If you’re reading this, chances are you have either heard the term or already have some familiarity with bookkeeping. Here is a brief overview and explanation of what bookkeeping is and some of the common activities of a bookkeeper.
To start with, bookkeeping is the act of recording, categorizing, and organizing business transactions. It’s the day-to-day entries of a business’s financial transactions, such as income and expenses.
Two Types of Bookkeeping
There are two types of bookkeeping: Single-Entry and Double-Entry.
Single-entry bookkeeping, also known as “Cash-Basis” is the simpler form and is generally used by small businesses with uncomplicated or minimal transactions. One simply records sales when the cash physically (or electronically in this day and age) comes in, and records expenses when the expense is actually paid.
Double-entry bookkeeping is used by companies with more complex transactions. As it sounds, there are two entries for each bookkeeping transaction. For a company that uses the accrual method of accounting, this is what is used.
Without getting too deep into it, accrual bookkeeping is more detailed and tends to give a better picture of the complete Assets, Liabilities, and Equity of a business. Expenses are added to the books when they are incurred, rather than when they are paid out. And, similarly, the income is recorded when the sale is closed, as opposed to when the cash is received.
For example, if a company closes a sale for $5000, two accounts would have entries made – the Income account and Accounts Receivable. While there are many details and aspects of the accrual method of bookkeeping, that is the general idea.
Common Activities of a Bookkeeper
A bookkeeper works with you on your day-to-day bookkeeping needs. There are several things that a bookkeeper can and may do for your company. Depending on your size, and what you have her or him hired for, it can vary. Depending on your business size and budget, you may have a full-time employee or may outsource it to a bookkeeping or accounting firm. Or you may still be handling it yourself! With that in mind, here are some of the common tasks a bookkeeper may do for you:
- Categorizing Expenses and Income
- Matching up income to invoices that had been sent out
- Logging bills and paying vendors
- Receipt management
- Assisted Payroll.
- Monthly reconciliation of your bank accounts
- Providing and going over your monthly/quarterly Financial Statements
While this is not a full list, it’s easy to see that these are all important tasks!
Benefits of Bookkeeping
There are many, many benefits to having good bookkeeping. Even though it seems like a small or unimportant task, using it to your advantage will help you run your business.
First, it’s important to note that the IRS requires all business owners to keep records. Keeping up your bookkeeping in a good software system will also help you immensely come tax season! If you are keeping good bookkeeping records throughout the year, you’ll be able to easily see all of your tax-deductible expenses, how much money you made, etc. Your CPA or tax professional won’t be able to help you if you don’t have good bookkeeping. Plus, if you have good bookkeeping, they can help make sure you’re getting the most deductions and tax savings possible.
Good bookkeeping, including having your receipts stored and matched up with transactions, keeps things in good shape in the event that you are ever audited by the IRS. While getting audited is never fun, having your records in order will help you immensely and help you prove all of your business expenses.
Regardless of the law or taxes, bookkeeping is immensely important for helping you run your business. By running even the three main financial statements (Balance Sheet, Income Statement, and the Statement of Cash Flows), you’ll always have a great idea of where your business stands financially. There are also dozens of additional, powerful reports that your bookkeeping software will be able to run, which can help give all kinds of important insights into your business.
Obviously, the whole point of being in business is to make a profit. Even if your business is a side hustle or hobby that you love, if you are continually losing money on it you won’t be able to stay in business and continue doing what it is you love! Reviewing financial statements helps you to identify any areas of loss and to, more importantly, strengthen your profits. Even if numbers aren’t your thing, taking some time each week or month to review your financial health is very important.
Make sure to work closely with your bookkeeper on your financial statements, and if they aren’t going over them at least once a month with you, ask them to spend some time with you on them. As they are handling your day-to-day transactional work, they probably have the best idea of what is happening with your business financially. Spending at least an hour a month with them will help you immensely in understanding where things are at.
Do you have any questions, comments or feedback? Email us at contact@lucrativebookkeeping.com.
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