Like accounting, bookkeeping is one of the essential things of running a business even if we don’t like to do it. Many people don’t know the difference but there are a few that you should know when hiring a professional. Accounting actually follows it and includes converting the data in the ledger into valuable company reports and metrics. A good thing is that it is simpler and easier to learn.
It can help you better understand your financial position and which part of your company is in critical condition. It may not be as important for smaller startups but you can always use the information it provides for a good purpose. Stakeholders wouldn’t be able to make strategic decisions without the information it provides. Before choosing who you will work with, it’s a big advantage to know how they are doing their job and what the differences between agencies are.
Top Reasons Why Bookkeeping Is Important
When someone says financial reports, they are referring to statement of cash flow, income statement and balance sheet which are decisive for ownership. You would want these reports to be very accurate and it is the first reason why you want to hire a reputable professional. The balance sheet shows the capital structure, liabilities and assets while the income statement shows net income, expenses and revenue. Find more information here: https://www.hopefinancialconsulting.com/
The cash flow report describes investing, operational and financing cash outflows and inflows. Everything described is done through bookkeeping processes which allow business owners to create strategic decisions or keep the company alive. If it isn’t done, the management will find out that something is wrong but only when it is too late. It is essential for tracking issues especially when it comes to cash flow and capital structure.
Another reason why it is important for your business is to manage payables. Similar to receivable, the agency will make accounts payable reports that show the money a firm owes to third-parties. If they don’t have enough cash to make a payment to payables on time, it is possible that they start debt financing. Your employees will need to manage it so you won’t run out of working capital but also without missing important obligations.
When accountants renew the general ledger and financial statements are provided, it becomes viable to pay calculated tax payments. It additionally becomes likely to fill out year-end tax returns. Expected tax payments are based on net income, while tax returns itemize the expenses and gross revenue to reach net income. You can have a problem with the federal agencies if the records provided aren’t accurate.
Payment to Employees
Besides working on taxes and cash flow, employee payment is another part of bookkeeping that is done through accurate bank reconciliations, record-keeping and connection with the payroll function. It can happen that there isn’t enough money for the payroll in which case the management needs to be addressed and make appropriate decisions. Every medium or large business is destined to fail if there isn’t an effective payroll process in place.
Consistency is a big part of it and you don’t want to record the same transaction twice, forget to record transactions or lose receipts. This is also the reason why many companies are working with one agency from the start. A great thing is that you now have software that helps in managing these issues.
Bookkeeping for Small Businesses
If you want to manage it yourself, you will have to use accounting software which is the simplest way to make sure that your transactions. You have programs like Expensify, FreshBooks or QuickBooks which will take away a lot of guesswork and present the data clearly. A lot of them are free and can be found online.
You would also want to use a spreadsheet which can be done with physical journals or on the computer which is a more sophisticated way. Some of the things you should place in it include the amount paid/owned, the date the invoice was created/received, expense/revenue type, account number and supplier name. Make sure that you enter every single piece of information as soon as something changes because making a small mistake takes a lot of time afterward when you need to figure out which one was a mistake.
Recording Transactions
There are two types of methods including accrual and cash accounting. For example, the cash method is when the money changes hands like when a client pays for a product or when you spend on a certain expense. Accrual type includes transactions but when the expenses are incurred but not only when money changes hands. Cash type is generally more in use when you have a smaller business because it is more accurate but there is more work.
When you grow as a firm, it will be less important to know the exact balance because there will be thousands of transactions and some of them will be less than a hundred dollars. You will then track when expenses occur rather than when they are paid off. It focuses on the financial health of the firm and negates the effects of payment delays.
Posting Transactions to a Ledger
Tracking transactions can be difficult if they aren’t separated into different accounts within the ledger. You would want to gain a clearer picture of where the money is going or coming in. It will depend on the type of business you do but most of the accounts should include retained earnings, owners’ equity, payroll expenses, cost of sales, inventory, sales and payable and receivable accounts.
The second book of entry or a ledger is a book that contains accounts where the classified and summarized data from the journals is posted as credits and debits. It contains the data which is required to prepare a financial statement. In most cases, you would want to let the professionals handle it but anyone can compare ledger accounts and see if there are deviations. You can check on your own if the sales are higher than expenses which mean you are making a profit.