If you are running a business, working as a freelancer, or a sole proprietor, bookkeeping is a highly essential task for you. This is because you need to keep a track of your financial record and expenses, know whether your business is financially stable or not, and also file the income tax return as and when required. Bookkeeping is a tedious and time-consuming process that requires perfection with the numbers. This is why every business owner should be knowing about its basics. Here is our guide that will take you through the basic concept of Bookkeeping, why is it important, and various terms related to it.
What Exactly is Bookkeeping?
Bookkeeping is the process of keeping a record of a business’s financial transactions and expenses and updating them regularly. A bookkeeper is required to maintain a track record of any transaction or any kind of financial intimation pertaining to business expenses whether the financial transactions are done by a person or an organization. These transactions include sales, purchases, receipts, and payments.
Bookkeeping basically keeps all the records of your business investments, profits, how much money is expected to be received by your business, how much it owes to others, and all the related aspects like keeping records of assets, liabilities, and owner's equity.
There are two major methods involved in the process of Bookkeeping-
- The single-entry bookkeeping system
- The double-entry bookkeeping system
The Importance Of Bookkeeping
In order to keep full track of your business finances and transactions, you need to implement an effective and stellar bookkeeping technique. This goes for every business whether small or big. Poor accounting is one of the major reasons responsible for the failure of many businesses. Bookkeeping provides the right direction for the growth of a particular business. This is the reason why it has become essential to maintain updated financial records for your business. It helps to manage the cash flows and business’s future financial plans effectively.
Bookkeeping can help you answer some of the following questions:
- Where is your cash going and coming from?
- Is your business giving you enough profit?
- What are the different products and services you should focus on for good business growth?
- What is the growth rate for your business and if it is actually growing, staying the same or incurring any losses? Are your strategies
- working or you need to amend something?
- What should you do for the long term growth of your business?
Bookkeeping answers these questions so you can easily choose the right direction to manage your business well and quite effectively.
4 Steps To Handle Bookkeeping For Your Business
There are 4 simple steps you need to know in order to handle bookkeeping for your business. These include:
Step 1: Learn and set up your chart of accounts
Step 2: Start keeping track of your financial transactions
Step 3: Adjust your bank accounts accordingly
Step 4: Keep your accounting data organized to review it when you close the month.
Basic Bookkeeping Terms That Are Important To Understand
Here are some of the terms you need to know in order to have a clear understanding of Bookkeeping.
- Assets: An asset is anything that has value in your business. This includes cash that is there in your bank account and the money that is owed to you by your customers which are known as your accounts receivable balance. Also, your computers, furniture, etc come under your assets.
- Liabilities: Liabilities are any kind of debt that your business owes to vendors. This is known as your accounts payable balance. Liability also includes a loan that your business owes to others.
Equity: Subtracting your business liabilities from your business assets gives you the equity you have.
- Expenses: Expenses are the day to day costs that a business requires to operate. This includes the salaries of your employees, the rent of the accommodation, electricity bills, etc.
- Revenue or Income: It is the money that your business earns through its various products and services.
- Balance Sheet: A balance sheet is a report that shows your assets, liabilities, and the capital of the business. It basically reflects your current financial situation by showing what your business owns and what it owes to others.
- Profit and Loss: It is a financial report that has a record of all the revenue and expenses over a particular period of time.
Types Of Bookkeeping
There are different types of bookkeeping accounts you must know. These include the following:
- Cash: This is an important account where all business transactions pass. Bookkeepers use cash receipts and cash disbursements to track financial activity.
- Account: The account provides information about income, expenses, assets, and liabilities.
- Accounts Receivable: This is an account that tracks money due to other customers. This happens if your business sells products or services and you don’t collect the money immediately from the customers. This is why it is required to be kept up to date and accurate.
- Accounts Payable: This is an account that gives a clear picture of what you need to pay to others and is very important to make sure you do not pay it twice.
- Sales: This is an important account where a track of all the incoming revenue from sales transactions is kept. By keeping a track of all your sales accurately, you can easily understand where your business growth stands.
- Purchases: The purchase account keeps track and costs of all the products or materials that are brought for the business.
- Payroll Expenses: This is an account where all the salaries and wages that are paid to the business employees are kept accurately.
Benefits of Hiring A Bookkeeping Professional
Hiring a professional Bookkeeping expert is an excellent idea if you want to manage your financial transactions and expenses effectively. A good and reputable bookkeeper can lower your stress of managing your business finances and help you in getting long term success for your business.
If you want to become a professional bookkeeper in Canada, then Get Trained Get Hired can help you out. We provide an online bookkeeping course and training that will help you start your own bookkeeping business and become an expert bookkeeper in the industry. You can contact us today at 647-870-6986. Our experts will get back to you as early as possible to help you out.