What is bookkeeping?
Booking keeping is the process that ensures that your business has systematic and accurate records of financial activity. As a business owner, your finances are a top priority and your process of bookkeeping too.
Let us understand the Basics of Bookkeeping:
In many traditional businesses, bookkeeping involved recording day-to-day transactions physically in a daybook or in a journal and consequently, the name “bookkeeping” has emerged. As businesses grew and expanded and markets became highly dynamic and extremely competitive, businesses had a hard time focusing on keeping track of finances and focusing on business growth. So, businesses started onboarding experts on keeping track of their finance “bookkeeping”, so that businesses can focus on running the core business. Now Bookkeeping is the backbone of any financial and accounting system. Accurate financial reports can be generated when you keep your transactions updated that ultimately helping to measure your business performance and in the event of any tax audit, detailed records are required.
Methods of Bookkeeping:
As a business owner, you must decide what method you are going to follow in bookkeeping. It all depends on the amount of revenue you earn on the volume of daily transactions your business has. Any complex method of bookkeeping for small businesses may result in complications and less complex methods of bookkeeping may not serve the purpose for larger enterprises.
Different Methods of Bookkeeping:
Single-Entry Bookkeeping – With single-entry account bookkeeping, only one entry is created in your books for each transaction. The transactions are generally maintained in a cash book which will help to track the outgoing expenses and incoming revenue. This single-entry method is very much suitable for sole proprietorships and small private companies that hold very small amounts of inventory, and do not sell or buy anything on credit.
Double-entry accounting is based on the idea that every transaction has an impact on two accounts, which are recorded as credits and debits. For instance, if your business makes a $100 sale, your sales account will be credited with $100 and your cash account will be debited with $100. At this point, your books will be in balance. If your enterprise buys and sells on credit, public or large, using the double-entry method bookkeeping is much more suitable.
Accrual-Based or Cash-Based:
Accrual-Based – As per this method, revenue is recognized only when it is earned and in the same context, expenses are recorded only when they are incurred.
Cash-Based – Under this accounting system, revenue and costs are recorded on a cash basis. Expenses are recorded when they are paid for. Credit sales or purchases won’t appear in the books until and unless there is a cash transaction.
Recording Entries in Bookkeeping
It starts with the source documents such as invoices, bills, cash register tapes, sales orders and purchases. After gathering all these documents you can now record the transactions using journals, ledgers and the trial balance.
Cash Registers
Transactions are calculated and recorded using an electronic device. The transaction receipts that can be entered into the sales journal are kept in these cash registers. There are cash registers like these in all sizes of businesses. This cash-based system of bookkeeping is much more suitable for small retail single-store businesses.
The Journal
The Journal is well known as a book of original entries. It is the place where the enterprise records its transactions. It may be for the first time and in the form of digital or physical, and it specifies the accounts debited or credited and also the date of each transaction. This is useful for double-entry bookkeeping.
The Ledger
It is a compilation of accounts. After entering transactions in a journal, the transactions are classified into separate accounts and transferred to the ledger. Ledgers are frequently audited. A credit balance exists when the total credit exceeds the total debits, and a debit balance occurs when the total debits exceed the entire credit. Ledger is vital in double-entry bookkeeping.
4i Advisory has years of experience in delivering remote bookkeeping services to enterprises across industries. Our outsourcing services are focused on helping clients with all accounting and reporting requirements and reducing the operating costs of their finance department. Reach out to our expert – Vinayaka Hanagodu (vinayaka.hanagodu@4iadvisory.com).
