It can also refer to the different recording techniques businesses can use. Bookkeeping is an essential part of your accounting process for a few reasons. When you keep transaction records updated, you can generate accurate financial reports that help measure business performance. This concept is important because each accounting transaction impacts at least two accounts.
In this day and age, the providers you contract with don’t need to be in the same city, state or even time zone as you. Remote work has expanded across nearly every field, including bookkeeping. If you find someone who is a good fit for your business needs, it doesn’t matter if they are in California while you work from New York.
Two Types of Bookkeeping Methods
If you use cash accounting, you record your transaction when cash changes hands. One of the first decisions you have to make when setting up your bookkeeping system is whether or not to use a cash or accrual accounting system. If you are operating a small, one-person business from home or even a larger consulting practice from a one-person office, you might want to stick with cash accounting. The financial transactions are all recorded, but they have to be summarized at the end of specific time periods. Other smaller firms may require reports only at the end of the year in preparation for doing taxes.
If the IRS ever conducts an audit on a company, it looks at a company’s accounting records and methods. Furthermore, the IRS requires taxpayers to choose an accounting method that accurately reflects their income and to be consistent in their choice of accounting method from year to year. From payroll taxes to managing invoices, efficient bookkeeping smooths out the process of all your business’s financial tasks and keeps you from wasting time tracking down every dollar. At least once a week, record all financial transactions, including incoming invoices, bill payments, sales, and purchases.
Accounts Receivable & Accounts Payable
Many small companies don’t actually hire full-time accountants to work for them because of the cost. Instead, small companies generally hire a bookkeeper or outsource the job to a professional firm. One important thing to note here is that many people who intend to start bookkeeping methods a new business sometimes overlook the importance of matters such as keeping records of every penny spent. Assets are what the company owns such as its inventory and accounts receivables. Assets also include fixed assets which are generally the plant, equipment, and land.
You record transactions as soon as they’re invoiced or billed, even if the money isn’t in your metaphorical pockets yet. Centuries ago, businesses would record their financial transactions in a physical book called the general ledger (GL). Using the data you gain from keeping a ledger, your next step will be to generate and prepare financial reports for analysis. The major reports to include are the profit and loss, the balance sheet, and a cash flow analysis. Additionally, the aged accounts receivables and aged accounts payables reports are helpful in knowing which customers have not paid and which vendors are yet to be paid. These reports will help you gain greater insights into the financial health of your small business.
What Do You Need to Set Up Bookkeeping for Your Business?
Rent, business insurance, and software subscriptions are expenses you pay before receiving the benefit of the service—these are prepaid expenses. Proper bookkeeping also allows you to determine the areas within your company that could benefit from improvements. If you’re a small business owner, it’s necessary to set projections and forecast the future of your business.
Start by reaching out to other business owners for recommendations, searching online for providers and checking out reviews on Google or Yelp. If you don’t feel comfortable with a freelancer, there are many firms that offer bookkeeping services as well. Bank reconciliation is the process of finding congruence between the transactions in your bank account and the transactions in your bookkeeping records. Reconciling your bank accounts is an imperative step in bookkeeping because, after everything else is logged, it is the last step to finding discrepancies in your books. Bank reconciliation helps you ensure that there is nothing amiss when it comes to your money.