Have you ever wondered how bookkeepers stay on track of how much your business is spending? How can they project these expenses and suggest the best financial approach for certain business decisions?
Part of the job of bookkeepers is to keep the business records and other documents organized so they can review previous spendings instead of memorizing or guessing the company’s cash flow.
This article will discuss the six different types of business transactions and how these records are being documented. Read on and find out more.
How Bookkeeping Services in Toronto Record Your Business Transactions
Small business bookkeeping services in Toronto understand that every spending needs to be jotted down— from the recent electric bill in your office space to your general ledger for future payment purposes and depreciation expenses to meet an adjusting entry. Recording a business transaction is integral in the accounting process and greatly determines the financial direction of the business.
These records need to be documented timely and accurately to avoid problems when it comes to sorting out your general ledger (or the database containing entries of recorded bills to be paid in the future, payments owed by a customer, payrolls allotted for employees, and more).
If you are recording with a manual accounting system, the accounting transaction is slowed down. This is why having the appropriate subsidiary ledger is important to stay organized and up to date with your business data and determine how your general ledger is affected. Below are the primary subsidiary ledgers:
- Journal for cash receipts
- Journal for cash disbursements
- Journal for sales
- Journal for purchases
Recording an accounting transaction often follows an accounting cycle that ensures all documents have been recorded properly. Bookkeepers need to adhere to specific steps which comprise the accounting cycle. The accounting cycle is as follows:
- Organize your transactions and record all journal entries
- Post these journal entries to the general ledger
- Facilitate an unadjusted trial balance
- Create adjusting entries and prepare a trial balance
- Run a financial statement and make a close for the month
The thing about cycles is that they do not end, so after step #5, the bookkeeper must begin the next accounting cycle again to meet their objectives in the financial lead.
Bookkeeping Services in Toronto: Knowing Your Business Transactions
Most bookkeeping services in Toronto require sophisticated accounting software despite their need for only inexpensive computers. Businesses no longer see the need to manually enter transactions into journals then post them to a general ledger account, followed by a subsidiary ledger account.
Businesses nowadays believe that modern-day technology should be incorporated into the basic bookkeeping and accounting techniques and ought to be improved by implementing relevant accounting software for more information and data entry. Let’s discuss further the six types of financial transactions in every business. Remember that these types need to be identified beforehand.
Whenever your business needs to pay another business for goods and services they have provided your company, you can choose either to pay the bill immediately or record it in an account to pay at a later date.
For small business bookkeeping services in Toronto that still do not use any kind of accounting software, they would need to record the entry in a purchase journal. In addition to what we have mentioned, here are some key takeaways from understanding what accounts payable are in a nutshell.
Keep in mind, however, that should you decide to pay the bill immediately or in cash for the goods and services, you must record the expenses and their reduction in cash from the appropriate accounts like what most businesses do with a utility expense bill.
- Accounts payable refer to the quantity or amounts that are due to the business’s service and good vendors or suppliers. This happens when you have not paid for them yet.
- The accounts payable may also refer to the total amount of all your outstanding balances which you owe your respective vendors and suppliers. To know your outstanding balance, simply check your business’s record sheets.
- Lastly, the accounts payable can be defined as the total AP’s increase or decrease based on a cash flow statement and period. What your management system can do is to pay the outstanding bills on or slightly before the due date to improve your business’s cash flow without letting the debt weigh down on your business.
This follows the same logic as accounts payable, except you record money which another business owes you via credit. If you are paying right away, you do not have to record anything in the accounts receivable since you will be taking note of the increase in cash and the number of sales.
In case the company doesn’t provide accounting software, the bookkeeper has to record their entry in a sales journal. Each time an invoice is sent to a customer, this would automatically record an accounts receivable entry and would apply whether you have or do not have an accounting software.
To give you a clearer and better understanding of this accounting term, here are the main definitions of accounts receivable.
- The accounts receivable represents money that is needed to be paid to the company; you can find this on your business’s short-term balance sheet. Through this accounting term, your buyers can purchase your products or services using a credit system.
- An account receivable setup is similar to the accounts payable process, except that the money is being received (instead of being owed) by your company. The good part about this is that you can analyze the turnover ratio and outstanding sales based on
- The strength of a company’s AR can be analyzed with the accounts receivable turnover ratio or days sales outstanding. It is common knowledge that it is better to be owed than to owe other businesses (considering that there are also interest rates nowadays).
Let’s say your business is ready to pay a bill. Regardless if it comes from the earlier records under accounts payable or an intent to pay immediately, you would have to record your intent in the form of an entry.
The pattern of a bill payment business transaction would usually resemble a reduction in the accounts payable and another reduction in the cash balance of the company. To record this procedure manually, bookkeepers will be using a cash disbursement journal.
In summary, we can define the bills payable as any of the following:
- A type of transaction that resembles the accounts payable process except it may be a short-term borrowing agreement done with other banking institutions; usually the business country's central bank.
- It can be a form of payable liability bill such as for utility purposes and loans. To review the bills and liabilities of your company, you can check your business balance sheet. When we talk about bills in terms of bookkeeping, this just refers to the banking skills of your bookkeeper.
- The most common documents involved in a bills payment scheme are the bank’s promissory note and pledge of government securities. This has to be maintained, paid to your bank, and be properly invested on.
In contrast to the accounts payable method, the context of the payments received is when a customer or client pays your company for goods and services.
The transaction may be carried out through cash (i.e., customers buying at your business’s physical store) or through an invoice for goods and services that they purchased with credit. When manually recording entries under this category, bookkeepers must document them in the company’s cash receipts journal.
In case you are still confused about the definition of payments received, here is a summary.
- A payment received accounting situation happens each time your customer sends money or any form of currency to your business. For this to occur, there should also be no notation concerning the invoice.
- Part of the process is for the seller to record the payments using a pending account as the bookkeeper deposits the check and keeps record of the payment through a maintaining file.
- The payment records are sent for investigation and clearance to the business owner or seller. This will clarify the expenses or payments that have been made and by which buyer. This will be compared afterwards with the generated invoice.
This data is highly important for businesses that hire employees and provide salaries. Normally, there are two sets of payroll transactions that need to be recorded— the initial entry in which the payroll is being processed and the cash entry in which the employees were already paid.
Having payroll journal entries can be complicated for most businesses, which is why it is best to incorporate a payroll service software to process the records and save the breakdown of computations. Take note that the equation for payrolls is different per employee.
Here’s a sample to compare payroll transactions for just one employee:
- During the first payroll, the computation includes gross wages and payroll taxes.
- During the second payroll, the computation includes employee wages and another set of tax deductions.
- During the third payroll, the computation includes the employee wages, tax payments, and remittance.
Still don’t have an accounting software to accommodate payroll entries? You will need to write these down into a general journal.
As mentioned earlier, the presence of accounting software has drastically influenced the demand for journal entries. As much as you may want to take advantage of the technological advancements and switch to a paperless scheme, there will still be instances where bookkeepers need to log in a journal entry.
Why does journaling still matter? It’s because some entries need to be manually adjusted for reasons encompassing the amortization, depreciation, payroll accruals, banking fees, accumulation of interests, and more. Then, after all have been computed, the bookkeeper, together with an accountant, should run and release a financial statement.
Bookkeeping services in Toronto are surely incredible since all means are exhausted to deliver accurate and timely business transaction records. If bookkeepers can deliver their expectations in this matter, imagine the results they can promise by providing the best financial decision for the company.
Did you learn anything new about bookkeeping in Toronto? Comment down below!