What is bookkeeping?
You are here to understand bookkeeping essentials for beginners. After reading this you should have obtained enough knowledge to understand the basics and better run your small business.
Bookkeeping is a fundamental component of any business, big or small. Bookkeeping involves the process of recording and organizing financial transactions such as sales, purchases, payments, and receipts. This process enables businesses to track their income and expenses, monitor their financial performance, and prepare financial statements such as income statements and balance sheets for management review.
To understand the principles of bookkeeping, you must first be familiar with the accounting equation, which is:
Assets = Liabilities + Equity
Assets are what a business owns, such as property, inventory, and cash. Liabilities are what a business owes, such as loans, bills, and taxes. Equity is what remains after deducting liabilities from assets and represents the business owner’s ownership interest in the company. This may sound a bit complicated, but I promise, its not!
Bookkeeping methods and tools
There are two methods of bookkeeping: single-entry and double-entry bookkeeping. In single-entry bookkeeping, transactions are recorded in a single account–think an excel sheet, while in double-entry bookkeeping, transactions are recorded in two accounts, with a debit to one account and a credit to another–think an accounting software such as Quickbooks. The double-entry system is the preferred method of bookkeeping as it provides a complete record of all financial transactions and allows for easier detection of errors.
Bookkeeping tools include spreadsheets (Excel, Google Sheets, etc.) accounting software (Quickbooks, Sage, Xero), and specialized bookkeeping programs. These tools automate the bookkeeping process, making it faster and more efficient, while also reducing the risk of errors. Here is a list of most common accounting errors to watch out for:
Why do you need a Bookkeeper? A bookkeeper is responsible for maintaining accurate financial records, reconciling bank statements, and preparing financial statements. They must also be familiar with tax laws and regulations and ensure compliance with them. A good bookkeeper should be able to review financial statements and detect any variances and help brainstorm a solution to present to the business owner.
What you need to know
In summary, bookkeeping is an essential component of any business and involves the process of recording and organizing financial transactions. It is based on the fundamental accounting equation and can be done using single-entry or double-entry methods. Bookkeeping tools include spreadsheets, accounting software, and specialized bookkeeping programs, and a bookkeeper is responsible for maintaining accurate financial records and ensuring compliance with tax laws and regulations.