Keeping accurate financial records is important for any business, no matter how large or small it may be. When business owners and managers have precise, up-to-date financial information at their disposal, they can make good strategic decisions, spot wasteful spending, and protect their cash flow.
The process of creating and maintaining these accurate financial records is often referred to as accounting, but “bookkeeping” is a more specific term for the tasks related to this concept. Let’s discuss what bookkeeping is, the different forms it takes, and why it is important.
What is Bookkeeping?
Bookkeeping refers to the daily process of recording a business’s financial transactions in a ledger, book, or computer program. Bookkeeping is considered to be one aspect of accounting. However, while accountants may perform other duties related to a company’s transactions, such as risk analysis or financial forecasting, bookkeepers are primarily concerned with maintaining the accuracy and completeness of the organization’s financial data.
Two Methods of Accounting
Bookkeepers may record transactions based on the cash method of accounting, or the accrual method. In the cash method, financial transactions are only recorded when the money actually “switches hands” — for instance, when a customer actually pays his invoice, or the company pays a vendor.
In contrast, transactions that are recorded using the accrual method follow the date when the transaction takes place, regardless of whether money was exchanged. For example, when a company purchases a product but will pay for it next month, the transaction would be recorded on the date of purchase, not the date of payment.
Single-Entry vs. Double-Entry Bookkeeping
There are two basic types of bookkeeping: single-entry and double-entry.
Single-entry bookkeeping is comparable to balancing your personal checkbook. The single-entry technique involves a linear record of transactions such as cash, tax-deductible expenses, and taxable income. Only one entry is made for each transaction and is expressed either as a positive or negative amount.
This form of bookkeeping is virtually never utilized by larger corporations. Realistically, it is only suitable for small businesses that don’t field a high volume of financial transactions on a regular basis. While single-entry is easier than double-entry, it can’t effectively track important accounts, such as inventory.
Double-entry bookkeeping is by far the most common type of record-keeping in the business world. In this model, two entries are made for each transaction — one a debit, and the other a credit. The two entries always “balance each other out,” so that the total of all debits and credits would equal one another.
The double-entry system is based upon a simple principle: you never get something for nothing. That’s where debits and credits come into the picture. A company’s debits are basically its assets, whereas a company’s credits are its liabilities or losses. For example, imagine that you have two accounts: a cash account, and an inventory account. When you pay $500 to replenish your inventory, two things happen:
- Your cash account is credited (or decreased by) $500
- Your inventory account is debited (or increased by) $500
Double-entry bookkeeping makes it much easier to keep track of assets and liabilities, profit and loss, and any irregularities in the books.
Why Bookkeeping is Important
Without accurate Scottsdale & Phoenix Bookkeeping, there’s no way that business owners or managers would know the financial state of their company. Moreover, accurate bookkeeping is vital for company leaders who want to make sound business decisions or convince investors to fund key projects. In fact, in the grand scheme of things, the entire world economy relies on accurate bookkeeping.