What Is Bookkeeping? A Guide on the Different Types

You’ve always heard that bookkeeping is hard, but who knew it could be so complicated? There is just so much going on and so much to fill in that it could take up so much of your time. Bookkeeping is not just complicated, it’s tedious, and a task dreaded by many, so you’re not alone.

So, what is bookkeeping, and why is it so important?

What Does Bookkeeping Mean?

In a nutshell, bookkeeping is the systematic recording of a businesses’ financial transactions.

It plays an integral part when it comes to the financial health of any business. With a clear understanding of your finances, you would be in a position to make informed decisions, and reduce any chances of mismanaging funds.

Unless you’re a trained bookkeeper, navigating your financial records, deciding on what accounting methods you should use, and managing cash flow won’t be easy. Still, if you want to give it a shot and have accurate bookkeeping, there are several ways you make it easier for yourself.

What’s the Importance of Bookkeeping?

Now that you know what is bookkeeping, you may wonder why it’s so important. Accurate bookkeeping lays a firm foundation for financial statements, cash flow, tax compliance, and so much more. It provides insight into the financial health of your business and enables you to produce financial statements that show how well your business is doing.

With these statements, you’ll have your cash flow projections, which essentially show all the cash that comes in and leaves the business at any time. This can be vital for your business growth as you can entice new investors. Beyond that, it makes it easier for you to make future plans, such as expanding the business and hiring more people.

One of the most significant reasons to have accurate bookkeeping is the fact that it takes the complicated out of filing taxes, which we all know can be a daunting task. Once tax season arrives, you must file accurate business taxes, and having accurate bookkeeping will cut down the time you need to gather all the necessary documents. Beyond this, it’ll lessen the pain of an audit if the time comes and you need one.

What’s Involved in Bookkeeping?

There are several elements of bookkeeping, and maintaining your general ledger is one of them. The ledger contains records of what you earn and spend in your business. This is the information you use to create financial statements as well as file taxes.

Tracking expenses and income is hands down one of the most tedious tasks of bookkeeping, but it’s also easily one of the most important. Managing bank reconciliations and account payables and receivables is also a part of it.

Types of Bookkeeping Systems

There are several types of bookkeeping systems, such as single and double entry. This is where small business bookkeeping gets hard because most business owners have no idea what to choose. So, how do you know which one to use?

Single Entry Bookkeeping System

This is usually the system of choice for most small business owners. Its easier to use compared to other systems. However, it involves huge volumes of data that are hard to keep up with. This is a single entry system because all items get their own entry in the records.

Its primary focus is usually on business expenses and cash sales. This system uses cash disbursements, bank statements, and cash sales to monitor transactions. Items should be entered as soon as they are incurred, and at the end of a given period, they are reconciled or compared with the bank accounts.

This system is relatively easy to keep up with, and you most certainly won’t need to hire a professional bookkeeper. You can actually do it with an excel spreadsheet. However, it’ll be hard for you to make future predictions because the information will not be enough. You may not be able to project the growth of your business or procure audit options.

Double Entry Bookkeeping Systems

Larger businesses use double-entry systems, but smaller businesses with complex transactions can also benefit from it. With this system, you can track up to five transactions, such as revenues, expenses, income, assets, and liabilities.

You can use credits and debits in each account to identify any increase or decrease. This system operates in the two-fold effects, which states that for every value given, which is credit, there must be a value received, which is debit. This system is superior in most ways, but it’s very hard to keep up with, and you may need professional help to manage it.

Computer Software

Given that most bookkeeping systems are quite complicated, you may opt for a computerized bookkeeping system, which may be a double or single entry. There are numerous software in the market, and you can choose one depending on how small or large your business is.

One of the best things about these systems is that they can be automated. They record transactions based on real-time transactions and improve accuracy.

Virtual Bookkeeping

Virtual bookkeeping involves hiring a bookkeeper online. Virtual bookkeeping has become more and more popular for both small and large businesses. This is an excellent option for companies that want to avoid hiring an in-house employee as a bookkeeper. They cost a fraction of what in-house accountants cost, and they are still as effective.

Apart from cost savings, this method is flexible as the bookkeeper can only work when it’s convenient for you, and they can offer you other services, such as tax preparations.

Is There a Difference Between a Bookkeeper and an Accountant?

Most people confuse the two, but while they both play critical roles, they place their focus on different tasks. Bookkeepers are involved in record-keeping at the initial stages, while accountants analyze bookkeeping records and provide insights.

An accountant takes all the information gathered by the bookkeeper to produce financial statements and models, analyze costs of operation, and complete tax returns. Bookkeepers may not specialize in taxes or have knowledge of what the IRS requires.

What Is Bookkeeping? The Takeaways

Now you no longer have to ask what is bookkeeping. You know what it is, and you can make an informed decision based on the size of your business and your needs. You may choose to get an automated bookkeeping software if you find all this too much for you, but you can also hire a bookkeeper to manage records for you.

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