Bookkeeping What is bookkeeping?

Essentially, bookkeeping means recording and tracking the numbers involved in the financial side of the business in an organised way. It’s essential for businesses but is also useful for individuals and non-profit organisations. Since bookkeeping is a more straightforward process than accounting, it is something that many people can (and do) opt to take care of themselves. As your business grows and you begin making higher profits, hiring staff and handling more transactions, however, it may make sense to outsource the details of bookkeeping to someone else. Keeping up with the records in your small business might be a task you are willing and able to tackle yourself.

In essence, the term implies that an individual is tasked with the most common ongoing accounting transactions; more complex transactions are reserved for those with more advanced accounting training. For example, a larger business that receives tens of thousands of orders per day will need a far more complex bookkeeping system than that of a small village bakery. The more transactions you need to record, the more complex your system will need to be to cope. These accompanying documents provide the audit trail for each transaction and are an important part of maintaining accurate records in the event of an audit. While there are a myriad of courses available for bookkeeper education and training, a good deal of bookkeepers are self-taught since there are no required certifications needed to work as one.

What credentials does a bookkeeper need?

Accountants, unlike bookkeepers, are also eligible to acquire additional professional certifications. For example, accountants with sufficient experience and education can obtain the title of Certified Public Accountant (CPA), one of the most common types of accounting designations. To become a CPA, an accountant must pass the Uniform Certified Public Accountant exam and possess experience as a professional accountant. These required credentials are a determinating factor in the cost of an accountant.

This information must be sufficiently organized that the auditors can easily access information when they conduct the year-end audit. The bookkeeper collects timesheet information from employees and pay rate information from the human resources department, and uses these inputs to prepare a periodic payroll. The bookkeeper also prepares paychecks for employees, and remits payroll taxes to the government. Although the two are different entities, they dovetail really well and can contribute to the great success and organisation of a business if carried out properly. So, if your accounting is going to be as strong as it can be, your bookkeeping needs to be too.

History of bookkeeping

For instance, if a business takes a loan from a financial entity like a bank, the borrowed money will raise the company’s assets and the loan liability will also rise by an equivalent amount. If a business buys raw materials by paying cash, it will lead to an increase in the inventory (asset) while reducing cash capital (another asset). Because there are two or more accounts affected by every transaction carried out by a company, the accounting system is referred to as double-entry accounting. The balance sheet is based on the double-entry accounting system where the total assets of a company are equal to the total liabilities and shareholder equity. Double-entry bookkeeping was developed in the mercantile period of Europe to help rationalize commercial transactions and make trade more efficient. Some thinkers have argued that double-entry accounting was a key calculative technology responsible for the birth of capitalism.

The cashier collects the cash for a sale and returns a balance amount to the customer. Both the collected cash and balance returned are recorded in the register as single-entry cash accounts. Cash registers also store transaction receipts, so you can easily record them in your sales journal. Both a cash and accrual basis can work with single- or double-entry bookkeeping.

Cash Basis vs. Accrual Basis

Owing to their critical contribution to accounting, bookkeepers are integral to any modern business organization. In the normal course of business, a document is produced each time a transaction occurs. Bookkeeping first involves recording the details of all of these source documents into multi-column journals (also law firm bookkeeping known as books of first entry or daybooks). For example, all credit sales are recorded in the sales journal; all cash payments are recorded in the cash payments journal. Most individuals who balance their check-book each month are using such a system, and most personal-finance software follows this approach.

It is a financial report that tracks incoming and outgoing cash in your business. It allows you (and investors) to understand how well your company handles debt and expenses. By summarizing this data, you can see if you are making enough cash to run a sustainable, profitable business. Similarly, expenses are recorded when they are incurred, usually along with corresponding revenues. The actual cash does not have to enter or exit for the transaction to be recorded.

Take the confusion out of bookkeeping

Recording transactions begins with source documents like purchase and sales orders, bills, invoices, and cash register tapes. Once you gather these documents, you can record the transactions using journals, ledgers, and the trial balance. The information can then be consolidated and turned into financial statements. But most small businesses do not have the time or resources to maintain these records on their own. As such, they often rely on a bookkeeper or automated bookkeeping software to document their transactions and keep their books well maintained.

• A bookkeeper cannot call himself a CPA (Certified Public Accountant) unless he achieves the designation.
• The three major financial reports that every business must know and understand are the cash flow statement, balance sheet, and income statement.
• Bookkeepers have been around as far back as 2600 BC—when records were tracked with a stylus on slabs of clay—making bookkeeping not the oldest profession, but pretty darn close.
• Check out our helpful guide for deciding when is the right time for your business to invest in hiring a bookkeeper.
• Instead, small companies generally hire a bookkeeper or outsource the job to a professional firm.
• But proper bookkeeping is more than entering numbers into a software program or an Excel spreadsheet.