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. If you wait until the end of the year to reconcile or get your financial transactions in order, you won’t know if you or your bank made a mistake until you’re buried bookkeeping 101 in paperwork at tax time. Regularly organizing and updating your books can help you catch that erroneous overdraft fee today, rather than six months from now, when it’s too late to bring up. A small business can likely do all its own bookkeeping using accounting software. Many of the operations are automated in the software, making it easy to get accurate debits and credits entered.
Since the information gathered in bookkeeping is used by accountants and business owners, it is the basis of all the financial statements generated. Most accounting software allows you to automatically run common financial statements such as an income and expense statement, balance sheet and cash flow statement. Business owners or accountants can then use these statements to gain insight into the business’s financial health. Bookkeeping is the regular practice of updating a company’s financial records to reflect all financial transactions, credits, and debits. Bookkeepers are financial professionals who document the financial accounting and records of a business.
Finding the right bookkeeping method for you
Recording and maintaining an accurate sales account will help you understand where your business is currently standing. This account tracks the purchase of any raw materials and finished products for the business. This account is a crucial component when it comes to calculating the cost of goods sold (COGS) — indispensable if you run an online or brick-and-mortar store. You just subtract the amount you paid to buy the raw material from the sales, and the remainder is your profit. This account tracks the amount you into your business as its owner, minus any liabilities. (Liabilities are essentially claims in which you owe lenders and other vendors.) This is also known as “net assets.”
Finally, if you want someone else to do your bookkeeping for you, you could sign up for a cloud-based bookkeeping service like Bench. Using the accrual accounting method, you record income when you bill your customers, in the form of accounts receivable (even if they don’t pay you for a few months). Same goes for expenses, which you record when you’re billed in the form of accounts payable.
What is business accounting? 21 tips for business owners
Other smaller firms may require reports only at the end of the year in preparation for doing taxes. Bookkeeping is the process of keeping track of every financial transaction made by a business firm from the opening of the firm to the closing of the firm. Depending on the type of accounting system used by the business, each financial transaction is recorded based on supporting documentation. That documentation may be a receipt, an invoice, a purchase order, or some similar type of financial record showing that the transaction took place.