Bookkeeping is the process of organizing a company’s financial transactions, and a bookkeeper is the person in charge of it. Bookkeeping is the most common approach for business owners to determine whether or not their company is profitable. Moreover, keeping track of your numbers allows you to predict financial problems and fix them before the disaster. Bookkeeping helps in identifying profit-making opportunities if financial records are presented in a professional format.
A bookkeeper’s job entails keeping track of transactions, sending invoices, processing payments, managing accounts, and preparing financial statements.
What is the definition of bookkeeping?
The process of tracking financial transactions done by a commercial firm from its inception until its closure is called bookkeeping. Each financial transaction is documented based on supporting paperwork, depending on the type of accounting system utilized by the company. A receipt, an invoice, a purchase order, or some other sort of financial record proving the transaction took place could be used as evidence.
What Is the Difference Between Bookkeeping and Accounting?
In a business, bookkeeping is crucial, though preparatory, function to the accounting function. A bookkeeper gathers evidence for each financial transaction, writes it in the accounting journal. Then categorizes it as one or more debits and credits, and organizes it according to the company’s chart of accounts.
Understand the Assets, Liabilities, and Equity:
An account does not refer to a specific bank account in the field of bookkeeping. An account, on the other hand, is a record of all financial transactions of a specific sort, such as sales or wages.
There are five different kinds of accounts:
Assets are the cash and resources that a company owns (e.g., accounts receivable, inventory)
Liabilities are the company’s obligations and debts owed to it (e.g., accounts payable, loans)
The money earned by the business, usually through sales, is referred to as revenues or income.
Expenses or expenditures are the funds that leave the company to pay for a product or service.
Equity is the value left after liabilities are removed from assets, and it represents the owner’s ownership interest in the company (e.g., stock, retained earnings)
Setting up each relevant account so you can record transactions in the appropriate categories is the first step in bookkeeping. The table below lists some of the most common types of small-business accounts.
Moreover, at the end of the year, you must balance your records in bookkeeping. The bookkeeper also maintain meticulous track of these items and ensure proper recording of all transactions involving assets, liabilities, and equity. You can use a simple method to balance your books always. The accounting equation is the name for this formula:
Liabilities + Equity = Assets
The accounting equation states that whatever a company owns (assets) must be balanced against claims made against it (liabilities and equity). Liabilities are claims for money owed to creditors and lenders. The remaining assets are subject to claims by the business’s owners (equity).
Understanding the fundamentals of small-business bookkeeping, whether you do it yourself or outsource it. Additionally, this will help you better manage your finances. You’ll save time chasing receipts, avoid costly mistakes, and obtain vital insight into the potential of your company.
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