Your books of accounts are important. Keeping them in order is the key to running a healthy and successful business. The way you manage your books of accounts can decide the future of your business. Without an efficient bookkeeping system in place, your business is handicapped. It is running, but it won’t be long before you’ll be in a mess and may even have to shut down your business.
Since bookkeeping is critical to the success of your venture, it is imperative that you have thorough knowledge about it to maintain efficiency. If you’re a small business owner, with little time on your hand, you should consider taking bookkeeping mentoring.
This article will help business owners get an overview of what bookkeeping is so that they can implement the right practices and ensure they have a well-managed system in place.
What comes to your mind when you hear the term ‘bookkeeping’? Maybe numbers, accounts, sales and purchase receipts, and the accounting statements? Many people even confuse bookkeeping with accounting.
Yes, bookkeeping and accounting go hand in hand, but they are two different processes. Bookkeeping forms the basis of your firm’s accounting system. It is the process of keeping a tab on your company’s transactions. With the help of bookkeeping, you can see exactly where your money is going, where your revenue is coming from, and how you’ll be able to save on taxes.
On the other hand, accounting is the interpretation of the financial records for strategic decision making. It involves the preparation of annual financial reports, financial forecasting, and tax planning. But, bookkeeping is where all the recording of transactions and calculations are done. So, how does bookkeeping work? Let’s look at it in detail.
Bookkeeping is all about recognizing transactions and identifying practices that best suits the nature and size of your business. It forms the basis for accounting and allows you to know where you stand financially. Here’s what the process of bookkeeping looks like:
The rule of thumb for an efficient bookkeeping system is to separate your business finances from your personal finances. This is essential as it helps you track your business expenses and income effectively. If you have a single account for your personal and business transactions, then you will face problems during tax filing. You will face difficulty in identifying the nature of an expense, whether it is personal or professional. And, this will restrict you from claiming tax deductions. To add to that, if your books of accounts are unreliable, you may even end up not complying with laws. For those entrepreneurs, who run a corporation or limited liability, they may have to be personally responsible for business debts. Prevent these issues by maintaining a separate account for all your business transactions.
As a business owner, you must have come across the terms ‘single-entry’ and ‘double-entry’ bookkeeping. Businesses, depending on their nature and size, can choose from any of these bookkeeping systems for their venture’s financial management. The single-entry system, as the name suggests, involves recording the entry only once. The entry can either be an income or an expense. On the other hand, the double-entry system involves making at least two entries. The double-entry system affects at least two accounts. One of the accounts is credited and the other is debited. For instance, you sold a good in exchange for cash, then your cash account gets credited and the goods account gets debited. The double-entry system can be complex but is also quite robust. No method is particularly right or wrong. Choose any that’s right for your business. You can take up bookkeeping mentoring to help you.
There are two accounting methods – cash and accrual. Before preparing your books, you need to choose an accounting method that you’ll follow throughout the bookkeeping procedure. Accounting on cash basis means that you record transactions only when the money has exchanged hands. For instance, your goods have been purchased by your client and an invoice has been raised, but until the payment is made you will not record the entry for that amount. When you implement the accrual system of accounting, then you will record transactions as they occur, irrespective of whether the money has been paid or received. So, in the example mentioned above, you will record the entry as soon as you raise the bill. And, the same goes for payments. You deduct them as soon as a purchase occurs. You can take help of financial advisors to select a method for your business.
Do you know the purpose of each of the expenses listed in your records? Have you categorized them accordingly? If not, then you need to do so now, or else you will miss out on potential deductions and face issues in taxation. When you do not know the purpose for which a particular expense occurred, you may not be able to claim a deduction on it in case it fell in the category. Typically, there are five terminologies where each transaction falls. They are assets, liabilities, revenue, expenses, and equity. Every item is then broken down further into subcategories. You may want to make a note on each receipt to ensure you can go back to finding the purpose if you forget it. Once you’re done, you can move forward to identify deductions.
Every expense you claimed a deduction for is invalid without a proof. Apart from an efficient bookkeeping and accounting system, proper documentation is essential for a business to succeed. When the CRA knocks on your door, you need to have all the documents and receipts ready. Anything missing can lead to costly consequences. Keep boxes for each type of transaction or have a filing system in place to ensure easy accessibility of records. You should also consider using cloud-based applications to store all important receipts and documents. In case, you misplace or lose any paper, you will at least have an electronic record to show.
An efficient bookkeeping system gives you an accurate picture of where your venture stands financially. From startups to multi-billion dollar companies, every business needs a proper bookkeeping system to survive. After all, it helps you direct your business accurately, increases your chance of getting funds, and also save on taxes. Whether you should do your business’ bookkeeping yourself depends on factors like time and expertise.
Many small business owners have their plates full of responsibilities. From pitching new clients, maintaining relations with existing ones, and managing the daily business chores, a startup owner takes on various roles. With so much on their hand, accounting and bookkeeping may seem tedious. And, when work is rushed, there is room for huge errors. If you’re a small business owner facing a similar situation, then you have two options. You can hire an accountant or partner with a bookkeeping and accounting service provider.
Expertise is another consideration. You don’t want to go wrong, time and again, with such a crucial aspect of your business. If you lack knowledge on the subject or your experience boils down to a few college courses, then it is recommended you hire a bookkeeping service. These financial services providers are well-versed in the subject and do it on a regular basis. They not only help you keep your records in order, but also provide assistance with financial forecasting. By recruiting a service provider for your bookkeeping and accounting needs, you get a team of professionals on board. From bookkeeping to tax and accounts, everything is taken care of. And, you can focus on growing your business.
Hope this guide helps you get a basic idea about bookkeeping. If you want to know more or need help with your firm’s financial management, then get in touch with us at Altitude Accounting.
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