Do you have your own business but are facing issues keeping track of day to day activities, accounting, balancing your books, and more?
Outsourcing bookkeeping services may seem like a smart choice to maintain a trail of your finances. But in reality, to keep your business running smoothly, it is essential to possess the knowledge to manage your books in-house.
While external bookkeepers or accountants help you avoid running headlong into cash-flow problems, the cost of bookkeeping services for small businesses is sometimes very high and eats into your profit margin.So, how do you ensure that your business isn't compromised while also safeguarding your profits?
Bookkeeping - What is it?
The process of entering and recording up-to-date, accurate, and comprehensive data of your business' various financial transactions, while meticulously organizing them, is known as Bookkeeping.
It plays a fundamental role in keeping your business healthy and growing.When done right, it helps you understand where your company is losing its money and where it is getting returns from. It is crucial for reducing your tax liability too.
Don't confuse bookkeeping with accounting. Accounting is much more elaborate as it involves reviewing, analyzing, and interpreting your company's books to provide the financial status of the business. Now, let's see how to do it the right way.
Bookkeeping made simple
Step One: Types of Bookkeeping
The most important decision that any organization has to take is which method of Bookkeeping to follow - Cash or Accrual Accounting. To put it simply, Cash Accounting is recorded when you purchase or sell an item in exchange of cash immediately, either in terms of currency notes or electronic funds; Accrual Accounting is recorded regardless of the exchange of money i.e when the purchase or sale of an item occurs on credit, to be paid at a later time.
For smaller businesses, Cash Accounting is generally a better option. As the business grows, one can gradually shift to Accrual Accounting.
Step Two: Understanding your business accounts.There are five key components:
- Assets: All that is owned by the business.
- Liabilities: All that belongs to the business but is either on loan or has certain obligations.
- Revenues/Incomes: All that the business earns through product sales.
- Expenditure/Expenses: All that the business has to pay for a service or an item.
- Equity: All that the owner and investors own in the firm.
Below are the common account, segregated as account types in business:
The formula to ensure that you have balanced your books the right way is known as the Accounting Equation.
Accounting Equation: Assets = Liabilities + Equity
Step Three: Decide the type of entry you want to make.
There are two types of entries that you can make while recording your finances.
- Single-entry Bookkeeping: As the name suggests, you enter the transaction amount only once. For instance, if you receive money, in exchange for goods, the entry is made into the Assets ledger Similarly, if you pay money in exchange for a service, the entry is made into the Expenses Ledger.
- Double-entry Bookkeeping: Consider this, for every action, there is an equal and opposite reaction. In business terms, for every transaction, there is a give and take that takes place. For instance, if you receive money, let's say $500, in exchange for goods worth $250, your money is being credited while the item is debited. Hence,
Cash (Asset) = $500
Inventory(Asset) = -$250
Profit or Loss a.k.a Retained Earnings (Equity) = $250
Do note: that this is a very simplified version for clarity.
Usually, the debited amount is placed on the left side and the credited amount on the right.
Double-entry bookkeeping is reliable and more frequently used as it perfectly balances your books, reduces possibilities of error, and gives you a clearer picture of when your profits start waning.
Step Four: Fill in your ledger
Once you've decided on the bookkeeping method, fill up your ledger with the correct amount in the correct account. The final ledger with all the accounts and numbers in one place is known as General Ledger.
Step Five: Balance the books
Remember the accounting formula: Asset = Liability + Equity?
After you have filled in your ledger, calculate the balance of Assets, Liabilities, and Equity. If by applying the above formula, it holds, then you have successfully tallied your books.
Let's refer to the example given in step 3.
Asset + Liability + Asset
Cash + Inventory = Liability + Retained Earnings
$500 +(-$250) = 0 + $250
$250 = $250
Hence, the equation holds and your books are balanced.
Now that you know exactly how bookkeeping works. There are two ways to do it
The process of auditing your company's finances physically might be a little cumbersome and is certainly a more time-consuming process.
Nowadays, there is no shortage of computer software that balances your books for you. The probability of error is also reduced to a great extent thus decreasing the time spent auditing. All you have to do is record your invoices - the software will automatically update it in your general ledger.
Related : The Digital Accountant of Today
Digitally manage your books with these software options that can help you :
It lets you create invoices, track expenses, and gives a real-time view of your inventory. It also lets you view financial reports when and where you need them. The app is intuitive and manages sales, orders, invoicing, shipment tracking among other things.
A user-friendly application by Intuit, Quickbooks is popular for accounting and keeping all your business accounts in order. It also has a low learning curve and comprehensive features for reports.
Enabling multiple users, Xero works well in tracking inventory and can integrate 800+ third-party apps.
Now, you no longer need to find a bookkeeper. You can do it by yourself or with the help of software - it has never been easier.