Bookkeeping explained for your business
Updated: Jun 7, 2019
If you think of bookkeeping you might think of a shoe box filled with receipts or the chore your doing your quarterly or annual tax returns the night before the tax deadline. But there is more to it and while it needs to be done anyway, you might as well get other benefits from it. This article will tell you how and why.
Definition of bookkeeping
Bookkeeping is the process of recording all of your company’s financial transactions so you can see exactly where your revenue is coming from and if you've received it, how your business is spending money and how much tax you are owed or need to pay. So your bookkeeping plays an important role.
Difference between bookkeeping and accounting
The difference between bookkeeping and accounting can be confusing. The difference can be explained by a bookkeeper recording all transactions and an accountant preparing its financial statements and tax reports.
When the transactions have been posted, the bookkeeping is complete and an accountant will make adjusting entries in order to prepare the financial statements and other reports.
Why bookkeeping is important for your business
Bookkeeping gives you a clear picture of how your business is doing financially. When you have bookkeeping in place you will be able to track your income and expenses. This gives you an objective view on how much profit your business made and you will be able to budget for the future. You will also be able to track how your businesses growing and improving on a monthly and annual basis.
Bookkeeping prevents you from making financial mistakes. When you are doing your bookkeeping you are keeping a close eye on the transactions in your business which means you will be able to spot things like bank errors, high charges from a supplier, or subscription fees for services that should be cancelled.
It helps your business to pay the right amount of tax and prevent fines. When you record and categorize every transaction in your business you will be able to see which expenses are tax-deductible so that don’t pay too much taxes, or pay too little and risk fines.
Bookkeeping can help you get a business loan if applying for a small business loan banks want to see your financial statements. Your bank statements will not be sufficient in this case, so you would need to show your Profit & Loss statement, Balance Sheet and perhaps your Cash Flow Statement. This also shows that you are well aware of what’s going on with your business. This will result in a lower risk for the bank which will result in a lower interest rate and perhaps a bigger loan amount.
7 tips to simplify your bookkeeping
Separate business and personal expenses. To make life easier you want to make sure that your business and personal transactions are not intertwined so it is clear to the HMRC what your business is earning, spending and then what your bottom line net profit is. HMRC has listed the requirements for Self Employed and Limited Companies.
Cash versus accrual method of accounting Cash basis means you only recognize revenue when you receive it. Accrual method means you recognise the revenue when you have delivered the goods or services (not when you got paid). If you are operating a small, one-person business, you might want to stick with cash accounting. Accrual accounting is when you record purchases or sales immediately. You record the expenses or sales when they occur and not when you receive them. You will now have two additional balance sheet accounts: Accounts Payable and Accounts Receivable.
Choose your bookkeeping system. You can do your bookkeeping manually using Excel, pen and paper or use accounting software. Lately, accounting software has become more user-friendly to use. There are even a few really good free(mium) accounting systems on the market such as Wave or Xero. You may need an accountant to help you set up your bookkeeping. Because if you enter incorrect information, then you will not have an accurate ‘set of accounts’ or bookkeeping.
Categorise transactions. Categories can help you understand your sales, expenses and taxes. For instance, not all transactions are equally tax deductible so you will want to know what you are spending on office supplies versus what you are spending on meals.
Organise and (digitally) store documents. You need to keep records for your bookkeeping but there is a bit more to it than just storing all of your receipts in a shoebox. We recommend storing them digitally. Such as in your accounting software or separate such ReceiptBank, Google Docs, Microsoft OneDrive, Evernote or Shoeboxed.
Make periodical bookkeeping a habit. Recommend entering in all your transactions at least once a month.
Management Information. Whenever you update your bookkeeping you can see how your company is doing, whether for just the last month or in comparison to last year. This helps you get an objective overview of your business’ profitability and which clients/ revenue streams bring in the most money.
Bookkeeping in the Old Days
Prior to computers and software, bookkeeping for small businesses usually began by writing entries into journals. Journals were defined as the books of original entry. The journal entries relate to the recorded transactions which were entered manually.
The company's transactions were written in the journals in date order. On a weekly or monthly basis, the amounts in the journals would be posted to the designated accounts located in the general ledger (book). Examples of accounts include Sales, Utility Expense, Wages Expense, Cash, Debtors, Loans Payable, etc. Each account's balance had to be calculated and the account balances were used in the company's financial statements.
To determine whether errors had occurred, the bookkeeper prepared a trial balance. A trial balance is an internal report that lists 1) each account name, and 2) each account's balance in the appropriate debit column or credit column. If the total of the debit column did not equal the total of the credit column, there was at least one error occurring somewhere between the journal entry and the trial balance. Finding one or more errors often meant spending hours retracing the entries and postings.
The electronic speed of computers and accounting software gives the appearance that many of the bookkeeping and accounting tasks have been eliminated or are occurring simultaneously. For example, the preparation of a sales invoice will automatically update the relevant general ledger accounts (Sales, Accounts Receivable, Inventory, Cost of Goods Sold), update the customer's detailed information, and store the information for the financial statements as well as other reports.
The accounting software has been written so that every transaction must have the debit amounts equal to the credit amounts. The electronic accuracy also eliminates the errors that had occurred when amounts were manually written, rewritten and calculated. As a result, the debits will always equal the credits and the trial balance will always be in balance. Also, most accounting software now includes the ability to upload the purchase invoices or receipts. This helps to prevent the receipts to get lost or it saves time in looking for an invoice or receipt when needed.
If you are a small business owner, you either have to set up your own accounting system or find a bookkeeper or an accountant to set it up for you. FinanceWise can help you find the right accountant which matches your business needs.
Finding your bookkeeper with FinanceWise
Depending on how big your business is you might want to do the bookkeeping yourself, hire a bookkeeper or hire a bookkeeper and an accountant. Either way by ‘keeping your books’ on a periodical basis, ideally weekly or monthly you can make business decisions on accurate and recent information. When you’re ready to hire a bookkeeper or accountant FinanceWise is here to help you find that bookkeeper or accountant. We have screened the accountants and know where they specialise in, so they know your industry and business. Also, we take in account your personal preferences such as type of accountant: small, large, informal, cultural backgrounds, male or female accountants. We’re here to help you find the right bookkeeper and accountant for your business.