Regardless of your company structure or the location of your company, bookkeeping is a very important aspect that you should take note of. There are a lot of key elements when it comes to bookkeeping, our guide below covers all the elements related to bookkeeping.
WHAT IS BOOKKEEPING?
- Bookkeeping entails tracking and categorizing all financial activities in your company. It records how much your company spends and how much it gets. Depending on the sort of accounting system used by the company, each financial transaction is documented using supporting documentation. That paperwork might be a receipt, an invoice, a purchase order, or any sort of financial record demonstrating that the transaction occurred.
- Bookkeeping transactions can be documented manually in a journal or electronically using a spreadsheet tool such as Microsoft Excel. Most companies today keep records that show their financial activities using specialist bookkeeping computer applications. To record financial transactions, bookkeepers can utilize either single-entry or double-entry bookkeeping.
WHAT IS THE DIFFERENCE BETWEEN BOOKKEEPING AND ACCOUNTING?
- Bookkeeping is an important but preliminary role in the accounting function of a business. A bookkeeper gathers evidence for each financial transaction, writes it in an accounting journal, categorizes it as one or more debits and one or more credits, and arranges it according to the company’s chart of accounts.
- Although all financial transactions are documented, they must be summarised at the conclusion of specified time periods. Some businesses need quarterly reports, while other smaller businesses may simply require reports at the end of the year in order to file taxes.
- The accountant takes over at the conclusion of the relevant time period and analyses, analyses, interprets, and reports financial information for the company entity. The accountant also compiles the company’s year-end financial statements and accounts. The accountant’s year-end reports must correspond to the standards specified by the Financial Accounting Standards Board (FASB), often referred to as the Generally Accepted Accounting Principles (GAAP).
WHAT ARE THE IMPORTANT ELEMENTS OF BOOKKEEPING?
Understanding the company’s fundamental accounts is required for effective bookkeeping. The chart of accounts for the company is made up of these accounts and their sub-accounts. The accounts that comprise the balance sheet of a company are assets, liabilities, and equity.
Assets
Assets are the things that the company possesses, such as inventory and accounts receivable. Fixed assets, which are often the plant, equipment, and land, are also included in the definition of assets. When you look at the arrangement of a balance sheet, you’ll notice that the asset accounts are displayed in the order of their liquidity. Since cash is fully liquid, asset accounts begin with it.
Following the cash, accounts are the accounts for inventories, receivables, and fixed assets. These are tangible assets, and you can touch them. Intangible assets, such as customer goodwill, may also be included on a company’s balance sheet.
Liabilities
Liabilities are what the company owes to its suppliers, bank and business loans, mortgages, and any other debt on the records. A balance sheet’s liability accounts comprise both current and long-term liabilities.
Accounts payable and accruals are common examples of current liabilities. Accounts payable often refer to what the company owes to its suppliers, credit cards, and bank loans.
Equity
The investment that a business owner and any other investors have in the company is referred to as equity. The equity accounts comprise all of the owners’ claims against the company.
The business owner has made an investment, which may be the company’s lone investment. If the business has taken on more investors, this is shown here.
At the end of the year, you need to balance your bookkeeping records. The bookkeeper must maintain close track of these elements and ensure that transactions involving assets, liabilities, and equity are recorded appropriately and in the correct place. You may use a simple formula to ensure that your books are always balanced, which is called the accounting equation. The formula is as follows: –
Assets=Liabilities + Equity
The accounting equation states that whatever a company has (assets) is weighed against claims made against the company (liabilities and equity). Liabilities are demands for money owed to suppliers and lenders. The remaining assets are subject to claims by the owners of the business (equity)
WHY DO SMALLER COMPANIES REQUIRE BOOKKEEPING SERVICES?
- An accurate, well-kept set of books is a good place to start when it comes to running a profitable business. Below are the reasons why,
- You can ensure that you are earning more money than you are spending.
- You will have accurate financial data for planning and budgeting purposes.
- You can predict and avoid a cash crisis by keeping track of when you need to pay suppliers and when you might expect payment from consumers.
- You are more likely to discover improper payments (or even fraud) that might cost you money.
- You are capable of completing accurate tax returns.
- Having your financial information organised makes it easy to collaborate with others, such as lenders, investors, and accountants.
HOW DOES THE BOOKKEEPING PROCESS WORK?
Recording and reconciliation are the two most crucial duties in proper small company bookkeeping. Further explanations of the recording and reconciliation process are as follows:
Recording every transaction
- Keep records of your sales. Traditionally, this was accomplished by entering them into a cashbook or punching them into a spreadsheet. Sales data from point-of-sale or invoicing software is increasingly being downloaded straight into the books of business owners.
- Keep track of your transactions. Every business-related purchase must be documented.
If you intend to claim the expenditure as a tax deduction, you should also save the evidence of purchase. Again, you may record this information in a book or spreadsheet. Alternatively, you may automate the process so that all debits from your company bank account go into your bookkeeping software.
Depending on whether you use cash or accrual accounting, you might record income and costs at various periods.
Reconciling every transaction
- Reconciliation is routinely comparing your business records to your bank accounts to ensure that the transactions and balances match – and determining why they don’t. Bank fees, interest payments, deposits, and payments that have not yet been received in your bank accounts must frequently be accounted for.
- Depending on the number of transactions in your organisation, you may perform bank reconciliation daily, weekly, monthly, or less regularly. However, you will very certainly be forced to reconcile your records before submitting tax returns.
- The sooner you reconcile transactions, the sooner problems may be discovered and fixed. It might be a good idea to do it daily so that the work doesn’t pile up.
HOW CAN THE USAGE OF SOFTWARE HELP IN THE BOOKKEEPING PROCESS?
Many smaller companies utilise online bookkeeping software to expedite these tasks and reduce the likelihood of human data input mistakes. These tools can do the following: –
- Retrieve transaction data directly from POS systems, invoicing applications, and banks.
- Significantly accelerate bank reconciliation.
- Automatically pay invoices.
- Send automated invoice reminders to individuals or entities that owe you money.
- Receive notifications when sales invoices are paid.
- Monitor cash flow from your phone.
Want to know more about bookkeeping, or require bookkeeping services for your company? Drop us an email at enquiry@relinconsultants.com, and our bookkeeping specialists from Relin Consultants will reach out to you.
FAQs
1. What are the common abbreviations used in bookkeeping?
Among the common abbreviations that are used in bookkeeping are: –
- A/c : Account
- A/R: Account receivable
- A/P: Account payable
- B/S: Balance sheet
- G/L: General ledger
- P/R: Payroll
- TB: Trial balance
- EAT: Earnings after tax
- PAT: Profit after tax
- Depr: Depreciation
2. Can a bookkeeper claim to be an accountant?
Usually, the work of a bookkeeper is monitored by either an accountant or the small business owner whose books they are completing. As a result, a bookkeeper cannot call himself or herself an “accountant.” Accountants are usually qualified and certified with certain qualifications as well.
3. What exactly does GAAP mean, and what are its objectives?
The Generally Accepted Accounting Principles (GAAP) are a collection of accounting rules and regulations for financial reporting that are generally followed. GAAP aims at enhancing the clarity, uniformity, and comparability of financial information communication.
