Bookkeeping is the task of recording all transactions relating to business. The systematic record ensures all business transactions are up-to-date, valid, and complete. There are professional bookkeepers who can maintain books for businesses.
However, if you're a small business owner, you can take charge of your finances and bookkeeping yourself. Here is a quick look into bookkeeping systems and why they are essential for small businesses.
Bridging Accounting and Bookkeeping
Many people confuse accounting and bookkeeping. Although the two processes are separate, they work together. Bookkeeping is the foundation of an excellent accounting process. When the bookkeeping process is correct, you can expect the result from accounting to be accurate and true, which will help scale your business.
To put it another way, bookkeeping is the act of documenting and collecting data, whereas accounting is the act of analyzing it. Without bookkeeping, businesses won’t be able to make sense of their numbers. To help you further understand bookkeeping, here is the objective of doing the bookkeeping process.
Clean and Absolute Records of Transactions
The primary objective of bookkeeping is to make accurate records of all business transactions to use as references in future accounting. The records in bookkeeping are reflected in books of accounts and often separated into different categories like income and expenses.
Shows the Company's Financial Position
Bookkeeping will help owners see the impact of business transactions on their company's overall health. The records can help monitor monthly and annual transactions made by businesses. This financial information also helps shareholders and administrators to plan better for their future financial ventures.
Types of Bookkeeping Systems
Small businesses can put two main types of bookkeeping systems in place. Business entities have the option of using one system exclusively or combining both. Here is a more detailed look at each type of bookkeeping system.
Single-Entry Bookkeeping
Most small businesses start with single-entry bookkeeping. With this method, every business transaction or activity only has one entry in the bookkeeping record. Only sales, purchases, receipts, and payments can be maintained using this manner. This bookkeeping method can keep your finances organized if your business handles minimal transactions.
Double-Entry Bookkeeping
The double-entry accounting system records business transactions in two entries. Due to the fact that it records a credit entry to match every debit entry, the double-entry system offers checks and balances. Transactions are recorded when money is received or lent—it is not a cash-based system.
Most professional bookkeepers use this method since this is universally adopted and gives the most accurate recording of financial transactions.
Importance of Bookkeeping Systems for Small Businesses
Bookkeeping is essential to all businesses, regardless if it’s a small or vast enterprise. Understanding your cash flow, tracking expenses, monitoring accounts payable, and even tracking your sales tax starts with bookkeeping. Here are reasons why you should have a bookkeeping system.
Helps Trace the Source of the Transaction
You keep records of your transactions, but isn't it also nice to know the source of your transactions? Instead of looking at raw numbers and wondering where they came from or where they’ve gone to, bookkeeping can tell precisely whether the entry is an expense or a sale.
In double-entry accounting reports, you can be as accurate as recording the type of business expenses in your books. There are several business expenses, such as meals, traveling costs, and accommodation. The details will help you plan your finances for more efficient spending.
Additionally, you can be sure that all of your financial transactions are in one place. So, when you need to pull your records for accounting or references, you know where to look.
Aids in Crucial Decision Making
Bookkeeping provides businesses with an accurate overview of their performance. The information from bookkeeping is valuable for making strategic moves for your business.
Bookkeeping is a reliable source of information. Business owners can use the information as a benchmark for their income and revenue goals. Companies with excellent bookkeeping systems are more likely to achieve their business goals.
Helps With Financial Reporting
If you have proper bookkeeping, you have complete and organized data, which is crucial for preparing financial reports. Bookkeeping can summarize a business's expenses, income, and ledger categories. Balance sheets, income statements, and cash flow statements are the three primary financial statements that firms require to evaluate their performance.
It can also provide you with more detailed reports such as expense reports, sales reports, and other statements that show key performance indicators. These reports are then used as communication for the business administrators and stakeholders.
Also, accurate financial reporting can be used to attract business investors. Information on how much profit your business generates and how you handle your expenses can be leveraged to attract inventors to your business.
Helps Manage Cash Flow
Income and expense tracking is vital in every business. There is more to running a business than merely making money. You also have expenses to pay that will keep your business running. It is critical to understand whether the flow of funds into and out of your company is balanced. If your expenses are through the roof, you’ll need to make more money or cut down on expenses.
Likewise, if you have a healthy profit, you can create a budget to improve your business. You can allocate it to get new inventory, enroll your employees in seminars and workshops, upgrade your equipment, expand to a new location, and more.
For Tax Compliance
In running a business, one thing is for sure—you have to fulfill your tax obligations. The government requires different forms of tax payables from businesses. Bookkeeping records will help businesses calculate the exact amount of taxes they must pay.
Failure to pay your tax obligations can lead to severe consequences. Bookkeeping is crucial in ensuring you won't be fined for getting your taxes wrong.
Bookkeeping Accounting Software: Is It Worth It?
Manual data entry is the old way. There is accounting software that can do more than bookkeeping for your business. Investing in software streamlines all accounting tasks, not just bookkeeping, for your business to help you manage your finances.
Here are some features to consider for small business accounting software:
- User-Friendliness: Look for an accounting solution that's easy to use. Not all business owners are able to use advanced features. Make sure to look for an easy bookkeeping system so even beginners in your team can use it.
- Payroll Services: Most modern accounting software programs help employers handle their employee's wages. Some also have a time tracking feature, which can be helpful when your employee's wages are based by the hour. This feature is a must for growing businesses.
- Inventory Management: If you have a product-based business, it is likely you have suppliers. Inventory tracking helps determine which of your supplies are still in stock and which need refilling. Some software have the ability to manage inventories across numerous warehouses.
- Mobile-Friendly: By being mobile-ready, business owners can easily access financial information at any time and from any location. Software with a mobile app allows you to manage your finances in real-time, in the palm of your hand.
- Reports: Out of all the accounting features, generating reports may be the most important. There are accounting software options that can instantaneously generate different reports for businesses. You can better comprehend your company's financial performance by using financial data from these reports.
- Cloud-Based Software: Online accounting software makes it easier for business owners to access their accounting data. They only need a stable internet connection and a device to access the software—no need to download and install programs.
Get Professional Bookkeeping Services at Unloop
Whether you have one small business or multiple businesses, bookkeeping can be challenging, especially if you're not well-versed in matters of accounting. Fortunately for business owners, Unloop can help you with your bookkeeping needs.
Unloop's bookkeeping services include:
- Providing businesses with monthly income statements, balance sheets, and cash flow statements.
- Using accrual accounting methods in creating financial statements.
- Providing businesses subscriptions to accounting software like QuickBooks Online and Xero accounting software.
- Unlimited consultation via Slack with our accounting professionals.
- Creating custom analytics and tailored KPIs for your business.
A bookkeeping system is a solid foundation for organized finances and accurate accounting. We hope this article helps you understand what a bookkeeping system is. For more online accounting services, book a call with Unloop and talk to an expert for free.