What Is Bookkeeping & Importance of Bookkeeping

When we hear the term bookkeeping, we may only imagine a bespectacled accountant scribbling complex mathematical formulas amid piles of bills, receipts, and checks.

But it’s actually easy to understand what Bookkeeping is all about.

Here we will understand Bookkeeping and its importance in more details.

This Blog Post is Divided into Following Sections:

What is Bookkeeping?

If we put it in simple words, then Bookkeeping is the process of recording financial transactions for a business.

Bookkeeping does not deal with taxes, auditing, or other types of accounting, but it’s a subfield of accounting that processes and interprets all types of financial information.

With the help of reports generated by the bookkeepers, accountants do their accounting tasks. Thus Bookkeeping provides the base of all other accounting activities and helps run your business smoothly.

Importance of Bookkeeping

Ease the Budgeting Process

Bookkeeping makes the budgeting process so much smoother.

Properly organised books make it easy to review the business’s financial resources, costs, income and expenses.

A budget leads business’s plans to action and paves a financial roadmap towards growth.

It’s hard to do a meaningful variance analysis of actual numbers against the budgets if you do not keep accurate and up to date books.

Makes You Ready for Tax Season

With your books on track, you will have financial information ready for tax season.

Need help in planning for tax? Then read our blog Tips for starting year-end tax planning.

Keeps Your Records Organised

Misplaced business transactions can give you last-minute stress and can be the reason for silly errors creeping.

Well organised books can keep you away from this stress.

You can maintain organised records by doing books regularly and staying on top.

Makes It Easy To See Business Targets

Every business has its targets; well organised financial records can make it easy to reach every business targets.

By keeping regular financial records, no one can stop you from reaching your targets.

You will be able to map out your business goals more accurately and achieve growth at the speed you want.

Makes It Easy To Meet Government Regulations

The government always comes up with a new initiative.

It is the Making Tax Digital (MTD) initiative with which the government expects businesses to comply.

As per this initiative, businesses with turnover greater than £85,000 must use HMRC compatible software and application to report VAT.

In this case, you’ll not only need to do your books but also use a software for it as well.

If you utilise easy-to-use software, then the process will be quite simple.

Types of Bookkeeping Systems

Selection of the right bookkeeping system is the matter of your awareness about how bookkeeping systems work and if the system can fit in your business.

So, it is essential to have some knowledge about bookkeeping systems to use one of these systems.

Have a look at some of the common types of bookkeeping systems and how they work,

1. Single Entry System

Single Entry Bookkeeping System is known for being the most straightforward method of Bookkeeping.

In this system, transactions contain records of sales and expenses and need single entry.

The Single-entry Bookkeeping is most suited to business with the following criteria

Mainly service-based
Unincorporated business
Low volume transactions
No assets such as vehicle or plant
Revenue below the VAT threshold

How Are Transactions Recorded?

In the single entry, information related to business sales recorded on one side, all the business expenses recorded on the other side of cash book, while drawings are recorded separately.

This takes a form of money in and money out.

Single entry records are made of the date, a reference number, brief details with the amount and the calculated grand total at the end of a period.

Pros

Easy to use the method
An individual with a basic understanding of business or accounting can perform single entry.
Best for small firms and startups
Expense and income are accounted for daily
Simple to determine the profit and loss

Cons

It’s cumbersome and time-consuming
More chances of errors
Chance of fraud
Incomplete records
Hard to track assets and liabilities
Inadequate valuation of financial information
Increased probability of incorrect reporting of taxable profit or loss

2.Double Entry System

This system contains two entries for each transaction, the first one is a debit entry, and the second one is the credit entry.

In the double-entry system, both debit records and credit records must be equal.

How Does It Work?

“Accounting equation” is the formula popularly used in the double-entry system.

This equation is made of assets and liabilities balanced by the equity, Assets = Liabilities + equity.

Every transaction is recorded in at least two ledger accounts. First, it is recorded in a sales/purchases ledger and then to a balance sheet account- like creditor, debtor or bank.

Below is the list of the five primary ledgers and the accounts which are posted to them.

In the double-entry system, every transaction is recorded to at least two different ledger codes.

Income – sales of goods and services
Expenses – purchases, director’s salaries, marketing, electricity, wages etc
Assets – plant and machinery, cash, stocks, debtors etc
Liabilities – accruals, loans payable, tax payable etc
Equity: profit, shareholders funds, dividends, share premium

You should always remember that each side of the equation must balance out.

Bookkeeping options today

Bookkeeping was all about multiple ledgers, excel files, or we can say a bunch of papers or computer files in previous days.

Today advancement in technology has affected almost every industry, where Bookkeeping is not an exception.

Bookkeeping Software

Today many software are available to purchase and download, facilitating an instant move towards the computerisation.

Not just that but continues development and advancement gave us what we are using right now, 100% cloud-based online application with infinite storage space.

In short, we don’t need to worry about storage space, downloads and buggy updates, losing data due to computer crashes and viruses anymore.

Numbers of cloud-based computerise software are available in the market for Bookkeeping.

Both the single and double entry systems can be performed in bookkeeping software, making it easy for you to record business transactions accordingly. Most accounting software follows the double entry bookkeeping system.

There is bookkeeping software designed for both small and large businesses such as Xero, QuickBooks, Sage, etc.

A basic accounting system is enough for a small business to track and record all the transactions and accounts with easy to use interface.

This cloud-based bookkeeping software is available in many versions, ranging from essential to advanced capacities.

Online Bookkeeping

If you are still not sure about the concept of a single entry and double entry system, then you can choose an option for online bookkeeping service.

You can hire an online bookkeeper who can effectively eliminate the need for an in-house bookkeeper with their expensive fees and manage your particular bookkeeping tasks.

Online bookkeepers manage your sales invoices, payroll, expense receipts and other transactions electronically and process them accordingly.

They will record business transactions to appropriate journals and send them to you via emails or other resources.

How to do Bookkeeping?

Separate Your Business from Personal Finances

It’s always the worst situation when you have to search through thousands of papers to find a small yet essential piece of paper you need immediately.

It is an excellent practice to keep your business and personal dealings separate.

You can easily avoid confusion between two and know where to find the financial information you need when doing your books.

Keep All the Records Organised

Neatly organised books can save you a lot of your valuable time as you know precisely what is stored where.

You can set up a direct bank feed in your accounting software. This way, your accounting software will fetch bank transactions daily.

Tidy and well in shape books can help you find documents easily while you are approaching tax deadlines.

So keep all your records well organised all the time and not just once.

Track your Expenses

For this, you can use a separate business credit card so that you can make sure all of your business transactions are kept in one place and tracked so well.

You can use tools like receipt bank, Hubdoc to save all your receipts and bills.

To make things a lot easier, you can categorise all business bills into types of expenses.

Let’s take the example of car mileage. If you are driving your business car for a meeting, you can track the mileage and record how far you have travelled and the costs according to it. Alternatively, you can use online tools to track your business mileage and feed that info directly to your accounting software.

Maintain Weekly Record

This is the most important thing you should do in case of Bookkeeping.

Keeping accurate records weekly can be helpful to track your business’s financial conditions without any difficulty.

To avoid mistakes and keeping good records, execute a system and stick to it.

Keep Your Accounts Receivable Up To Date

Late paying customers can negatively impact your business’s cash flow, which is never the right thing.

Just act right away and pay attention to when you receivable are due.

Work out a plan to get the money you are owed as soon as possible and avoid keeping it aside as it can harm your cash flow.

Bookkeeper or Accountant?

Which is best for your business? You might benefit from both.

It depends on many factors, such as Do you need to maintain several fixed assets or look after large amounts of inventory? Or how many employees do you have currently?

Make this decision early as it makes much more sense than leaving it until you have already got into a pickle, or discovered an issue, or left things too late.

In a nutshell, the earlier is the best. It makes a real difference to consulting professional at the startup stage then touching base with them every quarter.

Your decision matters the most because accurately set up books are a powerful tool for growth, where your books actually put the finger on the pulse of the business, looking way beyond basic cash expenses and income.