What Is Bookkeeping? A Detailed Guide of Everything You Need To Know

Take control of your business finances with competent bookkeeping

As a small business owner, you may be wondering what is bookkeeping and why it's so essential for the success of your enterprise.

Bookkeeping involves keeping track of all your financial data, and bookkeepers organize and classify the various transactions during the course of the financial year so that you can compile your financial records.

They file your financial documentation, ensure that your books of account are up to date, and complete bank statement reconciliations.

Key Takeaways

• Bookkeeping involves capturing and recording transactions.
• Accountants and bookkeepers fulfill similar roles.
• Bookkeepers focus on day-to-day data entry and financial transactions.
• A competent bookkeeper can prevent many problems in a small business. 
• It’s not necessary to have a degree to become a bookkeeper.
  

What Does A Bookkeeper Do?

Bookkeepers fulfill a wide range of tasks depending on the needs, size, and the industry in which a business operates.

A small business may use simple spreadsheets or manual data entry to keep track of their transactions, but it is more usual to use specialized accounting software.

Two popular accounting packages that many businesses use are Xero and QuickBooks, which have advanced features that make bookkeeping easier.

Daily, bookkeepers record financial transactions such as payments to creditors and receipts from debtors and maintain the stock function.

With the advent of advanced bookkeeping packages, a lot of the bookkeeping work is done automatically by pulling bank statement transactions directly into the Ledger.

Bookkeepers may also perform a payroll function where they maintain timesheet information, produce salary and wage registers, and prepare tax submissions.

Bookkeepers identify discrepancies between a business's financial records and ensure the accuracy of the financial information.

Roles & Responsibilities Of Bookkeepers

Depending on the size of the business, as well as the skill and experience of the bookkeeper, they fulfill a variety of roles within a company.

At the most basic level, a bookkeeper ensures that accounts payable are all correctly captured and that amounts due to the company are paid on time.

They will maintain an age analysis where each debtor's account balance is displayed and how much is outstanding on their account.

They might also be involved with the creditor's function, also known as accounts payable, ensuring that money owed to suppliers is paid on time.

As bookkeepers become more experienced, they may move into management roles, where they are responsible for preparing reports and financial statements.

Bookkeepers with a formal education and a diploma or degree are best suited for the financial reporting function.

However, many businesses employ bookkeepers with minimal formal education who have many years of industry experience and can fulfill the role.

A financial department with a skilled and diligent bookkeeper helps to keep the business running smoothly and maintain a sound accounting system.

What Is Bookkeeping

Different bookkeeping methods are used in business, depending on the industry's requirements, annual revenue, and the norms in that particular geographic area.

Modern bookkeeping is predominantly double entry and consists of a manual system or a combination of manual and computerized accounting packages.

No matter which system is used, the basic accounting terms remain consistent across the board so that there is continuity and standardization of reporting.

Double Entry Bookkeeping

A small business may prefer to run its double-entry bookkeeping system on a cash basis or use the accrual-based accounting system if it benefits them.

In cash-based accounting, all entries into a business's financial records are made when monies are received or paid out.

Accrual-based accounting is used in larger organizations, and transactions are recorded when an invoice is created or received.

This gives rise to both debtor's and creditors' balances and requires the bookkeeper to reconcile receipts and payments regularly to maintain an aged account analysis.

Cash-Based Accounting

Businesses like restaurants and small retail operations may be more suited to a cash-based accounting system as most transactions are handled in cash.

The Internal Revenue Service allows businesses to choose which accounting system to use, but certain limits exist based on the latest tax code.

If a business makes more than $25 million annually over three years, it must use the accrual accounting basis for the tax code.

Accounting Vs. Bookkeeping: What Is The Difference?

There is some confusion about the differences between accounting and bookkeeping and the distinction between an accountant and a bookkeeper.

Bookkeepers are usually in a less senior position within the financial department and are usually less qualified than accountants.

Bookkeepers spend most of their time capturing daily financial transactions from business operations, while accountants are more concerned with the reporting function.

Accountants generally compile monthly management accounts and financial statements and assist auditors with the business's annual financial statements.

Accountants will also prepare budgets, cash flow statements, and variance reports to present to management monthly or quarterly reports.

Depending on the type of business, an accountant may be qualified as a certified professional accountant or a certified management accountant.

Overviewing Financial Transactions

Bookkeepers generate the documentation and a company's financial transactions required to understand a company's financial position and identify any current or future potential financial problems.

To ensure that the financial records are correct and up to date, bookkeepers usually follow a variation of the following steps:

• Every financial transaction is documented as soon as possible; these include payments and expenses.
• The bank account is entered into the financial records either manually or electronically.
• When orders are placed, the bookkeeper ensures that invoices are sent and payments are processed promptly.
• Once all the transactions are processed, the balance sheet income statement and cash flow statement are prepared for management.
• To ensure the records are accurate, subsidiary ledger and balance sheet item reconciliations are completed on a schedule.
• Bookkeepers also conduct daily banking activities.
• Many companies employ outside payroll help, but bookkeepers can ensure that salaries and wages are paid on time.

Bookkeepers follow a carefully planned schedule to ensure that records are updated weekly or monthly to provide a clear picture of an organization's financial situation.

Creating Financial Statements

A company's bookkeeper may produce monthly financial statements in conjunction with the accountant or financial manager, who may oversee the final result.

Bookkeeping software has simplified this task by providing easily accessible templates to produce income statements and balance sheets from the company's trial balance.

The accuracy of the financial statements depends on the bookkeepers' ability to capture all of the financial information timeously and accurately.

The business's financial position can only be accurately assessed if the Balance Sheet and Income Statement are properly drawn up using accurate information.

Bookkeeping Vs. Accounting Software

Accounting software packages like SOHO, Freshbooks, Sage, Quickbooks, and Xero have automated most double-entry bookkeeping functions and are available as online services.

For instance, recording receipts and payments in the bank account is now very quick since bookkeeping software can import transactions directly from the bank.

The bookkeeper reconciles the cashbook and bank statement, ensuring that each transaction is correctly allocated and that there are no errors in the amount reflected.

Reconciliations Are Quick

Reconciling bank accounts is much quicker than it used to be, and bookkeepers have more time to focus on other bookkeeping tasks.

Accounting packages have a built-in ability to produce various financial reports every month using pre-made templates and advanced report-building tools.

This allows bookkeepers to create the reports their managers need without involving more expensive accountants with the knowledge and skills to prepare financial statements.

Software Helps With Strategic Decisions

All bookkeeping software follows basic accounting principles, ensuring consistent reporting across the entire economy.

Accountants use the software to advise leadership on making strategic financial changes that save the company money or generate more profit.

For certain larger businesses, like publicly listed entities and non-profit organizations, accountants must also be registered certified public accountants (CPAs).

Why Is Bookkeeping Important?

Business bookkeeping is essential for various reasons, including the ability to budget accurately, help in filing taxes, and maintain organized records.

For larger entities, it enables proper reporting to investors, assists in setting and monitoring business goals, and ensures compliance with government regulations.

If you do not ensure that your double-entry bookkeeping is adequate, you may end up with a variety of problems, including:

• Cash flow problems that lead to creditors and staff not being paid.
• Skipping bank reconciliations so that you miss crucial payment deadlines.
• Mixing personal and business finances results in incorrect reporting to the IRS.
• Not classifying employees correctly so that you end up being penalized.
• There are no backups, which could lead to financial data loss and expensive recovery options.
• Improperly categorizing expenses leads to the IRS disallowing claims.
• Disorganized financial records that lead to costly information recovery.
• An incorrect or inflated budget could cause you to lose your business.
• Not tracking expenses so that you don’t price your products or services correctly.
• Poorly configured accounting packages lead to inefficiencies and mistakes.
• Throwing away receipts prevents you from claiming expenses against income.
• Improper or no records management attracts penalties from the IRS.
• Filing taxes late so that you attract interest and penalties.
• Sales are not being correctly accounted for.
• Failure to detect fraud.
• Ignoring paperwork could lead to expensive mistakes later.
• A lack of management reporting leads to poor decision-making.
• Missed deadlines, leading to penalties and legal problems.
• Missed payments lead to cashflow problems or legal action.

These are just some of the many grave problems businesses may have if they fail to keep proper accounting records overseen by qualified bookkeeping staff.

Bookkeeping Career Overview

Upskilling to become an Accountant, Certified Public Accountant, or Financial Accountant allows bookkeepers to advance their careers.

These professions go beyond bookkeepers' transactional and maintenance activities and provide financial insights based on the data they collect.

However, everyone has to start somewhere, and bookkeepers can start in the industry without any official qualifications and learn on the job.

As they become more experienced and skilled, they can apply for more senior jobs or enroll in various courses to improve their job prospects.

It is anticipated that between 2022 and 2032, the number of bookkeeping, accounting, and auditing clerks employed will decrease by 6%.
However, over the next ten years, an average of 183,900 opportunities annually for bookkeeping, accounting, and auditing clerks will arise, even though employment is dropping.

The Bureau of Labor Statistics anticipates that all those positions will arise from the need to replace employees who change careers or leave the workforce for other reasons, such as retirement.

Bookkeeping For Small Business

A small business accounting tip is that they should rely on a professional accountant to assist in selecting the most appropriate accounting package.

When selecting accounting software, your bookkeeper will consider factors like the business type, payroll requirements, invoicing needs, and integration capabilities.

They will then help you choose an accounting method - deciding between a cash-based or accrual accounting method based on your business's revenue and inventory involvement.

IRS Requirements

Each method has differences and implications for financial reporting and compliance with accounting standards, specifically as it applies to the IRS requirements.

You'll need to maintain detailed records of all business expenses, including date, amount, and purpose, to ensure accurate financial reporting and compliance with tax regulations.

This record-keeping is best accomplished by preparing a bookkeeping schedule to track financial transactions, reconcile accounts, generate financial reports, and prepare tax filings.

Adhering To A Schedule

Ensure your accounting method pays bills and invoices timeously, utilizing accounting packages or establishing manual processes to track and manage bill payments and invoicing deadlines.

Open separate bank accounts for personal and business expenses to avoid commingling funds and simplifying bookkeeping and income tax submissions.

Establish a salary for yourself as a business owner and maintain proper documentation of personal withdrawals or reimbursements from the business.

This practice helps maintain accurate financial records and separates personal and business finances – avoiding trouble with the IRS later on.

Bookkeeping For Corporate Clients

Bookkeeping for larger corporate entities is very similar to that of small businesses and incorporates the same four basic steps.

1.  Examine and categorize financial transactions into appropriate accounts.
2. Composing unique journal entries that debit and credit the relevant accounts.
3. Data entry into ledger accounts.
4. Modifying entries at the conclusion of every accounting cycle.

When accounting for startups, it is imperative that this accounting methodology is followed, especially if there is outside funding.

A business's finances may very well depend on a double-entry bookkeeping system that produces an accurate and up-to-date profit and loss statement.

Freelance Bookkeeping

With the advent of the gig economy, many employees chose to work from home, providing a new way to earn an income with their skills.

While a professional accounting qualification helps secure bookkeeping jobs, having a certificate or degree is unnecessary to be employed as a bookkeeper.

Many of the largest gig economy companies employ overseas bookkeeping and accounting staff at much lower rates than US residents require.

This created a shift in the global pool of bookkeeping talent, with India and the Philippines benefiting from the lower rates charged by their citizens.

How Much Do Bookkeepers Make?

A survey revealed that the median salary for bookkeepers in the USA is $44,260, with the highest paid earning $53,505 and above.

These salaries are based on their years of experience, the state in which they live, and the specific industry in which they plan to work.

When compared to bookkeeper salaries in other countries, it becomes evident that to be competitive, local bookkeepers need to be well-qualified and experienced.

For instance, a quick survey of bookkeeper salaries in the Philippines on Glassdoor revealed that entry-level positions pay $800 monthly.

How Do You Become a Bookkeeper?

Many bookkeepers started in junior roles and slowly worked their way up over time without securing a higher accounting education.

However, a bachelor's degree in accounting or a certificate will help you secure a better-paying job as a bookkeeper with excellent prospects for advancement.

It would be best if you considered which area of accounting you wish to pursue and then enrolled in a course specific to that role.

If you wish to become a CPA, then a degree is mandatory, as is a certain amount of time spent at an audit and accounting firm getting trained in the profession.

Another alternative is to become a CIMA-qualified accountant focusing more on management accounting than auditing, which you can accomplish while employed as a bookkeeper.

Summary

Now that you better understand what bookkeeping is and why it's essential for businesses, it's worth finding a competent accountant to process your books.

If you plan on pursuing a career in bookkeeping, acquiring a degree or certificate from an accredited organization will help you secure a lucrative position.

Bookkeepers can make or break a business, and appointing a qualified bookkeeper will ensure that you capture your business's financial transactions correctly.