What is Bookkeeping & why it is important? Methods of Bookkeeping

Under single-entry, journal entries are recorded once, as either an expense or income. Assets and liabilities (like inventory, equipment and loans) are tracked separately. If you’re just starting out, are doing your books on your own and are still in the hobby stage, single-entry is probably right for you. Small business owners can choose from a wide variety of bookkeeping and accounting software products.

Bookkeeping is how businesses, entrepreneurs, and decision-makers monitor a company’s overall financial health and activity. Without basic bookkeeping practices, it’s easy for financial transactions and spending activities to get out of control, which can lead to confusion, disorganization, and loss of profit. The double-entry system of bookkeeping is common in accounting software programs like QuickBooks. With this method, bookkeepers record transactions under expense or income. Then they create a second entry to classify the transaction on the appropriate account.

Balance your books

Accountants, on the other hand, use the information provided by bookkeepers to summarize a business’s financial position and render financial advice to the business owner. Many accountants also prepare tax returns, independent audits and certified financial statements for lenders, potential buyers and investors. An accounting method refers to the rules a company follows in reporting revenues and expenses. The two primary methods of accounting are accrual accounting (generally used by companies) and cash accounting (generally used by individuals). When running a small business, it’s essential to track cash flow and have the ability to cover unexpected expenses. Unless you’re using a bookkeeping service to alert you when a problem arises, you’ll need to track your income and revenue closely.

By matching revenues with expenses, the accrual method gives a more accurate picture of a company’s true financial condition. If you’re using accounting software, financial reports might be automatically generated. If someone on your staff or an outside accountant prepares the report, review it for accuracy and keep apprised of your financial standing. The accrual-based accounting method records income when it’s billed, not when it’s received. If you decide to grow your business or sell to consumers, you’ll need to transition to the accrual method to meet generally accepted accounting principles (GAAP).

Why is bookkeeping important?

You can either keep hard copies or opt for electronic files by scanning paperwork. When an effective bookkeeping system is in place, businesses have the knowledge and information that allows them to make the best financial decisions. Tasks, such as establishing a budget, planning bookkeeping methods for the next fiscal year and preparing for tax time, are easier when financial records are accurate. After you have a bookkeeping system in mind, the next step is to pick an accounting software. Spreadsheets, such as Microsoft Excel, can be used for simple bookkeeping.

To make things easier, many companies opt to use bookkeeping software to keep track of their financial history. Effective bookkeeping requires an understanding of the firm’s basic accounts. These accounts and their sub-accounts make up the company’s chart of accounts. Assets, liabilities, and equity make up the accounts that compose the company’s balance sheet. You also have to decide, as a new business owner, if you are going to use single-entry or double-entry bookkeeping. You record transactions as you pay bills and make deposits into your company account.

QuickBooks Support

The accrual accounting method records financial transactions when they occur rather than when cash exchanges hands. When you keep detailed, organized records of your business transactions, tax season suddenly won’t feel like such a daunting chore. By being proactive with your bookkeeping, you’ll save your small business time when it comes to taxes. Simply turn your financial statements over to your CPA or other tax filings expert, and let them handle the rest.

Every financial transaction should have a line item in the general ledger, which tracks everything in one place. The general ledger notates the account number to which the debit or credit is applied. The best accounting software automates a lot of the process in journal entries for regular debits and credits to help eliminate possible errors in data entry. Accrual accounting provides a more accurate picture of a business’s financial health than cash accounting, as it considers all of the financial transactions for a given period.