What is bookkeeping?
Bookkeeping refers to the process of recording monetary transactions. This record-keeping process is usually done by a bookkeeper and the information is then input on a tax return by an accountant. Although online accounting software options now widely available, many small businesses still rely on “shoe box” record accounting.
Before modern boookkeeping software, a bookkeeper would go through transactions – either cash inflow or outflow and then records those in a balance sheet or ledger. This recorded information would be used to prepare a trial balance, known as the T-balance.
Mordern bookkeeping software automates this process and takes care off all the “back end” bookkeeping work. Typically all all the user needs to do is categorize the transactions.
While you don’t need an accounting degree to do your own bookkeeping, some general concepts are inportant to understand.
- Cash Accounting and Accrual Accounting
Businesses can choose whether to report transactions when they are paid (cash basis), or when the transaction takes place (accrual). For example, a small shop would generally prefer to record income for tax purposes when the customer pays invoice, instead of when the goods are sold. Cash accounting is recommended for smaller business. For bigger companies and certain industries, the accrual method might make more sense in some cases.
- Assets, Liabilities, and Equity
In a nutshell – whatever a company owns are its assets, liabilities are what a business owes to other businesses or people like bills and other payables, and equity is the shared ownership among other stakeholders of the business, e.g. investors and shareholders.
It is a bookkeeper’s job to appropriately record all the transactions in their respective assets, liabilities, or equity accounts and the accountant’s job is to process information to balance the books. The generic accounting equation involving these three is Assets = Liabilities + Equity.
The basic idea that is portrayed through this equation is – a business owns assets, which is comprised of the liabilities and equity shares of the business.
- Revenue, Expense, and Costs
Upon generation of revenue through a business, the owner of the business needs to prepare an income statement. Revenue, expense, and costs are the three essentials of an income statement.
Revenue is the amount of money a business generates through whatever it sells – either goods or services. Revenue and profit are fundamentally different, good number of people tend to mix these two up. However, profit isn’t considered as a bookkeeping element.
In accounting terms, costs would mean the cost of goods/services sold. For a small manufacturing plant, costing for the raw materials is taken as cost. For a small shop or service center, cost would mean the cost it takes to provide a customer with the goods or services.
Expenses and costs can get very confusing, because both seem to be the same from a distance. However, in bookkeeping terms, expense means the expenditure required to run a company, shop, or any other form of a small business. Salaries are the prime example of expense a business of any scale must bear.
Bookkeeping might be confusing, but fun
For someone who has no accounting background, bookkeeping can be a daunting task. Take double entry bookkeeping for example: a cash sale is to be recorded in both the revenue account and sale account. Connecting the dots is complicated and the first few times are to go wrong, inevitably. While the brainstorming can be fun, it can also cost a small business a significant amount of time. Every business owner needs to ask themselves, can they afford the time it takes to learn bookkeeping from the scratch, or should they just hire someone who knows how to keep books?
Plenty of bookkeeping software are now available and used by businesses of all sizes. For small businesses who probably would not pay additional personnel to work on bookkeeping, these programs are ideal. However, even using an accounting software would require a person to have basic bookkeeping knowledge. The topics explained here, can be a good place to start.