The most important part of a business is bookkeeping, regardless if it is small or large. It includes the systematic reporting, classification, and administration of the company’s transactions concerning the finances of the business which makes it easier to see how the business is doing financially.
There is a lot that comes with bookkeeping. Effective bookkeeping will help every owner, whether you are just starting or you are managing an established business, comply with taxes and facilitate transparency.
In this article, learn the essentials of bookkeeping, its importance, and its benefits, alongside simple strategies that will ensure business growth and financial performance. Let’s jump straight into the action.
What Is Bookkeeping?
Bookkeeping is the skilled process of recording, classifying, and storing all monetary transactions in an ordered manner. These records serve the purpose of ensuring that businesses have a clear overview of their transactions like sales, income, expenses, and purchases.
It is vital for economic management because it enables companies to check their economic health and make accurate decisions in the future. That is an important segment while operating a business and should not be ignored.
The Fundamentals of Bookkeeping
To start, bookkeeping is the process of keeping a record of any economic activity happening in your business. These activities usually include receipts, payments, debts, and investments among others. Important elements of bookkeeping entail:
Recording Transactions: Using a systematic approach to financial transactions by recording any sales, expenses, or payments.
Maintaining Ledgers: Recording all transactions into specific accounts such as sales, rent, or utilities to allow for effective tracking and easier reporting.
Reconciling Accounts: Checking whether the records in the books tally with the bank records and any other financial records available to ensure there are no differences.
Producing Financial Reports: The process of creating documents such as Balance Sheets, Cash Flow Statements, and Income Statements, which outline the affairs of a business.
Who Needs Bookkeeping Services?
Bookkeeping is the process of maintaining business records; every entity engaging in business transactions requires bookkeeping services.
Small Businesses: Business owners use bookkeeping to monitor limited resources and make tax claims.
Corporations: Big businesses hire bookkeepers for their intricate financial activities to ensure that regulatory requirements are fulfilled.
Freelancers and Self-Employed: Keeping tabs on their expenses and income prepares them for taxes and other business responsibilities.
Nonprofits: These organizations need bookkeeping services to ensure that the funds allocated by the donors are spent and accounted for appropriately.
No matter the scale of operations, bookkeeping serves as a prerequisite to what accounts for clarity and continuity in finances.
Fundamentals of Bookkeeping
Bookkeeping vs. Accounting: What’s the Difference?
- Bookkeeping focuses on maintaining a detailed record of daily financial transactions. It involves documenting invoices, receipts, and other records to ensure every monetary movement is tracked.
- Accounting is the next stage of bookkeeping where raw data is turned into more meaningful information like reports for the management, strategies, and finances. A business depends on an accountant’s accurate records and analysis for forecasting, budgeting, and decision-making. Sometimes an accountant’s work may involve business consultation.
So, a streamlined approach to a company’s finances involves both these disciplines working together: bookkeepers and accountants.
Types of BookKeeping
Business owners usually fall into one of two categories when it comes to bookkeeping systems:
Single-Entry Bookkeeping:
- Utilizes a singular entry system of recording transactions in a journal or spreadsheet.
- Useful for micro businesses that don’t make a lot of transactions including freelancers and sole proprietors.
- These systems do not provide much financial insight but they are effective and affordable.
Double-Entry Bookkeeping:
- Each transaction has a debit and credit recorded into an appropriate account.
- Provides a detailed picture of the firm’s finances, including the balance of assets and liabilities.
- This method is suitable for those businesses that are on a growth trajectory because it lowers the chances of erroneous recording and increases overall financial accuracy.
7 Steps to the Bookkeeping Process
Step 1: Separate Your Business Expenses and Personal Expenses
To keep track of your business finances accurately and make the filing tax process smoother, it is important to maintain records for both your personal and business finances separately. For this reason, it is advisable to open a separate business bank account and a business credit card to maintain a clearer picture of your business finances.
Step 2: Select a Bookkeeping System
Bookkeeping refers to the process of tracking the finances of the business for which there are two primary methods: single-entry bookkeeping system and double entry. Your choice will depend on the nature of the business.
- Single entry bookkeeping method is more basic and is suitable for small businesses with greater use of transactions.
- Double entry bookkeeping method is where every transaction is recorded as both a debit and a credit making this method more sophisticated and less error prone. This is often recommended for expanding businesses.
Step 3: Choose an Accounting Method: Cash Based or Accrual Based
Accounting methods define the point at which your transactions will be recorded within the books.
- Cash accounting is more suitable since the method records expenses and income once the relevant payment has been made.
- Accrual accounting relates to transactions rather than the receipt or payment of cash. It is a more sophisticated technique that yields a true and fair view of financial performance and is generally mandatory for bigger firms.
Step 4: Choose the Right Tools
Every business has specific tools that should be adopted to facilitate accounting activities. If you do not have many transactions or are operating a smaller business, you may be able to manage all your transactions using Excel. For larger businesses, compared to Excel, Easybooks, QuickBooks, or Xero would help with digital bookkeeping allowing for easier tax management. Plans should be set for monitoring income, expenses, invoices, and taxes.
Step 5: Make Sure Your Transactions Are Categorized
Categorization is essentially the classification of each transaction within income and expenses, such as revenue from sales, utilities, or purchase of office supplies. Categorizations help to maintain organized financial statements. Furthermore, knowing how much has been spent in which category helps in easy tax filing. It makes identifying deductions easy.
Step 6: Choose a System for Storing Your Documents
It is important to have a proper way to store all documents like invoices and receipts. Receipts and invoices can be stored physically or digitally. Other businesses opt for document storage systems like Easydocs, Dropbox, or Google Drive, whilst some use accounting packages that have cloud storage. The managed records will save you trouble in the future for tax purposes or audits.
Step 7: Organize Your Deductions
These are expenses that help to reduce your taxable income, and having proper records of them will save you a good amount in taxes. Deductible expenses include; business trips, meals, equipment purchased, and office space. If properly tracked, you will worry less when tax season comes along since you will have more deductions.
Benefits of Bookkeeping for Small Businesses
Understanding your finances: Being organized with your records allows you to plan your expenses and know which areas are giving you profits and which ones are draining money.
Saving on taxes: Proper record keeping ensures proper timing on tax payments as well as saving on possible taxable income expenses.
Increased decision-making: With up-to-date reports you can decide the best business strategies to follow.
Better budgeting: Correct bookkeeping enables business owners to monitor people’s spending and set budgets accordingly.
Legal Compliance: Aids in complying with regulations at the local and federal level, which lowers the chance for penalties or audits.
Organizational Benefits: Structured financial data improves the chances of getting funding or investment as the business expands.
Common Challenges in Bookkeeping
Although bookkeeping plays a key role in a business, small business operators have some of these issues:
Limited Time: Bookkeeping is time-consuming and when done together with daily tasks, it can be tricky.
Limited Experience: Mistakes can be made if one does not have the requisite skills in bookkeeping.
Data Inaccuracy: There could be inaccuracies due to poor transaction recording practices.
Having a Record-Keeping Routine: When people are busy, they are less likely to make records which leads to hasty and erroneous work.
The Tax Maze: Managing taxes is difficult without a good guide.
Money Management: Poor cash management is one of the most critical failures in any business due to bad tracking.
Essential Tools for Bookkeeping
With more businesses operating online, bookkeeping has been simplified by digital technologies. Here are some common examples from my clients that are geared toward small business users:
Accounting Software: Everything is in one place with these computer programs. For example, Easybooks, Quickbooks, Xero, and FreshBooks provide online invoicing, accounting, and receivable services, as well as automate bank reconciliation.
Spreadsheets: Programs like Microsoft Excel or Google Sheets can be used for first-generation bookkeeping as long as templates are available in an editable format.
Receipt Management Apps: Expense management tools like Expensify and Shoeboxed assist in organizing and managing receipts.
Cloud-Based Systems: Tools like Wave and Zoho Books allow you to securely store your financial records online so that you can remotely access the information, and use it with other business software.
Payroll Management Software: Gusto and ADP help with managing a company’s payroll, employee benefits, and tax withholdings while also keeping up with labor regulations.
Inventory Management Systems: These are integrated systems that keep track of inventory as well as the financial transactions involved in purchasing and selling the stock while making sure both costs and stock levels are maintained adequately.
Should You DIY or Hire a Bookkeeper?
As a small business owner, you may ask whether you should do it yourself or you should employ an expert. Here’s a breakdown:
DIY Bookkeeping:
- This method is best for startups or businesses that do not have many transactions.
- This is the cheapest option however, it costs more time because you have to keep learning everything related to bookkeeping.
- A basic understanding of bookkeeping and reliable software tools are needed for this approach.
Hiring a Bookkeeper:
- It would be perfect for businesses that are expanding and have intricate financial data or have several sources of income.
- It reduces workload and increases precision so that you can concentrate on growing your business.
- Gives valuable information regarding business management and tax strategies.
Outsourcing to an Accounting Firm:
- A compromise where professionals lease for bookkeeping, providing a level of freedom restricted by employees.
- Gives freedom and more knowledge compared to working with a single employee.
Tips for Effective Bookkeeping
Select Wisely: Little errors and overall fiscal backlogs can be avoided if companies undertake regular financial record keeping by updating at least once a week.
Combine Personal and Business Accounts: Using separate accounts for business spending makes it easier to manage finances.
Collect and Organize Receipts: Being thorough will aid in tax preparation, financial forecasting, and record keeping.
Self-Bank Reconciliation: Use technology to reduce overspending time on invoicing, costs, and matching accounts.
Routine Observation: Monthly financial reviews and account balances can help monitor changes in expenses.
Know Your Key Reports: Monitoring income statements, balance sheets, and cash flow archives will directly show the company’s performance.
Monetary Sector Education: Managing receipts and sending payments are not enough, strategies or workshops can help to gain competitive advantages.
How EasyFiling Can Assist in the Bookkeeping Process
Apart from providing LLC formation and compliance, EasyFiling is also a reputable financial service firm that helps business owners of all scales with easy bookkeeping. Here are some of the features EasyFiling has that can help streamline your bookkeeping tasks.
1. End-to-End Bookkeeping Solutions
At EasyFiling, we can assist you with bookkeeping, starting with daily transactions, and ending with business financial report generation, all customized to however your business needs it. When tax or audit season arrives, we ensure that every expense has been recorded in your books so that you are prepared for them.
2. Automation with Cutting-Edge Tools
At EasyFiling, we utilize sophisticated bookkeeping tools and software that help us and you eliminate manual errors and ensure efficiency. The cloud-based nature of our bookkeeping services gives clients access to their financial records whenever and wherever ensuring that your data is safe while also aiding in collaboration.
3. Tax Compliance Made Easy
With EasyFiling, you will always have defined guidance to avoid the violation of both federal and state tax rules. Tax laws can be hard to navigate through but, EasyFiling makes it easier. Deductible cost recording, categorization, and other bookkeeping are all a part of the services we provide to make tax filing easy for our clients.
4. Customized Services for Small and Medium Businesses
EasyFiling helps fellow business owners by providing flexible bookkeeping service plans that can assist with the needs of every business, whether it is a startup, a freelancer, or already an established company.
5. Ongoing Financial Support
EasyFiling Services include bookkeeping but also offer valuable insights by combining ongoing financial information with business activities. Data analysis and reports are integral to the decision-making process whether it’s budgeting, planning investments, or increasing the scale of operations.
6. Integration with Other EasyFiling Services
Having EasyFiling as your service provider for business registration, compliance management, or even a virtual address means you can add bookkeeping services knowing that all of your business requirements will be handled on a single platform. Such integration saves time, cuts costs, and enhances user experience.
Why Choose EasyFiling for Bookkeeping?
Convenience: Business formation, compliance services, and bookkeeping are done all in one platform.
Accuracy: Financial records are maintained without error through expert oversight of automated tools.
Time-Saving: While your business is growing, we take care of the numbers.
Transparency: All steps are reported in detail to keep you up to date all the time.
With EasyFiling, keeping books is easier than how most people perceive it and becomes an organized procedure that focuses on the growth and financial sustainability of your business. Whether it is starting a new business or running an existing one, EasyFiling takes care of all your records.
Let EasyFiling take the stress out of bookkeeping so you can focus on what truly matters, running your business!
Nabin Adhikari
