What is Bookkeeping?
At the most basic level, bookkeeping is an organized system of recording, storing and reviewing transactions within a certain time period.
Bookkeeping tracks the following:
- Individual and total client/customer AR balances
- Payments received from clients/customers
- Individual and total supplier/vendor AP balances
- Payments made to suppliers/vendors
- Payroll and payroll taxes owed
- Sales tax owed
- Loan and interest payments paid/owed
- Depreciation expense of computers, buildings, vehicles and other fixed/large assets
Source documents provide the information required to record the transactions listed above. Source documents are simply receipts, invoices, bills, check stubs and other items resulting from business transactions.
Here’s a quick tip: all source documents should be saved for at least 7 years in case your business is ever audited.
- Categorize transactions-The transactions are grouped into categories called accounts. The main account categories are assets, liabilities, equity, revenue and expenses. Within each main category there are subcategories.
- Record transactions-Following the rules of double entry accounting, each transaction impacts two accounts. Debit one account, credit the other. This results in the total debit balance equaling the total credit balance at any time.
- Post to the Ledger-The balance of each account changes from period to period. Based on the recorded transactions, the balances are updated at the end of every period. The General Ledger is where each account’s balance is stored and updated.
- Create Financial Statements-The account balances in the general ledger are used to create the financial statements. The most common statements are the Income Statement (also known as Profit and Loss), Balance Sheet, and the Statement of Cash Flow. Each one offers a view of the financial condition of the business. Putting the three together presents a complete picture.
Although the process is straightforward, bookkeeping is hardly ever problem free. For example, some transactions are tricky to categorize. Incorrect categorizations result in distorted financial statements.
Or, locating the source of errors that pop up later can take hours. Who wouldn’t dread this time-consuming project.
In addition, taxes, payroll, loans, depreciation and investments can make bookkeeping confusing if you haven’t been trained in it.
No wonder so many business owners hate keeping their books.
Despite its challenges, bookkeeping is a vital task in any business, big or small. Are you still lacking the motivation to tackle those books, regardless of how important bookkeeping is? Take a look at “Why You Can’t Ignore Bookkeeping” as well as “7 Reasons Why Bookkeeping is Important” to help stir you to action.
Otherwise, consider hiring a professional bookkeeper who can keep the books for you. An excellent bookkeeping system can enhance the success of your business.