Bookkeeping and the Essentials of It
Bookkeeping and the Essentials of It
Reina Dizon, Dizon Financial
Bookkeeping is the art of keeping records of the financial status of a firm or company. It is
the base of the accountancy system of the company. It is actually the complete financial
status of business, from evaluating the cost price to the profit or loss.
There is a very close relationship between bookkeeping and Accountancy. Bookkeeping is the task
of identifying and classifying the transactions while accountancy is the art of analyzing,
reviewing and interpreting financial information of a company.
Let us have an example of bookkeeping. Suppose that a person has a small industrial set-up
to manufacture of T.V. remotes. He had bought the raw material, hired laborers and
technicians, bought circuit boards; and at last, invested on the packaging and delivery of the
product to the market. If he wrote all these expenses and then calculated this net profit, this
activity would become bookkeeping.
Types of Bookkeeping:
There are two basic types of bookkeeping:
● Physical Book Based
● Software Based
For most of the small and new businesses, physical book base bookkeeping is preferred. But, for
large businesses or firms, software base bookkeeping is preferred.
Essentials of Bookkeeping:
After you have selected the type of Bookkeeping, you have to select a further option to start with the bookkeeping.
1- Entry System:
Here, we have two systems of entries:
- Single Entry System
- Double Entry System
Single Entry System:
For a single person business, single entry is preferred. For instance, it is simply the subtraction of $500 from your credit account. Single entry system is not very popular as the Double Entry System helps you to create better financial statements for the better decisions making in the upcoming days.
Double Entry System:
It is the type of bookkeeping which keeps the records of where you are earning and where it is being spent. As by name, two different entries are made. For example, if you buy a Laptop worth $500 for your business, two entries are made. One in the Credit Portion and the other in the Debit Portion of $500 i-e subtracting $500(cash) from credit and adding the same amount in Debit as an asset.
2- Cash vs Accrual Method
Cash Method of Accounting is the making of an entry when the cash is shifted from one hand to another. This can be made either in credit part or debit part in a double entry system with respect to the nature of the transaction.
Accrual Method of Accounting is the form in which you recognize the revenue only when you earned it from any source. Like in the business of Remote Manufacturing, when you sold the product and earned the revenue.
3- Basics in Bookkeeping:
The proper knowledge of the basis of accountancy bookkeeping is necessary for being successful in bookkeeping. This include three basic component, listed below:
Assets are the products or things which a company owns. Liabilities are those products or things which a company owes. And Equity is simply the ownership one has in the firm, of the owner or the investor.
Let us have a deeper look at these basics and essentials of bookkeeping.
Assets are basically a resource in a balance sheet of a company or which a company owns, with the mindset that it will provide benefits or profit in the future. Assets are the resource which will provide cash flow in the future, for example: for a manufacturing unit, the building of the factory, the land on which the building stands and the machinery inside that building is the assets of the company. There are numerous types of assets which include current/non-current assets, tangible/intangible assets, fixed assets, operating/non-operating assets etc.
Liabilities is the payable amount to the ledgers (internal or external parties). There are two main types of Liabilities. Current and Non-Current Liabilities. Current liabilities include Accounts Payable and Accruals. Account payable are those liabilities which a company owes to the customers or vendors. Accruals are those liabilities which you have to pay but still pending like tax and salaries. Non-current are those liabilities which you have to pay after a year like loans or bonds.
Equity is a confusing term. For the sake of simplicity, it is the residual ownership of the owner. For example, if a factory for remote production is worth $50000 and has liabilities of $10000, then the equity will be $40000.
This is simply calculated by the accounting equation:
Assets= Liabilities + Equity
It is the financial status of the company in an organized way with assets, liabilities etc are written with proper dates and headings. The major headings in a balance sheet include
- Shareholders’ equity
Profit and Loss:
Profit and Loss is calculated by P&L Statement which is the subtracting the earned revenue and the expenses of the company and if the net worth is positive, the company will be in Profit and if the net value is negative the company will be in Loss.
Importance of Bookkeeping:
Bookkeeping is one of the major assets of your company. It will help you to develop a better understanding about your expenses, earning and future planning like investments.
Bookkeeping helps you to manage your budget. If you have properly organized your budget including all the expenses, profits, liabilities etc, then it will make it easier for you to manage your budget.
Preparation for Tax:
Tax is being paid on your earnings you made from the business. If you had a proper and excellent bookkeeping system, this will definitely help you in filing the tax. If you made this financial statement you will be ready and have sound and correct information about the amount of tax you have to pay at the end of the financial year.
Being organized is the best thing in a business or life. A company may be owned by more than one person. So, if you are well managed then this will help you to provide all the essential information to all the share partners of the industry or company. This may include the salary status of the employees or the daily expenses.
With proper analytics of the company and the financial status, you will have a proper idea of what to do next. Bookkeeping is a fundamental part of the business. This will help you to gain more proper and profitable decisions.
Having the complete financial records will help you to have more happy and loyal investors. They will know the proper statements of the company and they will have trust in you and the company.
Bookkeeping will give the exact analysis of the company. It will provide you the information where it is standing and how to improve it.
By having a bookkeeping in the company, you will have a complete knowledge of the past about the profit or loss of the company, helping you to make proper decisions for the future.
Financial Management and Peace of Mind:
Having business is not child’s play. It requires your attention and if you didn’t make proper financial statements, it will hurt in the long run. You will have to search for the receipts, etc. for your company. So, by having bookkeeping, it will help you to have peace of mind with all the financial matters being solved and organized. This will help you to track your profit or loss in a financial year.
Having the bookkeeping habit will help you to make a better strategy for the future. Moreover, most laws require your business financial statements, failing to do so will have worse consequences. This will give you a quick overview of where your business is holding.
Bookkeeping and Tax:
Bookkeeping is the records of your financial terms of the company. And the tax has to be paid on the earnings of the company. Bookkeepers have managed them all. So, it is easy to pay tax by looking at the book records. Paying more tax will hurt your business and increase the overall loss and cause disbelief in the investors. So, all the taxes like Sale Tax, Income Tax, Employee Related Tax must be filled with proper checking from books.
Why You Need a Bookkeepers:
Bookkeeping is the best way for making the financial records of the company. Let us discuss, How? There are a lot of the other burdens of the business like the production, buying the raw material, selling and marketing. And, if one starts to make the books by themselves, it will hurt the other sector of business. Having a professional bookkeeper will help you to make the proper guidelines and will also assist you in making better decisions; by keeping an eye on the financial level of the business. Bookkeepers will manage all the financial receipts of the company and will indirectly help you to focus on the other departments of the business.
What Bookkeepers Offers:
- They manage and keep track of all the transactions and receipts.
- They manage the base of your business by keeping all the records of your business.
- They will help you in providing the required documents when needed.
- And they will record, manage and save financial records of your firm.
You can either use softwares for bookkeeping or you can use physical books for keeping track of your business financial status.
If you want to succeed in your business, what you require is to make it well managed and well organized. All the work that a professional can perform is not done by yourself. Keeping an eye on the financial status of the business is the soul of the future business tycoons. Add more professionals in your business and this will help you to become a success story!