Bookkeeping is the practice of tracking all the financial transactions that a business accumulates. Bookkeepers are the record keepers; they are tasked with logging and categorizing each of the transactions and keeping all of the data organized and complete. Bookkeeping is a separate part of the accounting process than what accountants typically handle. Accountants use the bookkeeper’s data. They are the analyzers and advice givers. Accountants create the financial statements from the bookkeeper’s records and use the information to understand the financial wellbeing of a business.
If a business is small and has relatively few daily financial transactions, they may choose to use the single-entry accounting system. This method is similar to that used when maintaining a checkbook. If a business is larger with many transactions occurring on a regular basis, they would most likely choose to use the double-entry accounting system. This system reduces errors ensuring everything is recorded properly and completely.
The Bookkeeping Process
Proper bookkeeping tracks each and every financial transaction a business completes from the time they open, until the time they close. Each transaction will be accompanied by some type of documentation (like a receipt or an invoice) which will be used when recording the transaction into the books.
Bookkeepers can utilize a physical paper journal to record the data or use a software program to electronically store the information. It is much more common for businesses to use electronic databases for their bookkeeping needs. Bookkeepers can use any accounting method a business needs (single or double entry methods, primarily). In order to be successful, a bookkeeper must know the chart of accounts for a business, be able to classify credit and debit entries, and keep the books balanced.
It is a bookkeeper’s job to be able to hand over all financial records, which are complete and accurate, to an accountant who will use the information to create financial statements and be ready for tax season.
Before Bookkeeping Begins
The first step when starting the bookkeeping process is deciding whether your business should use the cash or accrual accounting system. If you have a very small business, it may be best to consider a cash accounting system. However, most businesses will need to use the accrual accounting system.
The cash accounting system is the method where you only record transactions after cash is exchanged. The accrual accounting system records all transactions immediately, even if money is not exchanged until a later date. It is not uncommon for a business to start out using the cash method and later switch over to the accrual method once they start to grow.
The accrual accounting system will be required if you use credit, either by offering it to your customers or borrowing from a lender yourself.
Next, you need to choose whether your business should use the single-entry bookkeeping method or the double-entry. Single-entry means you only enter a transaction once in the books. This is similar to how you maintain a checkbook. It is only recommended to use single-entry bookkeeping if your business is quite small, and you only need to record when you bring in cash and spend it.
Double-entry bookkeeping is when all transactions have two entries. Every transaction will have equal but opposite entries (one debit, one credit) into at least two accounts. This is the ideal form of bookkeeping for larger, more complex businesses.
The next decision to be made is where you want your records to be written and stored. Again, this all depends on the size of your business. Small businesses could use physical paper books or even a spreadsheet program on the computer. Larger businesses will most likely need to use specialized bookkeeping databases to store all their financial data.
Finally, a business must create their chart of accounts. A chart of accounts lists every account (name and number) and subaccount the business has. This list may change over time as the business develops.