Bookkeeping is the process of recording daily transactions for a business.
That is a brief way of defining it but that can also oversimplify the actual work which goes into the process.
Bookkeeping is more involved than the simple recording of income, expenses and a tally of how much cash is on hand.
It is also used to protect a business’s assets and note errors before they become problems at tax time.
The following information explains general bookkeeping using the four-element system.
- Income and Expenses
- Assets and Liabilities
The four element system begins with keeping track of all the cash that flows in and out of a business. Cash is used to run the business and manage it.
Keeping track of cash is essential to the wellbeing of any business no matter how big or small.
The work that goes into managing cash includes saving receipts for payments or money spent on business expenses.
The cash books also note increases and decreases in the cash account.
A business must have a separate account for cash versus an account that is used for payroll or for tax payments.
Cash accounts are also used to retain records of deposits and withdrawals.
How can a business implement this first element of bookkeeping? It does not make practical sense to have everyone in the firm post entries to the cash ledger.
Instead, this job should be left to an assigned bookkeeper or an accounting firm. This means the daily cash entries can be accurately posted and recorded.
Reports can be accessed whenever they are needed for tax purposes or whenever questions arise.
Income and Expenses
Income and expenses must be recorded every day much like cash.
A bookkeeper must work each day to note all income received by the business and all expenses paid for by the business.
Gross receipts and sales are noted in one section of a ledger. Inventory purchases go in another section of the ledger.
Expenses for the business go in yet another section.
These include things like advertising, credit card or bank fees, health insurance, gifts, rent, utilities, and postage.
These notations become reports which can be used when filing taxes at the end of each year.
Assets and Liabilities
The third task which is the duty of the bookkeeper is that of tracking assets and liabilities.
Using what is known as a balance sheet, the bookkeeper notes the properties owned by the company and the rights to anything tangible or intangible used by the company.
Liabilities are recorded as those items which the company owes to another person, entity or firm.
A balance sheet reflects the company’s financial standing. It can be used to apply for loans or capital investments.
A bookkeeper’s fourth element of record keeping is that of capital. This is where net assets are disclosed following the deduction of liabilities.
In accounting, this is calculated as capital equalling total assets less total liabilities. The above items reflect the four essential elements of accounting.
A bookkeeper or an accounting and tax firm can also assist with things like preparing invoices and statements.
This job and the four elemental jobs can be efficiently handled by a designated professional such as a tax preparer or an accountant.
Your bookkeeper will also provide you with annual company reviews and other reports which you can request any time you need to review the financial status of your company.
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