Bookkeeping may seem confusing and overwhelming at first, but with some guidance, it can be easy to understand. So, this guide is designed to help business owners and bookkeepers get started with bookkeeping basics. Certainly, by following these simple steps, you’ll be able to keep your business finances in order!
What Is Bookkeeping, And What Does It Involve?
Bookkeeping is the process of tracking and recording financial transactions for a business. It involves recording income, expenses, assets, liabilities, and equity. Also, it is essential for small businesses because it gives owners a clear picture of their financial situation. Lastly, it also helps companies track spending and make informed decisions about allocating resources.
There are two main types of bookkeeping:
Manual bookkeeping
It is the process of keeping financial records by hand. It includes using ledger books or accounting software.
Computerized bookkeeping
It is the process of keeping financial records electronically using accounting software. This type of bookkeeping is more efficient and less prone to error than manual bookkeeping.
Essential Steps In The Bookkeeping Process:
- Recording the business transactions– Make sure to use the proper book in recording the transactions. There are two main books that you should maintain: Journal, Ledger
- Posting entries- Once transactions have been recorded, they must be posted to the appropriate accounts.
- Adjusting entries- Adjusting entries are made at the end of the accounting period to correct errors or omissions.
- Preparing Financial Reports – Financial reports are prepared from the bookkeeping records. These reports can be used to make informed business decisions.
- Closing the books- The books are closed at the end of the accounting period so that you can prepare financial statements.
The Benefits Of Keeping Accurate Records
Track the Income and Expenses
You can see your business’s financial health by tracking your income and expenses. You can use this information to make informed decisions about allocating resources.
Make Tax Time Easier
Good bookkeeping records make tax time much more accessible when you have all your financial information organized, filing your taxes, and getting the deductions you are entitled to be more straightforward.
Avoid Financial Penalties
If you do not keep accurate bookkeeping records, you may be subject to financial penalties from the government.
Inventory Management
You can also use bookkeeping for inventory management. By tracking your inventory levels, you can ensure that you have enough products on hand to meet customer demand.
Decision Making
Bookkeeping provides business owners the information they need to make informed decisions about their businesses. By understanding where your money is going, you can make changes to improve your bottom line.
Related: 15 Common Bookkeeping Mistakes Filipino Business Owners Make – And How to Avoid
Setting Up A Basic Bookkeeping System
- A place to store financial records can be either physical or electronic. If you choose to go electronic, you’ll need bookkeeping software. However, if you use hard copy records, you’ll need a filing system to keep everything organized.
- You can do a method of recording transactions with ledger books or bookkeeping software.
- A way to track income and expenses: This can be done with a budget or bookkeeping software.
- Financial statements can be prepared using bookkeeping software or by hiring an accountant.
- Tax information: You’llYou’ll need this when it’s time to file your taxes.
- An understanding of bookkeeping principles will help you make informed decisions about your bookkeeping system.
How To Record Income And Expenses
Income
Income is recorded in the book of accounts as a debit or an increase to your asset. The bookkeeping process is simple. When you receive income, the bookkeeper will debit your account by the income received. This will increase your assets. If you are self-employed, the bookkeeper will also record the income’s date, source, and purpose in the bookkeeping records. This information is essential for tax purposes. The bookkeeping process for income is simple and easy to understand. By following these guidelines, you can ensure that your bookkeeping records are accurate and up-to-date.
Expenses
On the other hand, expenses are recorded when there is a payment or decrease to the company’s assets. This accounting method is called bookkeeping. Under bookkeeping, all transactions are categorized into ledger accounts.
Single-entry bookkeeping
In single-entry bookkeeping, only one entry is made for each transaction. This method is simple and easy to use but is not as accurate as of the other two methods.
Double-entry bookkeeping.
In double-entry bookkeeping, two entries are made for each transaction; one entry is debited, and the other is credited. This method is more accurate than single-entry bookkeeping, but it can be more challenging.
Recording Income And Expenses
To keep accurate bookkeeping records, you must record all income and expenses. You can do it with ledger books or accounting software. When recording transactions, you must include the date, description, amount, and account affected.
Income
Income is money that is earned from selling products or services. When recording income, you must include the date, description, amount, and account affected.
Expenses
Expenses are the costs associated with running a business. It can include things like rent, office supplies, and marketing expenses. When recording expenses, you must have the date, description, amount, and account affected.
Preparing Financial Statements
Financial statements are prepared from bookkeeping records. It is used to make informed decisions about your business. The three most common financial statements are the balance sheet, income statement, and cash flow statement.
Balance Sheet
The balance sheet is a snapshot of your
business’s financial position at a specific time. It includes information on assets, liabilities, and equity.
Income Statement
The income statement shows your business’s revenue and expenses over some time. You can use this information to assess your business’s financial performance.
Cash Flows
The cash flow statement shows the movement of cash in and out of your business. This information is used to assess your business’s financial health.
Tax Implications Of Bookkeeping
Bookkeeping has tax implications. It is essential to understand these implications so that you can make sure that you are compliant with the law.
Income/ Sales
It is earned from selling products or services. When preparing your taxes, you must include bookkeeping records as supporting documentation.
Deductions
You can use bookkeeping records to support deductions. It includes things like office supplies and marketing expenses.
Filing Taxes
Bookkeeping records will need to be filed with your taxes. This can be done electronically or by hard copy filing of taxes.
Conclusion
Bookkeeping is an essential part of running a business. It helps you keep track of your finances and make informed decisions about your business. When bookkeeping, you will need to record transactions, prepare financial statements, and understand the tax implications of bookkeeping.
Recommended: 10 Tips To Make Your Business More Profitable With Proper Bookkeeping
