Here is our list of the best bookkeeping basics.
Bookkeeping basics are the keys to effective financial management, which provide a clear picture of a company’s finances. Examples include the role of a bookkeeper, different bookkeeping systems, and common mistakes to avoid. The purpose of this guide is to ensure that bookkeepers are well-equipped with the knowledge to succeed in the role.
This list includes:
- basic accounting principles
- step-by-step bookkeeping
- small business bookkeeping
- online bookkeeping tools
- best practices in bookkeeping
- accounting services
Let’s get started!
Bookkeeping is defined as the process of tracking and recording a company’s financial transactions. Bookkeepers must organize these transactions into different accounts on a daily basis. While this is a crucial task for all businesses, 21% of small business owners admit to not knowing enough about bookkeeping.
Whether you are new to the industry or are looking to sharpen your skills, here is our guide that covers the basics of bookkeeping.
Bookkeeping 101: The basics
Bookkeeping begins the moment a transaction is completed via an invoice, sales receipt, or expense report. Any time a company makes a financial transaction, it must be recorded promptly and accurately – and this is where bookkeepers come in. Professionals in this role are tasked with recording, classifying, tracking, and organizing the finances of a company. Additionally, bookkeepers are also responsible for creating financial reports and managing cash flow, among a plethora of other responsibilities.
At its core, bookkeeping is all about keeping track of and maintaining accurate records of a business’s finances. However, many aspects form the foundation of the profession.
Here is a breakdown of some basic tasks that new and experienced bookkeepers should keep in mind:
- Choosing the right bookkeeping system and method
- Recording transactions accurately
- Reconciling accounts consistently
- Creating detailed financial reports
- Ensuring tax compliance
- Choosing the right software and/or tools
Mastering the basics of bookkeeping can help professionals in the field provide top-notch services that allow them to excel in the role.
Bookkeeping vs accounting
Not to be confused with accounting, bookkeepers record the entirety of a company’s financial transactions. The two professions do, however, go hand-in-hand. An accountant’s role focuses on accounting services like interpreting and analyzing the data provided by bookkeepers.
Although the two jobs may seem similar at a glance, there are many differences between bookkeeping and accounting. Bookkeepers focus on recording, organizing, and categorizing day-to-day financial transactions. The objective of bookkeeping is to establish an accurate record of a company’s financial activities while providing a clear reflection of its financial standing.
Accountants, on the other hand, are tasked with interpreting the information and data provided by bookkeepers. Individuals in an accounting role use this data to perform complex financial analyses that enable strategic decision-making based on a company’s financial state.
Essential bookkeeping terms to know
Bookkeeping can be confusing for beginners. There are so many terms and acronyms to keep up with in the industry. Knowing these basic accounting principles, however, is one key to success in the role.
Here are some of the most common bookkeeping terms to remember:
- Accounts payable: The money a company owes to its suppliers or vendors for goods or services that have been received.
- Accounts receivable: The money that customers owe to a company for goods or services that have been provided.
- Balance sheet: A detailed report and financial statement that reflects a company’s assets, liabilities, and capital at a certain point in time.
- Income statement: A financial statement that summarizes a company’s revenue and expenses over a specific timeframe.
- General ledger: Serves as the main record of a company’s financial accounts, including assets, liabilities, equity, expenses, and income or revenue.
- Trial balance: A detailed report that lists all the accounts in a company’s ledger as well as their balances.
Knowing and understanding these terms can help professionals in the field, as well as aspiring bookkeepers, keep a company’s financial records accurate, organized, and up-to-date.
The role of a bookkeeper
To put it simply, bookkeepers are responsible for maintaining accurate financial records for a company. These professionals perform important tasks like general ledger entries and monthly financial reporting.
These are some additional duties and responsibilities that make up the role of a bookkeeper:
- Recording financial transactions: A bookkeeper must record all financial transactions made by a company, from sales and purchases to expenses and receipts. Bookkeepers play an important role in building a company’s financial history.
- Reconciling accounts: This process paints an accurate picture of a business’s financial standing, ensuring that all financial transactions align with bank statements and other financial documentation.
- Creating financial reports: Bookkeepers are pros when it comes to translating complex raw financial data into comprehensive reports. Financial reports provide valuable insights into a company’s profits and losses, cash flow, and overall financial performance. These reports play a big part in aiding strategic decision-making.
- Ensuring tax compliance: A critical responsibility of bookkeepers is to make sure a business is compliant with tax laws and regulations. As part of this process, bookkeepers must maintain accurate record-keeping and adherence to tax reporting requirements.
Furthermore, there are different types of bookkeepers based on the size and nature of a company. Each of these employees has different day-to-day responsibilities.
Small business bookkeepers, for example, are versatile in managing a variety of tasks. These employees may work on everything from payroll management to accounts payable and accounts receivable. Corporate bookkeepers, on the other hand, must navigate the complex finances of large corporations. These employees tend to specialize in a specific area, such as payroll or tax reporting.
Although the job may seem straightforward, a high level of accuracy and attention to detail is crucial. This is because just one mistake can have serious consequences, such as tax penalties or legal issues.
Different types of bookkeeping systems
Deciding which type of bookkeeping system to use depends on a company’s size and specific needs. Each system has a distinct approach to recording financial transactions. The two main types of bookkeeping systems are single-entry and double-entry.
Single-entry systems are most commonly used in small business bookkeeping since this process is ideal for limited transactions. This system focuses on recording cash disbursements, sales, purchases, and cash receipts on accounts payable, either as revenue or expense. More complex aspects, like equipment investments or stocks, are simply stored in the program’s notes section.
Double-entry systems, on the other hand, are more advanced. This type of system is often used by businesses, bookkeepers, and accountants with their own firms. With a double-entry system, it is a requirement to record two aspects of each transaction.
Double-entry systems include a field for debits and credits so any transaction that is recorded on one statement can also be recorded on the corresponding account. Double-entry systems cover everything from basic transactions, like cash receipts and sales, to more complex transactions like stock or building purchases.
Different bookkeeping methods
When it comes to execution, there are a few bookkeeping methods to consider. Choosing the right method can shape the way a business records and manages its financial transactions. Luckily, there are a few methods to choose from, providing companies with enough options to find the right fit for their needs.
Different bookkeeping methods include:
- Automated, or computerized bookkeeping: Uses specialized software or online spreadsheets to record financial transactions automatically.
- Virtual bookkeeping: Working with an online agent who manages the books.
- Manual bookkeeping: Manually recording financial transactions by hand using paper, worksheets, ledgers, or journals.
Choosing the right method depends on a business’s specific needs. For example, a small business may rely on manual bookkeeping as a cost-effective solution for limited transactions, whereas a large corporation might use computerized bookkeeping for a quick and seamless process.
Each method has its advantages and disadvantages. The key is for business owners to choose an approach that aligns directly with the company’s business goals.
Essential bookkeeping reports
A variety of reports within this field can help provide a comprehensive view of a company’s financial health and standing.
Some of the most important bookkeeping reports include:
- Balance sheet: Reflects a business’s assets, liabilities, and equity.
- Income statement: Summarizes revenues and expenses.
- Cash flow statement: Keeps track of cash inflows and outflows.
Collectively, these reports provide an all-encompassing view of a company’s financial performance. These reports help stakeholders make informed decisions and identify potential areas of improvement. Bookkeeping professionals should provide these reports consistently so businesses can plan strategically and effectively manage finances.
The benefits of online bookkeeping tools
Thanks to online bookkeeping tools, business owners can easily keep accurate financial records. These tools make it easy to maintain accurate records at the click of a button.
Here are some of the biggest benefits of using online bookkeeping:
- Automation tools: Features like automatic data entry and bank reconciliation can save time, allowing business owners to focus on more important tasks.
- Real-time financial insights: Customized financial reports and interactive dashboards can provide timely financial information to business owners.
- Enhanced decision-making: The insights provided by these tools can empower business owners to make informed business decisions based on the most up-to-date financial data that is available.
- Integration capabilities: These tools can easily integrate with other business software, including invoicing and payment processing tools, resulting in an efficient workflow.
Online bookkeeping software and tools provide a reliable and cost-effective solution to help a business save time and reduce errors. In addition, these tools are efficient in streamlining tedious processes and providing valuable insights into the company’s financial health.
These tools can provide valuable data and insights that allow business owners to make informed decisions that can have a positive impact on the company, such as increased profitability and growth.
How to get started with bookkeeping
There are a few different ways to jumpstart a career in bookkeeping, from completing certifications and higher education to taking advantage of online tools and resources.
Although a specific educational background is not needed to become a bookkeeper – unless required by employers – candidates can largely benefit by completing a bookkeeping certification program. These programs help aspiring bookkeepers learn basic accounting skills as well as typical bookkeeping duties and responsibilities. Completing a certification program can set candidates apart from others who are also looking for bookkeeping jobs.
Some bookkeepers, on the other hand, choose to teach themselves the profession through courses, books, seminars, or accounting software tools. Most individuals can learn the basics of bookkeeping in about six months, according to the US Bureau of Labor Statistics (BLS). After learning the basics of the field on their own, self-taught bookkeepers often learn even more about the profession through on-the-job training and experience in the role.
Taking the higher education route is another option when looking to land a job as a bookkeeper. Completing an associate’s or bachelor’s degree in accounting or business administration can give aspiring professionals the upper hand when it comes to entering the field. Although this option is costly and takes more time, it can open the door to more job opportunities.
Additionally, a few key skills are needed to become a bookkeeper. These include:
- Interpersonal communication
- Numeracy and basic math skills
- Data entry
- Critical thinking
- Time management
- Customer service
- Basic accounting skills
- Technical and workplace skills
The best way for aspiring bookkeepers to highlight their skills is by highlighting them on a resume or cover letter. Job interviews are also a great way to get a job in bookkeeping.
Bookkeeping plays an essential role in the financial health and success of any business. After all, accurate bookkeeping is more than just number crunching – it is a strategic approach to understanding and optimizing a company’s finances. Proper bookkeeping is essential in helping business owners manage their finances and comply with tax laws and regulations.
Whether conducted in-house or through different accounting services, mastering the basics of bookkeeping is crucial in running a successful business. Plus, modern software and tools can help make bookkeeping a breeze, allowing business owners to manage these tasks easily and efficiently.