5 Must-Know Facts About Bookkeeping
Whether you operate a company in the Philippines or in California, and even anywhere in the world, bookkeeping is one of the most important aspects of managing a business — big or small. Tracking your finances could be very overwhelming, but the good news is it doesn’t have to be. These five foundational facts can help you be an effective bookkeeper.
1. What is bookkeeping?
Bookkeeping is the process of recording all financial transactions of a company, organization, or an individual person. This includes all the money that comes in and out of a business. It helps business owners track whether they are generating profits or losses. Bookkeepers are responsible for recording, classifying, and organizing all financial data.
Bookkeeping is often confused with accounting, but they differ from each other. While bookkeeping involves recording all financial transactions, the accounting process involves taking the information from the bookkeeper in order to interpret and analyze financial data and use it to make strategic decisions.
2. What is an account?
In bookkeeping, an account refers to a record of all financial transactions of a certain type. There are 5 basic types of accounts, namely:
- Assets, which are the resources owned by a business (e.g. Cash, Accounts Receivable, Equipment, Inventory, Real Estate, Supplies, etc.)
- Liabilities, which are debts and obligations a business has (e.g. Accounts Payable, Loans Payable, Interest Payable, Income Tax Payable, etc.)
- Expenses or Expenditures, which is the outflow of cash used to pay for an item or service (e.g. Cost of Goods Sold, Insurance Expense, Utilities Expense, Payroll Expense, etc.)
- Revenues or Income, which is the inflow of cash earned by a business (e.g. Sales Income, Service Revenue, Interest Income, Rental Income, etc.)
- and Equity, which is the value of a business’ total assets minus its total liabilities (e.g. Retained Earnings, Stock, Dividends, etc.)
3. What are the 2 types of bookkeeping systems?
The two main types of bookkeeping systems are the single-entry system and the double-entry system.
The single-entry system uses a cash book and simply looks at the inflow and outflow of cash. Each transaction would be entered into just one account within one cash book. This system can be used by small businesses with few and uncomplicated financial transactions.
In the double-entry system, single transactions are recorded as two entries — a debit and a credit. Each transaction entered into an account is then traced with an opposite entry to a corresponding account. This system is used by businesses with more complex financial transactions.
4. What other terms do you need to know?
Here are some of the most popular bookkeeping terms you should know.
- Balance sheet – This is a very important report which indicates the general financial health of your business. It includes the assets, liabilities, and capital or equity within a certain period of time.
- Income Statement – It is also called the Profit and Loss Report. It lists only the income (revenue) and expense accounts and their balances.
- Trial Balance – It contains both debits and credits for one account. It has to be balanced, meaning debit should be equal to the credit.
- Chart of Accounts – It is a complete list of accounts that are used to categorize the financial transactions of your business.
- General Ledger – It is the main part of the bookkeeping ledger where all business transactions are recorded.
5. What tips could be useful in bookkeeping?
- Use bookkeeping software.
Simpler accounting records can be tracked using an accounting book. However, using spreadsheets like Google Sheets or Microsoft Excel could be a good starting point. For more advanced recording, you will have to use bookkeeping softwares like QuickBooks and Xero.
- Record every financial transaction.
It is very important to make sure that all your financial transactions are recorded. In able to do so, it would be a great help to store your receipts and records securely.
- Stick to a schedule.
Make it a priority to record your transactions and close your books regularly. Sticking to a schedule will help you build a habit of keeping your records up to date.
Bookkeeping could be a really challenging task when managing a business. This helpful information could be a great place for you to start doing it on your own. However, as your business grows, the bookkeeping work that comes with it becomes bigger as well. In that case, it is important to know when to ask for bookkeeping and accounting services done by a professional.