Understanding Bookkeeping Basics: A Business Owner’s Guide
August 27, 2021
Every successful business has a professional bookkeeper documenting its transactions and keeping a record of all financial activities. In the last couple of years, there has been a growing trend of business owners hiring professional bookkeepers to manage accounts instead of doing all the paperwork on their own.
Let’s take a look at a few basic elements involved in bookkeeping.
Accounting vs. Bookkeeping
While bookkeeping and accounting are often used interchangeably, there is a stark difference between the two financial services. On the surface, a bookkeeper’s job may appear to be the same as that of an accountant’s. However, while a bookkeeper is responsible for recording all financial transactions, it’s the accountant’s job to interpret and analyze the recorder data.
Thus, bookkeeping mainly includes recordkeeping activities. On the other hand, accounting involves using the recorded data for analyzing a company’s financial standing. It includes tasks such as auditing, preparing financial statements, and filing tax returns.
Key Bookkeeping Tasks
So, what are the tasks involved in bookkeeping? A bookkeeper has various duties such as:
- Entering data
- Recording payments and invoices
- Updating the payroll system
- End of period closing
- Drawing and managing financial reports
Key Bookkeeping Terms
If you’ve never looked up bookkeeping practices before and are new to the financial service, you might get confused by the many different terms used by professionals. Bookkeeping has a language of its own and it can be tricky to keep up with the terms.
Here’s a list of basic vocabulary that you’re likely to encounter during bookkeeping:
Assets: This includes tangible and intangible items that your business owns, such as cash, patents, invoices, vehicles, and buildings.
Liabilities: This includes things that your business owes, such as loan balances, credit card balances, and tax liabilities.
Equity: This includes items owed to the business owner or a shareholder, such as contributions and retained earnings.
Together, these terms form the Accounting Equation: Assets = Liabilities + Equity. This equation balances your books.
General Ledger: The general ledger is your business’s income, expenses, assets, liabilities, and equity.
Reconciliation: This is the process of verifying the balance against the financial statements from an external source.
Accounts Receivable: This is the account used to represent outstanding client payments and is used for drafting accurate invoices.
Accounts Payable: This is an account used to keep track of accounts and amounts that you need to pay.
Chart of Accounts: This is a listing of categories that are used to classify your business’s transactions.
Balance Sheet: This gives an overall view of your business’s financial health and includes details such as your assets, liabilities, and expenditure.
Cash Flow Statement: This is a financial statement that describes your business’s investing, financing, and operating cash flow, giving an insight into the overall financial performance.
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Book your consultation with our experts today!