What Is Bookkeeping? Definition, Types & Importance
What is bookkeeping? Is it the same as accounting? People are often confused and think the terms are interchangeable. They aren't! In this article, you'll learn all about bookkeeping. It will discuss what bookkeeping means, types of bookkeeping and why it matters for your business. Here’s everything you need to know!
Here’s What We’ll Cover:
What Is Financial Bookkeeping?
Financial bookkeeping is the record-keeping aspect of accounting. It includes recording all daily transactions. These are individual entries in journals or ledgers that summarize each business transaction. Accountants use these journals to prepare your financial statements. These are reports containing a summary of the business’s income and expenses for a specific timeframe. This accounting period could be weeks, months or years. It will reflect in your accounts receivable and accounts payable.
Why Is Bookkeeping Important for a Business?
Bookkeeping isn't just an inconvenience. It's crucial to the success of your business! Bookkeeping is important because it documents every transaction that occurs within your company. This information allows you to make smart decisions for future growth and planning. It could result in improving processes or making purchasing decisions.
Good bookkeeping can reveal issues with your business. These issues might be preventing you from climbing the ladder to success! For example, let's say that your business is losing money each month or that your overhead costs are too high. You can make changes by improving processes or evaluating purchases. However, you also need the right type of bookkeeping software to evaluate this information correctly.
How Do You Record Financial Transactions?
There are different bookkeeping methods. Each one of these is designed to track specific types of business transactions. For example, there's cash basis accounting and accrual basis accounting. You need to decide which accounting method you will use for your company. The most commonly used accounting method is the accrual method. Either way, it's critical to have an accurate balance sheet and income statements.
If you're unsure about this, consult a professional. A financial advisor or accountant can provide you with some guidance on the best type of bookkeeping software for your business.
Top 5 Bookkeeping Apps for Business Owners
Now that you know what bookkeeping is and why it's important, let's talk about what software you should be using. There are lots of great choices for bookkeeping software depending on your business’s needs. Here are five of the best:
FreshBooks is another great bookkeeping app for small businesses that need time-tracking capabilities. It's an easy-to-use program that will let you set up recurring invoices for repeat clients. It's a great choice if you need to save time by making your invoices as automatic as possible!
- QuickBooks Self-Employed
This is the perfect choice for people who work as freelancers or run a one-person shop. This is because QuickBooks Self-Employed offers 100% coverage for your tax prep so you won't have to spend extra time filing taxes! It's a great choice for anyone who needs a simple bookkeeping solution that will allow them to manage their expenses and income quickly.
TSheets is another great choice for businesses that work with employees and need to track their time. It's an easy-to-use solution that makes it quick and simple to manage employees' hours.
Xero is a great option if you deal with any international transactions or have multiple currencies. It offers real-time cloud bookkeeping, and also gives you access to certified accountants. It's a great choice for any business that needs financial support and advice from its bookkeeping app.
Wave provides a cloud-based solution for businesses looking to do their bookkeeping themselves. They'll handle its complicated tax prep services for you, too! It's a great choice if you'd like to manage your finances from anywhere and won't require additional assistance.
What is the Difference Between Bookkeeping and Accounting?
Financial bookkeeping and accounting both record financial transactions. They're not the same thing though! Financial bookusing software will help you track your business's income and expenses. Accounting software is what you'll use to prepare your financial statements. These statements show your company's profit and loss over a specific period of time. Accounting software also makes it easier to forecast future growth and plan for the coming months or years!
Here are some other differences between bookkeeping and accounting:
- Accounting creates financial reports
- Bookkeeping records transactions
- Accounting is for your internal use only
- Bookkeeping can be completed by an accountant or yourself
The Different Types of Bookkeeping
Now that you know what bookkeeping is, let's talk about the different types of bookkeeping. There are two main types: single-entry and double-entry .
Single-entry systems only record one side of a transaction. For example, if you paid $100 for supplies this month using your credit card, your expenses account would increase by $100.
Double-entry systems record both sides of a transaction. If you used your credit card to purchase supplies, then your cash account would decrease by $100 and your expenses account would increase by $100.
What Is Petty Cash Bookkeeping?
Petty cash is a small amount of money that your business uses for different purposes throughout the day. This could be as simple as buying doughnuts for your office or grabbing lunch during an impromptu meeting. To keep track of these expenses, you'll need to use the petty cash bookkeeping method.
Petty cash bookkeeping is a single-entry system that simply records the total amount of money you have in your petty cash drawer. If you're using an actual cash box for this, it's best to keep track of each entry. This way, you can determine how much change remains at the end of the day.
Is It Hard to Be a Bookkeeper?
Much of the work that goes into bookkeeping is more administrative than anything else. For example, your bookkeeper will need to make sure that every transaction in your business's financial records has an entry. This could range from paying employees or purchasing supplies for your office.
It can be difficult to get used to doing this on a daily basis. It's easy to make small mistakes and forget a few transactions every once in a while. This is why it's important to choose the right bookkeeping software for your business. These types of programs will do all of this work automatically, so you won't have to keep track of everything!
All in all, bookkeeping simply means tracking your business's expenses and income. There are a variety of methods for this, including single-entry and double-entry systems.
Today's better bookkeeping software makes it easier to prepare financial reports for your accountant or tax professional. You can use these reports to help you make informed decisions about the future of your company.
Hopefully this article provides some insights in bookkeeping. It should give you a great starting point for perfecting your bookkeeping strategy.
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