To run a successful business, you need to have at least a basic understanding of bookkeeping. Staying in control of your business finances and knowing how your business is performing at any one time will allow you to plan for the future of your business with more certainty. With up-to-date accurate financial data, you will also be able to make changes to your business with ease to keep up with changes in the marketplace. With the right knowledge of business bookkeeping and best practices, you can take full control of your financial future and look forward to more success going forward.
Essentially, bookkeeping is the process of recording and organising all of the financial transactions made by your business from the time you open until the time you close each day. These transactions are typically recorded along with supporting documentation of the transaction such as a receipt, a purchase order, an invoice or other evidence that the transaction occurred. Bookkeeping transactions can be recorded manually in a notebook or they can be entered into an Excel spreadsheet or similar program. Nowadays, there are specialised bookkeeping software programs that make the bookkeeping process more streamlined and efficient than ever before. However, you decide to maintain your records, bookkeeping is an essential aspect of running your business and to succeed, you need to understand the basics.
Let’s take a look at five bookkeeping basics you should understand to manage your business more efficiently.
Set Up Your Accounts
When it comes to bookkeeping, it’s important to remember that an account doesn’t typically refer to a single bank account. An account, instead, refers to a record of a particular set of financial transactions of the same type. For example, you could have an account for sales, which would include all of the financial transactions made in relation to the sales in your business.
Generally speaking, there are five primary types of accounts that you should be aware of. These are assets, liabilities, revenues or income, expenses and equity. The assets account relates to resources and cash that the business owns such as inventory and accounts receivable. Liabilities are debts and other financial obligations that the business has such as credit card debt, loans or accounts payable. Revenues or income is money generated by the business through the provision of services or the sale of products. Expenses refer to any cash flow used to pay for products or services related to the business such as utilities or staff wages. Finally, equity refers to the remaining value after you subtract your liabilities from your assets, which highlights your held interest in the business including things like retained earnings and stock.
Each of these accounts needs to be set up so that your financial transactions can be recorded in the relevant accounts. While there are some accounts that will be applicable to almost every business such as accounts payable, accounts receivable, cash, dividends, equipment and inventory, there are many other accounts that will be unique to the needs of the business in question. When you’re getting started with bookkeeping, be sure to set up your accounts correctly to get your bookkeeping journey off to the best start possible.
Single-Entry Vs. Double-Entry Bookkeeping
If you are planning on doing your own books, you will need to determine which bookkeeping method you are going to use, single-entry bookkeeping or a double-entry system. Typically single entry is reserved for businesses that operate in a simpler manner. A double-entry approach is more certainly more complicated but as most accounting software programs use it as the default option and your books are always balanced, this is often the preferred for business owners.
Single-entry bookkeeping requires you to record each financial transaction nonce. When your customers pay you, for example, you would add that transaction to your asset column. For very small businesses that don’t own or use any equipment, work from home, don’t keep inventory and rarely deal with cash, this can be a good choice.
For most business owners, however, double-entry bookkeeping is the preferred option. With the double-entry system, you must record two entries for every business transaction. The idea is that every action has an opposite reaction so you must enter both a debit (Dr) and a credit (Cr) record for every completed transaction. Using a double-entry bookkeeping system, your books are always balanced, allowing you to be alert to any changes to your profits and react instantly.
Keep Accurate Records
Once you have set up your accounts and determined which bookkeeping method you are going to use, the next thing you need to do is to start recording the necessary financial information. Every debit and credit transaction should be recorded accurately to ensure that your books are balanced correctly. When you are entering new records into the ledger, be sure to double-check the account that they are being entered into and also the amount that is being recorded. Failing to enter the data correctly will result in your books being unbalanced, preventing you from closing your books at the end of each quarter.
If you are using a double-entry bookkeeping system, remember that you will need to record entries in both the account that was credited and in the account that was credited. For example, if you have purchased a new piece of machinery for your printing business, that cost $10,000, this transaction will affect two different accounts. First, you will need to debit $10,000 from your cash account and record a $10,000 credit in your equipment, keeping your books balanced.
Balance And Close Your Books
Balancing and closing your books at the end of each quarter is what you are striving to achieve with your bookkeeping efforts. At the end of each quarter, simply add up your total account debts and your total account credits. If you completed your accounts correctly, these two figures should match and your books are balanced.
Throughout the financial period, you will have been recording bookkeeping entries as debits or credits. At the end of each financial period, each of these entries will be added to the accounts in the general ledger and the account balances will need to be adjusted before you can close your books and prepare your financial reports.
Adjusting the account balances might sound complex, however, with a clear understanding of what is involved, it is relatively straightforward. For example, if your expenses account recorded $2,000 in credits and $3,000 in debits you would need to adjust the account balance by $1,000, as an increase. This same practise should be applied to all of your accounts, adjusting the balance for each account in your general ledger, giving you an ‘adjusted trial balance. Combining the different account types your adjusted balance should fulfil the ‘Assets = Liabilities + Equity’ formula. If the equation doesn’t work, you will need to reexamine your books and find the errors before you can finally close your books and start preparing the reports.
Preparation Of Financial Reports
Closing your books allows you to prepare financial reports to help you decipher all of the financial data and see how your business is doing from a financial standpoint. With these financial reports, you can get a better insight into the financial health of your company and make well-informed decisions about the future direction of our business. There are three primary reports that business owners should be aware of; the Balance Sheet, Income Statement and Cash Flow Statement.
The Balance Sheet can help to give you a snapshot of the financial position of your company at any given moment in time. Summarising the assets, liabilities and equity of your business at a particular point in time, the balance sheet is crucial in showing how your business is performing and how you should proceed moving forward.
An income statement is used by business owners to compare income and expenses in order to make better predictions regarding the future needs of the business. This report is designed to break down the financial data related to your costs, expenses and revenue generated during a particular time frame.
The cash flow statement is similar to an income statement, however, it does not include non-cash items such as investment gains or losses, or depreciation. The cash flow statement can be used to identify areas of the business that are performing well or underperforming. Analysing where you are earning and spending money, allows you to assess areas of your operations that might need attention and those that need to be further strengthened.
Understanding these three basic reports is key for business owners to plan for the future of their business with more certainty and confidence.
Understand The Basics Of Bookkeeping And Take Control Of Your Business Finances
Having a firm grasp of the basics of bookkeeping will help you to manage your business finances better moving forward. Being able to decipher the information outlined in your financial reports will allow you to capitalise on opportunities for your business to grow and evolve over time. With better knowledge of the bookkeeping process, you can gain better insight into how your company is performing and make any necessary changes to your business processes when required to maximise productivity and revenue in the future.