Bookkeeping is a strenuous activity but one that demands high diligence. It sets the tone for other financial aspects of the business. We can best explain this by knowing how the decision-makers arrive at crucial business decisions. The decision-makers of an enterprise make use of the financial statements to convey the condition of the business. An organized collection of data as per the accounting procedures makes these financial statements. Bookkeeping is the collection and categorization of financial data.
Bookkeeping is tough to master. It is better done by a professional rather than by a novice. There must be a clear understanding of what the bookkeeper does to benefit the business owners to make the right decisions. The renowned American philanthropist and investor Warren Buffett has famously said that it is beneficial for a businessperson to understand accounting and its nuances, as it is the language of business.
It is beneficial for the scalability of the business that the decision-makers and bookkeepers speak and understand the very same language of accounting. Hence, it is prudent to look into the basics of bookkeeping for the business.
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Bookkeeping basics that cannot be ignored
The basics of bookkeeping include familiarising with the different categories and understanding its written and unwritten rules. One of the first fundamentals in bookkeeping is to choose between single entry or double-entry bookkeeping. Single-entry bookkeeping is the oldest method in which there is a single entry for every financial transaction. The double-entry style of bookkeeping has its basis on fundamental accounting principles and hence is more scientific. Every transaction affects two accounts, in which one is credit while the other one is debit.
The classification of accounts
The categorization of financial data into different heads makes it easy to understand while preparing financial statements. As per the nature of the business, there might be individualization in the categories. Here, we will look into the regular heads for any enterprises.
Cash Management has to maintain the balance between liquidity and cost. The cash account can be in two sub-heads: cash-in-hand and cash at the bank. The bookkeeper records the money received and payments under cash receipts and cash disbursements, respectively. It helps to monitor the flow of money in the business.
The sub-categories of inventory are raw materials, work-in-progress, and finished goods. The stock itself is money. That means the management and recording of inventory is a top priority. The firms give recording of entry and exit of goods is done with utmost care and checked periodically.
The buying of goods or inventory may be in cash or on credit. The purchases account keeps track of the transactions involved in the purchase.
The sales of goods again may be in cash or on credit. The proceeds of sales, if sold on credit, will take time to realize. The sales account keeps in check all the realized and unrealized transactions.
Accounts receivable, also popularly known as receivables, comprise a significant part of the total current assets of the business. These are the payments that have a future date to realize. The trade credit is an essential marketing tool but requires constant monitoring.
The management of accounts payable is as crucial as the management of accounts receivable. There will be a penalty, loss of good name, and loss of discounts on mismanagement of accounts payable. The bookkeepers track the accounts payable and receivables with a hawk’s eye.
The accrued interest can either be revenue or an expense depending on whether the business lends or borrows. As the name suggests, this is the incurred amount that is not yet paid or received.
Owner’s equity and Retained earnings
Owner’s equity is the rights of the owner on the assets of the business. In other words, it is the difference between the assets and liabilities of the firm. If it is a sole proprietorship, it is readily available for the owner to use or put back into the business. Large firms set aside a portion of their profits for contingency or future use. It is the retained earnings (RE). The management of these accounts is necessary, as it is an indicator of the scalability of the business.
Invoicing, billing, and its preservation
Bills are records provided to a customer on the purchase of a product. Invoices are records given to a client in return for a service. The shared feature of both is that they are records of transactions. These records help in tracking the accounts receivables and account payable. It is crucial to preserve these bills and invoices as proof of a deal for a certain amount on a particular date. These seem like simple processes in bookkeeping but, it carries heavyweight.
Reconciliation, in simple terms, is comparing and checking the entries and the records. There are different types of reconciliation. They are bank reconciliation, customer reconciliation, vendor reconciliation, etc. This accounting process helps in reducing errors, preventing fraud, and also in preparing accurate financial statements.
Preparing financial statements and taxation
Financial statements show the profitability and financial soundness of the business. They need thoroughness to prepare, using categorized data available through bookkeeping. Taxation is another essential process that comes under the responsibilities of a bookkeeper. Taxation also requires a rigorous follow-up. The penalty for missing the due dates is high, and it will harm business.
The role and responsibilities of a bookkeeper have a massive effect on how smoothly the financial aspects of a business run. Diligen and its team understand the importance of bookkeeping in the scalability of a firm. The bookkeeping services provided by a proficient team will help the business to have better financial culture.