Bookkeeping is the methodical procedure of organising, recording, and sustaining a business’ financial transactions and records. The bookkeeper documents all assets, liabilities, equity, income, and expenses of a business.
They use these to produce accurate financial statements and reports. This allows business owners, managers, and other stakeholders to make educated decisions about an organisation’s financial health.
Keeping accurate records through bookkeeping is essential. These give businesses a better chance of complying with regulatory and legal needs. In this way, it is easier to supply evidence of financial reports, statements, and transactions during audits. They can also fulfil their tax obligations without problems.
Proper bookkeeping functions mean businesses can monitor their financial position and performance. They can keep track of business income and expenses to analyse profitability and identify any areas of overspending. Hence, informed budgeting and resource allotment decisions are easier.
The bookkeeping process lays a foundation for forecasting and financial planning. Businesses can assess their cash flow, and predict future financial requirements. They can hence better evaluate their financial stability. Straightforward access to a business’s financial records means better investment opportunities and loan application success rates.
An accounting system with good bookkeeping software means closer monitoring of a company’s financial transactions, statements, and reports. It also allows for more efficient business growth planning.
All stakeholders value up-to-date access to financial statements within their enterprise. Accurate bookkeeping encourages and facilitates effective communication with such stakeholders. Confidence and trust levels in the business’s financial management improve, enhancing its reputation.
Sound bookkeeping practices in both personal and business finances provide an important foundation. This improves the chances of short and long-term success and sustainability.
Finally, here are some pivotal reasons why bookkeeping is important in all businesses:
- A sound understanding of an organisation’s finances and access to financial statements is needed by those involved. This makes it easier for a business owner to sustain the success of the company.
- A capable bookkeeping process allows those in charge to prepare for new financial periods efficiently. As such, there won’t be doubts about the liquidity and profitability of an organisation at any time. Access to the business’s financial transactions will always be available.
- Bookkeeping tasks and processes kept up-to-date by reliable financial staff and accounting software encourage investors. Business owners can prove their business’s profitability and financial reliability when seeking investment.
- A responsible bookkeeper enforces an accurate accounting process. This improves business responsibilities like controlling tax filing, levy payments, and other bookkeeping basics. Recording transactions correctly allows for the precise and quick calculation of all amounts due.
- Bookkeeping employees can liaise easier with an accountant. A bookkeeper recording financial transactions and maintaining financial data saves time for the accountant. This means the company saves money.
What Is The Difference Between Accounting And Bookkeeping?
Qualifications and compensation
There are several similarities between bookkeepers and accountants. They often work in tandem on both personal and business finances, even when the “bookkeepers” are owners who do their own bookkeeping. Besides the similarities, there are distinct differences between the two financial roles as well.
One difference between bookkeeping and accounting is the qualifications required for the roles. Bookkeepers are usually less qualified than accountants. Hence, they are often employed by businesses to fill full-time, on-site positions.
Accountants, especially chartered accountants, often have their own practices. They contract to small business concerns or start-ups, producing financials and offering financial advice. They also could be employed by financial service companies catering to larger businesses.
Accountants can command higher salaries or charge higher rates than bookkeepers.
Bookkeeping is the initial stage of the financial process. A bookkeeper records all transactions taking place in a business, along with the initial financial records.
Once this is done, an accountant accesses the data and analyses it, adjusting where necessary. They advise the business owner on various decisions that may be needed. Making the right calls may assist with cash flow, money saving, and the organisation’s growth.
In other words, bookkeeping involves data capture and recording everyday transactions. These include areas involving accounts receivable, accounts payable, the bank and income statement, and tax filing.
Accounting covers the reporting of a business’s financial position. An accountant may reference a bookkeeper’s work through the accounting software used by the business.
Accountants carry out financial forecasting, funding requirements, business audits, and profitability assessments. They will make use of a company’s cash flow statement, income statement, balance sheet, and other reports. Accountants can also file annual financial accounts on a company’s behalf.
Different Types Of Bookkeeping
Bookkeeping is done in two different ways – single-entry bookkeeping and double-entry bookkeeping. The methods differ from each other, and business owners should understand the difference.
Single-entry bookkeeping is the most fundamental method of keeping books. It is perfect for sole proprietors who do their own bookkeeping to keep their business finances separate from their personal records.
This bookkeeping method gets done by hand or on a computer using a platform like Google Docs or software like Microsoft Excel. Each business transaction gets posted as a single entry. It gets allocated to either an income or expense column on capturing.
Single-entry is an acceptable method of bookkeeping for small business owners with only a few transactions. It can be done without specialised bookkeeping software or the need for financial professionals. For this reason, it is a much cheaper method of recording business transactions.
Starting a single-entry system is easy. The bookkeeper enters an opening balance into a manual cash book or a computer spreadsheet. Thereafter, they record every transaction involving the enterprise for the month. Finally, they add the income and subtract the expenses to arrive at a month-end closing balance.
The balance is then carried forward to the next month where the process begins again. Comparing the opening balance of the two periods means an owner can see whether the business has made or lost money over the preceding month.
A single-entry system will usually include information for every transaction:
- The transaction date
- A basic description of the purchase or sale
- The name of the supplier or customer
- The value of the transaction
- The balance carried forward after the transaction
The double-entry system is a lot more involved. This method is an internationally-recognised and time-tested bookkeeping standard for most organisations. Generally, businesses use an experienced bookkeeper to carry out the role efficiently.
Double-entry bookkeeping is structured to allow for fast and detailed financial transaction access and tracking. Information can be accessed quickly to use for VAT returns, levy payments, and other record keeping.
It also allows for timely access to financial reports like cash flow and income statements or a business’s trial balance, balance sheet, or bank account balances. Practically every kind of bookkeeping software uses the double-entry system. It is the recognised standard bookkeeping method worldwide.
All financial transactions have two entries involved – a debit and a credit entry. For example, if a business buys stock through its bank, its stock-on-hand (current assets) will increase. At the same time, the bank’s balance decreases.
After these entries get captured by the bookkeeper, they become part of the general ledger. The general ledger summarises all entered transactions according to their types. It will usually show debit entries on the left and credits on the right.
Once a business’s transactions are successfully processed, a trial balance can be generated. This report shows when all debits and credits balance, and enables a bookkeeper to spot if any incorrect entries exist. If there is an error, the bookkeeper can do a journal entry through the general ledger to rectify it.
At Business Financing, we believe every organisation should consider having a professional bookkeeper. Due to the complex nature of the accepted double-entry system of bookkeeping, it makes perfect sense.
It’s also advisable to hire an accountant to manage your business’s finances. The accountant plays an important role in ensuring all legal requirements get followed at financial year-end too.
As an individual, you could also do worse than to use an accountant to keep your domestic finances and tax requirements in order as well.
Also see: Accounting vs Bookkeeping
Can I do bookkeeping on my own, or should I hire a professional?
You can do your own bookkeeping, especially as a small business with a few straightforward transactions.
As your business grows or you need more complex financial reporting, it would make sense to hire a professional bookkeeper.
How long should I keep bookkeeping records in the UK?
The standard recommended time frame for keeping bookkeeping records in the UK is at least five years after the submission deadline of the latest tax period.
These periods can vary, though, depending on type of records you’re keeping.
Why is bookkeeping important?
Bookkeeping is important to get an idea of your business’s financial health. It also makes financial analysis and decision-making easier. Plus, you will know what tax is due.