Bookkeeping is an essential part of doing business. Our bookkeeping guide will look at the basics of bookkeeping and help beginners understand this crucial process more.
Beginner’s Guide to Bookkeeping
Bookkeeping refers to the process of tracking financial transactions by businesses. Financial transactions are reported along with supporting documentation. The documentation used could be the purchase order, invoice, receipt, or similar financial record of the transactions.
Bookkeepers can use journals, spreadsheets, or accounting software to track these financial transactions. Accounting software, which we’ll get into later, is a popular choice because it makes bookkeeping for beginners easier. Bookkeepers should understand the chart of accounts and how to utilize credit and debit to balance the books for an organization.
Single vs. Double Entry Bookkeeping
Single-entry bookkeeping is for small businesses without much activity. This form of bookkeeping is similar to what you do at home to track personal finances. It involves keeping records of transactions such as cash, expenses, and taxable income.
Single-entry bookkeeping is when you only make one entry per transaction like you would with a personal check register. You track entities in one column, marking positive or negative amounts. Single-entry bookkeeping involves a two-column ledger. Income goes in one column, and expenses go in the other. It is still considered “single-entry” as you only record each transaction once.
Single-entry bookkeeping isn’t suited to large businesses and corporations. This accounting method doesn’t account for accounts receivable, accounts payable, and inventory. Single-entry bookkeeping is suited for tracking net income, but it can’t be used to create a full balance sheet and track asset and liability accounts.
Most businesses use double-entry bookkeeping for accounting. This accounting method’s main features are that each account has two columns, and transactions are tracked in two accounts. Bookkeepers make two entries for every transaction – a credit in one and debit in another.
One example of double-entry bookkeeping would be if a business wanted to pay off its creditors. The money would be removed from the cash account in the form of debit. The double-entry bookkeeping then reduces how much the business owes to the credit in the form of credit.
Double-entry bookkeeping is better suited for tracking asset and liability accounts. This bookkeeping method offers other benefits, including making it easier to track loss and profits across complex organizations, easily find errors and fraud, and prepare financial statements directly.
Balance Sheet Basics
The balance sheet is a critical part of bookkeeping basics 101. The balance sheet offers a quick glimpse of the financial standing of a business for a specific period. Balance sheets include assets, liabilities, and equity.
The assets and liabilities on the sheet are divided into short-and-long-term obligations, including checking, government securities, and money market cash accounts. A balance sheet is one where the assets equal liabilities plus owner equity. Assets are everything the business owns with monetary value. Liabilities are the claims creditors have on the business assets.
Balance sheets help small business owners come to grips with the financial strength and standing of their business. Could the company stand to expand? How well is the company withstanding the ebbs and flows of cash flow? Should the company take immediate steps to increase the amount of available cash?
Balance sheets make it easier to spot and utilize trends, particularly trends with payables and receivables. Balance sheets are among the basics of bookkeeping and are a vital part of reporting to banks, vendors, investors, and other potential lenders.
Income Statement Basics
Income statements are next in the list of bookkeeping basics 101. These statements offer a basic summary of business expenses and revenues over time.
Income statements start with the revenue businesses make by selling products and services to customers. Given that revenue is at the top of the statement, some call it the “top line.” The income statement also includes other items with increased net revenue, mentioned at the bottom of the sheet. That net income sits at the bottom of the sheet is why some say that revenue is the “bottom line” of companies.
These items are all weighed against the company revenue to generate the net income for the business.
The lines between these two points include the cost of goods sold, which accounts for manufacturing costs. Income statements also include administration expenses and other general expenses, depreciation, internet costs, and taxes.
Cash Flow Statement Basics
The idea that “cash is king” certainly applies to businesses. Companies need cash to pay bills, buy inventory and assets, pay employees, and expand the business when the time comes. Business owners can’t even pay themselves without any cash.
The cash flow statement reports all cash flowing into – and out of – the business. This sounds a lot like an income statement, but the cash flow statement offers unique benefits.
The reason you need both is that you could see an income statement that shows you’ve made record profits, but when you take a look at your account, you find nothing there. This situation is more possible than you might think.
You could make a lot of money but not have any if you sell products and services on credit. It can also happen if you don’t accurately track cash flow for your business.
These sorts of extreme situations are rare in real life, but the example should explain why cash flow statements are an integral part of bookkeeping for beginners. These statements show what your business is doing with the money accounted for in the income statement.
Cash vs. Accrual Basis Accounting
Cash and accrual basis accounting are the two primary forms of bookkeeping. The critical difference between the two is when one tracks income and expenses. Cash accounting is more immediate, while accrual accounting focuses on expected income and expenses.
The accrual method accounts for revenue as soon as it is earned. The income is recorded before your business receives the money. The accrual method accounts for revenue when products or services are delivered with the expectation money will exchange hands in time. Bookkeepers record expenses for goods and services even though the company hasn’t received the money yet.
Cash basis accounting reports revenue only when that money comes in. Expenses are recorded when cash is paid out. The cash method is better suited for personal finances and small businesses.
Bookkeeping software makes bookkeeping for beginners much easier. This software is a must for anyone running their own business. While standalone platforms exist for invoices and taxes, bookkeeping software tends to be more comprehensive.
QuickBooks, FreshBooks, and Sage Business Accounting are three of the most popular choices for bookkeeping software. Some software programs are free, while others have paid subscriptions. Paid software generally has more features and is better suited for people who see a lot of business or need a lot of help with bookkeeping.
These software programs have sections for income statements, cash flow statements, tax calculations, and more. It’s impossible to overstate how helpful all this information is when you need it.