generation, bank reconciliation, accounts payable/receivable, and cash management. Additionally, its built-in automation handles tedious accounting procedures so you may concentrate more on your business.