Bookkeeping in accounting?
What is meant by Bookkeeping in accounting terms?
Bookkeeping involves the documentation of a company’s financial dealings into their finances, fees or charges carried out daily. It may also refer to the various recording and reporting techniques that a business uses. As well being a legal requirement, keeping your financial records updated, can help you generate factual financial reports that will help you determine the overall performance of your business. It will also come in handy when it comes to tax auditing.
Choosing the right method is essential in keeping your business running smoothly but before you decide which method is best for you, examine the volume of daily financial transactions that your business has and the revenue that you earn. Complicated bookkeeping methods may not work with small businesses while less hefty methods are not enough for large companies.
Now that you know what bookkeeping is, let us take a closer look at some of its methods and determine which method is right for you.
- Single-entry. This is a fairly simple method where an entry is created for every transaction. The transactions are usually kept in a cash book so tracking incoming profit and outgoing overheads can be simplified. This method is so simple that even those with no formal accounting training can accomplish it correctly. This method is usually applicable for small business and sole proprietors that hold small volumes of inventory, those with minimal or zero physical assets and those that don’t buy or sell through credit.
- Double-entry. This is a more robust method than the single entry. The method works by following a principle that every financial transaction will affect 2 accounts, which is recorded as credits and debits. For instance, whenever you make a sale of £50, your debit account will be charged £50 and your sales account will be charged with the same amount too. In this method, the total credits should always be equal to the total debits. Whenever this happens, you will have books that are ‘balanced’. This method is advantageous for large corporations, businesses that are public and those that buy and sell through credit. It is generally the most preferred method for businesses due to the fact that it leaves little room for error. The method works in a way that double-checks your transactions as each entry is recorded as two corresponding but counterbalancing accounts.
- Cash or accrual-based. This is the next step in bookkeeping and focuses on your business recognising its expenses and revenue. In cash-based bookkeeping, you identify revenue whenever you receive cash in your business. Expenses are identified when they are being paid for something. In simple terms, every time cash enters or departs from your accounts, it should be recognised in your books. This means that transactions based on credit will not go into your books unless the cash exchange has already transpired. In accrual-based bookkeeping, the revenue is identified when it is being earned. Expenses can be written in the books in a similar way too, and they are usually recorded alongside its matching revenue. The physical cash does not need to enter or depart for the transaction to be recognised and recorded, so you can mark your purchases and sales made through credit right then and there. Cash and accrual-based bookkeeping work well with single or double-entry bookkeeping. However, the accrual method works best for double-entry bookkeeping.
What are the examples of bookkeeping?
There are many tasks that involve bookkeeping. Some of them happen when you create financial reports; record depreciation or other adjusting listings; bill customers for services or goods provided; pay suppliers; monitor accounts that are receivable; verify or record invoices coming from suppliers; record receipts from clients; process your employees’ salary and other related governmental requirements like VAT or PAYE contributions.
The below breaks down some examples and what they entail:
- Accounts Payable. If you want to get a clearer view of what your business is spending, accounts payable will serve as a representation of the money that your business owes in the form of invoices and bills from your suppliers. This will help you keep track of making payments on time and prevent you from paying your suppliers twice.
- Accounts Receivable. This is the opposite of accounts payable. If somebody owes you payment and you don’t collect it immediately, you can track receivables by putting them in your books. It is simply money that your suppliers or customers owe to you. It must be kept updated so you can send invoices and bills on time.
- Cash. This account tracks all financial transactions that happen in your business. It is simple because you only need to recognise your deposits and withdrawals and record them in your books.
- Inventory. All your products in stock must be tracked and accounted for carefully. Your books and actual inventory should match. You can carry this out by regularly stock counting your inventory on a regular basis such as daily, weekly, monthly, quarterly, yearly, etc. or whenever you create a sale.
- Loans Payable. This entry on your books can be recognised whenever you borrow money from somebody. All you need to do is code this entry into the loans payable account so you can track how much you owe and when you should pay it.
- Owner’s Equity. Small businesses are often owned by a single person or group of partners. To divide the ownership, all money invested into the business must be tracked through the capital accounts and the money that is taken out from the business should be tracked through the drawing accounts. This will help you track all the equity accounts of each owner.
- Purchases. This is one way of tracking all the stock, equipment, commodities you buy for your business. You can determine what your gross profit of a product or service line is by taking the cost and subtracting the sales.
- Payroll Expenses. If you keep staff to help you run your business, you should include this cost in your books so you can meet tax requirements and pay your staff on time.
- Retained Earnings. This account helps you keep track of how much your profits are and how much you can use to reinvest in your business. This is something that you don’t pay for yourself or the other owners of the company. This will let you see how much your business has grown ever since you started.
- Sales. This is the account where you code all incoming revenue. This will help you recognise your business’ current financial situation often referred to as Revenue or Turnover.
How Can Nigel B Butler Accounting help?
As Chartered Certified Accountants, we can relieve an enormous burden by taking care of all your bookkeeping and accounting needs, including the preparation of your annual accounts, management accounts, VAT returns, end of year accounts and estimated tax liabilities.To learn more about the role of bookkeeping in accounting or find out which methods would be best for your business, contact Nigel B Butler Ltd on 01793 852121 or