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• Accounting Principles
• Bookkeeping – Definition, Importance, Types & Methods

Bookkeeping – Definition, Importance, Types & Methods

What is bookkeeping and why is it important.

Bookkeeping is the process of recording your company’s financial transactions into organized accounts on a daily basis. It can also refer to the different recording techniques businesses can use. Bookkeeping is an essential part of your accounting process for a few reasons. When you keep transaction records updated, you can generate accurate financial reports that help measure business performance. Detailed records will also be handy in the event of a tax audit.

This guide will walk you through the different methods of bookkeeping, how entries are recorded, and the major financial statements involved.

Methods of bookkeeping

Before you begin bookkeeping, your business must decide what method you are going to follow. When choosing, consider the volume of daily transactions your business has and the amount of revenue you earn. If you are a small business, a complex bookkeeping method designed for enterprises may cause unnecessary complications. Conversely, less robust methods of bookkeeping will not suffice for large corporations.

With this in mind, let’s break these methods down so you can find the right one for your business.

Single-entry bookkeeping

Single-entry bookkeeping is a straightforward method where one entry is made for each transaction in your books. These transactions are usually maintained in a cash book to track incoming revenue and outgoing expenses. You do not need formal accounting training for the single-entry system. The single-entry method will suit small private companies and sole proprietorships that do not buy or sell on credit, own little to no physical assets, and hold small amounts of inventory.

Double-entry bookkeeping

Double-entry bookkeeping is more robust. It follows the principle that every transaction affects at least two accounts, and they are recorded as  debits and credits . For example, if you make a sale for $10, your cash account will be debited for $10 and your sales account will be credited by the same amount. In the double-entry system, the total credits must always equal the total debits. When this happens, your books are “balanced.”

Using the double-entry method for bookkeeping makes more sense if your business is large, public, or buys and sells on credit. Enterprises often choose the double-entry system because it leaves less room for error. In a way, it ‘double-checks’ your books because each transaction is recorded as two matching but offsetting accounts.

Cash-based or accrual-based

The next step is choosing between a  cash or accrual basis for your bookkeeping. This decision will depend on when your business recognizes its revenue and expenses.

In  cash-based, you recognize revenue when you receive cash into your business. Expenses are recognized when they are paid for. In other words, any time cash enters or exits your accounts, they are recognized in the books. This means that purchases or sales made on credit will not go into your books until the cash exchanges.

In the accrual method, revenue  is recognized when it is earned. 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. You can mark your sales and purchases made on credit right away.

Both a cash and accrual basis can work with single- or double-entry bookkeeping . In general however, the single-entry method is the foundation for cash-based bookkeeping. Transactions are recorded as single entries which are either cash coming in or going out. The accrual basis works better with the double-entry system.

How to record entries in bookkeeping

Generating financial statements like balance sheets, income statements, and cash flow statements helps you understand where your business stands and gauge its performance. For these reports to portray your business accurately, you must have properly documented records of your transactions. Keeping these records as current as possible is also helpful when reconciling your accounts.

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 . If you are a very small company, you may only need a cash register. The information can then be consolidated and turned into financial statements.

C ash registers

A cash register is an electronic machine that is used to calculate and register transactions. Usually, cash registers are used to record cash flow in stores. 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.

Cash registers are commonly found in businesses of all sizes. However, they aren’t usually the primary method of recording transactions because they use the single-entry, cash-based system of bookkeeping. This makes them convenient for very small businesses but too simplistic for enterprises.

The journal

The journal is called the book of original entry. It is the place where a business chronologically records its transactions for the first time. A journal can be either physical (in the form of a book or diary), or digital (stored as spreadsheets, or data in accounting software). It specifies the date of each transaction, the accounts credited or debited, and the amount involved. While the journal is not usually checked for balance at the end of the fiscal year, each journal entry affects the ledger. As we’ll learn, it is imperative that the ledger is balanced, so keeping an accurate journal is a good habit to keep. This form is useful for double-entry bookkeeping.

A ledger is a book or a compilation of accounts. It is also called the book of second entry. After you enter transactions in a journal, they are classified into separate accounts and then transferred into the ledger. These records are transcribed by accounts in the order: assets, liabilities, equity, income, and expenses. Like the journal, the ledger can also be physical or electronic spreadsheets.

A ledger contains a chart of accounts, which is a list of all the names and number of accounts in the ledger. The chart usually occurs in the same order of accounts as the transcribed records.

Unlike the journal, ledgers are investigated by auditors, so they must always be balanced at the end of the fiscal year. If the total debits are more than the total credits, it’s called a debit balance. If the total credits outweigh the total debits, there is a credit balance. The ledger is important in double-entry bookkeeping where each transaction changes at least two sub-ledger accounts.

Trial balance

The trial balance is produced from the compiled and summarized ledger entries. The trial balance is like a test to see if your books are balanced. It lists the accounts exactly in the following order: assets, liabilities, equity, income, and expenses with the ending account balance.

An accountant usually generates the trial balance to see where your business stands and how well your books are balanced. This can then be cross-checked against ledgers and journals. Imbalances between debits and credits are easy to spot on the trial balance. It is not always error-free, though. Any miscalculated or wrongly-transcribed journal entry in the ledger can cause an incorrect trial balance. It is best to look out for errors early, and correct them on the ledger instead of waiting for the trial balance at the end of the fiscal year.

Financial statements

The next, and probably the most important, step in bookkeeping is to generate financial statements. These statements are prepared by consolidating information from the entries you have recorded on a day-to-day basis. They provide insight into your company’s performance over time, revealing the areas you need to improve on. The three major financial reports that every business must know and understand are the cash flow statement, balance sheet, and income statement.

The cash flow statement

The cash flow statement is exactly what its name suggests. 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.

The balance sheet

The balance sheet  reports a business’ assets, liabilities, and shareholder’s equity at a given point in time. In simple words, it tells you what your business owns, owes, and the amount invested by shareholders. However, the balance sheet is only a snapshot of a business’ financial position for a particular date. It must be compared with balance sheets of other periods as well. The balance sheet allows you to understand the liquidity and financial structure of your business through  analytics like current ratio, asset turnover ratio, inventory turnover ratio, and debt-to-equity ratio.

The income statement

The income statement ,  also called the profit and loss statement, focuses on the revenue gained and expenses incurred by a business over time. There are two parts in a typical income statement. The upper half lists operating income while the lower half lists expenditures. The statement tracks these over a period, such as the last quarter of the fiscal year. It shows how the net revenue of your business is converted into net earnings which result in either profit or loss. The income statement does not focus on receipts or cash details.

Bank reconciliation

Bank reconciliation is the process of finding congruence between the transactions in your bank account and the transactions in your bookkeeping records. Reconciling your bank accounts is an imperative step in bookkeeping because, after everything else is logged, it is the last step to finding discrepancies in your books. Bank reconciliation helps you ensure that there is nothing amiss when it comes to your money.

Why is it mandatory?

Bank reconciliation is a must because it:

• Provides the exact financial situation of your company
• Tracks cash flow accurately
• Helps detect fraud or bank errors

Stay on top of your bookkeeping

Proper bookkeeping drives your company to success. It is a foundational accounting process, and developing strategies to improve core areas of your business would be nearly impossible without it. Yet as important as bookkeeping is, implementing the wrong system for your company can cause challenges. Some companies can still use manual methods with physical diaries and paper journals. However, as technology gets more and more advanced, even smaller companies could get benefits from going digital. This is where a cloud bookkeeping solution like Zoho Books comes in. Zoho Books helps you keep accurate records of your business finances. It provides quicker and easier solutions for cash management, accounts payable/receivable, bank reconciliation, and generating financial statements. Further, its built-in automation takes care of mundane accounting tasks and helps you focus more on your business. Try our bookkeeping software for free and see how it can help your business maintain perfect bookkeeping records.

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• Bookkeeping

We often use the terms accounting and bookkeeping interchangeably. However, bookkeeping is actually just one part of the accounting process which deals with the recording of the transactions. So let us learn about book-keeping and its differences with accounting.

Bookkeeping is the activities concerned with the systematic recording and classification of financial data of an organization in an orderly manner. It is essentially a record-keeping function done to assist in the process of accounting . It is a key component in forming the financial statements of the organization at the end of the financial year.

Bookkeeping also concerns itself with the classification of financial transactions and events. Such classification of transactions is essential to maintain proper financial accounts. It also involves preparing source documents for the financial transactions and other business operations being carried out.

There are many methods of book-keeping. The most common ones are the double-entry system and the single-entry system. But even methods other than these, which involves the process of recording financial transactions in any manner are acceptable book-keeping systems or processes.

(Source: debitoor.com)

Browse more Topics under Meaning And Scope Of Accounting

• Meaning of Accounting
• Objectives and Functions of Accounting
• Sub-fields of Accounting
• Limitations of Accounting
• Functions of an Accountant

Objectives of Bookkeeping

The main objective of book-keeping is to keep a complete and accurate record of all the financial transactions in a systematic orderly, logical manner. This ensures that the financial effects of these transactions are reflected in the books of accounts .

Then the second main objective is to ascertain the overall effect of all recorded transactions on the final statement of the company. Book-keeping will eventually ascertain the final accounts of the company, namely the Profit and Loss Account and the Balance Sheet .

Need for Bookkeeping

One of the main reasons for bookkeeping is so records can be maintained to show the financial position of each and every head/account of income and expenditure. Through book-keeping, detailed information about each expense or income could be obtained instantaneously.

Say for example a company makes sales in both cash and credit. Each of these sale transactions will be recorded. When a credit sale is made, the creditor’s account will be recorded. So at any time, the management of the company can determine which creditors owe them how much money by just looking at the records/accounts.

Also, the maintenance of books of accounts and financial statements is a legal requirement in many cases. In the case of companies or banks or insurance companies, there are acts that require such firms to keep and maintain financial records. In such a case, book-keeping becomes mandatory.

Activities of Bookkeeping

Book-keeping comprises of a lot of functions and activities bundled together. Some such activities are

• Recording all financial transactions
• Posting debit and credits in the respective ledgers
• Producing and organizing all source documents such as invoices
• Payroll accounting and upkeep may also be clubbed in with book-keeping

Bookkeeping vs. Accounting

Solved Question for You

Q: Book-keeping is an analyzing function. True or False?

Ans : False. Book-keeping is actually a recording function. The analysis is done during accounting.

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Meaning and Scope of Accounting

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What is Bookkeeping? Understanding the Basics of Financial Record-Keeping

Bookkeeping is the systematic recording and organizing of a company’s financial transactions. It’s a fundamental aspect of managing a business’s financial affairs, laying the groundwork for accurate accounting. Bookkeepers track all monetary exchanges , ensuring that each transaction, whether income or expenditure, is accurately entered into ledgers or accounting software. This practice is essential to provide stakeholders with clear insight into the financial position and performance of the business.

With financial transactions properly recorded, bookkeepers can then prepare key financial statements , such as the balance sheet, income statement, and cash flow statement. These documents are critical for making informed business decisions, as they reflect the company’s financial stability and growth prospects. Additionally, thorough bookkeeping is crucial for regulatory compliance, helping businesses meet legal obligations by maintaining transparent and up-to-date financial records .

Key Takeaways

• Bookkeeping is the detailed recording of a company’s financial transactions.
• It forms the basis for accurate financial statements and business decision making.
• Proper bookkeeping is crucial for regulatory compliance and financial transparency.

Fundamentals of Bookkeeping

Bookkeeping is an indispensable aspect of financial management, ensuring precise records are kept for all transactions. This foundational mechanism supports business operations and informs strategic decisions.

Role of Bookkeepers

Professional bookkeepers are tasked with the systematic recording of financial transactions in an accurate and orderly manner. They serve as the custodians of a business’s financial data, maintaining comprehensive records that reflect the financial activities of the company. Bookkeepers are often responsible for the implementation of either the single-entry or double-entry bookkeeping systems:

• Single-entry bookkeeping involves recording transactions once, either as an income or an expense—simple and suitable for small businesses.
• Double-entry bookkeeping requires each transaction to be recorded twice, once as a debit and once as a credit—this method ensures accuracy and is foundational to accounting fundamentals .

Through diligent record-keeping, bookkeepers contribute to the preparation of financial statements, which accountants later analyze.

Bookkeeping vs. Accounting

While bookkeepers concentrate on the day-to-day recording of transactions, accountants analyze these records to provide insight into the financial health of a business. The distinction lies in their responsibilities :

• Bookkeepers prepare the groundwork by documenting financial data.
• Accountants use this data to create financial models, perform audits, and offer strategic advice.

Although accounting extends beyond transaction records, incorporating financial planning and analysis, it is built on the precise information supplied by bookkeeping practices . Enrollment in a bookkeeping course is a common pathway for individuals to begin their journey in the field, providing the necessary competencies to perform as a professional bookkeeper .

Understanding the symbiotic relationship between bookkeeping and accounting is critical, as both play crucial roles in the financial well-being and regulatory compliance of any business entity.

Core Elements of Bookkeeping

Bookkeeping is a meticulous discipline that demands attention to the details of a company’s financial interactions. It is the bedrock upon which businesses understand and manage their financial well-being.

Transactions and Financial Events

Bookkeeping begins with the accurate recording of financial transactions and events. Every monetary action that a company undertakes, from sales to purchases, needs to be recorded in a systematic manner. Financial transactions are the individual entries that reflect the economic activity of the business.

Debits and Credits

The foundational concept in bookkeeping is the use of debits and credits . Each transaction involves a debit entry in one account and a corresponding credit entry in another, ensuring the books are always balanced. Debits usually signal an increase in assets or expenses and a decrease in liabilities, equity, or income. Credits, conversely, represent the opposite:

• Debits (Dr.) : Increase in assets/expenses, Decrease in liabilities/equity/income
• Credits (Cr.) : Decrease in assets/expenses, Increase in liabilities/equity/income

General Ledger

The general ledger acts as the repository of all financial transactions, organized by account. Journals serve as preliminary records where transactions first enter the bookkeeping system, while the ledger compiles these entries into accounts. The ledger reflects a company’s financial status holistically, showing all debits and credits across all accounts.

Recording Financial Transactions

The essence of bookkeeping lies in the accurate and systematic recording of financial transactions . Bookkeepers ensure that every sale, purchase, receipt, and payment is captured methodically in a company’s accounting records.

Journals and Ledgers

Bookkeepers first record transactions in chronological order in the journal , often referred to as the “books of first entry.” Every transaction entered into a journal must have adequate documentation, like receipts or invoices, to support it. These transactions are then posted to a ledger , which groups entries by account. The ledger provides a categorized record that shows the financial story of the company.

Sales and Receipts

The recording of sales involves detailing every transaction in which a product or service is sold. Precise information, including the date, amount, and client details, is critical. Bookkeepers also manage receipts, documenting the money that enters the business, ensuring accuracy to maintain an up-to-date picture of the business’s financial health.

• Sale: Company A sold 100 units of Product B at $10/unit.
• Receipt: Payment received on January 20XX, Check #1234.

Purchases and Invoices

Purchases and invoices are the cornerstones of the procurement process in bookkeeping. Each purchase, whether for office supplies or company assets, must be recorded along with the corresponding invoices. The accuracy of this process is crucial as it affects the financial statements of the business.

• Purchase: Company A purchased office supplies worth $500.
• Invoice: Invoice #789 for office supplies dated January 20XX.

Proper organization of all these documents is essential for accurate and efficient bookkeeping. They form a trail of economic activity that supports a business’s financial decisions and tax filings.

Financial Statements and Reporting

Financial statements are essential tools for conveying a company’s financial performance and economic condition. These reports offer comprehensive insights into the financial activities and outcomes for a designated period.

Income Statement

An income statement , also known as a profit and loss statement, itemizes a company’s revenues and expenses within a specific time frame, ultimately revealing the net income or loss. This statement provides a clear view of the company’s operational efficiency by showcasing the financial results of its activities, which can include sales figures and cost of goods sold.

Balance Sheet

A balance sheet presents a snapshot of a company’s financial standing at a given point in time. It lists assets , liabilities , and shareholders’ equity in a structured format. Assets, detailing what the company owns, are often balanced against the company’s obligations plus the equity invested by its proprietors or shareholders, hence the term “balance sheet.”

Cash Flow Statement

The cash flow statement tracks the flow of cash into and out of a company, distinguishing between operational, investing, and financing activities. By revealing how a company generates and uses its cash, it provides insights into its liquidity and financial health. The statement helps stakeholders gauge the firm’s ability to fund operations, pay debts, and finance growth.

Managing Business Accounts

Managing business accounts is an intricate part of bookkeeping that involves the organization and tracking of financial transactions to maintain a clear view of a business’s fiscal health. This section will explain the fundamental components of business account management, which include keeping track of money owed by the business, money that is owed to the business, as well as managing payroll and other expenses.

Accounts Payable

Accounts payable refer to the money a business owes to its suppliers and creditors. It is crucial for a business to:

• Record all invoices received from vendors.
• Track payment deadlines to avoid late fees and maintain favorable relationships with suppliers.
• Update financial records to reflect outstanding liabilities accurately.

These obligations must be managed efficiently to ensure a business can meet its short-term financial commitments without jeopardizing cash flow.

Accounts Receivable

Accounts receivable encompass the money that is due to a business for goods or services that have been delivered but not yet paid for by customers. For effective receivables management, a business should:

• Invoice customers promptly and accurately.
• Monitor incoming payments and follow up on overdue accounts.
• Reconcile payments received with the corresponding invoices to ensure accurate bookkeeping.

Effective management of accounts receivable is essential for maintaining healthy cash flow and for the sustainability of business operations.

Payroll and Expenses

Payroll is a significant expense for most businesses. Proper management of payroll involves:

• Calculating correct wages, taxes, and withholdings for all employees.
• Maintaining detailed records of payroll transactions to adhere to legal and tax requirements.

Other business expenses, ranging from rent, utilities, to office supplies, must be:

• Categorized and recorded methodically to provide insight into spending patterns.
• Reviewed regularly to identify cost-saving opportunities and ensure that expenditures align with business goals.

Bookkeeping plays a pivotal role in the meticulous recording and analysis of all these transactions, which is vital for the continuity and growth of a business.

Bookkeeping Software and Tools

Bookkeeping software and tools are essential for maintaining accurate financial records. They streamline the process of recording transactions, managing invoices, and reconciling accounts.

Accounting Software

Accounting software automates the process of recording financial transactions and generating reports. QuickBooks Online is one of the most popular accounting software options available. It offers features such as income and expense tracking, invoice creation, and financial reporting. Users can access this cloud-based platform from anywhere, facilitating real-time updates to financial data.

Spreadsheets and Excel

Not all businesses require complex accounting software. Spreadsheets can be a flexible alternative, specifically Microsoft Excel . Excel allows the creation of customized formulas and functions to track income and expenses. Moreover, it can be used to create financial reports and budgets, although it does require manual entry and updating of financial data.

Reconciling Accounts

Reconciling accounts is crucial for accurate bookkeeping. It involves comparing internal financial records against external records, such as bank statements, to ensure they match. Most accounting software, including QuickBooks , provides tools for reconciliation, simplifying this process. Regular reconciliation helps in catching and correcting errors, thus maintaining the integrity of financial records.

Regulatory Compliance

Bookkeeping plays a critical role in ensuring that an entity adheres to the necessary regulatory frameworks that govern financial transactions. It provides a clear and consistent record, aiding in compliance with various legal and financial requirements.

Taxation and Government Reporting

Entities are required to file tax returns that accurately reflect their financial situation. Bookkeeping is essential for the accurate reporting of taxable income, deductible expenses, and the payment of any owed taxes. It ensures that all transactions are properly recorded, classified, and summarized, facilitating a transparent and timely submission to government agencies.

• Tax Returns: Precise maintenance of financial records is crucial for declaring correct tax liabilities.
• Government Oversight: Regular financial reporting, as mandated by law, upholds the integrity and compliance with government standards.

Financial Institutions and Investors

Both financial institutions and investors depend on reliable bookkeeping to foster trust and transparency in their relationships with businesses. Compliance with the accounting standards recognized by these stakeholders is imperative for securing funding and maintaining ongoing investment.

• Financial Institutions: They require detailed financial records for loan assessments, determining creditworthiness, and monitoring financial stability.
• Investors: Accurate and compliant bookkeeping practices allow investors to analyze the financial health and performance of businesses, aiding in decision-making processes.

Advanced Bookkeeping Practices

In advanced bookkeeping, a practitioner goes beyond basic transaction recording to implement strategies for detailed financial tracking and analysis. These strategies tie directly to an organization’s financial planning and strategic decision-making.

Costs and Budgeting

Bookkeepers play a crucial role in managing costs by categorizing and recording all expenses accurately. They utilize advanced software to track costs in real-time, allowing for a precise budget creation and adjustments.

• Fixed Costs : Regularly recurring costs such as rent or salaries.
• Variable Costs : Fluctuating expenses like utility bills or raw materials.
• Capital Costs : Long-term investments in assets.

They compare actual expenditures against the projected budgets to identify discrepancies and provide actionable insights. Regular audits and reviews ensure the budgeting process responds dynamically to the business’s needs.

Financial Analysis and Business Strategy

Advanced bookkeeping involves the use of financial data for comprehensive analysis . Bookkeepers examine financial statements to understand the business’s cash flow, profitability, and financial health. This analysis supports strategic business decisions regarding:

• Investment opportunities : Assessing feasibility and potential returns.
• Financial planning : Long-term planning for growth and stability.

A bookkeeper’s expertise in analyzing financial data aids in developing sound business strategies . They translate numerical data into actionable business intelligence, contributing to informed decision-making across the organization.

The Importance of Accurate Bookkeeping

Accurate bookkeeping is pivotal for maintaining the financial health of a business. It serves as the groundwork for error-free reporting and strategic decision-making by management and investors.

Error Prevention

Accurate bookkeeping plays a crucial role in the prevention of errors which can have substantial impacts on the financial integrity of a business. With meticulous record-keeping, companies are able to:

• Track financial transactions in real-time, reducing the likelihood of omissions or duplications.
• Ensure consistent data entry, which is essential for reliable financial statements.
• Detect and correct discrepancies promptly, thus safeguarding against misstated financial positions.

Investment and Management Decisions

Investment and management decisions rely heavily on the accurate and detailed financial records provided by bookkeeping. Key benefits include:

• Investors use financial data to assess the viability and performance of a business, influencing both current and prospective investments.
• Management utilizes bookkeeping records to inform operational adjustments, budget allocations, and to gauge the company’s achievement of financial goals.
• Empowering stakeholders with the confidence to make informed decisions based on solid financial evidence is the hallmark of effective bookkeeping.

The Profession of Bookkeeping

Bookkeeping is a precise and structured approach to managing the financial transactions of a business. It plays a critical role in accounting, providing the underpinning data necessary for financial analysis and reporting .

Career and Education

A career as a bookkeeper usually requires at least a high school diploma , but having an associate’s degree or a bachelor’s degree in business or accounting is highly advantageous and often preferred by employers. According to the U.S. Bureau of Labor Statistics , bookkeeping jobs are expected to maintain stable demand , given their essential role in businesses across various industries.

Salaries vary based on experience, education, and location, but bookkeepers can expect to earn a median salary that is competitive with other jobs requiring similar levels of education and expertise. It’s not uncommon for bookkeepers to advance in their careers, often moving into more complex accounting roles as they gain experience and further their education.

Certifications and Skills

Although not always mandatory, obtaining a certification such as the Certified Bookkeeper designation from the American Institute of Professional Bookkeepers can enhance a bookkeeper’s credentials.

Key Skills Required for Bookkeepers:

• Detail-oriented: Accuracy in managing and recording financial data is crucial.
• Communication: They must effectively relay financial information to other stakeholders.
• Workplace Skills: Proficiency in accounting software, spreadsheet tools, and an understanding of standard bookkeeping procedures.

Becoming certified typically requires passing an exam and meeting specific work experience criteria, thereby showcasing a bookkeeper’s dedication and proficiency in the field. Mastery of these skills, combined with recognized certification, can open doors to higher salaries and more advanced positions.

Frequently Asked Questions

Bookkeeping encompasses the systematic recording and organization of financial transactions within a business. It is a key function for maintaining accurate financial records and managing the financial health of an organization.

How does bookkeeping differ from accounting?

Bookkeeping is the process of recording daily transactions in a consistent way, and it is a subset of accounting , which is a broader field that includes preparing and interpreting financial statements, analyzing costs and revenues, and conducting audits.

What are the primary responsibilities of a bookkeeper?

A bookkeeper’s main responsibilities include recording financial transactions , maintaining accurate ledgers, reconciling bank statements, and preparing invoices. They ensure that financial records are up-to-date and accurate.

Can you provide some examples of common bookkeeping tasks?

Common bookkeeping tasks include managing accounts payable and receivable , documenting receipts and expenditures, tracking inventory, and processing payroll. These activities form the basis for the business’s financial recording.

Why is bookkeeping considered essential in business operations?

Bookkeeping is essential because it ensures accurate financial records are kept which is necessary for preparing tax returns, assessing business performance, and aiding in strategic planning. It serves as the backbone for a company’s financial management .

In what ways does bookkeeping contribute to financial management?

Bookkeeping contributes to financial management by providing detailed records that are used to create financial statements, forecast business trends, manage cash flow, and formulate budgeting. These records are crucial for making informed financial decisions.

How would you describe the bookkeeping process to a non-specialist?

The bookkeeping process can be described to a non-specialist as the practice of methodically recording all monetary transactions made by a business to provide a clear financial overview. It involves categorizing each transaction and maintaining comprehensive records for review and use in various financial practices.

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What is Bookkeeping?

The process of recording and preserving financial transactions for a company or a person.

Prior to becoming our CEO & Founder at Wall Street Oasis, Patrick spent three years as a Private Equity  Associate for Tailwind Capital  in New York and two years as an Investment Banking Analyst at Rothschild.

Patrick has an  MBA  in Entrepreneurial Management from The Wharton School and a BA in Economics from Williams College.

What Is Bookkeeping?

Understanding bookkeeping.

• Importance Of Bookkeeping

Bookkeeping Vs. Accounting

• How To Become A Bookkeeper

Bookkeeping FAQs

The process of recording and preserving financial transactions for a company or a person is known as bookkeeping. It does this by tracking and documenting all financial activities and records to ensure that all financial information is accurate and updated.

The main reason businesses will hire bookkeepers is to record financial transactions, whether digital or in a literal book. This includes capturing all income received and expenses incurred by the business as well as any other financial transactions.

Some common transactions recorded include sales, purchases, payments to suppliers, wages, loans, and more. To find this information, bookkeepers will use source company documents such as receipts and bank statements to record this properly.

A company's bookkeeping and book balancing will follow the same system as its accounting, which is usually the double-entry system. The double-entry system just means that every transaction will affect at least two accounts, hence the name.

How the double-entry system works is for every debit entry made in one account, there's a corresponding credit entry in another account. This system ensures that the accounting equation (Assets = Liabilities + Equity) remains balanced.

Not only is the person in charge of the books, the bookkeeper, responsible for accounting all of the financial transactions but they must maintain a general ledger . The ledger is a comprehensive record of all accounts used by the business.

The general ledger tracks all transactions related to each account. Its purpose is to easily provide a summary of specific accounts to analyze financial activity.

Proper book balancing forms the foundation for generating accurate financial statements . Bookkeepers compile data from the general ledger to prepare key financial statements such as income, balance, and cash flow statements.

All legal and regulatory requirements must be met by bookkeeper records. To avoid any compliance issues with legal and regulatory requirements, a company’s financial data must meet all accounting standards.

By maintaining well-organized financial data, bookkeepers can be a key part of providing reliable financial information to support various stakeholders in understanding a business's financial position and performance.

Key Takeaways

• In a nutshell, bookkeeping is the practice of organizing and recording financial information for a business to meet all regulatory standards.
• Bookkeepers are different from accountants and require less schooling.
• Bookkeepers will sometimes assist in preparing tax returns and providing the information for auditors.
• Bookkeeping provides reliable financial information to a company, individual, or stakeholder.
• The practice of balancing books has recently moved to technology, but some still prefer to use physical books.

As stated before, book balancing is the general process of storing a company’s financial data and keeping a record of important monetary business data. It involves documenting all financial activities to provide a clear picture of an entity's financial health and performance . 

Bookkeepers ensure that each number in a dataset makes sense. Well, what does that mean? They are responsible for tasks such as recording journal entries and performing bank reconciliations.

They will not necessarily interpret the data but instead just relay a company's financials. They act as the first point of contact to address any financial statements or data issues within a company.

To understand bookkeeping involves grasping its key components and processes. Here's a breakdown to help you understand bookkeeping:

1. Components

a. Transactions: The main aspect revolves around recording financial transactions. Some examples of these transactions include sales, purchases, expenses, income, payments, and receipts. Each transaction affects specific accounts.

b. Accounts: Accounts refer to an accounting practice that represents different financial categories. 

Common accounts examples include cash, accounts receivable , accounts payable , inventory, fixed assets, and equity. Each account has a normal balance that reflects either a debit or a credit.

c. General Ledger: The general ledger is a summarized repository of each account and its respective transactions. It provides a comprehensive record of financial activity that allows an individual to see each transaction of an account in one flow.

d. Double-Entry System: The Double-entry system is the most common method of bookkeeping. It ensures that every transaction affects at least two accounts to maintain the balance of the accounting equation: 

Assets = Liabilities + Equity

2. Processes

a. Recording: Financial transactions are documented chronologically using source documents like receipts, invoices, and bank statements. They categorize transactions and assign them to the appropriate accounts.

b. Posting: Once recorded, transaction details are transferred to the respective accounts in the general ledger. This involves debiting and crediting accounts based on the double-entry system.

c. Reconciliation: Regular reconciliations, such as bank reconciliations, are very common. They are used to compare recorded transactions with external records. This helps identify discrepancies and ensures the accuracy of financial documents.

d. Reporting: Bookkeeping helps accountants generate financial statements that provide a snapshot of the entity's financial position and performance. The key financial statements include the income statement , balance sheet , and cash flow statement.

To gain a better understanding of balancing books, consider studying basic accounting principles, familiarizing yourself with financial statements, and utilizing book-balancing software or tools to practice recording transactions. 

Additionally, seeking guidance from accounting professionals or enrolling in bookkeeping courses can enhance your understanding and proficiency in balancing practices.

Importance of Bookkeeping

Bookkeeping can commonly be overlooked when contemplating a business's success factors. However, it plays a significant role in ensuring all financial information is accurate and current.

Book balancing provides businesses with organized records of their financial transactions, enabling them to make informed financial decisions. A stable business starts with reliable book balancing.

Without bookkeepers, companies could not meet legal requirements or have any record of their finances.

Accountants rely on the information bookkeepers provide, and it serves as the backbone of financial management.

Let's break down some more specific reasons why bookkeeping is so important to a company’s success:

1. Financial Decision-Making

The updated financial data provided by book balancing provides valuable financial information that enables informed decision-making. Accessible, reliable financial data helps business owners and managers analyze revenue, expenses, and profitability.

2. Financial Monitoring and Control 

Bookkeepers will continuously monitor the control of financial activities. This is done typically by tracking income and expenses, overspending, cost inefficiencies, or revenue decreases. 

Regular review of financial data helps detect and address issues promptly, promoting better financial control and efficiency.

3. Compliance with Legal and Regulatory Requirements

Compliance with legal and regulatory obligations is necessary to file tax returns, meet financial reporting requirements, and provide information during audits or inspections. 

When done properly, businesses can avoid penalties, fines, or legal issues resulting from non-compliance.

4. Financial Analysis and Planning 

Financial statements derive from these auditing records. Accountants will use these records to create income statements, balance sheets, and cash flow statements.

This information facilitates budgeting, forecasting, and long-term strategic planning .

5. Obtaining Financing

Financial institutions and investors require accurate and detailed financial records to evaluate creditworthiness , assess the viability of the business, and make informed lending or investment decisions. 

Proper book balancing enhances credibility and increases the chances of securing financing.

6. Tax Compliance and Planning

Financial records enable tax return preparation and timely filing, ensuring that businesses meet their tax obligations. 

7. Business Performance Evaluation

By comparing financial records, identifying trends, and calculating key performance indicators . 

This evaluation helps set realistic goals, measure progress, and implement improvement strategies.

8. Transparency and Stakeholder Confidence

Transparency of financial records builds stakeholder confidence. Transparent financial records enable clear communication with stakeholders, including investors, lenders, suppliers, and customers. 

Book balancing is important because it provides accurate and reliable financial data that supports decision-making, financial control, compliance, planning, analysis, and stakeholder confidence.

Bookkeeping and accounting are closely related but have distinct differences in activities within the financial management of a business. While bookkeeping and accounting share similarities, they have distinct differences in their activities within the financial management of a business

They represent two distinctly different aspects of the financial process within a business.

Bookkeeping focuses on accurately recording financial data, while accounting involves translating that data into meaningful information for business decision-making

Both aspects are crucial for the financial health of a business, and understanding the difference can help a business effectively manage its finances.

Bookkeeping

The practice of Bookkeeping is a systematic process of recording, organizing, and maintaining financial transactions and records. It focuses on the day-to-day financial activities of a business and provides a foundation for accurate financial reporting.

Bookkeepers do not need any other additional schooling after college to be able to work. However, one should obtain a Certified bookkeeper designation from the American Institution of Professional Bookkeepers.

Certification is not necessary to work as a bookkeeper, but it increases your chances of getting hired and performing well.

Key aspects include:

• Recording Transactions: Record financial transactions such as sales, purchases, expenses, and payments using source documents like invoices, receipts, and bank statements.
• Data Entry: Enter transaction details into the general ledger, categorizing them based on established accounts using the double-entry system.
• Reconciliation: Perform regular reconciliations to maintain the accuracy of financial records.
• Financial Records Maintenance: Organize and maintain financial records, including general ledgers, subsidiary ledgers, and supporting documentation like invoices and receipts.

Accounting, known as the language of business, builds upon the foundation of book balancing and involves more complex analysis, interpretation, and communication. Accounting requires more schooling as well as certain certifications to be able to work. 

The CPA, Certification of Professional Accounting is an exam all accountants must pass and complete their bachelor's at a respected college. 

Some accountants go on to complete their masters and even engage in several other exams to obtain different certificates depending on their specialties. 

Key aspects of accounting include:

• Financial Analysis:  Accountants analyze financial data, interpret trends, and generate reports to evaluate a business's financial health and performance. They use financial ratios and trend analysis to make recommendations for decision-making.
• Financial Reporting: Accountants will prepare the three main financial statements, which are the income statements, balance sheets, and cash flow statements. Stakeholders use these statements to assess the business's financial position and performance.
• Tax Planning and Compliance:  Accountants help businesses plan and manage their tax obligations by understanding tax laws, identifying deductions and exemptions, and ensuring compliance with tax regulations.
• Financial Strategy and Planning: Accountants contribute to strategic financial planning, budgeting, and forecasting. They analyze financial data to help set goals, develop budgets, and make informed decisions regarding investments, cost management, and resource allocation.

Bookkeeping and accounting are commonly mistaken for each other; however, they are not two interchangeable terms. Book balancing is the foundation for accounting, providing organized financial records that accountants use to generate meaningful insights and reports.

Bookkeeping focuses on recording and organizing financial transactions, while accounting involves analyzing, interpreting, and communicating financial information to facilitate decision-making, compliance, and strategic planning.

Both are extremely important to the success of a business but vary in responsibility.

How to Become a Bookkeeper

There are multiple routes to becoming a bookkeeper. Each route will require a combination of education and experience. At first glance, the road to bookkeeping can seem a little overwhelming, so we simplified the process into steps. 

Here are a couple of steps to get started:

1. Education and Training

• High School Education: A high school diploma or equivalent qualification is a good start and a necessary requirement to being a bookkeeper. 
• Post-Secondary Education: While not required, pursuing a certificate or associate's degree in bookkeeping, accounting, or a related field can provide extra experience.
• Professional Certifications: Obtaining a professional certification, while not required, should be considered to enhance your credentials. Examples of certifications would be the Certified Bookkeeper designation and the Certified Public Bookkeeper designation 

2. Skills Development

• Bookkeeping Software Proficiency: Learning popular bookkeeping software such as QuickBooks, Xero, or Sage can improve your chances of getting hired and performing well.
• Attention to Detail: Bookkeepers are known for being detail-oriented to record and organize financial transactions accurately.
• Organizational Skills: Well-organized financial records must be maintained to stay on top of deadlines for payments and reporting.

3. Practical Experience

• Gain Experience: Seek entry-level positions or internships that provide hands-on experience after graduating.

4. Career Advancement

• Continuing Education: Staying updated with changes in accounting regulations, software advancements, and industry best practices is an excellent way to increase your performance.
• Specialization: Consider specializing in specific areas such as payroll, taxation, or industry-specific auditing to broaden your expertise and increase job prospects.

The potential earnings of bookkeepers will vary based on location, experience, qualifications, and the organization's size, like most jobs. 

In May 2020, The U.S. Bureau of Labor Statistics reported the median annual wage for bookkeepers as $42,410. However, like most careers, entry-level bookkeepers will probably earn less, while experienced professionals can earn higher salaries.

Salaries can also be influenced by industry demand and the level of responsibility involved. Each company is different. Additionally, bookkeepers who become certified or pursue advanced qualifications could have better earning potential.

A bookkeeper's role is to ensure accurate financial information, track income and expenses, reconcile accounts, and help generate financial statements .

Formal qualifications will vary depending on the employer, but a high school diploma or equivalent is typically the minimum requirement. Some pursue post-secondary or professional certifications, such as Certified Bookkeeper or Public Bookkeeper.

They often use specialized accounting software such as QuickBooks, Excel, Xero, Sage, or FreshBooks. These software programs streamline the process and provide tools for generating reports and managing financial data.

Bookkeepers primarily focus on recording financial transactions, maintaining records, and organizing financial data. Conversely, accountants will analyze and interpret financial information, prepare financial statements , provide financial advice, and handle tax planning.

Bookkeeping should be done regularly for financial records to be updated. Many businesses perform book-balancing tasks on a monthly or quarterly basis. This includes recording transactions, reconciling bank statements, and updating financial documents.

Yes, many businesses choose to outsource their bookkeeping tasks to professional services or freelancers. Outsourcing book balancing can provide cost savings, access to expertise, and more time for businesses to focus on core operations.

While digital record-keeping has become common today, retaining physical copies of important documents is often advisable. This helps in case of an audit, compliance requirements, or the need for historical reference.

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What is Bookkeeping?

Keeping records of all financial transactions

Bookkeeping involves the recording, on a regular basis, of a company’s financial transactions . With proper bookkeeping, companies are able to track all information on its books to make key operating, investing, and financing decisions.

Bookkeepers are individuals who manage all financial data for companies. Without bookkeepers, companies would not be aware of their current financial position, as well as the transactions that occur within the company.

Accurate bookkeeping is also crucial to external users, which includes investors, financial institutions, or the government – people or organizations that need access to reliable information to make better investments or lending decisions. Simply put, business entities rely on accurate and reliable bookkeeping for both internal and external users.

Importance of Bookkeeping

Proper bookkeeping gives companies a reliable measure of their performance. It also provides information to make general strategic decisions and a benchmark for its revenue and income goals. In short, once a business is up and running, spending extra time and money on maintaining proper records is critical.

Many small companies don’t actually hire full-time accountants to work for them because of the cost. Instead, small companies generally hire a bookkeeper or outsource the job to a professional firm. One important thing to note here is that many people who intend to start a new business sometimes overlook the importance of matters such as keeping records of every penny spent.

The Accrual vs Cash Basis of Accounting

In order to properly implement bookkeeping, companies need to first choose which basis of accounting they will follow. Companies can choose between two basic accounting methods : the cash basis of accounting or the accrual basis of accounting. The difference between these types of accounting is based on the timing for when the company actually records a sale (money inflow) or purchase (money outflow) in the books.

Video Explanation of the Bookkeeping Process

Additional resources.

Thank you for reading CFI’s guide to the Bookkeeping Process. To keep advancing your career, the additional CFI resources below will be useful:

• Free Accounting Fundamentals Course
• Analysis of Financial Statements
• Disbursement
• 3 Statement Model
• Source Documents
• See all accounting resources
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1.1 Explain the Importance of Accounting and Distinguish between Financial and Managerial Accounting

Accounting is the process of organizing, analyzing, and communicating financial information that is used for decision-making. Financial information is typically prepared by accountants —those trained in the specific techniques and practices of the profession. This course explores many of the topics and techniques related to the accounting profession. While many students will directly apply the knowledge gained in this course to continue their education and become accountants and business professionals, others might pursue different career paths. However, a solid understanding of accounting can for many still serve as a useful resource. In fact, it is hard to think of a profession where a foundation in the principles of accounting would not be beneficial. Therefore, one of the goals of this course is to provide a solid understanding of how financial information is prepared and used in the workplace, regardless of your particular career path.

Think It Through

Every job or career requires a certain level of technical expertise and an understanding of the key aspects necessary to be successful. The time required to develop the expertise for a particular job or career varies from several months to much longer. For instance, doctors, in addition to the many years invested in the classroom, invest a significant amount of time providing care to patients under the supervision of more experienced doctors. This helps medical professionals develop the necessary skills to quickly and effectively diagnose and treat the various medical conditions they spent so many years learning about.

Accounting also typically takes specialized training. Top accounting managers often invest many years and have a significant amount of experience mastering complex financial transactions. Also, in addition to attending college, earning professional certifications and investing in continuing education are necessary to develop a skill set sufficient to becoming experts in an accounting professional field.

The level and type of training in accounting are often dependent on which of the myriad options of accounting fields the potential accountant chooses to enter. To familiarize you with some potential opportunities, Describe the Varied Career Paths Open to Individuals with an Accounting Education examines many of these career options. In addition to covering an assortment of possible career opportunities, we address some of the educational and experiential certifications that are available. Why do you think accountants (and doctors) need to be certified and secure continuing education? In your response, defend your position with examples.

In addition to doctors and accountants, what other professions can you think of that might require a significant investment of time and effort in order to develop an expertise?

A traditional adage states that “accounting is the language of business.” While that is true, you can also say that “accounting is the language of life.” At some point, most people will make a decision that relies on accounting information. For example, you may have to decide whether it is better to lease or buy a vehicle. Likewise, a college graduate may have to decide whether it is better to take a higher-paying job in a bigger city (where the cost of living is also higher) or a job in a smaller community where both the pay and cost of living may be lower.

In a professional setting, a theater manager may want to know if the most recent play was profitable. Similarly, the owner of the local plumbing business may want to know whether it is worthwhile to pay an employee to be “on call” for emergencies during off-hours and weekends. Whether personal or professional, accounting information plays a vital role in all of these decisions.

You may have noticed that the decisions in these scenarios would be based on factors that include both financial and nonfinancial information. For instance, when deciding whether to lease or buy a vehicle, you would consider not only the monthly payments but also such factors as vehicle maintenance and reliability. The college graduate considering two job offers might weigh factors such as working hours, ease of commuting, and options for shopping and entertainment. The theater manager would analyze the proceeds from ticket sales and sponsorships as well as the expenses for production of the play and operating the concessions. In addition, the theater manager should consider how the financial performance of the play might have been influenced by the marketing of the play, the weather during the performances, and other factors such as competing events during the time of the play. All of these factors, both financial and nonfinancial, are relevant to the financial performance of the play. In addition to the additional cost of having an employee “on call” during evenings and weekends, the owner of the local plumbing business would consider nonfinancial factors in the decision. For instance, if there are no other plumbing businesses that offer services during evenings and weekends, offering emergency service might give the business a strategic advantage that could increase overall sales by attracting new customers.

This course explores the role that accounting plays in society. You will learn about financial accounting , which measures the financial performance of an organization using standard conventions to prepare and distribute financial reports. Financial accounting is used to generate information for stakeholders outside of an organization, such as owners, stockholders, lenders, and governmental entities such as the Securities and Exchange Commission (SEC) and the Internal Revenue Service (IRS).

Financial accounting is also a foundation for understanding managerial accounting , which uses both financial and nonfinancial information as a basis for making decisions within an organization with the purpose of equipping decision makers to set and evaluate business goals by determining what information they need to make a particular decision and how to analyze and communicate this information. Managerial accounting information tends to be used internally, for such purposes as budgeting, pricing, and determining production costs. Since the information is generally used internally, you do not see the same need for financial oversight in an organization’s managerial data.

You will also note in your financial accounting studies that there are governmental and organizational entities that oversee the accounting processes and systems that are used in financial accounting. These entities include organizations such as the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), the American Institute of Certified Public Accountants (AICPA), and the Public Company Accounting Oversight Board (PCAOB). The PCAOB was created after several major cases of corporate fraud, leading to the Sarbanes-Oxley Act of 2002, known as SOX. If you choose to pursue more advanced accounting courses, especially auditing courses, you will address the SOX in much greater detail.

For now, it is not necessary to go into greater detail about the mechanics of these organizations or other accounting and financial legislation. You just need to have a basic understanding that they function to provide a degree of protection for those outside of the organization who rely on the financial information.

Whether or not you aspire to become an accountant, understanding financial and managerial accounting is valuable and necessary for practically any career you will pursue. Management of a car manufacturer, for example, would use both financial and managerial accounting information to help improve the business. Financial accounting information is valuable as it measures whether or not the company was financially successful. Knowing this provides management with an opportunity to repeat activities that have proven effective and to make adjustments in areas in which the company has underperformed. Managerial accounting information is likewise valuable. Managers of the car manufacturer may want to know, for example, how much scrap is generated from a particular area in the manufacturing process. While identifying and improving the manufacturing process (i.e., reducing scrap) helps the company financially, it may also help other areas of the production process that are indirectly related, such as poor quality and shipping delays.

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What Is Bookkeeping? Definition, Tasks, Terms to Know

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Table of Contents

The evolution of bookkeeping

What is a bookkeeper’s job, what is the difference between bookkeeping and accounting, common bookkeeping terms.

Bookkeeping is broadly defined as the recording of financial transactions for a business. It’s a key component of the accounting process and can be done as frequently as daily, weekly or monthly. Accurate bookkeeping is vital to filing tax returns and having the financial insights to make sound business decisions.

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Modern bookkeeping was formally established in the late 15th century when Italian mathematician and Franciscan monk Luca Pacioli described double-entry bookkeeping in his book, “Summary of Arithmetic, Geometry, Proportions and Proportionality.”

While the basics of accounting haven’t changed in over 500 years, the practice of bookkeeping has. Bookkeeping was once done manually using actual books called journals and ledgers. Because bookkeeping is based on double-entry accounting , each transaction affects two accounts — one gets debited and the other is credited. These debits and credits had to be manually recorded and balanced.

The advent of accounting software significantly lessened the tediousness of bookkeeping by handling debits and credits for you in the background. And technologies like optical character recognition (OCR) and bank feeds have come just short of fully automating the traditional bookkeeping process. Data entry can now happen as soon as you snap a photo of a receipt with your smartphone. And reconciliations happen almost in real time through daily bank feed maintenance, making the end-of-month closing process a snap. Now one bookkeeper can manage the bookkeeping for several businesses in fewer than eight hours a day.

» MORE: Bookkeeping 101: A crash course in small-business bookkeeping

Bookkeeping means different things to different people. Some bookkeepers focus solely on “write up” work, which basically consists of compiling the books quickly, usually for tax preparation purposes. Other bookkeepers provide “full-charge” services and can even serve as a financial controller for your company.

Full-charge bookkeeping tasks can be broken down into four broad categories.

1. Data entry

Data entry involves entering your business’s transactions into your bookkeeping system. As mentioned above, a lot of the data entry now happens automatically, either through OCR or bank feeds.

There's more to data entry than just putting the numbers into your software, though. Proper data entry includes:

Source document verification: This step usually gets skipped when doing your bookkeeping solely from bank feeds. Ideally, you want to make sure your data entry comes not from the bank feed, but from source documents like receipts or bills. This ensures that only valid business transactions are being entered into your books. Today’s bookkeeping software allows you to snap a photo of or scan in your source documents, and then OCR technology will extract the pertinent information and do much of the data entry for you. This means you can maintain source document verification while still taking advantage of the time-saving technology of your accounting software.

Accurate classification of transactions: Each entry into your bookkeeping system impacts at least two accounts in your business’s chart of accounts . Proper data entry — or data management if you rely on automation for your data entry — ensures that transactions are being posted to the correct accounts. Accurate classification of transactions enables you to produce financial management reports that can be used to make strategic business decisions.

Accurate identification of transactions: One downfall of some bookkeeping software is that the artificial intelligence behind it can make mistakes a human wouldn’t make while entering the data. The most common of these mistakes is assigning the wrong payee name to a transaction. You must make sure your transactions are being identified correctly. This is especially important for payments you make to vendors who will need a 1099 form at the end of the tax year.

2. Office management

Often, office management tasks like customer billing, paying vendors and payroll are considered to be bookkeeping tasks. Although accounts receivable , accounts payable and payroll do impact your books, some of these tasks can be managed by a person in your company other than your bookkeeper. Others, like payroll, can be outsourced to independent companies that specialize in the task.

If your bookkeeper bills your customers or pays your vendors and employees, make sure you have proper checks and balances in place to mitigate the possibility of fraud.

3. End-of-period closing

Your books should be closed at the end of each accounting period. End-of-period closing includes:

Reconciling all bank, credit card and loan accounts.

Reconciling accounts payable and accounts receivable.

Making any adjusting journal entries for prepaid revenue or expenses, depreciation or other unusual transactions.

Reviewing the financial statements for accuracy and completeness.

Locking the books so they can’t be changed after the end-of-period closing has been completed (optional, but highly recommended).

4. Internal management reports

Only an accountant licensed to do so can prepare certified financial statements for lenders, buyers and investors. However, your bookkeeper can generate internal management reports for your business.

There are three common reports your bookkeeper can prepare:

Your balance sheet is a snapshot of your assets, liabilities and equity as of a certain date.

Your income statement (also known as a profit and loss statement) details your business’s income and expenses for a period of time (a month, quarter, year, etc.). It shows whether your business has earned a profit or experienced a loss.

Your cash flow statement reconciles the income statement to the balance sheet and answers the question, “Where did the cash go?” for accrual-basis businesses.

Your bookkeeper might also prepare other auxiliary reports for your business, like accounts payable and accounts receivable aging reports . You can use these to make business decisions, but they should not be presented as audited, certified or official financial statements.

It’s important to note that not all lenders and investors require certified or audited financial statements. However, it’s still a good idea to ask an accountant to review your bookkeeper’s financial statements for accuracy and completeness prior to submitting them to a third party for consideration. And even if you’re not looking for funding, consider asking an accountant to review your financial statements at least once a year.

» MORE: Best online bookkeeping services

Bookkeeping is largely concerned with recordkeeping and data management. Bookkeepers make sure the information in the books is accurate and that the books are reconciled each month. In essence, they complete the first step in the accounting process.

Accountants, on the other hand, use the information provided by bookkeepers to summarize a business’s financial position and render financial advice to the business owner. Many accountants also prepare tax returns, independent audits and certified financial statements for lenders, potential buyers and investors.

Accountants typically have at least a bachelor’s degree in accounting, and many go on to become certified public accountants (CPAs) or certified management accountants (CMAs). Bookkeepers might also have degrees in accounting, but most have either technical certifications or on-the-job experience.

» MORE: Does your business need a bookkeeper or an accountant?

Bookkeeping has its own language, and bookkeepers and accountants sometimes forget business owners might not be fluent in it. Here are some common bookkeeping terms:

The accounting equation: The accounting equation is the key formula that keeps your books in balance. That equation is Assets = Liabilities + Equity. You can see the accounting equation in action in your business’s balance sheet.

Assets: What your business owns. Assets include cash, buildings, vehicles, patents and open invoices due from customers (accounts receivable), just to name a few.

Liabilities: What your business owes. Liabilities include credit card balances, amounts due to vendors (accounts payable), loan balances and tax liabilities that haven't yet been paid.

Equity: What is owed to the owner or shareholders of the business. Equity includes money paid in by the owner (contributions), money the owner has earned but not taken from the business (retained earnings) and other types of contributions like stock issued.

General ledger: The general ledger is where financial transactions are recorded and is made up of assets, liabilities, equity, income and expenses. These five types of accounts comprise the books for your business.

Chart of accounts: The list of categories you use to classify your business’s transactions. Think of the chart of accounts as a sort of filing system for your business’s transactions.

Debits and credits: Each bookkeeping transaction has two sides (remember, it’s called double-entry accounting). One side of the transaction is the debit side, and the other side is the credit side. Assets and expenses are increased by debits and reduced by credits. Income, equity and liabilities are increased by credits and reduced by debits.

Accrual basis and cash basis: Accrual-basis accounting recognizes income and expenses when they are incurred. Cash-basis accounting recognizes income when payment is received and expenses when payment is made. Check out NerdWallet’s accrual vs. cash basis accounting guide for more details.

Reconciliation: The process of verifying the balance of certain accounts (checking, credit cards, loans, etc.) against statements from an outside source, usually a bank.

Income: Money your business earns through sales.

Expenses: Money your business spends on operations and overhead.

Cost of goods: Money your business spends to produce income. Read NerdWallet’s cost of goods sold explainer to learn more.

Profit: What your business has earned after cost of goods and expenses are subtracted from income. Profit is not the same as cash on hand.

» MORE: NerdWallet’s top picks for accounting and bookkeeping apps

A version of this article was first published on Fundera, a subsidiary of NerdWallet.

On a similar note...

Why Bookkeeping is Important [15 Things Small Businesses Should Know]

Keran Smith - October 19, 2020

Today, we’re going to give you 15 reasons why bookkeeping is important.

You heard that right, not 5 but 15 convincing and valid reasons.

We know that there are a ton of things that are important to businesses owners like:

• service delivery

…and much more.

But if we were you, we’d place bookkeeping at the top of our important list as it affects literally everything we just mentioned, which you’ll see why and how by end of this post.

In fact, if you are doubtful that bookkeeping is important, we want to pose a question that we want you to answer at the end of this article!

The question is this:

What story is your bookkeeping telling you? Is it a horror story or one where the main character is triumphant?

We’ll come back to that! So l et’s talk about why bookkeeping is important. Here are 15 reasons:

15 Reasons Why Bookkeeping is Important for Businesses

1. it helps you stay organized.

You’re probably saying now, really, that’s what you start with? Well, hear us out.

Being organized is a skill every business owner should have. You should be able to find information regarding your business at any time.

There are a few parties that are interested in your company’s financial records – the IRS, employees, investors, lenders, and most importantly, YOU!

Being able to provide the information requested by these parties is vital to your ongoing operation.

• If you don’t have the information for yourself you could make a financial decision that could cripple your business.
• If you don’t provide records requested by the IRS, that could mean penalties and fees.
• If you don’t provide records requested by investors or lenders, that could mean a stoppage of cash flow and so on.

Being disorganized with your books could cause your relationships with these parties to be compromised or terminated altogether.

Literally, by definition, bookkeeping is the organization of financial information.

Keeping your financial records organized makes it easier to locate and provide to appropriate parties.

2. It Helps You Budget

Bookkeeping is important because it helps you budget.

When income and expenses are properly organized, it makes it easier to review financial resources and expenses.

A budget creates a financial roadmap for your business.

With a budget, you can plan for future expenses and the anticipated resources that would cover those expenses.

3. It Helps You With Tax Preparation

In most cases, your business has to file a tax return every year. Even more, you also have to file a personal return that requires your business return to be filed.

And yet every year, millions of business owners are scrambling through their desks to find missing paperwork. Sound familiar?

The tax filing process can be made more efficient by simply having a bookkeeping function within your company.

4. It Helps You With Performance Analysis

Bookkeeping is a tool used by management to analyze business performance.

The product of bookkeeping is financial statements. Financial statements should be regularly generated and used for analysis.

By analyzing financial statements, you can track your cash inflows and outflows which lets you know what business activities are working or not working.

This type of analysis allows you to focus on your company’s strengths and improve on its weaknesses.

5. It Helps You Make Better Decisions

With analysis comes better decision-making. In order to make the best decisions possible, you need to have access to all available information.

Bookkeeping is important because it provides you this information.

How can you expect to make profitable decisions without financial information to back it up?

6. It Helps You Plan For The Future

Bookkeeping presents the past financial performance of your company. In order to plan for the future, you have to have a good understanding of the past.

This includes planning for strategic purposes and tax planning as mentioned previously.

7. It Helps You Easily Report to Investors

Investors want to know the financial performance of your business to be able to want to quantify the value of their investment. Financial statements do just that.

The balance sheet, income statement, and cash flow statement all present the value of your business, which allows investors to have up-to-date and accessible information.

Investors will be able to make better, well-informed, decisions which is the ultimate purpose of bookkeeping.

Bookkeeping is not only for current investors but for future investors too.

Prospective investors are more likely to invest in your business when you have organized financial information.

Think about it, if you were an investor, would you invest in a company that didn’t have accessible and organized financial records?

8. It Helps You With Financial Management

Bookkeeping is important because it allows you to take control of your business’ finances.

Bookkeeping paints a clear picture of how you spend money.

You can see outstanding invoices owed by you or your customers. You will benefit from paying your bills on time and receiving payment for your products or services on time too.

It’s this delicate balance of cash inflow and outflow that will keep your business going.

9. It Gives You Peace of Mind

Disorganized books can weigh heavy on your mind as a business owner.

With all of the other factors of running a business, your bookkeeping should not be keeping you up at night.

When your books are complete, you can rest easy knowing that your company’s financial information is review-ready.

Banks or the IRS no longer have to give you anxiety.

Instead, you’ll find your mind at ease and more focused on other elements of your business.

10. It Allows You To Track Profit and Growth

Want to know your business’ profitability? Start bookkeeping.

For example, the income statement is one of the financial statements that is prepared from your bookkeeping.

On the income statement, you can see if your business is profitable or not. Without this information, it is impossible to know how well (or not so well) you’re doing.

Bookkeeping also helps with tracking growth.

Over time, you will accumulate months and years of data.

With this data, you can observe trends and gain a greater understanding of your business cycles and compare results across periods.

11. It Improves Your Cash Flow

How does bookkeeping help improve cash flow?

Because bookkeeping provides information regarding your outstanding invoices…

• customer/vendor name,
• date issued, and

…which can be used to implement better cash flow policies.

Some examples are shortening the amount of time you allow your customers to pay you.

On the flip side, you can delay the payment of vendor invoices by waiting until a day or two before the due date.

By doing so, you are increasing the average amount of cash you have on hand at any given time.

12. It Provides a Greater Focus on Strategy

Tactical and strategic planning is the core of what you do as a business owner. You’re always thinking of ways to grow and develop your business.

With bookkeeping as a tool, you are closer to your short and long-term goals.

You should use the information that bookkeeping offers to focus on strategy.

You can track the results of your strategy with bookkeeping and adjust goals accordingly.

13. It Provides a Snapshot of Your Business

Bookkeeping provides financial information about your company in the form of financial statements.

Financial statements like the balance sheet, income statement, and cash flow statement all provide financial information for a set period of time.

Together, these statements take a snapshot of your business allowing you the ability to see how well your business performed.

14. It Makes an IRS Audit Easier

Let us say this… we hope you never get audited by the IRS !

But in the unfortunate circumstance that you are audited by the IRS, you want to make sure your books are in order.

Messy books prolong the auditing process, making your business more susceptible to fees and penalties.

If the IRS feels that your books are disorganized or outdated, they have more motivation to impose penalties.

When faced with an audit, it’s best to make their job as easy as possible by providing what they request in a timely manner.

15. It’s a Requirement Under Law

Last, but certainly not least, the law requires you to keep financial records for your company.

Depending on your legal structure, the law requires you to keep financial records separate from your personal expenses.

Failing to do so, can lead to the termination of your business.

There you have it. Now that you know the 15 reasons why bookkeeping is important, let’s revisit the question we asked you earlier.

What story is your bookkeeping telling you? Let us know in the comments.

If you find yourself needing to implement a bookkeeping process, consider hiring a bookkeeping professional to help such as the LYFE Accounting team.

Contact us today to learn more about how we can help you.

One Response

I like that you mentioned that business bookkeeping services is a bit of a necessity in order to be more profit-oriented. I will have to keep this in mind because I plan to start my own clothing shop business someday. Making sure that it can easily grow in the first few years will give me more opportunities for the future.

Comments are closed.

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Why is accounting important.

Accounting is more than just a way to track profits and losses, it’s also a systematic process of recording, analyzing, and reporting economic events that affect a company’s business operations and financial performance. 

By generating financial statements and related reports, accounting provides important information to a company’s management, potential investors, lenders, and the government. This data is essential to properly evaluate a company’s performance, file federal and state tax returns, track business revenues and expenses, and plan future business goals and operations. 

In this article, we will explore the concept of accounting further, cover how accounting helps small company owners, and explain the different types of accounting.

Key Takeaways 

• Accounting is the best way to track profits and losses, keep money organized, and ensure your business is tax-compliant.
• Some accounting objectives include assisting with decision-making, budgeting, and planning.
• Accounting helps businesses keep detailed records, comply with local and federal laws, and control company finances. 
• A professional accountant can give you a more in-depth understanding of your business while helping you avoid mistakes, fraud, and theft.

Table of Contents

What Is Accounting?

• Why Is Accounting Important?

How Does Accounting Help Small Businesses?

Types of accounting, why is an accountant important.

Accounting is the process of recording, analyzing, summarizing, reporting financial transactions and other events affecting a company’s financial position, and generating financial reports . Accounting involves tracking all profits and losses, analyzing transactions, and producing financial reports for regulators and tax collectors. 

In the business world, accounting is one of the most necessary functions, as it gives all the information you need to know to make decisions, plan for the future, and determine whether the company is profitable.

Why Is Accounting Important For Business?

Accounting is an important process because it organizes financial data and summarizes your company’s financial performance. It’s often called the “language of business” as it communicates financial information to different users, like regulators, stakeholders, investors, creditors, oversight agencies, and government tax agencies.

The main objectives of accounting are:

1. Decision-Making

Accounting assists in many decision-making processes and helps owners develop policies to increase business efficiency. Some examples of decisions based on accounting information include product and service prices, resources used, and financing and business opportunities.

2. Budgeting and Planning

Owners of small businesses need to plan how they allocate their limited resources including labor, machinery, equipment, and cash towards accomplishing their business objectives.

Accounting is an important component of business management, budgeting, and planning as it enables business planning by anticipating the needs and resources. This helps in the coordination of different segments of an organization.

3. Recording Transactions

The primary role of accounting is to maintain a systematic, accurate, and complete record of all financial transactions of a business. These records are the backbone of the accounting system. Company owners should be able to retrieve and review the transactions whenever required.

4. Business Performance Management

Using accounting reports , business owners can determine how well a business performs. The financial reports are a reliable source of measuring the key performance indicators so that they can compare themselves against their past performance as well as against the competitors.

5. Financial Statements 

The financial statements generated at the end of the fiscal period reflect the financial condition of a business during that period. They provide information about how much capital has been invested, the funds the business has used, revenues it generated, profits and losses, and the assets and liabilities of the business.

6. Statutory Compliance

The law requires businesses to maintain accurate financial records of their transactions and share the reports with the shareholders, tax authorities, and regulators. This information is also required for indirect and direct tax filing purposes.

7. Financial

In the business world, accounting helps organization owners prepare historic financial records like an income statement and balance sheet as well as financial projections which can be used while applying for a loan or securing investments for the business.

Poor financial management is one of the primary reasons for small business failure, especially in the first year of the business. Since small businesses have a limited budget and other resources, accurate financial record-keeping provides information that helps them grow and develop.

For small business owners, accounting is crucial due to the reasons below:

1. Track Cash Flows

Efficient record keeping and implementing sound financial strategy are the best ways to track your business cash flow patterns. A small business owner who can create financial reports can understand the money coming and flowing out of their organization and will be better able to make smart business decisions in the future.

2. Understand Fixed and Variable Costs

Cost accounting records fixed cost and variable costs , analyzes them and generates helpful reports that help a business owner more accurately determine how much a project or product production will cost. This allows them to make better financial decisions and create a precise budget, improving the business’s net profit margins and maintaining financial stability during production. 

3. Gain a Better Grasp on Your Company’s Health

Accounting gives you a better grasp of the business’s financial position, especially when you learn about preparing financial statements, and reading balance sheets, income statements, and cash flow statements . Once you know how your business is performing, you’ll be better prepared to make informed decisions. 

4. Avoid Fraud and Theft

Accurate accounting helps you detect and avoid fraud and theft by customers, employees, and suppliers by creating a system of checks and balances that verifies transactions. It builds accountability by making it easier to trace any transaction. Effective internal controls are a key element of a successful accounting system.

5. Face Audits With Confidence

When you understand business finance and dealings, you are better prepared for potential audits. An accountant can help ensure your business is compliant with all tax obligations and keep you organized with detailed records, so you’ll have nothing to worry about if the IRS requests more information.

6. Attract More Funding 

Bankers are more confident when dealing with company owners who have a handle on their company finances and understand the financial implications of their decisions. The overall financial health of your organization can determine future loans, which, in turn, may allow you to purchase new machinery or invest in new technology. 

7. Run Your Business More Efficiently

Regularly reviewing your financial statements and establishing a detailed budget will allow you to discover operational inefficiencies. Saving a little bit in your business bank account on several expenses can add up to big results over the long run as you improve the overall health of your organization and achieve long-term success.

Different types of accountants serve different accounting needs and perform a wide range of functions. The following are 4 of the most common types you may need to utilize while managing your business.  

1. Financial Accounting 

Financial accounting involves tracking, recording, and categorizing financial transactions, and generating financial statements like balance sheets, cash flow statements, and income statements. 

2. Managerial Accounting

Managerial accounting is the process of measuring, interpreting, and analyzing a business’ financial data. This type of accounting is for internal use, within the company, to give upper-level management insights, risk assessments, and projections that can help with operations and decision-making. 

3. Public Accounting

Public accounting is done by an external business that works for multiple clients. It is the process of preparing and reviewing public financial documents, filing tax documents with the IRS, giving bookkeeping advice, and helping identify areas that could use better organization. 

4. Governmental Accounting 

Governmental accounting is the management, tracking, and auditing of government budgets and spending, following the strict laws of the Governmental Accounting Standards Board (GASB). 

As a small business owner , managing the business’s financial affairs yourself may be tempting, but financial matters can be delicate and may require a trained accountant to handle them correctly. Here are some of the key reasons to invest in an accountant for your small business:

• A professional accountant assists business owners in making smart, strategic fiscal decisions while adhering to compliance requirements
• They’re experienced in collecting and organizing information in a format that’s easy to understand, according to the Generally Accepted Accounting Principles (GAAP)
• They help business owners track operating costs, changing revenues, and dividends, and they can help with budgets and monitoring of cash flows
• Accountants can provide an unbiased, verifiable, and objective look at the health of your company, determine areas for improvement, and offer advice based on your unique business needs
•  Tax time is easier when your accountant helps to identify potential deductions, file your tax returns, and avoid audits

Accounting is important for planning, making decisions, identifying cash flow patterns, and measuring your company’s economic effectiveness. Having a good accountant on your team allows you to identify, measure, and communicate your company’s economic status and helps you understand the nuances of your business finances. 

Organized accounting and bookkeeping can also help stakeholders and other investors in evaluating the business’s financial performance, and ensure your business remains tax compliant. Along with hiring an accountant, small business owners increasingly use online accounting software like FreshBooks. With FreshBooks’ user-friendly cloud-based mobile interface, you can access integrated double-entry accounting features from any device, even on the go. We make it easy to take control of your business and manage your bookkeeping safely, from anywhere. 

Try FreshBooks free to send professional invoices, track your finances, and keep your finances in check from your personal accounting dashboard. Let FreshBooks help you make informed decisions and keep your business growth on track.

Sandra Habiger, CPA

About the author

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.

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Financial Accounting and Its Importance Essay

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• As a source of information (ensure proper referencing)
• As a template for you assignment

Corporate Environment

Financial accounting is an important part of every business, corporation, and other organizations that operate with various sums of money. This system helps people count their profits, calculate their regular expenses, and operate their financial means properly. The following paper will explain what financial accounting is and what role does it play in a corporate environment.

Financial accounting is a number of certain operations in any business or profitable organization that are intended to summarize, analyze, and report every transaction that is somehow related to the company’s activity. People who work in this sphere are usually responsible for making quarterly and annual reports that should reflect all the expenses and earnings of the business for a set period. Sometimes, accountants are expected to prepare financial statements that will be published on sources open to consumers or other people interested in this information (Bushman, 2014). Usually, this data is beneficial for stakeholders, workers, government services, financial institutions, and businessmen to help them make correct decisions as to their investments or collaboration with a particular company.

Financial accounting departments’ employees must follow professional standards established by both transnational and local organs related to the given industry. Nevertheless, the rules set by GAAP (Generally Accepted Accounting Principle) always have to be regarded by people who work with financial operations and reports. This doctrine includes all the ethical, professional, and organizational rules accountants must refer to when they summarize and prepare different financial statements.

There is another set of accounting rules called IFRS (International Financial Reporting Standards). Information presented in this source is used by professors of all Universities in the world and qualified specialists to identify how various types of transactions have to be reported not to confuse individuals who will have to deal with the given records in the future (Narayanaswamy, 2017). As IFRS develops and becomes more accurate every year, transnational corporations use its standards more often recently.

When professional accountants work on their reports, they must remember every factor presented below:

• Relevance. All the provided data must be accurate as it has to help people make their decisions based on the statistics they obtain from financial departments of different firms.
• Materiality. Every mistake made in a report might lead to other individuals’ material loses. Therefore, every recorded number or a sum of money has to be checked several times before publishing.
• Reliability. Only people who are trusted and have enough experience can be allowed to operate such financial operations as making reports as their competence can influence several consequential mistakes (Wang, 2014).
• Lucidity. Every person who reads financial reports has to understand all the presented information clearly and without any difficulties. This requirement can be accomplished only by a skilled professional.
• Comparability. As financial reports are updated once a set period, they have to be comparable because other employees need this factor to define and calculate certain tendencies in their company’s profits and expenses.

The number of small business has been increasing rapidly all over the world within the past two to three decades. Therefore, the profession of financial accountants is now valued and appreciated more than it was in the previous century. It appears that accounting is a crucial element of every business, regardless of its size, profits, and other similar factors. Profitable organizations cannot exist without making and summarizing their financial reports.

The significance of accounting in any corporate environment is tremendous because it lets managers see all the transactions their companies made for a specified period. This statistic is helpful as it demonstrates all the results that were achieved according to a certain plan or without it. The organization of the cash flow must be managed correctly to allocate all the earned money properly and to maintain the business profitable (Pratt & Peters, 2017). There are many examples in the history when people forgot about making financial reports after establishing their businesses. This mistake influenced specific difficulties in these companies that led to their bankruptcy.

It would be proper to mention that all the earnings have to be recorded correctly as minor mistakes in financial statements might lead to various unintended law violations. All these reports have to be provided to the State Tax Inspectorate in time (Warren & Jones, 2018). Otherwise, the business owner might have to pay additional fees for not following the requirements of his or her professional activity.

It is necessary to state that financial accounting is also used in a corporate environment to assess the amount of financial means that can be invested in the development of a certain organization and the sum that has to be kept to cover all the utilities, supplying services, and other monthly expenses. In general, accounting is a central activity of any organization that deals with money (Henderson, Peirson, Herbohn, Artiach, & Howieson, 2017). Every profit loss can be determined with the help of monthly reports as well.

Financial accounting is a process of reports that display all the expenses and earnings of a particular firm. This factor is essential for every profitable organization because it controls all the cash flows in a corporate environment. This work has to be completed accurately and only by skilled professionals that can calculate every figure appropriately and without any mistakes.

Bushman, R. M. (2014). Thoughts on financial accounting and the banking industry. Journal of Accounting and Economics, 58 (2-3), 384-395. Web.

Henderson, S., Peirson, G., Herbohn, K., Artiach, T., & Howieson, B. (2017). Issues in financial accounting . Melbourne, AU: Pearson Australia.

Narayanaswamy, R. (2017). Financial accounting: A managerial perspective (6th ed.). Delhi, ND: PHI Learning Private Limited.

Pratt, J., & Peters, M. (2017). Financial accounting in an economic context . Hoboken, NJ: John Wiley & Sons, Inc.

Wang, C. (2014). Accounting standards harmonization and financial statement comparability: Evidence from transnational information transfer. Journal of Accounting Research, 52 (4), 955-992. Web.

Warren, C., & Jones, J. (2018). Corporate financial accounting . Saint Louis, MO: Cengage Learning.

• Incidents of Accounting Anomalies in the Organization
• Deferred Tax Assets and Future Payments Study
• International Financial Reporting Standards: Pros and Cons
• GAAP vs. IFRS Accounting Approaches and Implications
• International Financial Reporting Standard 16
• Disclosure Levels in Mexican Companies
• Accounting and Auditing Enforcement Release Project
• Smith Company: Profitability Determination
• Central World Products Plc. Management
• The Linbarger Company's Accounting Problems
• Chicago (A-D)
• Chicago (N-B)

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• List of Commerce Articles
• What is Bookkeeping

Bookkeeping- Types, Objectives and Importance

What is bookkeeping.

Bookkeeping is a part of the accounting process that deals with recording of the transactions. It is the systematic recording and classification of accounting transactions. Bookkeeping can be described as an accounting function that is helpful in the accounting process.

Bookkeeping is associated with proper classification of all the financial transactions that take place in the business. It ensures that the recorded transactions are correct and properly updated.

Bookkeeping is the source of information from which financial accounts are prepared. Accurate bookkeeping is essential for the external users, which includes investors, government and other financial institutions.

Bookkeeping provides these users with reliable information that influences decisions related to lending and investment.

Types of Bookkeeping

Bookkeeping can be of different types, the most common ones are single entry and double entry bookkeeping systems.

• Single Entry bookkeeping: Single entry bookkeeping is the recording of transactions using a single entry. The transactions are either recorded as incoming or outgoing.
• Double Entry bookkeeping: Double entry bookkeeping is that system of bookkeeping where two entries are given for a transaction, one will be debit while the other will be a credit entry.

Objectives of Bookkeeping

The objectives of bookkeeping are as follows:

1. The primary objective of bookkeeping is recording the financial transactions in an orderly or systematic manner.

2. To summarise the transactions in a chronological order.

3. To provide financial information to both internal and external users, which will be beneficial in making future plans.

4. To detect potential errors in recording of information.

Importance of Bookkeeping

Following are some of the points about importance of bookkeeping:

1. Helps in budgeting: Bookkeeping makes it easier for the business organisation to plan a budget accordingly.

2. It is easier to calculate tax.

3. Bookkeeping makes it easier for analysing the financial performance of the company.

4. Bookkeeping makes it easier to present the financial information to investors, which is helpful in decision making related to investment.

This concludes the topic of Bookkeeping, which is important for Commerce students. For more such interesting articles, stay tuned to BYJU’S.

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What is Accounting and Why it Matters For Your Business

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March 4, 2022

This article is Tax Professional approved

When you start a business, you’ve suddenly got all kinds of new responsibilities. One of the most important? Business accounting.

But what exactly is accounting? What value does it provide your business? And how much time is it going to require?

The good news is that with the right people, tools, and resources, accounting doesn’t have to be a black hole for your time.

I am the text that will be copied.

In this post, we’ll cover the basics of accounting, from budgets to other accounting functions. But if you want to jump straight to the how-to, you can download our free guide to small business accounting .

A simple definition of accounting

Accounting is how your business records, organizes, and understands its financial information.

You can think of accounting as a big machine that you put raw financial information into—records of all your business transactions, taxes, projections, etc.—that then tells you a story about the financial state of your business.

Accounting is how you get a clear picture of your financial position. It tells you whether or not you’re making a profit, what your cash flow is, what the current value of your company’s assets and liabilities is, and which parts of your business are actually making money.

Accounting vs. bookkeeping

Accounting and bookkeeping are both part of the same process: keeping your financial records in order. However, bookkeeping is more concerned with recording everyday financial transactions and operations, while accounting puts that financial data to good use through analysis, strategy, and tax planning.

The accounting cycle

Accounting begins with recording transactions. Business transactions—any activity or event that involves your business’s money—need to be put into your company’s general ledger . Recording business transactions this way is part of bookkeeping.

Bookkeeping is the first step of what accountants call the “ accounting cycle ”: a process designed to take in transaction data and spit out accurate and consistent financial reports.

The accounting cycle has six major steps:

• Analyze and record transactions. Collect any invoices, bank or credit statements, and receipts from business transactions.
• Post journal entries to the ledger. It’s time to take those documents and start making journal entries for your transactions. Journal entries include three components of a transaction: when it happened, what it was for, and how much it was. Some businesses use single-entry accounting where only the expense or revenue is entered. But more common is double-entry accounting, which records each transaction in two accounts: where money is coming from and where it’s going.
• Prepare an unadjusted trial balance. At the end of a reporting period, list all of your business’s accounts and figure out their balances.
• Prepare adjusting entries at the end of the period. When you need to update entries you’ve already made, you prepare adjusting entries. For example, if a client is late on paying an invoice and you offer a 5% discount to help them pay, you would enter the discount as an adjusting entry, as opposed to changing the entry you’ve already made.
• Prepare an adjusted trial balance . After entering in adjusting entries, you’re left with an adjusted trial balance. This information is now ready to be turned into financial statements.
• Prepare financial statements. Finally, all the information you’ve collected is converted into your financial statements. This final step includes summarizing all your financial information into succinct reports for easy review.

Accounting software takes your accounting information and automates most of these rules and processes, so we’re going to skip over the gritty details of the accounting cycle and talk about the end product: financial statements.

Suggested reading: A Beginner’s Guide to The Accounting Cycle

Financial statements

Financial statements are reports that summarize how your business is doing financially.

There are three main types of financial statements: the balance sheet , income statement , and cash flow statement . Together, they tell you where your business’s money is and how it got there.

Let’s say you’re a self-employed surfing instructor who bills clients for surfing lessons. Financial statements can tell you what your most profitable months are, how much money you’ve spent on supplies, and what the total value of your business is.

Accounting software can help you generate financial statements easily, or you can have a bookkeeper do it for you.

Suggested reading: The ROI of Hiring a Bookkeeper

Generally accepted accounting principles (GAAP)

Every company is different, but in order to make accurate financial comparisons between companies, we need a common language to describe each of them. That’s what generally accepted accounting principles (GAAP) are: a series of standards and procedures that accountants at all companies must adhere to when preparing financial statements.

A non-governmental body called the Financial Accounting Standards Board sets the GAAP. While there are no laws enforcing these standards, most lenders and business partners in the United States will require that you adhere to GAAP. If you’re in Canada, you’ll use a different system called International Financial Reporting Standards, or IFRS .

Cash vs. Accrual

You can do your business accounting on a cash or accrual basis. The difference between the two comes down to timing.

Cash basis is the most basic accounting. On a cash basis, you only record transactions when money changes hands. If you receive an invoice on the 10th but don’t pay it until the 15th, the transaction is recorded on the 15th.

With accrual basis, you record transactions twice: when they occur and when they’re paid. For the invoice above, you record the expense on the 10th and the payment on the 15th as two separate transactions.

The method you use depends on what you need from your business finances. Cash basis is simpler and easier to stay on top of, while accrual offers greater insights for more detail-oriented business owners.

Most small businesses have more basic accounting needs, which means cash basis is often the right fit.

Suggested reading: Cash Basis Accounting vs. Accrual Accounting

The different types of accounting

Financial accounting.

Every year, your company will generate financial statements that people outside of your company—people like investors, lenders, government agencies, auditors, potential buyers, etc.—can use to learn more about your business’s financial health and profitability.

Preparing the company’s annual financial statements this way is called financial accounting. If you’re looking to hire a financial accountant, start with looking into how much an accountant costs .

Managerial accounting

Managerial accounting (or management accounting) is similar to financial accounting, with two important exceptions:

• The statements produced by managerial accounting are for internal use only.
• They’re generated much more frequently—often on a quarterly or monthly basis.

If your business ever grows to the point where you need to hire an accountant full-time, most of their time will be taken up by managerial accounting. You’ll be paying them to produce reports that provide regular updates on the company’s financial health and help you interpret those reports.

This is somewhat similar to the work a financial analyst might do, although a financial analyst will also look at past and current trends in the larger economy, not just your business, to inform their recommendations.

Tax accounting

Tax accounting is designed to make sure that you don’t pay more income tax than you are legally required to by the IRS. An example of this is when your accountant provides you with recommendations for how to get the most out of your tax return.

Tax accounting is regulated by the Internal Revenue Service (IRS), and the IRS legally requires that your tax accounting adhere to the Internal Revenue Code (IRC).

Cost accounting

Whenever you’re trying to figure out how to increase your margin or deciding if raising prices is a good idea, you’re doing cost accounting.

Cost accounting involves analyzing all of the costs associated with producing an output (whether it be a physical product or service) in order to make better decisions about pricing, spending, and inventory.

Cost accounting is often a prerequisite of managerial accounting because managers use cost accounting reports to make better business decisions. It also feeds into financial accounting since costing data is often required when compiling a balance sheet.

Credit accounting

Credit accounting involves analyzing all of a company’s unpaid bills and liabilities to make sure that a company’s cash isn’t constantly tied up in paying for them.

Credit accounting can be one of the most difficult kinds of accounting to do well, in part because it’s a difficult subject to be critical about. Talking about debts can be a sensitive, but necessary, conversation.

Why accounting matters for your small business

Accounting helps you plan for growth.

Every great journey begins with a roadmap. When you’re planning your company’s growth, it’s essential to set goals. What should your profits look like one year from now? How about in five years?

Keeping up with your accounting helps you stay on top of your business finances. That information is essential to assess how quickly your business is developing and guide future decision making. Without accurate reporting, you won’t have the full financial picture.

Has your cost of goods sold increased? Are margins thinner? Are your growth goals reasonable? Without financial statements, you won’t have an objective answer.

Accounting is essential for securing a loan

Up-to-date financial statements are essential if you want to fund your small business with a loan.

For instance, suppose you want to apply for a Small Business Association (SBA) loan through one of the big banks. You’ll need to provide, on average, three years of financial statements, plus a one-year cash flow projection . It’s virtually impossible to deliver any of these if you don’t have an accounting system in place.

Suggested reading: What to Prepare When Applying for a Business Loan

You need accounting to attract investors or sell your business

You may not be planning to court investors or sell your business right now, but it’s a good idea to leave your options open. And the best way to do that is to put a proper accounting system in place now.

Potential investors, stakeholders, or buyers will expect accounting records vetted by a CPA (Certified Public Accountant) that prove your business is profitable and on track for growth.

Accounting helps you get paid

When a customer owes you money, it appears as Accounts Receivable (AR) on your balance sheet , which is generated automatically by your accounting software or manually by you or your accountant.

The balance sheet tells you how much of your AR you’ve already pocketed during the month and how much is still outstanding.

By referring to your balance sheet, you can track how effectively you’re collecting payment. Then you can put in place processes—like harder payment deadlines or better follow-up with clients—to make sure you get your hands on the money you’ve earned when you need it.

Accounting helps you stay on top of your debts

If your business owes debts to a variety of sources, like credit cards, loans, and accounts payable, you’ll have to jump into multiple accounts to check what you’re left owing.

The balance sheet shows everything you owe in one place. It also shows all your bank account balances so you can reference both at the same time. It’s the perfect report to review to make sure you have the cash available to tend to your debts and plan future payments.

Accounting keeps you out of jail (or at least saves you from fines)

As your business grows, it can be difficult to keep track of all your tax information reporting obligations. What’s more, if there are mistakes in your financial reports, you run the risk of misreporting your income. Either mistake could land you in hot water with the IRS and other regulators.

Solid accounting gives you complete, accurate financial records , which reduces your risk of breaking tax laws and the chance of an audit . And, when you have an accountant filing your taxes for you, you can be sure they’ll be done accurately and on time.

Accounting helps you pay the right amount of taxes (and not a dollar more)

If you don’t pay your tax bill in full, the IRS will fine you . But they won’t give you a gold star for paying too much.

You can tell you’re paying too much in taxes if your business consistently receives large tax refunds.

Remember: a tax refund isn’t free cash from the IRS. It’s money you’ve overpaid the government that you could’ve used to invest in your business instead.

Refunds are often the result of miscalculated quarterly estimated tax payments . To calculate quarterly estimated tax payments accurately, you need to predict your income. It’s almost impossible to do so without reliable financial records produced through accurate accounting.

Suggested reading: The Top 19 Self-Employment Tax Deductions

What an accountant does

An accountant does more than just year-end tax preparation. A skilled CPA will save you time by communicating your company’s financial state to you in clear language, while anticipating your financial needs.

Accounting professionals like CPAs or tax advisors can also provide you with knowledge and insight that are simply inaccessible to non-accountants. These experts can offer guidance on tax deductions you didn’t know you qualified for, tax rules you didn’t know you were breaking, and best practices picked up while working for other companies in your industry.

If those are tips your business can benefit from right now, it might be time to hire an accountant .

Suggested reading: How to Find an Accountant

Accounting solutions

Small business accounting software has made big advancements as more people take the entrepreneurial path.

The self-service software you use is now almost equal to the accounting software used in firms all over the world. There are now a wide array of options available—which one is best for you depends on your business’s accounting needs.

Freshbooks offers integrated invoicing that makes it simple to manage your accounts receivable and your accounting in one place. Automated bank reconciliation will import all transactions from your business bank accounts, but you will have to review and categorize each one. Their time-tracking functionality also makes it easy for freelancers who bill by the hour. Freshbooks is a good fit for someone generating a lot of invoices with a low number of transactions.

Intuit makes both Quickbooks and a payroll processor, and allows you to bundle both for one monthly cost. The payroll service automates payroll taxes, checks, and all year-end forms, but the accounting platform is mostly manual. While the tool is powerful and can help a skilled user navigate multiple aspects of running a business, it takes a good amount of know-how to get the most out of it.

If you prefer a completely hands-off approach to bookkeeping and accounting, Bench might be right for you. Connect your business bank accounts to have transactions automatically imported, categorized, and reviewed by your personal bookkeeper.

Communication is quick and reliable—the Bench platform allows you to send messages straight to your bookkeeper or set up a call to go over any financial questions that might come up. Our premium package even includes tax filing, which makes all accounting tasks completely automated. Learn more about how Bench can help .

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• Introduction

History of bookkeeping

From journal to ledger to financial statements.

bookkeeping

bookkeeping , the recording of the monetary values of the transactions of a business. Bookkeeping provides the information from which accounts are prepared but is a distinct process, preliminary to accounting .

Essentially, bookkeeping provides two kinds of information:

• the current value, or equity, of an enterprise
• the change in value— profit or loss—taking place in the enterprise over a given period of time

Management officials, investors, and credit grantors all require such information: management in order to interpret the results of operations, to control costs, to budget for the future, and to make financial policy decisions; investors in order to interpret the results of business operations and make decisions about buying, holding, and selling securities; and credit grantors in order to analyze the financial statements of an enterprise in deciding whether to grant a loan.

Traces of financial and numerical records can be found for nearly every civilization with a commercial background. Records of commercial contracts have been found in the ruins of Babylon, and accounts for both farms and estates were kept in ancient Greece and Rome. The double-entry method of bookkeeping began with the development of the commercial republics of Italy , and instruction manuals for bookkeeping were developed during the 15th century in various Italian cities.

In the late 18th and early 19th centuries, the Industrial Revolution provided an important stimulus to accounting and bookkeeping. The rise of manufacturing , trading, shipping, and subsidiary services made accurate financial records a necessity. The history of bookkeeping, in fact, closely reflects the history of commerce, industry, and government and, in part, helped to shape it.

The global expansion of industrial and commercial activity required more sophisticated decision-making processes, which in turn required more sophistication in the selection, classification, and presentation of information, increasingly with the aid of computers. Taxation and government regulation became more important and resulted in increased demand for information; business firms had to have available information to support their income tax , payroll tax , sales tax , and other tax reports.

Governmental agencies and educational and other nonprofit institutions also grew in size, and the demand for bookkeeping for their own operations increased.

Although bookkeeping procedures can be extremely complex, all are based on two types of books used in the bookkeeping process—journals and ledgers. A journal contains the daily transactions (sales, purchases, and so on), and the ledger contains the record of individual accounts. The daily records from the journals are entered in the ledgers.

Each month, as a general rule, an income statement and a balance sheet are prepared from the trial balance posted in the ledger. The purpose of the income statement or profit-and-loss statement is to present an analysis of the changes that have taken place in the ownership equity as a result of the operations of the period. The balance sheet shows the financial condition of a company at a particular date in terms of assets, liabilities, and the ownership equity.

Home / Essay Samples / Business / Management / Accounting

Accounting Essay Examples

An essay about accounting serves as a means to explore the principles, practices, and significance of accounting in the world of business and finance. The purpose of such an essay is to provide insights into how accounting functions as a vital tool for tracking financial transactions, making informed decisions, and ensuring the transparency and integrity of financial reporting. Essays on accounting shed light on the complexities and implications of this discipline, while also highlighting its role in shaping economic systems and business operations. Exploration of Accounting Principles in Accounting Essay Topics One of the primary goals of an essay about accounting is to delve into the fundamental principles that underlie accounting practices. This involves discussing concepts such as the accrual basis of accounting, the matching principle, revenue recognition, and more. Essays on this topic aim to explain how these principles guide financial reporting and decision-making. Essays about accounting often focus on the process of financial reporting, including the preparation of financial statements such as the balance sheet, income statement, and cash flow statement. These essays explore how accurate and transparent financial reporting is essential for stakeholders to assess a company’s financial health. Accounting plays a crucial role in aiding business decision-making. Essays in this field can discuss how financial data and reports help businesses evaluate profitability, assess risks, and make informed strategic decisions. These essays showcase how accounting information impacts various aspects of business operations. Tips for Writing an Essay About Accounting:

Choose a Focus: Select a specific aspect of accounting to explore, such as a particular principle, concept, or its role in a specific industry. Thesis Statement: Begin with a clear thesis that outlines the main topics or questions your essay will address. Explain Concepts: Ensure that you provide clear explanations of accounting concepts for readers who may not be familiar with the subject. Real-World Examples: Use real-world examples and case studies to illustrate the application of accounting principles. Consider Ethical Implications: Discuss the ethical considerations that accountants face, such as the importance of honesty and integrity in financial reporting. Address Current Trends: Explore how technological advancements are impacting the field of accounting, such as the use of AI and automation. Cite Sources: Properly cite sources to support your arguments and provide credibility to your essay.

An accounting essay provides a window into the intricate world of financial management and reporting. By analyzing principles, practices, and real-world applications, these essays contribute to a better understanding of the crucial role that accounting plays in shaping business decisions, financial transparency, and the overall health of economic systems.

Navigating Ethical Dilemmas in Accounting

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Report on Internship in the Field of Accounting and Finance

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Overview of Current Accounting Environment in Peru

Peru is an emerging economy, but still considered a developing country, which began to introduce the widely-used IFRS accounting standards during 1994. Prior to this introduction, the Peruvian system had become a hybrid of many other country’s accounting policies, taking influence over time from areas...

A Research Paper on Tesco 2014 Accounting Scandal

Within this paper I will be discussing the impact and causes of the 2014 Tesco accounting scandal and the challenges in which they faced after such huge event. In addition, this essay will describe the aftermath in which followed with an Analysis of the strategy...

Comparative Analysis of Computerised Accounting Software

Sage 50 is a computerised accounting software that is designed to assists firms when managing finances, overseeing the rate of sales, profits and expenditure that the business must go through. It is also useful for the analysis of business performances by using a variation of...

The Impact of Advancements in Technology on Accountants and Bookkeepers’ Job

Accounting is the process of recording financial transactions to help a company or a small business to keep records of their financial health. These reports support the company, help them manage their money better, and are used by every unit that is related to the...

The Use of Technology in Accounting: Accounting Software

Technology has always been revolving and improving as time pass by. Many things were emerging because of it. Life has been easy and people rely more to it ever since it flourished. The continuous growth of technology is not only evident in the everyday lives...

Being an Accountancy Student: Reflections on the Journey Thus Far

Reflecting on my journey as a fourth-year college student in an Accountancy program, I am reminded of the many risks and sacrifices I have made to reach this point. Throughout my college years, I have frequently evaluated my performance and reflected on how I arrived...

The Way Working Capital Management Works

Working capital is a proportion of corporate momentary money related status just as its proficiency. Working capital is touched base at by subtracting complete current resources with its all out current liabilities. In the event that the distinction in proportion between current resources and current...

Effect of Corporate Governance on Accounting Conservatism in Manufacturing Companies

The increased accounting scandals in the past previous years that caused subside of high reputable companies such as Enron have led several sectors to focus on amending accounting quality and corporate governance (Emmanuel & Salisu, 2018). Corporate governance is the system that is used to...

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