Bookkeeping has been in practice since ancient times. Some records even go back to 6000 BC. Artifacts show that every civilization had some record-keeping, too. Even though it is an old concept, Frater Luca Pacioli presented the modern-day bookkeeping system in the 15th century.
What is bookkeeping and its relation with business?
Bookkeeping is a method to maintain accurate financial records. It is an integral part of a business, as studies show that most businesses fail due to a lack of record-keeping.
Bookkeeping is a very vast project in the overall accounting services of any company. Just like every other country, businesses also keep track of their records. Doing so is essential for various reasons, as discussed in the article below.
Types of Bookkeeping Systems
Two types of bookkeeping systems help record business transactions: one is a single-entry bookkeeping system, and the other one is a double-entry bookkeeping system.
- A single-entry Bookkeeping System is still standard for small businesses with minimal transactions. Usually, it only records cash disbursement, receipts, ongoing sales, and purchases. Besides this, all accounting records, such as inventory, equipment, etc., are only recorded. However, the single-entry bookkeeping system is prone to errors and incompleteness because it needs a detailed recording system compared to a double-entry bookkeeping system. Although for tax purposes, it is an acceptable method of record-keeping for small business setups.
- A Double-Entry Bookkeeping System is the standard and profound method of record-keeping often used by most medium and big businesses. It introduces the idea of debit and credit, which means with every transaction, there is something received (debit) and given up (credit) that results in the reported transaction impacting two or more accounts, making it more detailed and complex.
Methods of Bookkeeping
There are two methods used:
1. Manual bookkeeping
Manual bookkeeping is traditional and requires a lot of paperwork. This method is still widely used, especially by small businesses with less complex transactions. Countries opt for manual bookkeeping because it is cheaper and easier to maintain. They also want to avoid the technical training involved in computerized bookkeeping.
2. Computerized bookkeeping
Computerized bookkeeping is a new and innovative way of recording business transactions. With the help of accounting and bookkeeping software, the auditing process has been made much easier, faster, and more accurate. Keeping in mind the traditional ways and concepts of bookkeeping are still followed in computerized bookkeeping. It only saves you from the tedious tasks of manual bookkeeping.
Advantages of Bookkeeping
Hiring an outsourced bookkeeper is the solution for starting up a new business or running a small business. Outsourced bookkeeping will save you the time and money to spend on a full-time accountant.
Keeps your business activity in contact
Bookkeeping is necessary for the day-to-day running of a business. It can save hours of hard work and brainstorming by allowing you to process orders quickly and effectively.
Some companies also offer reliable online auditing services for businesses.
Enhances business image
The records will help you grow your business, attracting the right people to be a part of it. That is especially beneficial for small, growing companies to get recognized internationally. It also helps secure a bank loan or an overdraft much easier.
Leads to insurance
When credit is hard to come by, good documentation supports the tough times.
Assists in managing cash
Being able to manage, analyze, and track the financial performance of your organization over time allows the company to prepare for the future and fulfill its tax obligations.
Master your tax return
Taxation is one of the most essential advantages of keeping the correct record. They are a great support in completing the annual tax return. When declaring money spent on equipment and facilities, you’ll have relevant paper trails for business use, which supports completing the yearly tax return. They can even help in identifying mistakes. You will understand the benefit of accurate accounting when completing your annual tax return.
Settle financial disputes
Almost every business in the world experiences customers disputing invoices now and then. Well-kept books are vital for revealing the truth for any investigation, whether routine or due to accusations of financial inaccuracy.
Computerized single-entry bookkeeping
It helps save time and avoid the errors of manual calculations. Today, single-entry bookkeeping is accessible with do-it-yourself bookkeeping software.
Saves you time
It helps you make solid decisions and plans for your company down the road, but an efficient bookkeeping system also saves time. It gives you a complete insight into where to protect yourself from fraud.
The double-entry bookkeeping system records your accurate and complete data of business transactions. It is a worthy yet reliable source of managing your financial information and a fair valuation of the performance of a business.
It tracks the amount an owner puts into the business, called net assets.
Advantages Of Outsourcing Bookkeeping Services
There are so many benefits of outsourcing bookkeeping services. First, it saves you time and money. Secondly, it provides detailed statistics and records. Thirdly, it helps with taxes and removes unneeded services.
Suppose you have consulted a proper financial consultant and outsourced your bookkeeping virtually or online. Upon your consultant’s recommendation, it will leave you stress-free, providing accurate financial records without any hassle.
Advantages Of Double Entry Bookkeeping System
Double-entry bookkeeping is an approach where you record transactions of every business transaction as an entry record in two or more accounts as a debit or credit. The amounts you register must be equal to the amount recorded as credits.
The advantages of double-entry bookkeeping are as follows:
- It increases accuracy and accountability.
- It will make year-end tax preparation easy.
- It will give you a greater transparency.
- It can improve your cash flow management.
- It will simplify your financial reporting.
- It will help you catch mistakes, and the oversight will prevent fraud.
There are various offers for bookkeeping services in every sector – that you can avail of on a daily, weekly, quarterly, monthly, half-yearly, and annual basis. You can choose the bookkeeping service provider according to your business requirements. Some examples of services include:
- General Ledger Accounting & Bookkeeping.
- Banking & Credit Card Activity Checks.
- Accounts Payable and Receivable Management.
- Sales Tax Bookkeeping.
- Profit And Loss Statement Bookkeeping.
- Income Tax Bookkeeping.
- Financial Performance Record-keeping.
- Balance Sheet Generation and Review.
- Management and Payment of Bills.
- Financial Statements & Custom Reporting
And a thread of other options for any business that requires progress. Each time you make a transaction, a document is produced in the usual course of business.
For example, the sales journal records all credit sales, while the cash payments journal records all cash payments. Each column in a journal corresponds to an account.
- The primary worldwide objective of accounting and bookkeeping is to keep a systematic record.
- It tracks the profit and loss a company faces by finding out the profitability.
- To ascertain the financial position of the company, this is done by creating a balance sheet. The count of every asset, liability, loan, etc., is specified in this balance sheet. The balance sheet of a company shows an accurate and fair view of the company’s position.
- The company’s management assists in decision-making based on this balance sheet, whether to invest or not, to cut off the liability, or to purchase more assets. The balance sheet provides all this information, enabling the company’s directors to decide.
- After all the analysis comes the law compliances where the income tax charges are applied. The company’s financials have gone through the observation of the law board for submission.
Types Of Bookkeeping Accounts
Here are seven main types of bookkeeping accounts for small businesses:
- Cash management: The Cash account handles all your business transactions, which are so crucial that bookkeepers use two journals, Cash Receipts And Cash Disbursements, to track the activity.
- Account receivables: If your company sells products and does not collect payments on time, you have ‘receivables.’ which is the money paid from customers. You must track your Accounts Receivable and keep it current to send bills on time.
- Inventory: Unsold products are like money in a store and must be carefully tracked and accounted for.
- Accounts Payable: The amount a company owes its suppliers is also known as accounts liability. Accurate bookkeeping ensures on-time payments and prevents you from paying someone twice. Early bill payments can also qualify the company for discounts.
- Loan Payable: If you have borrowed money from someone as a loan to buy equipment, vehicles, furniture, or other necessary items for your business, your loan payable account will track payments and due dates.
- Sales and Purchases account: The Sales account tracks all incoming money from your sales. The Purchases Account records any goods that you buy for your business. It is the chief component of calculating the Cost of Goods Sold (COGS), which you subtract from Sales to find your business’s gross profit.
- Payrolls: Keeping this account current is vital for meeting tax and other government requirements. Avoiding those responsibilities will put you in serious hot water.
It is important to note that maintaining business records is a legal requirement. Failing to meet the rules regarding bookkeeping and auditing can bring significant financial penalties and damage your credit rating. Most tax office departments require you to keep records for 6 to 10 years at least.
Simply put, business entities rely on accurate and reliable bookkeeping services for internal and external users, including the government.
By: Arisha Naz