Many financial transactions occur daily in your company in finance and accounting services. As a result, you may be required to provide documentation to the appropriate authorities at the end of each fiscal year (or any other relevant period). Therefore, small or large, every business needs a bookkeeping system to keep track of transactions without human intervention.
What is a bookkeeping system, and why is it important?
Every day, the financial transactions of your business are recorded in a set of organized accounts by a bookkeeper. It can also be used to define the various recording methods that companies employ.
For a variety of reasons, bookkeeping is critical to your accounting process. For example, you can use accurate financial reports to measure your business’s performance if you keep transaction records up to date. Tax audits may also benefit from detailed records. Bookkeeping outsourcing services play a vital role for organizations in such tasks.
Types of Bookkeeping Systems
In Finance and Accounting services, single-entry and double-entry bookkeeping are the two main types of accounting software.
Single-entry bookkeeping system
A single-entry bookkeeping system would be extremely beneficial if you’ve just started a small business. It keeps track of all business transactions, including cash disbursement, cash receipts, and purchase and sale transactions. This type of system is a more informal system for small business transactions.
The bookkeeper commonly uses this system to keep track of daily cash receipts and payments, as well as monthly totals. One account is affected by every transaction in a single-entry bookkeeping method. Every transaction would be recorded in both accounts if it were a double-entry bookkeeping scenario.
The cash receipt or cash deposit account should only be updated with the amount received if a sale is made. The corresponding sales account entry will not be made in a single-entry bookkeeping system.
Thus, it doesn’t provide a complete picture of the financial health of the company’s various systems. A double-entry accounting system can help you keep track of all the systems involved in a transaction.
Double Entry Bookkeeping System
Double-entry accounting. Mostly, the bookkeeper or accountant in any business uses this system. The bookkeeper uses this system to keep track of all of the company’s transactions. Debit and credit are introduced in this system. An entry of debit in one accounting system is almost always accompanied by a credit entry in another or more than one accounting system.
An accountant may be required to record more than one credit entry in the bookkeeping ledger. It is possible to determine an organization’s financial standing and health using the accounting information provided by double-entry accounting systems.
In the bookkeeping System, how should entries be recorded?
With financial statements like balance sheets (income and cash flow), you can see where your business stands and how it’s doing compared to your expectations. You must keep accurate records to ensure that these reports accurately reflect the business’s activities and achievements. When reconciling your accounts, having current records is a huge asset.
Cash register tapes and purchase and sales orders are all good places to start when recording transactions. You can use journals, ledgers, and the trial balance to record the transactions once you’ve gathered the necessary paperwork. A cash register is all you need to run a small business. Consolidated financial statements can be generated from this data.
Cash registers
Transactions are entered into a cash register, which is a computerized device. Cash registers are commonly used in retail establishments to keep track of sales. The cashier takes the money from the buyer and returns the remaining balance. Single-entry cash accounts are used to record the money collected and returned. Transaction receipts can be easily recorded in your sales journal using cash registers.
Any business, no matter how big or small, has a cash register. However, single-entry bookkeeping and cash-based transactions aren’t usually used as primary methods of recording transactions. As a result, they’re ideal for startups and micro businesses but overly simplistic for large corporations.
The Journal
The journal is referred to as the book of the first entry. It is the first place a company records all transactions in chronological order. There are two ways to keep a journal: physical (like a book or diary) or digital (like an online journal) (stored as spreadsheets or data in accounting & bookkeeping software).
Each transaction’s date accounts credited or debited, and dollar amount are all listed here. When it comes to the end of the fiscal year, the journal isn’t usually checked for balance. An accurate journal is one of the best cultivating habits because the ledger must be balanced. Double-entry bookkeeping is made easier with the help of this form.
The ledger
A ledger is a collection of financial records. Alternatively, the book of the second entry is known as that. You enter transactions in the journal and then move them to the ledger, where they are categorized by account. Assets, liabilities, equity, income, and expenses are listed in alphabetical order in the transcripts. Physical or electronic spreadsheets can be used to keep track of the ledger.
The chart of accounts in a ledger contains a list of all the accounts’ names and numbers. Most charts follow the same account numbering scheme as the transcribed documents.
Auditor scrutiny of ledgers means that they must always be balanced at the end of the fiscal year. The term “debit balance” refers to an account where the total debits exceed the total credit. In a credit balance, there is more money in the bank than in the account. In double-entry bookkeeping, each transaction affects at least two sub-ledger accounts, so the ledger is critical.
Trial balance
The ledger entries are compiled and summarized to produce the trial balance. The trial balance is a sort of accounting audit. There are assets, liabilities, equity, income, and expenses with the final account balance listed.
An accountant typically generates the trial balance to determine the current state of your company’s finances and the degree to which your books are balanced. The ledgers and journals can then be cross-checked. The trial balance makes it easy to spot discrepancies between the debits and credits. Though not always error-free, it is a good starting point.
An incorrect trial balance can be caused by a miscalculated or inaccurate journal entry in the ledger. Therefore, early detection and correction of errors on the ledger are preferable to waiting until the end of the fiscal year for a trial balance.
The financial reports
The generation of financial statements is the next and, arguably, the most critical step in bookkeeping. The information in these statements is compiled from your daily entries. They give you a long-term picture of how well your business is doing and highlight areas for improvement. The cash flow, balance, and income statements are the three most important financial statements that every company should be familiar with.
The statement of cash flows
The statement of cash flow is what it sounds like. It’s a financial statement that shows where your company’s money is coming from and going. When you’re able to see how well your company manages debt and expenses, you’re able to show investors. You can see if you have enough money to run a long-term, profitable business by summarizing this data.
Methods of Bookkeeping System
There are two ways to track your finances. Manual bookkeeping and computerized bookkeeping systems are two different ways of doing business. With bookkeeping outsourcing services, mostly it will be a computerized bookkeeping system.
Manual bookkeeping system
Using a journal book or a ledger book, the bookkeeper will keep track of the various accounting entries related to the company’s business transactions in manual bookkeeping. Small business owners still prefer manual bookkeeping because it is more cost-effective and can be used to keep track of less complicated transactions.
Computerized bookkeeping system
Computerized bookkeeping makes it much easier and faster for the bookkeeper to keep track of complicated business transactions. The accounting entries are typically done using an accounting software system. The ease with which reports and calculations can be generated in this system, as opposed to manual bookkeeping, is a significant advantage. As a result, it is achievable to perform complex calculations quickly and accurately.
Conclusion
Your company’s success is fueled by accurate bookkeeping from reputed Finance and Accounting Outsourcing Companies. It is a fundamental accounting process without which it would be nearly impossible to develop strategies to improve core areas of your business. However, even though bookkeeping is critical, choosing the wrong system can lead to problems.
Using paper diaries and journals as a manual method is still an option for some businesses. A shift to digital may also be advantageous for small businesses, especially as technology advances. Several bookkeeping outsourcing services are available that can perform your bookkeeping services effectively.
Photo by Austin Distel on Unsplash
