What Is Bookkeeping?
Bookkeeping involves more than numbers and spreadsheets — it’s the process of recording each of your business’ financial transactions. Whether you’ve been an entrepreneur for years or you’re only getting started, you can improve your finances. Bookkeeping gives you an accurate view of your organization’s performance and can set you up for success.
To help you understand the importance of bookkeeping, we cover the meaning of bookkeeping, the benefits, the differences between bookkeeping and accounting and whether you should do your bookkeeping yourself or hire professionals.
Bookkeeping refers to the process of recording and tracking each of your business’ financial transactions. Your company’s accounting department or a third-party bookkeeper records your business activities according to your organization’s accounting principles and supporting documents. Supporting documents may include:
- Purchase orders
While you can record your business transactions in an Excel spreadsheet or a notebook, tracking your organization’s financial history will be much easier with bookkeeping software or help from an accounting professional. Crucial aspects of your accounting process include keeping your transaction records up to date and generating accurate financial reports to measure your organization’s performance.
With an organized bookkeeping process, you can carefully monitor your business’ financial capabilities and progress toward growth and increased profits. You can also make pivotal investing, financing and operating decisions. Additionally, having detailed records will be helpful if you face a tax audit.
A bookkeeper is someone who manages all your company’s financial data. Without an effective bookkeeping process or a reliable bookkeeper, you may be unaware of your business’ current financial position and transactions. A bookkeeper can ensure your records are correct for you and external users, such as the government, financial institutions or investors. These organizations need access to accurate financial information to make lending or investment decisions.
How Does Bookkeeping Work?
There are three types of bookkeeping — single-entry, double-entry and accrual-based or cash-based bookkeeping. Your business needs will determine the correct method for you.
- Single-entry bookkeeping: Single-entry bookkeeping involves tracking expenditures and cash sales over a given period. Small startups, sole proprietors and companies with little transaction activity tend to prefer this method. If you choose to record transactions in a single entry, you should maintain a few pieces of documentation, including bank statements, cash disbursements and cash sales.
- Double-entry bookkeeping: Double-entry bookkeeping involves recording your business transactions in at least two accounts as a credit or debit. With this bookkeeping technique, debit amounts should match the credit amounts recorded. Since this process is more advanced, it’s ideal for enterprises that accrue expenses. Documents involved with this approach include payroll, general ledgers, accounts payable, accounts receivable and business journal entries. The first entry records a transaction as either an income or expense, and the second entry classifies the transaction on the proper account.
- Accrual-based or cash-based bookkeeping: You can also decide between accrual-based or cash-based bookkeeping, depending on where your organization recognizes expenses and revenue. With the accrual method, you recognize your revenue when you earn it. With the cash method, you recognize your revenue when your business receives cash. You can use either approach with single-entry and double-entry bookkeeping.
Benefits of Bookkeeping
An efficient bookkeeping process can offer the following advantages.
- Prepare for tax season: Getting ready for tax season can be overwhelming, but your bookkeeping can simplify the process.
- Make informed decisions: When you have a big picture of your business’ financial health on hand, you can make wiser business decisions and set goals.
- Access detailed records of every transaction: Tracking all your financial transactions means you have quick, easy access to your financial information whenever you need it. To make pulling and analyzing your data simpler, bookkeepers may group transactions into different categories, such as wages, services, goods and taxes.
Bookkeeping vs. Accounting
Though sometimes used interchangeably, bookkeeping and accounting have some notable differences. While accounting is an umbrella term that encompasses all processes involved in recording your business financial transactions, bookkeeping is a crucial part of the accounting process. To better understand the differences, consider these bookkeeping examples:
- Processing payroll
- Posting credits and debits
- Preparing financial statement
- Recording financial transactions
On the other hand, accounting tasks include:
- Filing tax returns
- Performing tax audits
- Preparing and adjusting entries
- Analyzing and reviewing business financial statements
Bookkeeping differs from accounting in that it focuses on the administrative side of your company’s finances, while accounting tends to be more subjective. Bookkeeping is an essential part of accounting and allows your company to gain the insights you need to make more informed financial decisions that can help grow your business and increase profits.
Should I Do My Bookkeeping?
Armed with a thorough understanding of what bookkeeping entails, you may now wonder whether you should take on this responsibility yourself or outsource it to a team of experienced professionals. There are two factors to consider when determining whether you should handle your bookkeeping on your own — whether you have the time to dedicate to the process and the expertise needed to efficiently and successfully perform your bookkeeping tasks.
- Time: Bookkeeping can be a tedious, time-consuming process, and as a business owner, you’re already juggling multiple tasks to keep your business up and running. If you’re already shouldering several responsibilities, adding on bookkeeping could quickly become overwhelming. Unless you have time to update your records daily, you may want to hire a professional. By outsourcing, you can regain some of your valuable time and return your focus to the revenue-generating parts of your business.
- Expertise: Consider your experience with bookkeeping to determine whether you can handle the task yourself. A professional bookkeeper is far more likely to have the expertise needed to handle the process and ensure your numbers are accurate. Unless you stay abreast of federal and local tax codes, tackling your bookkeeping yourself could be challenging. A bookkeeper will have the in-depth finance and tax knowledge needed for successful bookkeeping, which is why so many business owners opt to outsource their bookkeeping.
If you lack the necessary time and expertise to handle the bookkeeping process, turn to our team of bookkeeping professionals at Steph’s Books.
Contact Us at Steph’s Books for Bookkeeping Services
At Steph’s Books, we can tackle your bookkeeping and take the task off your hands forever. Our team of caring, resourceful and reliable bookkeepers will help you grow your business. You can trust that we’ll use our more than 25 years of experience to streamline your operations and bookkeeping. We can augment your team, which means you can choose how much or how little of your bookkeeping you want us to handle.
Contact us at Steph’s Books to learn more about our online bookkeeping services or get a free quote today.