What Is Bookkeeping? A Small-Business Owner’s Guide

One of many first challenges new enterprise homeowners face is managing their enterprise’s bookkeeping. Not solely is strong bookkeeping required to file your tax returns annually, however additionally it is essential to have the monetary info it’s good to make sound enterprise selections.

Even with this inherent information concerning the significance of bookkeeping, many enterprise homeowners are nonetheless confused. What, precisely, is bookkeeping? What’s the distinction between bookkeeping and accounting? What goes into bookkeeping, and what do you have to count on out of your bookkeeper?

Bookkeeping is broadly outlined because the recording of monetary transactions for a enterprise. It’s a part of a enterprise’s total accounting course of. Bookkeeping could be achieved as steadily as day by day or as occasionally as as soon as per 12 months.

Fashionable bookkeeping was formally established within the late fifteenth century when Italian mathematician and Franciscan monk Luca Pacioli described double-entry bookkeeping in his ebook, Overview of Arithmetic, Geometry, Ratio and Proportion.

That’s proper: “Fashionable” bookkeeping is over 500 years previous. And whereas the fundamentals of accounting haven’t modified in over 500 years, the observe of bookkeeping has. Bookkeeping was as soon as achieved manually utilizing precise books referred to as journals and ledgers. As a result of bookkeeping is predicated on double-entry accounting, transactions needed to be recorded in two separate locations (the journal and the ledger). The books then needed to be balanced every month — often known as a trial steadiness — earlier than monetary statements may very well be ready.

In different phrases, bookkeeping for a enterprise was a full-time job.

The arrival of computerized accounting software program considerably lessened the tediousness of bookkeeping. Applied sciences like optical character recognition (OCR) and financial institution feeds have come simply wanting absolutely automating the standard bookkeeping course of. Knowledge entry can now occur as quickly as you snap a photograph of a receipt together with your smartphone. And reconciliations occur virtually in real-time via day by day financial institution feed upkeep, making the end-of-month closing course of a snap. Now one bookkeeper can handle the bookkeeping for a number of companies in fewer than eight hours a day.

Accounting vs. bookkeeping

Many individuals use the phrases bookkeeping and accounting interchangeably. Regardless that many bookkeepers right this moment do fulfill some conventional accounting roles — like consulting shoppers on their funds — there’s a distinction between bookkeeping and accounting.

Bookkeeping is basically involved with recordkeeping and knowledge administration. Bookkeepers be certain that the knowledge within the books is correct and that the books are reconciled every month. In essence, they full step one within the accounting course of.

Accountants, then again, use the knowledge supplied by bookkeepers to summarize a enterprise’s monetary place and render monetary recommendation to the enterprise proprietor. Many accountants additionally put together tax returns, unbiased audits and licensed monetary statements for lenders, potential patrons and traders.

Accountants usually have a minimum of a bachelor’s diploma in accounting, and lots of go on to turn out to be Licensed Public Accountants (CPAs) or Licensed Administration Accountants (CMAs.) Bookkeepers may additionally have levels in accounting, however most have both technical certifications or on-the-job expertise.

Bookkeeping has its personal language, and bookkeepers and accountants typically overlook enterprise homeowners may not be fluent in it. The next are some widespread accounting phrases you’ll encounter when doing bookkeeping or working with a bookkeeper or accountant. That is in no way a complete glossary, however a fast primer:

• The accounting equation: The accounting equation is the important thing formulation that retains your books in steadiness. That equation is Property = Liabilities + Fairness. You may see the accounting equation in motion in your corporation’s steadiness sheet.

• Property: What your corporation owns. Property embrace money, buildings, autos, patents and open invoices due from prospects (accounts receivable), simply to call a couple of.

• Liabilities: What your corporation owes. Liabilities embrace bank card balances, quantities as a result of distributors (accounts payable), mortgage balances and tax liabilities that haven’t but been paid.

• Fairness: What’s owed to the proprietor or shareholders of the enterprise. Fairness consists of cash paid in by the proprietor (contributions), cash the proprietor has earned however not taken from the enterprise (retained earnings) and different forms of contributions like inventory issued.

• Normal ledger: The final ledger is made up of belongings, liabilities, fairness, revenue and bills. These 5 forms of accounts comprise the books for your corporation.

• Chart of accounts: The itemizing of classes you employ to categorise your corporation’s transactions. Consider the chart of accounts as a form of submitting system for your corporation’s transactions.

• Debits and credit: Every bookkeeping transaction has two sides (bear in mind, it’s referred to as double-entry accounting). One aspect of the transaction is the debit aspect, and the opposite aspect is the credit score aspect. Property and bills are elevated by debits and diminished by credit. Earnings, fairness and liabilities are elevated by credit and diminished by debits.

• Accrual foundation and money foundation: Accrual foundation accounting acknowledges revenue and bills when they’re incurred. Money foundation accounting acknowledges revenue when cost is obtained and bills when cost is made. Our accrual vs. money foundation accounting information can present extra element.

• Reconciliation: The method of verifying the steadiness of sure accounts (checking, bank cards, loans, and so forth.) towards statements from an out of doors supply, normally a financial institution.

• Earnings: Cash your corporation earns via gross sales.

• Bills: Cash your corporation spends on operations and overhead.

• Value of products: Cash your corporation spends to supply revenue.

• Revenue: What your corporation has earned after price of products and bills are subtracted from revenue. Revenue is just not the identical as money available.

Bookkeeping means various things to completely different folks. Some bookkeepers focus solely on “write up” work, which principally consists of compiling the books shortly, normally for tax preparation functions. Different bookkeepers present “full cost” companies and may even function a monetary controller to your firm.

Full cost bookkeeping duties could be damaged down into 4 broad classes.

Knowledge entry entails getting into your corporation’s transactions into your bookkeeping system. As talked about above, loads of the info entry now occurs routinely, both via OCR or financial institution feeds.

There’s extra to knowledge entry than simply placing the numbers into your software program, although. Correct knowledge entry consists of:

• Supply doc verification: That is the step that normally will get skipped when doing all of your bookkeeping solely from financial institution feeds. Ideally, you need to be certain that your knowledge entry comes not from the financial institution feed, however from supply paperwork like receipts or payments. This ensures that solely legitimate enterprise transactions are being entered into your books. Right this moment’s bookkeeping software program permits you to snap a photograph of or scan in your supply paperwork, after which OCR know-how will extract the pertinent info and do a lot of the info entry for you. This implies you’ll be able to keep supply doc verification whereas nonetheless making the most of the time-saving know-how of your accounting software program.

• Correct classification of transactions: Every entry into your bookkeeping system impacts a minimum of two accounts in your corporation’s chart of accounts. Correct knowledge entry — or knowledge administration for those who depend on automation to your knowledge entry — ensures that transactions are being posted to the right accounts. Correct classification of transactions allows you to produce monetary administration stories which can be utilized to make strategic enterprise selections.

• Correct identification of transactions: One of many downfalls of some bookkeeping software program is that the factitious intelligence behind the software program could make errors a human wouldn’t make whereas getting into the info. The commonest of those errors is assigning the incorrect payee title to a transaction. You have to be certain that your transactions are being recognized appropriately. That is particularly necessary for funds you make to distributors who will want a 1099 Type on the finish of the tax 12 months.

Usually, workplace administration duties like buyer billing, paying distributors and payroll are thought-about to be bookkeeping duties. Though accounts receivable, accounts payable and payroll do impression your books, a few of these duties could be managed by an individual in your organization apart from your bookkeeper. Others — like payroll — could be outsourced to unbiased firms specializing in the duty.

In case your bookkeeper payments your prospects or pays your distributors and staff, be sure to have correct checks and balances in place to mitigate the potential for fraud.

Your books needs to be closed on the finish of every accounting interval. Finish of interval closing consists of:

• Reconciling all financial institution, bank card and mortgage accounts.

• Reconciling accounts payable and accounts receivable.

• Making any adjusting journal entries for pay as you go income or bills, depreciation or different uncommon transactions.

• Reviewing the monetary statements for accuracy and completeness.

• Locking the books so the books can’t be modified after the tip of interval closing has been accomplished (non-compulsory, however extremely really helpful).

Solely an accountant licensed to take action can put together licensed monetary statements for lenders, patrons and traders. Nevertheless, your bookkeeper can put together inner administration stories for your corporation.

There are three widespread inner administration stories your bookkeeper can put together for your corporation:

1. Your steadiness sheet is a snapshot of what your belongings, liabilities and fairness as of a sure date. It’s the accounting equation Property = Liabilities + Fairness in motion for your corporation.

2. Your revenue assertion (often known as a revenue and loss assertion or P&L) particulars your corporation’s revenue and bills for a time period (a month, quarter, 12 months, and so forth.). It reveals whether or not your corporation has earned a revenue or skilled a loss.

3. Your money circulate assertion reconciles the revenue assertion to the steadiness sheet and solutions the query, “The place did the money go?” for accrual foundation companies.

The steadiness sheet and revenue assertion could be ready on both a money foundation or an accrual foundation (the money circulate assertion is at all times an accrual foundation report). Though accrual foundation statements are extra correct, many enterprise homeowners discover money foundation stories simpler to know.

Your bookkeeper may additionally put together different auxiliary stories for your corporation, like accounts receivable and accounts payable getting older stories. You should use these unaudited monetary statements and auxiliary stories to make enterprise selections primarily based on the knowledge in your bookkeeping system, however they shouldn’t be introduced as audited, licensed or official monetary statements.

It’s necessary to notice that not all lenders and traders require licensed or audited monetary statements. Nevertheless, it’s nonetheless a good suggestion to ask an accountant to assessment your bookkeeper’s monetary statements for accuracy and completeness previous to submitting them to a 3rd occasion for consideration. And even for those who’re not in search of funding, think about asking an accountant to assessment your monetary statements a minimum of yearly.