In order to operate, businesses need to manage their cash flow and know where they stand financially — exactly how much money they earn and how much money they spend.
Bookkeeping is the maintenance of accurate day-to-day financial records for the benefit of the company as well as to help satisfy the reporting requirements of local and federal tax authorities. Accountants may then use the information kept by bookkeepers to produce financial reports.
Bookkeepers record financial transactions like the money earned from clients, customers, and investments as well as the money spent on operating expenses and capital improvements. They record this information into daybooks, journals, and ledgers. Bookkeepers may also prepare bank deposits, prepare invoices, and track overdue accounts. Depending on the size of the company, they may find themselves using a single-entry or double-entry bookkeeping system.
To work as a bookkeeper, you must be an accurate and meticulous record keeper and know how to use accounting software programs.
Bookkeeping Systems: The Basics of Accounting
Bookkeeping – it's a simple process, right? Not always, but sometimes so, although it depends. Simpler businesses need simple bookkeeping systems and complex businesses need complex bookkeeping systems. But first, let's get the definition down:
Bookkeeping Systems: The process that records financial transactions.
There are two main types of bookkeeping systems, double-entry systems and single-entry systems.
Single-Entry Bookkeeping: This is the simplest method of bookkeeping that is usually used for families or individuals. For each transaction, as the name implies, there is only one entry made. An example of this type of bookkeeping system would be a checking account register to record checks written. Obviously, this type of system is not going to work for a business.
For businesses, you need to have a second entry to record not only the accounts where the money is coming from or where the money is going, but a second account to record the expense or revenue to track this information as well.
Double-Entry Bookkeeping: All financial transactions have two entries, creating a system of checks and balances. The entries each have a debit and credit.
To understand bookkeeping systems, you need a basic understanding of accounting.
Debits: A debit transaction indicates an asset, such as cash, or an increase to a debit balance or a decrease in credit balance.
For example: Your company receives a payment of $10 in cash. You will debit the cash account, meaning that account increased. The debit entry is physically placed on the left hand side of what's called a T account, because of the shape, which helps illustrate the process:
So where does the second entry go? There needs to be a credit to balance out a double entry system.
Credits: A credit entry indicates a transaction that will cause a liability or a gain. It can be used to decrease a debit balance or increase a credit balance.
So, in the example what other account was affected? You just increased your sales figure, which is a revenue account. Revenue accounts record increases as credits. So your account would look like this:
That is the basic concept of a double-entry bookkeeping system. Every double-entry bookkeeping system, whether you are handwriting transactions in a ledger or using a computerized bookkeeping system, uses this basic accounting principle.
When you break down bookkeeping systems into this concept, they're not as complicated as they first look.
Chart of Accounts
So how do you know what the accounts in the bookkeeping system are? There's a chart called the chart of accounts, which lists all the accounts used within a business during bookkeeping. Each account has an account number, an account name and usually a brief description. It also breaks down the accounts as a debit account, a credit account, or a revenue account, which helps the bookkeeper determine which account to credit or debit for a transaction.
Computerized Bookkeeping Systems
These days, most bookkeeping systems are computerized, but the concept is the same. When a sale is recorded, the system is generally programmed to figure out the debits and credits on its own. The sale may need to be manually input, either each transaction input or a daily total is input, or some systems tie in with the cash registers or other computers to automatically record each transaction properly.
The End Result
From all these accounts, financial statements are generated from the bookkeeping system. The financial statements are the records of a company's finances. The financial statements include:
Balance Sheets: A snapshot of a company's assets, liabilities and equity at any given time.
Statement of Cash Flows: A report that shows the company's operating, investing, and financing transactions.
Income Statement: Also called a profit and loss (P&L) report which reports on the company's operations, their expenses and profits.
The Bottom Line
Bookkeeping systems are the heart and soul of a company's finances, and bookkeepers help put the process together and keep it together. Whether it's the basic T account shown above or the most complex computerized system, bookkeepers should have basic understanding of these accounting principles and an attention to detail.
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