Why do you need bookkeeping in a company?
Bookkeeping is an integral part of every successful business. That is why managers of small businesses and individual entrepreneurs need to know at least the basics of bookkeeping and this Bookkeeping 101 guide will help you with that.
The key goal of bookkeeping is to generalize and systematize information about all the facts of the economic life of a business. In simple words, accounting reflects a complete picture of all the business activities. On the basis of this financial information, it becomes possible to:
- prevent negative results of economic activities of the organization
- identify internal resources to ensure the financial stability of the organization
- control of compliance with legislation
- control of the feasibility of business transactions
- control of the availability and movement of assets and obligations
- control over the use of materials, labor and financial resources.
Most business owners would love to get their business to the next level. However, the majority do not know how to achieve this. The answer is in your bookkeeping records and reports. The information obtained from accounting data allows you to make the right management decisions. The tax authorities, as well as investors and counterparties, are constantly interested in information about the company’s financial position.
Bookkeeping 101: Basic terms
There are many specific terms and definitions used in the accounting industry. In our Bookkeeping 101, we will go over just the basic terminology:
- Assets – the resources of the enterprise. They are current and long-term. Current assets include raw materials, finished products, and everything that can bring a one-time profit to the organization. The long term assets are such assets that are used for long duration i.e. more than a year in the business to generate revenue.
- Liabilities – short-term and long-term obligations before customers, suppliers, financial institutions, and other companies.
- Expenses -costs incurred to generate revenue.
- Revenue – the total amount of money that a business made by selling goods or providing services.
- Profit – what is left from revenue after accounting for all expenses, debts, additional income streams, and operating costs.
- Cost of goods sold – the cost of making or buying a product sold or providing a service rendered.
- Payroll – the process of calculating employees’ salaries, tax deductions and paying them.
- Financial flows – the receipt or expenditure of cash, assets, and other equivalents.
- Capital – the net worth of a business, that is the excess of total assets over the liabilities.
- Authorized capital – the amount of funds that were initially invested by the founders of the organization for its creation.
As we said in the beginning, bookkeeping is the key to the effective management of your company. Let’s walk through the simple steps of the bookkeeping process in our Bookkeeping 101 guide.
- Gather source documentsSource documents include the sources of information. Many organizations produce a number of different financial transactions, whether that would be sales or that would be expenses, such as purchasing office supplies and paying salaries. Bookkeepers have to look at all of the different transactions and they have to classify those particular transactions. They take all the sales receipts, purchase receipts, and shipping documents and organize them in such a way that it will be possible to produce financial statements later on.
- Record transactions in journalsThe next step is recording transactions in journals. These journals can be actually physical journals and the bookkeeper would have different journals for different categories of transactions. Nowadays, with the evolution of technology, businesses use different types of accounting software. They are meant to really record the actual transactions that take place.
- Transfer transactions to ledgerThe third step would be transferring these transactions from journals to the general ledger. This is commonly done with computer programming and in software as well. The ledger is a specialized accounting book or program. It accumulates specific categories, so you can look at the ledger for specific types of expenses or for revenues. It allows to find all the information about one type of account in the same place.
- Produce trial balanceA trial balance is a summary of financial data. It summarizes what is in the ledgers and allows accountants to identify the errors and issues that can take place in bookkeeping process. If any discrepancies are identified, the bookkeeper will take steps to correct them before moving on to the next step.
- Prepare financial statementsThe process of adding, classifying, and recording of your transactions provides the data you need to prepare your financial statements. There are three reports that you would need to prepare: the balance sheet, the profit and loss statement, and the statement of cash flows.
- Analyze reportsQuality analysis of financial statements is a key point in making management decisions. Actually, this is what accounting reports are intended for. Their analysis helps not only to determine the financial condition of the organization at a certain moment but also to identify its profitability and make important forecasts of functioning, which helps to determine the management strategy.
There are different types of analysis, but all of them are aimed at objectively assessing the situation that resulted in the course of business operations, as well as taking measures to improve it in the event of a decline in economic profitability or maintain good performance. Additionally, it helps to take steps to grow and maximize profit.