What is Bookkeeping and Why Is It Crucial To Your Business?

Bookkeeping is comprised of a variety of functions...

and is a key component to any business. In summary, bookkeeping is a summation of daily business transactions allocated into specific income, expense, asset and liability accounts.

The Basics

The foundation of any accounting process and system is the Chart of Accounts. The chart of accounts lays out the type of accounts that all of the business transactions will be allocated to over the life of the business. Every business will have a chart of accounts unique to their business, although many accounts are common to a variety of business.

Every business is unique in its own way and their chart of accounts will reflect this. For example, an accounting firm may have two types of "Income" accounts: "Personal Tax Income" and "Corporate Tax Income". On the other hand, a software company will have different types of "Income" accounts - anything from "Subscription Income" to "Licensing Income" to "Support Income".

The same goes for a variety of expenses. Although many costs are common across many businesses (for example, payroll and office expenses), each business will have its own unique expenses that they will establish in their chart of accounts (for example, a logistics company may have "Fuel Expenses" meanwhile a law firm may not).

Some thought should be put in before you establish a chart of accounts for your business, but that being said, all accounting systems will allow you to edit, add and remove previous accounts as your business evolves.

Some typical accounts found in a Chart of Accounts are listed at the bottom of this blog post.

Bookkeeping

The bookkeeping process consists of recording daily business transactions and allocating them to the accounts that they relate to. For example, if a business cut cheques for payroll on a certain day, each cheque is a transaction and each amount would be recorded as a payroll expense. The same goes for each transaction on a business credit card that relates to fuel or software or supplies.

Over the period of a month, quarter and year, the sum of all of these transactions make up the balance sheet and income statement reports for the business. For example, if you recorded a variety of "Supplies Expense" over the year, you will have one number at the end of the year showing you the total of your "Supplies Expense" for the year.

As a business owner, this is crucial because you can track you business metrics month-over-month and year-over-year to understand where you're making money and where your expenses are too high. The quicker the bookkeeping can get done, the quicker you will have that information. This information is a key driver when it comes time to important business decisions. How can you make a business decision without knowing where you stand?

Online Bookkeeping

Traditionally, bookkeepers would have to manually input every transaction from multiple bank and credit card statements into an accounting system. This could take hours, if not days and even weeks. Many business owners would only have access to historical information since the bookkeeping process would be drawn out.

With the advent of the internet and cloud technology, the mundane tasks related to data entry have almost become eliminated. Online accounting software can connect directly to your online bank and credit card accounts and download your transactions automatically. All that's left to do is allocate the transactions to the appropriate chart of accounts. The bookkeeper's role changes from data entry to an individual who can complete the bookkeeping in a quarter of the time and have an intelligent conversation about the business with the owner.

Online accountants with expertise in cloud accounting software are able to set up businesses up with the correct online and cloud accounting systems so that the business owners have real-time information and access to their books from anywhere in the world with internet access.

Bookkeeping Functions

Typically, bookkeeping functions relate to the recording of daily business transactions into accounting software. Depending on the role and expertise of the bookkeeper, added functions can include:

> Payroll

> Generating invoice and Accounts Receivable collections

> Generating bills and cutting cheques to vendors

> Posting manual journal entries

Final Words

A successful business owner will have a strong relationship with their bookkeeper. The bookkeeper provides them with reports that outline the financial health of their business. Organized records are essential in providing clarity over business performance and it is crucial for every business owner to do their due diligence before hiring a bookkeeper.

Common accounts found in a Chart of Accounts

Income and Revenue:

> Income from Services or Product Sales

> Interest Income

Expenses/Cost of Sales:

> Supplies

> Office

> Auto (fuel, parking, repairs and maintenance, etc.)

> Payroll

> Meals and Entertainment

> Cost of Goods Sold or Cost of Sales

> Rent