bookkeeping explained

It’s also worth noting that while all CPAs are accountants, not all accountants are CPAs. Finding the right person to suit your business’s needs may also take some time and effort. Since bookkeeping is a more straightforward process than accounting, it is something that many people can (and do) opt to take care of themselves. As your business grows and you begin making higher profits, hiring staff and handling more transactions, however, it may make sense to outsource the details of bookkeeping to someone else.

bookkeeping explained

Without accounting, investors would be unable to rely on timely or accurate financial information, and companies’ executives would lack the transparency needed to manage risks or plan projects. Regulators also rely on accountants for critical functions such as providing auditors’ bookkeeping explained opinions on companies’ annual 10-K filings. In short, although accounting is sometimes overlooked, it is absolutely critical for the smooth functioning of modern finance. Tax accountants overseeing returns in the United States rely on guidance from the Internal Revenue Service.

Business stage

Often, office management tasks like customer billing, paying vendors and payroll are considered to be bookkeeping tasks. Although accounts receivable, accounts payable and payroll do impact your books, some of these tasks can be managed by a person in your company other than your bookkeeper. Others, like payroll, can be outsourced to independent companies that specialize in the task. Some bookkeepers focus solely on “write up” work, which basically consists of compiling the books quickly, usually for tax preparation purposes. Other bookkeepers provide “full-charge” services and can even serve as a financial controller for your company. If your company is larger and more complex, you need to set up a double-entry bookkeeping system.

The single-entry bookkeeping method is often preferred for sole proprietors, small startups, and companies with unfussy or minimal transaction activity. The single-entry system tracks cash sales and expenditures over a period of time. Business transactions can be recorded by hand in a journal or an Excel spreadsheet. To make things easier, many companies opt to use bookkeeping software to keep track of their financial history. Bookkeeping traditionally refers to the day-to-day upkeep of a business’s financial records.

Methods of bookkeeping

The most important parts of doing your own bookkeeping are staying organized and keeping track of the details. But if you have the time to dedicate to updating your books regularly, doing your own bookkeeping may be feasible. You may be hoping for the best and have a few college courses in your back pocket. Even with these tools, you may not have the expertise you need to handle the responsibilities of a bookkeeper. Now that you’ve got a firm grasp on the basics of bookkeeping, let’s take a deeper dive into how to practice good bookkeeping. There’s no one-size-fits-all answer to efficient bookkeeping, but there are universal standards.

  • The chart of accounts may change over time as the business grows and changes.
  • While the basics of accounting haven’t changed in over 500 years, the practice of bookkeeping has.
  • A Practical Guide was first published in April 1988, with the help of
    the Committee on Professional Ethics of the New York County Lawyers’
    Association.
  • Another easy to use option that’s perfect for self-employed entrepreneurs who need an affordable accounting solution is Neat.
  • This content is for information purposes only and should not be considered legal, accounting, or tax advice, or a substitute for obtaining such advice specific to your business.

Let’s say a client just paid their invoice online, or money was withdrawn from your checking account to pay a utility bill. Most business owners opt for small-business accounting software to help automate the process and reduce the likelihood of error. Accounting software allows you to do basic tasks such as tracking inventory, invoicing and payments, and generating reports on sales and expenses. It’s useful for small businesses and freelancers who don’t have the resources to hire an accountant or bookkeeper. Besides, this frees up time so you can focus on running your business smoothly.

Why Are Businesses Begging For My Services?

You can outsource your accounting work to outside professionals who specialize in bookkeeping and tax preparation. Outsourcing can offer many advantages because it allows you to take advantage of specialized skill sets that may not be available when hiring someone in-house. This is the act of tracking and reporting income and expenses related to your company’s taxes. You don’t want to be in a situation where you have to pay more income tax than is normally required by the Internal Revenue Service (IRS).

The information can then be consolidated and turned into financial statements. Both a cash and accrual basis can work with single- or double-entry bookkeeping. In general however, the single-entry method is the foundation for cash-based bookkeeping. Transactions are recorded as single entries which are either cash coming in or going out. It’s important to note that not all lenders and investors require certified or audited financial statements. However, it’s still a good idea to ask an accountant to review your bookkeeper’s financial statements for accuracy and completeness prior to submitting them to a third party for consideration.