Bookkeeping is the process of recording the financial transactions of any business. Small businesses and start-ups maintain simple books, but large companies use complex books which are now software-based.
What is bookkeeping?
Bookkeeping starts with the opening of any firm and exists till the closure. The finances are categorical and depend on the supporting documents. There are several supporting documents, receipts, invoices, payment orders, purchase orders, and bank loan papers. The traditional bookkeeping method was a manual recording of any financial transactions in the journals, with the supporting document was on ledgers. Gradually, the accountants moved to Microsoft excel for the recording of accounts. But, presently, almost all the businesses have shifted to computerized bookkeeping.
Bookkeeping is either a single entry or double-entry system. Every business is unique, and on comprehension of the same, you can record the charts of accounts. The charts are a combination of debit and credit balances.
The bookkeeping is vital for the calculation of tax at the end of the financial year. It gives a transparent view of everything. What is the cash inflow, outflow, liabilities created, assets gained, and even the calculation of goodwill?
Bookkeeping VS Accounting
Bookkeeping is the primary step to any accounting. There is NO accounting without good bookkeeping. A bookkeeper collates all the documents related to a financial transaction, makes a proper recording in the relevant accounting journal, categorizes every transaction, and prepares the accounts charts. Every business follows a different term for the collation of financial records, some require quarterly reports, and some prefer annual.
The accountant’s work is dependent on the bookkeeper’s job. The accountant analyzes, reviews, cross-verifies, interprets and then generates the final financial statement for the business. The financial statement also includes the year-end report, which is under the regulation of the standards set by the Financial Accounting Standards Board (FASB). The regulations are set by Generally Accepted Accounting Principles (GAAP). Brian C Jensen suggests sticking to the rules and maintains the uniformity of records at the end of the year.
Brian C Jensen’s advice on the type of accounting system
The most crucial decision at the start of bookkeeping is the type of system for your business – cash accounting system or accrual accounting system. For start-ups and smaller businesses where most transactions are in cash then, cash accounting is ideal. In cash accounting, every cash flow is in the record.
Accrual accounting purchase and sales transactions are essential for consideration whether cash flow is present or absent. Many companies start with a cash accounting system but then gradually move to accrual accounting. Any business that has credit transactions, whether credit purchase or sales, should consider an accrual accounting system.
Single bookkeeping VS Double-entry bookkeeping
Single bookkeeping is like maintaining a record of every record. Payment of bills, deposits, receipt of cash is few to mention. However, in double-entry bookkeeping, when any financial transaction results in a dual effect that affects two accounts (gain/loss or coming/going), the double-entry system is perfect.
Bookkeeping is a vast topic, and this was just a prelude to getting a sneak peek to start. All the best!
