Bookkeeping is a crucial element for any business. It helps you organize financial records, prepare balance sheets and income statements. This enables you to make informed decisions about investments, new business opportunities and more. It also helps you comply with tax regulations and audits.
It also helps you reconcile bank accounts and improves the accuracy of data entry. In short, it makes your company financially healthy and profitable.
1. It is the process of recording financial transactions
Regardless of whether you’re a small business owner just getting started or an established corporate giant, accurate bookkeeping is essential for success. The process of recording financial transactions ensures that every penny received and spent is documented, thus providing a detailed representation of the company’s real-time financial standing.
This information can be derived from a variety of sources, but the best way to keep up with income and expenses is through a method known as double-entry bookkeeping. This method involves creating a chart of accounts and using it to record each financial transaction in your accounting books. Every account is assigned a unique identifier, such as an asset, liability, or equity account. Then, each time a sale is made or an expense is incurred, the account is debited and credited respectively. This allows the overall balance of all assets and liabilities to remain balanced. The information recorded is then used to generate important financial statements, such as the profit and loss statement and the balance sheet.
Bookkeeping also helps with budgeting, as it provides a clear picture of a company’s current spending and revenue. Moreover, the records provide the foundation for creating a financial roadmap that can guide a business’s future decisions. For example, a company’s leadership can use the results of its bookkeeping to decide if it is worth investing in a new product line or expanding into a new market.
Additionally, bookkeeping helps with compliance by documenting a company’s receipts and expenditures for state and federal taxing authorities. In the event of an audit, it is crucial that this type of information is readily available.
Up-to-date records are also helpful for potential investors and lenders. These parties will want to see a company’s profit margins, performance charts, and other data that can be easily retrieved with the help of a well-organized bookkeeping system.
2. It is the process of preparing financial statements
Bookkeeping involves recording daily transactions and preparing financial statements from these records. These statements provide insight into the company’s performance and financial health, and they are vital for making well-informed decisions, obtaining financing, attracting investors, and maintaining transparency with stakeholders. Financial statements are derived from the detailed entries made in the company’s accounting records, and they include an income statement, balance sheet, and cash flow statement. These statements are a summary of the overall financial state of the company, and they can be used to compare the current and historical financial data against future goals.
The main purpose of bookkeeping is to maintain a real-time view of the company’s financial standing. To achieve this goal, books are maintained by using a chart of accounts that lists every account in the general ledger and a system to record the details of each transaction, such as how much was credited or debited to an account. A company’s management can then obtain the current financial status of each head/account of revenue and expense at any time by looking up the record.
For example, a company’s revenue can be recorded by using the cash sales journal and the cash disbursements journal. These journals are then reconciled with third-party documents, such as bank statements, to make sure the dollar amounts match up. If there are discrepancies, the bookkeeper can offset these by adjusting entries.
Another benefit of bookkeeping is that it can be used to create accurate budgets. Having detailed records of a company’s income and expenses allows it to see where its money goes and whether it can save any money by reducing certain expenditures. It also helps the business to plan for the future and set a budget that it can realistically stick to.
In addition, having an accurate budget can help a business to secure loans and investors. This is because lenders and investors will want to know that a business has an accurate picture of its finances and can demonstrate that it is responsible with its investments. This is important because it will give them confidence that a business will be able to repay its debt and meet future commitments.
3. It is the process of analyzing financial data
Regardless of the type of business, every company requires accurate and organized financial records to operate. Bookkeeping is the foundation of these records, serving as a compass for businesses, helping them navigate challenging economic conditions and make sound business decisions. Without it, companies would be sailing blindly, risking their chances of success.
One of the most important aspects of bookkeeping is analyzing data to gain insight into the health and performance of a company. This process involves consolidating information from the various entries recorded on a daily basis to create financial statements. These statements include the cash flow statement, balance sheet, and income statement. Analyzing these reports can help businesses of all sizes identify areas where they need to improve and set realistic goals for the future.
In addition to preparing and reviewing these financial statements, bookkeepers also perform other tasks that help businesses better understand their performance. For example, they may reconcile general ledger cash balances against bank and credit card statements to ensure that all business transactions are recorded accurately. They may also create invoices and send them to customers. Finally, they may analyze historical financial data to determine trends and patterns that can inform strategic planning.
For example, a bookkeeper may use vertical analysis to compare the current year’s net sales to the previous year’s net sales to see how much the company’s profit has grown or shrunk over time. Similarly, horizontal analysis can be used to identify which accounts on a financial statement are growing (hopefully revenue) and which are shrinking (hopefully expenses).
Additionally, companies can use the information from their books to prepare budgets for the upcoming period. By comparing actual expenditures to the budget, businesses can identify any variances and take corrective actions as needed.
Moreover, investors want to know how well a company is performing before they invest their money. By ensuring that the financial statements are accurate, up-to-date, and accessible, businesses can build trust with their investors and cultivate an environment of transparency and accountability that is essential for healthy business relationships. This helps to increase the value of the investment and ultimately lead to a more successful outcome for both parties.
4. It is the process of making financial decisions
Bookkeeping is a necessary process for entrepreneurs and business-owners to track their earnings and expenses. When done correctly, this can help them make informed decisions about their finances and financial capability. Accurate bookkeeping also helps external stakeholders like investors and financial institutions make better investment and lending decisions.
A key aspect of bookkeeping is maintaining a general ledger, which is the primary document where a company records its sales, expenses and receipts. The more sales or spending occurs, the more often the general ledger will be updated. It can be maintained using specialized software, a spreadsheet program or even a plain sheet of paper (although we wouldn’t recommend this).
To ensure that each debit has an equal and opposite credit, bookkeepers use T-charts, which have two columns for credits and debits. They then record each financial transaction in the appropriate account, ensuring that all accounts remain balanced at the end of an accounting period.
Another important task is reconciling bank and credit card statements. This ensures that the general ledger cash balance is accurate and that all outstanding invoices are being processed in a timely manner. It also helps ensure that any discrepancies are sorted out as soon as they occur. In some cases, bookkeepers may also assist with business tax planning by calculating quarterly estimated taxes and preparing tax returns.
In addition, many companies rely on their bookkeepers, or outsource the task to professionals like The Bottom Line, to create and update financial reports for various stakeholders. This data is used to develop budgets, manage cash flow and assess a company’s financial health. Having up to date financial records also allows accountants to do their job more quickly, whether creating a monthly financial report or responding to an ad-hoc request for information.
There are many reasons why bookkeeping is important for businesses of all sizes. It provides transparency to internal stakeholders, and it makes it easier for them to make wise decisions about their investments, finances and operations. Without it, companies would be unaware of their current financial standing and wouldn’t be able to effectively plan for the future. And while bookkeeping can be a time-consuming and labor intensive process, it’s one that every business should have in place.
