What Is Bookkeeping And It’s Importance To Your Business?

Bookkeeping is the process of recording every financial transaction of business. Bookkeepers record accurate and comprehensive financial data. It helps to create a base for the business’s accounting by keeping track. And with that you should know and grasps its importance to your business. 

Owners and investors can keep track of money coming in and going out of the business. Bookkeeping presents an overview of the profits and losses of the business. 

You can choose a bookkeeping method depending on the size of your business. The number of transactions or employees affects the bookkeeping entry. 

You may be confused between bookkeeping and accounting because both have similar goals. Bookkeeping is a part of accounting. It contributes to preparing the final statement for the business.

A bookkeeper records every monetary transaction in the daybooks. This information is then transferred to the general ledger. 

The general ledger is the main hub of a business’s monetary record where all accounting data is maintained during the operating life of a business. The final data of the general ledger helps to create financial statements for the business.

Types of transactions involved in bookkeeping (but not limited to)

1. Payment to suppliers

2. Customer invoices and receipts

3. Keeping track of asset depreciation

4. Billing for sold product or services

5. Payment and tracking of employees wages

6. Accounts receivable

7. Preparing financial reports

8. Payments for business loans

Types of Bookkeeping Systems

Businesses rely on the two forms of bookkeeping entries. You could choose a form of bookkeeping entry based on your business’s complexity. 

The two distinct methods of entry are:

1. Single Entry Bookkeeping
2. Double Entry Bookkeeping

Let’s get to know more about these entries in detail.

Single Entry Bookkeeping

The single-entry bookkeeping records simple transactions. For example account receivables, taxes, cash and account payables. Every record is entered only once.

This is a simple and straightforward form of bookkeeping that requires the least information to track records. Single entry bookkeeping is the go-to option for solopreneurs, freelancers or personal purposes.

However, single-entry bookkeeping does not provide accurate transactional information and has its limitations.

Double Entry Bookkeeping

Double-entry bookkeeping is a common method of entry for the majority of businesses. It allows an entity to record complex transactions. Every transaction has two parts: Debit and Credit which affect two ledger accounts.

Balanced bookkeeping means the sum of debit and credit is equal on both sides. An error occurs when the sum is not balanced. This is a great and easy way to find any mistakes in calculation and sort them out as soon as possible. 

It works like double-checking your calculations which makes it very reliable compared to single-entry bookkeeping.  

Double-entry bookkeeping is a little bit more complex method. But it provides clear and accurate data of your business’s finances. 

 

Importance of Bookkeeping

Bookkeeping helps businesses to manage their cash flows effectively and accurately.

Keeping up to date records of accounting transactions is a must for any business be it small or big. 

So how important is bookkeeping for your business?

– The daily records is a way of keeping track of your tax deductions. Without proper bookkeeping of your business, you won’t be able to legally claim the tax deductions with supporting evidence.  So keep your books prepared for the tax season. 

– It’s impossible to find financial mistakes just by looking at your balance. The accurate data of the bookkeeping will aid you to identify where your finances went downhill. If it’s a banking error, the issue can be sorted out quickly.

– It is a transparent method of recording business transactions. That means you can easily monitor where your money is going or coming from. Managing your cash flow will be convenient.

– If you run a small business, you’ll probably need to expand your business in the near future. And for that, bookkeeping will be your best friend. The bank will be able to provide you with a loan based on your transactional history and determine if you can pay back quickly. 

– The bookkeeping records of a business is an essential tool used for making important business decisions. Businesses often analyze their bookkeeping records before investing in a new project or bringing new changes in the business. 

– Your investors will always need a transparent and accurate record of how well the business is doing. You could also use the valuable information of the records to get a new investor. 

Online Bookkeeping or a Professional Bookkeeper?

Now that you know bookkeeping and the importance of recording every financial transaction, it’s time to find out what options are available.

If you’re beginning a business all by yourself and are not sure about where to start, you could take aid from online bookkeeping software. 

Bookkeeping software is easy to use and can act as a quick solution to your business record-keeping issues. Some good examples of bookkeeping software are Quickbooks, Xero.

Automated bookkeeping can be compared to a home remedy for the health issues that you can treat in the first stages of symptoms. You may find some relief from pain for a while but without a doctor, your problems will not be diagnosed or treated properly. 

Similarly, you will need the assistance of a professional bookkeeper to maintain your business’s financial records properly.

Fun Facts About Bookkeeping

1. Bookkeeping started around 4000 – 8000 B.C. Recording transactions is the most ancient method that human beings still follow.

2. A “waste book” is the ancient name for Bookkeeping. It was temporarily used to take notes and keep a document of transactions. The waste book was thrown away after the information was stored into the general ledger.

3. Frater Luca Pacioli was the father of Bookkeeping. 

4. Debit and Credit originated from the Latin words “Debitum” and “Creditum”. 

Some Final Thoughts

The act of recording every time money comes in or goes out of business is known as bookkeeping. Single entry and double-entry are two main methods of bookkeeping. 

With the accurate data of your finances, you will be able to pay or claim tax deductions of your business.

You can try bookkeeping software if you’re starting a business or are a freelancer. But you will need a professional bookkeeper for running smooth financial operations. 

Bookkeeping is one of the core elements of business success. It is the very basic need of a business.