In a nutshell, bookkeeping is nothing but a systematic recording of a company’s financial transactions in an organized manner. People use bookkeeping to record everyday activity to ensure there is a proper reconciliation of finances. When you accurately record individual transactions, there will be no errors in the records.
Why Bookkeeping is Crucial
Bookkeeping is crucial because it helps you to make the right decisions when it comes to business. For example, the investment you are looking for and how you want to operate your business depends on it. Making financial decisions will be seamless when there is an accurate record of all of your business transactions.
Bookkeepers manage all the financial information of a company. Without them, it isn’t easy for companies to make rational decisions when it comes to finances. They will not know where they have spent the money or where they are spending a lot. It creates a chaotic situation within the organization.
The government, investors, and financial institutions that can be considered external users also use the bookkeepers’ records to access a business’s financial health. We can say that the bookkeepers maintain an accurate record of the finances for the consumption of both internal or external users.
Thus, we can see that bookkeeping can help you realize how you are performing as a company. Senior management teams can make strategic decisions on how to do things.
It is the crucial reason you must be ready to invest in bookkeeping as an entrepreneur or business person. Some founders in the initial stage of their business take bookkeeping lightly and soon find themselves in anarchy.
Hiring a full-time employee to do this job can indeed be pretty costly. Many start-ups do not have that comfort to hire a full-time employee. It is the main reason why they employ a part-time bookkeeper to do this job. Some of them plan to outsource the task rather than hiring a bookkeeper. It is one of the best ways to save money.
Who Should Use Bookkeeping Services
Many people wrongly think that bookkeeping is something that business owners of companies should be doing. It is indeed going to help them a lot. Apart from the business owners, bookkeeping activities will benefit sole proprietors, or people who earn money through self-employed activities should also use bookkeeping. For example, solopreneurs, creatives, bloggers, coaches, consultants, and goods and service providers should do bookkeeping.
Accounting and Bookkeeping
Many people think that bookkeeping and accounting are the same. They think they are synonyms. But, in reality, they are not. In simple terms, bookkeeping is organizing or accurately recording the individual financial transactions in a day.
When it comes to accounting, accountants take the bookkeepers’ data to create crucial financial reports.
Accountants also ensure that the company is complying with the tax regulations set forth by the law. Since accounting has a vast scope, you can say that bookkeeping is a segment under it. Though they use these phrases as synonyms, they are two different things.
While accounting refers to all the financial transactions and activities related to a business, bookkeeping is specific. It talks only about recording individual financial transactions using particular methods and practices in the financial world.
Differences Between Bookkeeping and Accounting
You might be wondering how bookkeeping and accounting differ. Here are some details for your information.
|Without understanding the accounting concepts and having a thorough knowledge of what you are doing, you will not succeed.||You do not have to high a high-level knowledge of accounting concepts to become successful in bookkeeping.|
|One who does accounting-related tasks is called an accountant.||A person who does bookkeeping tasks is called a bookkeeper.|
|Preparing and using financial statements is crucial when it comes to accounting.||You do not prepare financial statements when it comes to bookkeeping.|
|One of the accountant’s main tasks is to show a company’s financial position and show how they are doing.||One cannot know the financial health of an organization through bookkeeping.|
|Accountants analyze the financial data at hand to give insights or suggestions to improve the business.||Bookkeeping does not require people to analyze the data.|
|Companies use the data that is given by the accountants to make crucial decisions for their organization.||While bookkeepers help provide accurate data when it comes to financial transactions, these records are often not sufficient to make critical business decisions.|
Cash or Accrual Basis of Accounting
Companies need to decide on what kind of accounting they want to follow before implementing bookkeeping. They can pick either the cash basis of accounting or the accrual basis of accounting.
You might be wondering what exactly is the difference between the two. The only difference between these two types of accounting is how they will record the purchase or a sale. In accounting, a purchase is money outflow, while the sale is money inflow.
Cash Basis: In this accounting type, you will record the transaction only when you pay or receive the cash. For example, if you bought 500 units of a particular product, and you will pay it only in the next month or after. You will not record it until you pay for the item.
Accrual Basis: In this form of accounting, you will make a record of the transaction even when you do not pay cash or receive money for trade. For example, taking the same example that we used above, even though you will make the payment the next month, you will record the transaction.
Tasks Related to Bookkeeping
Bookkeepers take care of meticulously recording the transactions that occur in a business. Businesses can significantly benefit when they use bookkeeping practices and methods. However, both NGOs and individuals can greatly benefit when they use bookkeeping methods to record their finances.
Bookkeepers record this and a lot of other financial transactions as listed below:
1. Loan payments
2. Expenses payments given to suppliers
3. Payments received from customers towards invoices
4. Monitor asset depreciation and make necessary adjustments to the entries
5. Generate or create financial reports
6. Process payments for employees working in the organization
7. Verify and record the invoices received from various suppliers
Effective Bookkeeping Is Possible
You can reduce the errors related to bookkeeping when you follow specific tips. Many people commit mistakes when they do not follow the best practices prevalent in the industry. Here are some tips that can help you:
- Plan to purchase a bookkeeping software that will help reduce the errors, which will help you streamline the whole process. This software should work seamlessly both offline and online.
- Set up a process to ensure what kind of financial reports you want to generate and what information you want to include in those documents.
- Have a process to properly document the records and organize them so that it is easy for you to pull the reports that you need when in time of need.
These are some of the tips you can follow to streamline the process that you do not commit any mistakes when working on bookkeeping tasks.
10 Different Accounts You Must Know
There are different kinds of accounts that you use to operate the business. Knowing them in detail will make your job easy. Here are some of the terms for your reference:
This particular account helps you to keep track of how you are spending the money and to whom you have to pay money. Spending money from your pocket is not something people like but do not forget that this keeps you progress or operate.
Invoice forms and bills that come from the vendors fall under this category. Bookkeepers ensure that a company is always on top of finances by paying what they owe to others in time.
Besides making the payment to the customers on time, professionals ensure that they are not releasing any amounts to the vendor twice.
AR or Accounts Receivable is quite the opposite of Accounts Payable. If you as a business are not collecting money immediately after you provide a service or sell a product, all the receivables fall under this category or account.
You are going to record all the money that your customers owe to your business under this account. When you correctly record these documents, it will help you raise proper invoices and bills.
The quantity of products that you have in stock is called inventory. If you do not keep track of the products that you have in hand, it is hard for your business to sustain in the long run.
It is the key reason why you must put in some time and effort to organize your inventory. You need to account for all the stock in your hand to make the right decisions to sell products.
According to their convenience, a business needs to keep track of their inventory every day, month, quarter, or year.
This account includes all the information about the loans you availed to purchase things such as furniture, vehicle, and other office equipment. You will know how much you owe and how much you have to pay every month to keep up with it.
All the financial activity or the business transactions that you make fall under this account. Most experts feel it is the easiest and the most straightforward way to keep track of cash withdrawals and deposits.
You cannot undermine this thing if you have employees working with you. Not a lot of people are going to work with you for free. It would be best if you did record all of these expenses accurately in the books. This way, when you are to report to the tax authorities, you are in better shape. If you do not take care of this aspect, you will get into trouble when it’s time for you to submit your taxes.
Since in small businesses, owners use their money to ensure that the company is operating. This section includes all the partners in a company are investing. When you accurately record how much each of the owners is spending, there will be no future problems.
The profit that you are going to use to reinvest in your business is called retained earnings. It is the amount you will not pay towards the other owners or keep it for yourself. Since this section will have cumulative information, keeping track of this account is not that difficult. Maintaining this account will help you see how your business is performing over the years.
Here is the account where you are going to record all the sales that you make. All business owners love this account above the rest. You will know how much money you are generating and how much you will be making. Recording the transactions will help you realize how your business is performing.
Crucial Terms You Should Know
Transaction: A transaction, in a nutshell, is the sale or exchange of goods, services, or financial assets for a value.
Account: An account is nothing but the accumulation of similar records. For example, when you collate all information about loans, it is called a loan payable account.
Report: A statement that a professional bookkeeper prepares to summarize certain transactions or accounts for some time is called a report.
Employing an Inhouse Team Versus Outsourcing This Task
Since now you understand what bookkeeping is, you have the following options available — choose a professional company to do this task for you or hire a bookkeeper. Many people are stuck when they come to this juncture.
It is wise to see the pros and cons of each of these choices before making a decision. Here are some of the benefits that you get to enjoy when you outsource this task to a professional company:
Experience and Expertise
First, you must understand that a professional financial company that provides bookkeeping services will employ only the best. They will scrutinize the resume before picking the best among all the available options.
Thus, you can relax when you outsource the task to a professional bookkeeping service. The professional bookkeepers will ensure that they take care of your books and maintain an accurate record of the financial documents. Now imagine trying to hire bookkeepers yourself.
Finding the right person might take a lot of your time. You might know if a person has the expertise and knowledge until after some time. Why should you waste your time when you can get the best services from a professional company.
Avoid Additional Expenses
Once you hire an employee, you might also have to work on buying other things such as furniture, system, printer, software, and a host of other things. If you add all of these expenses, it might be a high amount.
But, when you choose to use a professional financial company, you will cut down all of these additional expenses. As a start-up or a small business, you know how crucial it is to save as much money as possible.
The best part of professional companies is that they will take care of these aspects. They will have the best software in place so that their staff does not face any hassle when doing the work. These companies will also ensure that they do back up the data every day to ensure that no information is lost.
When you get an in-house bookkeeper, one more thing that should concern you is to give them consistent training. You have to spend additional money to ensure that they are getting equipped with the crucial knowledge for bookkeeping.
But, when you outsource this task to a professional company, you can relax in this part. They will do everything from their end to train and upskill their employees.
You know how crucial it is for you to have a bookkeeper taking care of your financial matters. Many people think that choosing a professional company might be an expensive affair. But it is not.
It would be best if you took the time to get the quote from two or three reputed companies. Compare the prices and negotiate with the company that you like to get the best deal. Choose a company with the best name and reputation rather than pick a firm that gives its services for less cost.
Looking at the benefits of outsourcing this task, it seems like it is the best thing to outsource the bookkeeping tasks to a reputed finance company. You should take the time to do some research before picking a company. Here are some things that should be of concern to you when you are selecting one:
- Experience and Expertise
- Testimonials and Reviews
- Software They Use
- The Pricing
- Scope of Work
- Contract Document
You should check these things before picking a company to help you with the bookkeeping services. If you take care of these things, you will, for sure, find the best company that provides bookkeeping services.