Bookkeeping is the act of recording and classifying different accounting transactions in any business and the techniques used for such processes.
For small business owners, there is the option of doing your own bookkeeping, hiring someone else to do it for you or outsourcing it to a third party.
Taking this into consideration, following is what you need to know about bookkeeping as a beginner.
Currently, there are numerous bookkeeping programs on the market. However, there are some things you need to understand first such as:
Double Entry Or Single Entry
With the single entry method, you can record your transactions when you make payments. It can work perfectly for a small company without many transactions.
However, for larger companies, the double entry system is the best choice. Here, you will make 2 entries for each transaction, a debit and a credit.
Accrual Or Cash Accounting
Cash accounting works best for small businesses especially if it’s a one-person business working from home or a consultancy run by one person.
Here, you will record the transaction when any money changes hands. It might be actual cash or electronic funds transfer.
You can switch to accrual accounting when the business grows.
On the other hand, if you will offer credit to your customers or request suppliers for products on credit, an accrual system should be applied.
Here, you will record the purchases or sales immediately even if the cash doesn’t change hands.
- Assets – These refer to the things the business owns such as the accounts receivables that include things like cash and inventory.
- Liabilities – These are the things the business owes to the suppliers (accounts payable) such as business loans, mortgages and any other debts.
- Equity – This is the level of ownership the investors and the business owner have in the firm.
What You Need To Know About Balancing Books
To keep proper books for the business, you need to keep track of all the items just discussed above.
Make sure the transactions dealing with liabilities, assets and equity are properly recorded and in the right section.
You should follow the standard equation: assets = liabilities + equity whenever recording anything.
This simply means that all the assets owned by the business are balanced against the claims against the business which is the liabilities and equity.
The Income Statement And What To Do About It
The income statement handles the expenses, costs and revenue. When a business sells its products and services, it receives revenue.
On the other hand, costs (also known as costs of goods sold), refers to the money the company will spend to manufacture or buy the goods or services offered to the customers.
Expenses are the costs spent to run the company not related to the goods or services sold such as salaries and wages.
The role of a bookkeeper is identifying where these transactions should be recorded.
For instance, if the business makes a cash sale to a customer and the business relies on the double entry method of recording, such a transaction will be recorded in the asset account referred to as cash.
The sale would then be recorded in the revenue account named sales.
Proper bookkeeping is what keeps your business afloat.
Recording the transactions properly means that there is no missing information and it’s easy to assess the current financial situation of the company.
As mentioned, you can do your own bookkeeping, hire a bookkeeper or outsource it to a third party.
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