Bookkeeping

Bookkeeping is the process of recording all financial transactions made by a

business. Bookkeepers are responsible for recording, classifying, and organizing
every financial transaction that is made through the course of business operations.
Bookkeeping differs from accounting. The accounting process uses the books kept
by the bookkeeper to prepare the end of the year accounting statements and
accounts.

Very small businesses may choose a simple bookkeeping system that records each
financial transaction in much the same manner as a checkbook. Businesses that
have more complex financial transactions usually choose to use the double-entry
accounting process.

What Is Bookkeeping?

Bookkeeping is the process of keeping track of every financial transaction made by

a business firm from the opening of the firm to the closing of the firm. Depending
on the type of accounting system used by the business, each financial transaction is
recorded based on supporting documentation. That documentation may be a
receipt, an invoice, a purchase order, or some similar type of financial record
showing that the transaction took place.

The bookkeeping transactions can be recorded by hand in a journal or using a

spreadsheet program like Microsoft Excel. Most businesses now use specialized
bookkeeping computer programs to keep books that show their financial
transactions. Bookkeepers can use either single-entry or double-entry bookkeeping
to record financial transactions. Bookkeepers have to understand the firm's chart of
accounts and how to use debits and credits to balance the books.1

Note
The bookkeeping process should allow for communication of the financial results
of the firm at the end of the year for income tax purposes and the preparation of
financial statements by the firm's accountant. How Does Bookkeeping Differ From
Accounting?

Bookkeeping in a business firm is an important, but preliminary, function to the

actual accounting function. A bookkeeper collects the documentation for each
financial transaction, records the transactions in the accounting journal, classifies
each transaction as one or more debits and one or more credits, and organizes the
transactions according to the firm's chart of account.

The financial transactions are all recorded, but they have to be summarized at the
end of specific time periods. Some firms require quarterly reports. Other smaller
firms may require reports only at the end of the year in preparation for doing taxes.

At the end of the appropriate time period, the accountant takes over and analyzes,
reviews, interprets and reports financial information for the business firm. The
accountant also prepares year-end financial statements and the proper accounts for
the firm. The year-end reports prepared by the accountant have to adhere to the
standards established by the Financial Accounting Standards Board (FASB). These
rules are called Generally Accepted Accounting Principles (GAAP).

What Do You Need to Set Up Bookkeeping for Your Business?

One of the first decisions you have to make when setting up your bookkeeping
system is whether or not to use a cash or accrual accounting system. If you are
operating a small, one-person business from home or even a larger consulting
practice from a one-person office, you might want to stick with cash accounting.2

If you use cash accounting, you record your transaction when cash changes hands.
Using accrual accounting, you record purchases or sales immediately, even if the
cash doesn't change hands until a later time, Sometimes firms start their business
using cash accounting and switch to accrual accounting as they grow.

If you are going to offer your customers credit or if you are going to request credit
from your suppliers, then you have to use an accrual accounting system.

You also have to decide, as a new business owner, if you are going to use single-
entry or double-entry bookkeeping. Single-entry bookkeeping is much like keeping
your check register. You record transactions as you pay bills and make deposits
into your company account. It only works if your company is relatively small with
a low volume of transactions.

If your company is larger and more complex, you need to set up a double-entry
bookkeeping system. Two entries, at least, are made for each transaction. At least
one debit is made to one account, and at least one credit is made to another
account. That is the key to double-entry accounting.

Companies also have to set up their computerized accounting systems when they
set up bookkeeping for their businesses. Most companies use computer software to
keep track of their accounting journal with their bookkeeping entries. Very small
firms may use a basic spreadsheet, like Microsoft Excel. Larger businesses adopt
more sophisticated software to keep track of their accounting journals.

Lastly, the business must set up its chart of accounts. The chart of accounts may
change over time as the business grows and changes.

Note

The chart of accounts lists every account the business needs and should have. Each
account has a number and a name. Subaccounts are also listed.

Understanding Assets, Liabilities, and Equity When Balancing the Books

Effective bookkeeping requires an understanding of the firm's basic accounts.
These accounts and their sub-accounts make up the company's chart of accounts.
Assets, liabilities, and equity make up the accounts that compose the company's
balance sheet.1

Assets are what the company owns such as its inventory and accounts receivables.
Assets also include fixed assets which are generally the plant, equipment, and land.
If you look you look at the format of a balance sheet, you will see the asset
accounts listed in the order of their liquidity. Asset accounts start with the cash
account since cash is perfectly liquid. After the cash account, there is the
inventory, receivables, and fixed assets accounts. Those are tangible assets. You
can touch them. Firms also have intangible assets such as customer goodwill that
may be listed on the balance sheet.

Liabilities are what the company owes like what they owe to their suppliers, bank
and business loans, mortgages, and any other debt on the books. The liability
accounts on a balance sheet include both current and long-term liabilities. Current
liabilities are usually accounts payable and accruals. Accounts payable are usually
what the business owes to its suppliers, credit cards, and bank loans. Accruals will
consist of taxes owed including sales tax owed and federal, state, social security,
and Medicare tax on the employees which are generally paid quarterly. Long-term
liabilities have a maturity of greater than one year and include items like mortgage
loans.

Equity is the investment a business owner, and any other investors, have in the
firm. The equity accounts include all the claims the owners have against the
company. The business owner has an investment, and it may be the only
investment in the firm. If the firm has taken on other investors, that is reflected
here.
In bookkeeping, you have to balance your books at the end of the year. The
bookkeeper has to keep careful track of these items and be sure the transactions
that deal with assets, liabilities, and equity are recorded correctly and in the right
place. There is a key formula you can use to make sure your books always balance.
That formula is called the accounting equation:

Assets = Liabilities + Equity

The accounting equation means that everything the business owns (assets) is
balanced against claims against the business (liabilities and equity). Liabilities are
claims based on what you owe vendors and lenders. Owners of the business have
claims against the remaining assets (equity).

Income Statement and Bookkeeping: Revenue, Expenses, and Costs

The income statement is developed by using revenue from sales and other sources,
expenses, and costs. In bookkeeping, you have to record each financial transaction
in the accounting journal that falls into one of these three categories.

Note

The information from a company's balance sheet and income statement gives the
accountant, at the end of the year, a full financial picture of the firm's bookkeeping
transactions in the accounting journal.

Revenue is all the income a business receives in selling its products or services.
Costs, also known as the cost of goods sold, is all the money a business spends to
buy or manufacture the goods or services it sells to its customers. The Purchases
account on the chart of accounts tracks goods purchased.
Expenses are all the money that is spent to run the company that is not specifically
related to a product or service sold.3 An example of an expense account is Salaries
and Wages or Selling and Administrative expenses.

A bookkeeper is responsible for identifying the accounts in which transactions

should be recorded. For example, if the business makes a cash sale to a customer
and your business uses double-entry bookkeeping, you would record the cash
received in the asset account called Cash and the sale would be recorded in the
revenue account called Sales.

Key Takeaways

Bookkeeping is the process of keeping track of every financial transaction made by

a business firm from the opening of the firm to the closing of the firm.

Accounting analyzes, reviews, interprets, and reports financial information for the
business firm. The accountant also prepares year-end financial statements and the
proper accounts for the firm.

In cash accounting, you record your transaction when cash changes hands. Using
accrual accounting, you record purchases or sales immediately, even if the cash
doesn't change hands until a later time,

Effective bookkeeping requires an understanding of the firm's basic accounts.

These accounts and their sub-accounts make up the company's chart of accounts.

A business's six basic accounts are Assets, Liabilities, Equity, Revenue, Expenses,
and Costs.

When you think of bookkeeping, you may think it’s all just numbers and
spreadsheets. That’s not exactly the case. Bookkeeping is the meticulous art of
recording all financial transactions a business makes. By doing so, you can set your
business up for success and have an accurate view of how it’s performing.

So, what is bookkeeping? And what are the benefits? Let us walk you through
everything you need to know about the basics of bookkeeping.

Overview: What is bookkeeping?

Bookkeeping is the process of tracking and recording a business’s financial

transactions. These business activities are recorded based on the company’s
accounting principles and supporting documentation.

Examples of these documents include:

Bills

Receipts

Invoices

Purchase orders

Business transactions can be recorded by hand in a journal or an Excel spreadsheet.

To make things easier, many companies opt to use bookkeeping software to keep
track of their financial history.

Bookkeeping is just one facet of doing business and keeping accurate financial
records. With well-managed bookkeeping, your business can closely monitor its
financial capabilities and journey toward heightened profits, breakthrough growth,
and deserved success.

Bookkeeping vs. accounting: What’s the difference?

a chart representing bookkeeping vs accounting and a list of responsibilities for

both
At first glance, bookkeeping and accounting may seem interchangeable. While it
may be easy to confuse the two, they are not the same thing. Accounting is the
umbrella term for all processes related to recording a business’s financial
transactions, whereas bookkeeping is an integral part of the accounting process.

Common examples of bookkeeping include:

Recording financial transactions

Posting debits and credits to a journal

Preparing financial statements

Processing payroll

Unlike accounting, bookkeeping zeroes in on the administrative side of a

business’s financial past and present. Accounting, on the other hand, utilizes data
from bookkeepers and is much more subjective.

Common examples of accounting include:

Reviewing and analyzing financial statements

Preparing adjusting entries

Performing audits

Filing relevant tax returns

Without bookkeeping, accountants would be unable to successfully provide

business owners with the insight they need to make informed financial decisions.

3 key benefits of bookkeeping

If you’re new to business, you may be wondering about the importance of
bookkeeping. Whether you outsource the work to a professional bookkeeper or do
it yourself, you’ll be able to reap a variety of benefits.

1. Access to detailed records of all transactions

By logging and keeping track of all financial transactions, you will have easy
access to any financial information you might need. To make it even easier,
bookkeepers often group transactions into categories.

Common transaction categories include:

Goods

Services

Wages

Taxes

When it’s finally time to audit all of your transactions, bookkeepers can produce
accurate reports that give an inside look into how your company delegated its
capital. The two key reports that bookkeepers provide are the balance sheet and the
income statement. The goal of both reports is to be easy to comprehend so that all
readers can grasp how well the business is doing.

2. Ability to make informed decisions

Because bookkeeping involves the creation of financial reports, you will have
access to information that provides accurate indicators of measurable success. By
having access to this data, businesses of all sizes and ages can make strategic plans
and develop realistic objectives.

Examples of financial statements that can help with decision-making include:

Balance sheets

Income statements

Cash flow statements

Not only can this help you set goals, but it can also help you identify problems in
your business. With an accurate record of all transactions, you can easily discover
any discrepancies between financial statements and what’s been recorded. This
will allow you to quickly catch any errors that could become an issue down the
road.

3. Better tax preparation

When it’s time to file your taxes, you’ll need to comply with the Internal Revenue
Service’s (IRS) legal regulations and systems that govern their finances. Some of
the most common documentation businesses must provide to the federal
government include:

Financial transactions

Financial statements

Tax compliance

Cash flow reports

By staying up to date with your bookkeeping throughout the year, you can help
alleviate some of the stress that comes with filing your taxes.

2 types of bookkeeping for small businesses

When it comes to bookkeeping, there are two main types: single-entry

bookkeeping and double-entry bookkeeping. Follow along to learn more about
which method might be best for you and your business.
1. Single-entry bookkeeping

The single-entry bookkeeping method is often preferred for sole proprietors, small
startups, and companies with unfussy or minimal transaction activity. The single-
entry system tracks cash sales and expenditures over a period of time.

With this bookkeeping process, you must maintain three pieces of documentation:

Cash sales journal: This is where the business records all revenue.

Cash disbursements journal: This is where the business records all expenses.

Bank statements: All journal entries should align with the business’s bank
statements.

In these documents, transactions are recorded as a single entry rather than two
separate entries.

2. Double-entry bookkeeping

Double-entry bookkeeping is the practice of recording transactions in at least two

accounts, as a debit or credit. When following this method of bookkeeping, the
amounts of debits recorded must match the amounts of credits recorded. This more
advanced process is ideal for enterprises with accrued expenses.

The following documents are required for double-entry bookkeeping:

Journal entries

General ledgers

Inventory

Cashbooks

Accounts payable
Accounts receivable

Loans

Payroll

The double-entry system of bookkeeping is common in accounting software

programs like QuickBooks. With this method, bookkeepers record transactions
under expense or income. Then they create a second entry to classify the
transaction on the appropriate account.

Bookkeeping best practices

Now that you’ve got a firm grasp on the basics of bookkeeping, let’s take a deeper
dive into how to practice good bookkeeping. There’s no one-size-fits-all answer to
efficient bookkeeping, but there are universal standards. The following four
bookkeeping practices can help you stay on top of your business finances.

1. Consider a phased approach

Trying to juggle too many things at once only works to put your organization in
danger. If you’re looking to convert from manual bookkeeping to digital, consider
a staggered approach. Overhauling all at once can be overwhelming and
discouraging, so it’s best to take it slow and make meaningful and intentional
shifts.

Those baby steps can help you manage your organization on a new and improved
system. Small steps also give everyone time to familiarize themselves with the new
bookkeeping software.

2. Keep your general ledger current

things that are included in a general ledger with an icon of a business building a
credit card and receipt, as well as a certificate.

A general ledger is a collection of accounts that classify and store all records
associated with a company’s financial transactions. The general ledger includes
balance sheet accounts (liabilities, equity, assets) and income statement accounts
(revenue, expenditure, gains, losses).

Under the double-entry accounting structure, every business transaction will affect
two or more general ledger accounts. General ledger accounts include:

Asset accounts such as cash, accounts receivable, investments, land, equipment,

and inventory

Liability accounts such as accounts payable, accrued expenses payable, customer

deposits, and notes payable

Stockholders’ equity accounts such as common stock, treasury stock, and retained
earnings

Your general ledger should be up to date so that your bookkeeping software is able
to provide functionality that you can navigate easily. QuickBooks is an excellent
option for novice and seasoned digital bookkeepers alike.

3. Plan for taxes throughout the year

Whether it’s updating your books or keeping in contact with your tax adviser,
maintain your business’s financial records and expenses throughout the year. That
way, you can be well prepared when it’s time to file taxes with the IRS. Without
any hiccups or last-minute scrambles, you’ll be able to enter tax season
confidently.

4. Keep your personal and business finances separate

As you dive deeper into the bookkeeping process, it may be tempting to blur the
lines between your personal and business finances, but it’s not the best idea. By
avoiding this, you’ll reduce the risk of triggering an IRS audit and will allow an
accurate picture of your business finances.

Some common ways to help keep your personal and business finances separate
include:

Utilizing a business credit card for all business expenses

Setting up separate checking accounts

Keeping all personal and business receipts organized and separate

By following these tips and diligently working to keep your personal and business
finances separate, you’ll get a clear view of the performance of your business,
while minimizing the risk of accidentally misrepresenting your business’s finances.

Should I do my own bookkeeping? 2 questions to ask yourself first

Now that you have a better understanding of bookkeeping, you may be wondering
if it’s something you want to take on yourself or with the help of a professional.
When making this decision, there are two things you should keep in mind.

1. Do I have the expertise?

How does your accounting and bookkeeping experience size up? You may be
hoping for the best and have a few college courses in your back pocket. Even with
these tools, you may not have the expertise you need to handle the responsibilities
of a bookkeeper.
If you’re unfamiliar with local and federal tax codes, doing your own bookkeeping
may prove challenging. On the other hand, if you have in-depth tax and finance
knowledge beyond the bookkeeping basics, you may be able to get the job done.

2. Do I have the time?

Bookkeeping can be time-consuming and tedious. If you’re a new business owner,

you’re likely already spread thin. Adding bookkeeping to the mix may overwhelm
you. But if you have the time to dedicate to updating your books regularly, doing
your own bookkeeping may be feasible.

If you’re like most modern business owners, odds are you didn’t become one so
that you could practice professional-level bookkeeping. Outsourcing the work to a
seasoned bookkeeper can allow you to focus on your business plan and growth.

Ready to get started?

Take routine bookkeeping off your never-ending to-do list with the help of a
certified professional. A QuickBooks Live bookkeeper can help ensure that your
business’s books close every month, and you’re primed for tax season. Our expert
CPAs and QuickBooks ProAdvisors average 15 years of experience working with
small businesses across various industries.

Whether you’re trying to determine the best accounting system for your business,
learn how to read a cash flow statement, or create a chart of accounts, QuickBooks
can guide you down the right path.

Introduction to Bookkeeping

The term bookkeeping means different things to different people:

Some people think that bookkeeping is the same as accounting. They assume that
keeping a company's books and preparing its financial statements and tax reports
are all part of bookkeeping. Accountants do not share their view.

Others see bookkeeping as limited to recording transactions in journals or

daybooks and then posting the amounts into accounts in ledgers. After the amounts
are posted, the bookkeeping has ended and an accountant with a college degree
takes over. The accountant will make adjusting entries and then prepare the
financial statements and other reports.

The past distinctions between bookkeeping and accounting have become blurred
with the use of computers and accounting software. For example, a person with
little bookkeeping training can use the accounting software to record vendor
invoices, prepare sales invoices, etc. and the software will update the accounts in
the general ledger automatically. Once the format of the financial statements has
been established, the software will be able to generate the financial statements with
the click of a button.

At mid-size and larger corporations the term bookkeeping might be absent. Often
corporations have accounting departments staffed with accounting clerks who
process accounts payable, accounts receivable, payroll, etc. The accounting clerks
will be supervised by one or more accountants.

Our explanation of bookkeeping attempts to provide you with an understanding of

bookkeeping and its relationship with accounting. Our goal is to increase your
knowledge and confidence in bookkeeping, accounting and business. In turn, we
hope that you will become more valuable in your current and future roles.

Bookkeeping in the Old Days

Prior to computers and software, the bookkeeping for small businesses usually
began by writing entries into journals. Journals were defined as the books of
original entry. In order to reduce the amount of writing in a general journal, special
journals or daybooks were introduced. The special or specialized journals consisted
of a sales journal, purchases journal, cash receipts journal, and cash payments
journal.

The company's transactions were written in the journals in date order. Later, the
amounts in the journals would be posted to the designated accounts located in the
general ledger. Examples of accounts include Sales, Rent Expense, Wages
Expense, Cash, Loans Payable, etc. Each account's balance had to be calculated
and the account balances were used in the company's financial statements. In
addition to the general ledger, a company may have had subsidiary ledgers for
accounts such as Accounts Receivable.

Handwriting the many transactions into journals, rewriting the amounts in the
accounts, and manually calculating the account balances would likely result in
some incorrect amounts. To determine whether errors had occurred, the
bookkeeper prepared a trial balance. A trial balance is an internal report that lists 1)
each account name, and 2) each account's balance in the appropriate debit column
or credit column. If the total of the debit column did not equal the total of the credit
column, there was at least one error occurring somewhere between the journal
entry and the trial balance. Finding the one or more errors often meant spending
hours retracing the entries and postings.

After locating and correcting the errors the bookkeeping phase was completed and
the accounting phase began. It began with an accountant preparing adjusting
entries so that the accounts reflected the accrual basis of accounting. Adjusting
entries were necessary for the following reasons:

additional revenues and assets may have been earned but were not recorded

additional expenses and liabilities may have been incurred but were not recorded

some of the amounts that had been recorded by the bookkeeper may have been
prepayments which are no longer prepaid

depreciation and other non-routine adjustments needed to be computed and

recorded

After all of the adjustments were made, the accountant presented the adjusted
account balances in the form of financial statements.

After each year's financial statements were completed, closing entries were needed.
The purpose of closing entries is to get the balances in all of the income statement
accounts (revenues, expenses) to be zero before the start of the new accounting
year. The net amount of the income statement account balances would ultimately
be transferred to the proprietor's capital account or to the stockholders' retained
earnings account.

Bookkeeping Today

The electronic speed of computers and accounting software gives the appearance
that many of the bookkeeping and accounting tasks have been eliminated or are
occurring simultaneously. For example, the preparation of a sales invoice will
automatically update the relevant general ledger accounts (Sales, Accounts
Receivable, Inventory, Cost of Goods Sold), update the customer's detailed
information, and store the information for the financial statements as well as other
reports.
The accounting software has been written so that every transaction must have the
debit amounts equal to the credit amounts. The electronic accuracy also eliminates
the errors that had occurred when amounts were manually written, rewritten and
calculated. As a result, the debits will always equal the credits and the trial balance
will always be in balance. No longer will hours be spent looking for errors that
occurred in a manual system.

CAUTION: While the accounting software is amazingly fast and accurate in

processing the information that is entered, the software is unable to detect whether
some transactions have been omitted, have been entered twice, or if incorrect
accounts were used. Fraudulent transactions and amounts could also be entered if a
company fails to have internal controls.

After the sales invoices, vendor invoices, payroll and other transactions have been
processed for each accounting period, some adjusting entries are still required. The
adjusting entries will involve:

revenues and assets that were earned, but not yet entered into the software

expenses and liabilities that were incurred, but not yet entered into the software

prepayments that are no longer prepaid

recording depreciation expense, bad debts expense, etc.

The adjusting entries will require a person to determine the amounts and the
accounts. Without adjusting entries the accounting software will be producing
incomplete, inaccurate, and perhaps misleading financial statements.

After the financial statements for the year are released, the software will transfer
the balances from the income statement accounts to the sole proprietor's capital
account or to the stockholders' retained earnings account. This allows for the
following year's income statement accounts to begin with zero balances. (The
balance sheet accounts are not closed as their balances are carried forward to the
next accounting year.)

Recording Transactions

Bookkeeping (and accounting) involves the recording of a company's financial

transactions. The transactions will have to be identified, approved, sorted and
stored in a manner so they can be retrieved and presented in the company's
financial statements and other reports.

Here are a few examples of some of a company's financial transactions:

The purchase of supplies with cash.

The purchase of merchandise on credit.

The sale of merchandise on credit.

Rent for the business office.

Salaries and wages earned by employees.

Buying equipment for the office.

Borrowing money from a bank.

The transactions will be sorted into perhaps hundreds of accounts including Cash,
Accounts Receivable, Loans Payable, Accounts Payable, Sales, Rent Expense,
Salaries Expense, Wages Expense Dept 1, Wages Expense Dept 2, etc. The
amounts in each of the accounts will be reported on the company's financial
statements in detail or in summary form.
With hundreds of accounts and perhaps thousands of transactions, it is clear that
once a person learns the accounting software there will be efficiencies and better
information available for managing a business.