What is Bookkeeping, and why is It Important?

The act of daily documenting your company's financial transactions into arranged accounts
is known as bookkeeping. It may also refer to the many recording methods that companies
may employ. For a number of reasons, bookkeeping is a crucial step in the accounting
process. Updating transaction data allows you to produce accurate financial reports that
aid in gauging your company's performance. Additionally, thorough records will come in
handy if there is a tax audit.
This manual will take you step-by-step through the various bookkeeping techniques, how
transactions are recorded, and the key financial statements involved.

Methods of Bookkeeping
Your business must determine which approach it will use before you start bookkeeping.
Take into account your business's daily transaction volume and revenue before making a
decision. If your company is tiny, using a sophisticated bookkeeping system intended for
large corporations may lead to unneeded issues. On the other hand, major organisations
will not be able to get by with less reliable bookkeeping techniques.

Let's dissect these strategies in light of this so you can select the best one for
your company.
Single-Entry Accounting

A single entry is made in your books for each transaction when using the simple single-
entry accounting method. To keep track of incoming income and outgoing expenses,
these transactions are typically kept in a cash book. With the single-entry method,
formal accounting training is not necessary. The single-entry technique is appropriate for
small private businesses and sole proprietorships that do not engage in credit-based
transactions, possess few to no tangible assets, and maintain modest inventories.

Using Double-Entry Accounting

A stronger method of bookkeeping is double-entry. Every transaction must have an

impact on at least two accounts in order to be recorded, and it adheres to this rule. For
instance, if you sell something for $10, the same amount will be credited to your sales
account and deducted from your cash account. The total credits and total debits in the
double-entry system must always be equal. Your books are "balanced" when this occurs.

It makes more sense to keep your books using the double-entry system if your company is
large, publicly traded, or performs purchases and sales using credit. Because there is less
possibility for error with the double-entry approach, businesses frequently choose for it.
Because each transaction is recorded as two matching but contrasting accounts, it
effectively "double-checks" your books.
 Accrual-Based Versus Cash-Based

Next, decide whether to use a cash basis or an accrual basis for your
bookkeeping. The timing of your company's income and spending recognition
will determine your choice.

When you receive cash into your business, you record revenue in a cash-
based accounting system. When they are paid for, expenses are recognised.
To put it another way, every time cash flows into or out of your accounts, it is
recorded in the books. This implies that until cash is exchanged, purchases or
sales conducted on credit will not appear in your records.

Revenue is recognised when it is earned under the accrual method. Similar to

how revenues are typically documented at the same time as expenses, so
are they. For a transaction to be recorded, physical cash does not need to
enter or leave. You may immediately mark your sales and credit-based
purchases.

With either single-entry or double-entry bookkeeping, a cash basis or accrual

basis can be used. However, the single-entry approach typically serves as the
basis for cash-based bookkeeping. Cash flowing in or going out is recorded as
a single entry for each transaction. The double-entry system complements
the accrual basis more effectively.

How to Record Entries in Bookkeeping

You may better understand and assess the performance of your firm by creating financial
statements including balance sheets, income statements, and cash flow statements. You
must have properly documented records of your transactions in order for these reports to
accurately represent your firm. Keeping these data as up-to-date as feasible when
balancing your accounts is also beneficial.

Source papers such as purchase and sales orders, checks, invoices, and cash register
tapes serve as the first step in the transaction recording process. Journals, ledgers and the
trial balance can be used to record the transactions once you have gathered these
supporting papers. If your business is really small, you might only require a cash register.
Financial statements can then be created by consolidating the data.
Cash registers
An electronic device called a cash register is used to compute and record transactions.
Cash registers are typically used to track cash flow in retail establishments. A sale's cash is
collected by the cashier, who then gives the customer the remaining money. Single-entry
cash accounts are used to record both the money that was collected and the money that
was returned. Transaction receipts are also stored in cash registers, making it simple to
enter them in your sales diary.

Businesses of all sizes frequently use cash registers. They use a single-entry, cash-based
bookkeeping system; thus, they aren't typically the main way to record transactions. They
are therefore practical for extremely small firms, but too basic for larger ones.

The Journals

The book of original entry is the name of the journal. It is the location where a company
first records its transactions in chronological order. A journal may be physical (such as a
book or diary) or electronic (stored as spreadsheets, or data in accounting software). It
details each transaction's date, the accounts that were credited or debited, and the dollar
amount involved. Each journal entry affects the ledger even if it is not customary to review
the journal's balance at the end of the fiscal year. The ledger must be balanced, as we will
discover, therefore keeping an accurate notebook is a desirable habit to develop. For
double-entry bookkeeping, use this form.

Financial Statements

The creation of financial statements is the next and most crucial stage in bookkeeping.
These statements are created by combining data from the daily entries that you have
made. They show you where you need to make improvements by giving your insight into
your company's performance over time. The cash flow statement, balance sheet, and
income statement are the three main financial reports that every organisation must be
familiar with and comprehend.

The statements of cash flow

The cash flow statement is what it sounds like. It is a financial report that keeps tabs on the money
flowing into and going out of your company. It enables you to assess how effectively your business
manages debt and expenses, as well as those of investors. You may determine if you are earning
enough money to operate a lucrative, sustainable business by synthesising this data.
 The balance Sheets

A company's assets, liabilities, and shareholder equity are listed on the balance sheet at
any given time. Simply said, it outlines the assets, liabilities, and shareholder investment
in your company. The balance sheet, however, only provides a snapshot of a company's
financial situation as of a certain date. Additionally, balance sheets from different times
must be compared. Through analyses like the current ratio, asset turnover ratio, inventory
turnover ratio, and debt-to-equity ratio, the balance sheet enables you to comprehend the
liquidity and financial structure of your company's

The Income Statements

The income statement, commonly known as the profit and loss statement, is concerned
with the money made and money spent by a company over time. A typical income
statement has two components. The operating income is listed in the upper half, and
expenses are listed in the lower half. These are tracked throughout time in the statement,
for example, the final quarter of the fiscal year. It demonstrates how your company's net
sales is transformed into net earnings, which produce profit or loss. The focus of the
income statement is not on cash or receipt information.

Bank Reconciliation

Finding consistency between the transactions in your bank account and the transactions in
your bookkeeping records is known as bank reconciliation. Because it is the final stage in
identifying anomalies in your records after everything else has been noted, reconciling
your bank accounts is a crucial step in bookkeeping. By using bank reconciliation, you can
be sure that nothing is wrong with your finances.
Why Is It Required?
There must be a bank reconciliation because it:

• Provides precise financial information about your business.

• Reliable cash flow tracking

• Aids in identifying fraud or financial mistakes

• Keep up with your bookkeeping.

Your company's success is driven by accurate bookkeeping. It is a fundamental accounting

procedure, and without it, it would be quite difficult to come up with plans to enhance your
company's core competencies. Even though bookkeeping is crucial, problems might arise if
the wrong system is implemented for your business. Some businesses still have access to
manual processes like paper journals and physical diaries. But as technology develops
 more, even smaller businesses may benefit from going digital. An online bookkeeping
programme can help in this situation.

Summary

At the end of the topic, we learned about introduction to bookkeeping. People that manage
all of a company's financial data are called bookkeepers. Without bookkeepers, businesses
would be unaware of both their internal activities and present financial situation. External
users, such as investors, financial institutions, or the government, who require access to
trustworthy information to make better investment or lending decisions, depend on
accurate bookkeeping as well. Simply expressed, for both internal and external users,
corporate organisations depend on precise and trustworthy bookkeeping.

ou've just started your own company, but you have no idea how you're going to take care
of the financial aspects of running it. Accounting is a crucial process that not only moves
your company forward but also enables you to evaluate how successful you have been.
You have to settle on a technique of bookkeeping for your company before you even begin
because you need to keep accurate financial records. There are two different approaches
to accounting: the cash method and the accrual technique.

Accounting Method Concepts and Standard

You've just started your own company, but you have no idea how you're going to take care
of the financial aspects of running it. Accounting is a crucial process that not only moves
your company forward but also enables you to evaluate how successful you have been.
You have to settle on a technique of bookkeeping for your company before you even begin
because you need to keep accurate financial records. There are two different approaches
to accounting: the cash method and the accrual technique.

Topics to be covered in this topic:

• What Makes Choosing the Right Method Important?

• Cash-Based Accounting

• The Pros and Cons of Cash Accounting

• When is Cash Accounting Appropriate to Use?

• Accounting that is Done on an Accrual Basis

• The Advantages and Disadvantages of Using Accrual Accounting

• When is the Method of Accounting Known as Accrual Used?

• Knowing the Difference is Key

 What makes Choosing the right method important?

The method of accounting that you employ has a variety of effects on your
company, including the following:

• The methods vary in the manner in which revenue is acknowledged. You need to be sure
that the approach you pick for calculating revenue for your firm is compatible with the
manner in which you intend to do so.

• The financial reports generated by the two approaches are distinct from one another,
which impacts how you evaluate the current state of your company's finances and how
you plan to move forward with your organisation. It is imperative that you select the
approach that gives you access to the appropriate financial reports for your company.

• The way you file your taxes and the deductions you can claim are both affected by the
method you select. This is due to the fact that the cash method and the accrual method
record taxes at various times depending on when the revenue is earned. During tax
season, you will need to select the strategy that functions most effectively for you.

Let's have a look at the two different accounting procedures and how they compare and
contrast with one another.

Cash-Based Accounting
The term "cash-based accounting" alludes to the fact that the primary consideration in this
method is, well, cash. The other way is more complicated than this one. When cash enters
or exits your firm in the form of expenses or payments to vendors, transactions are
recorded here. Transactions are also logged here whenever you receive cash payments
from clients.

Sales Transactions

Consider the following scenario: you are a carpet retailer who made a sale to a customer
on the first of July for a total of $100 worth of carpets. On the fifth of July, the customer
paid you in cash for the carpets.

In cash accounting, the transaction related to the sale of goods or services is recorded on
July 5th (when you receive the cash).
Purchase Transactions

On June 10th, you pay $100 to your dealer for some carpets that they sell you. You may
only pay for this purchase with cash on July 6th, as that is the only day it is available.

This is where you make a record of the purchase transaction that took place on July 6th
(when you pay cash).

The Pros of Cash Accounting

1. Cash accounting, despite its seeming simplicity, confers a great number of
benefits for very tiny enterprises that function solely on a cash basis.
2. It does not require you to have extensive understanding of accounting, and
because to its simplicity, it enables you to handle your accounts without having to
employ the services of an accountant.
3. Accounting activities are also able to be completed with the use of spreadsheet
software or a straightforward cash book, thus this method does not require the
use of accounting software.
4. The fact that this approach only keeps track of your transactions in terms of cash
coming in and cash going out is by far the most significant benefit of using it. This
gives a realistic picture of the amount of money that is currently available to
spend at any one time in your firm

Cons of Cash accounting

1. Cash accounting does have a few drawbacks, despite the fact that it is
straightforward to use and offers accurate insights regarding your company's cash
flow.
2. Companies that keep their financial records based on cash transactions typically do
not use integrated accounting systems. Because there is no way for checking for
faults that are built in, this can make the likelihood of errors higher.
3. Despite the fact that it reveals the amount of money you possess, it does not reveal
your overall financial status. This is due to the fact that cash accounting does not
make it simple to compile reports such as income statements and balance sheets,
which are essential for accurately determining your company's financial status.
 When is cash accounting appropriate to use?

• The accounting system known as cash-based accounting is typically employed by

relatively small enterprises. You should consider using the cash basis of accounting if any
of the following apply:

• Your company is quite modest in size and is either privately held or run by a solitary
proprietor.

• You do not engage in sales on credit, which means that you do not furnish clients with
things before receiving payment in full and then bill those customers later.

• You make use of a bookkeeping method known as single-entry accounting.

• Because your company only employs a small number of people, a cash accounting
structure is enough for managing employee compensation and reimbursements.

• You typically engage in a small number of transactions on a daily basis, and each one can
be recorded in either a cash book or a spreadsheet.

• Because you do not possess many physical assets, it is not required for you to keep track
of inventory for those items.

Accounting that is done on an accrual basis

Sales Transaction and Purchase Transaction
When using an accrual method of accounting, transactions are not recorded depending on
whether cash is coming in or going out; rather, they are recorded based on when they first
began. When using this method, revenue is recorded when it is earned, and expenses are
recorded when they are incurred; it does not matter when the payment is actually made.
Let's use the identical example as before, but this time calculate everything
using the accrual approach.

Sales Transactions
Your customer purchases carpets from you on the 1st of July with a total value of $100, and they
send payment to you on the 5th of the same month.

The primary distinction between cash and accrual accounting is that the sales transaction is not
recorded until the first of July (when you sell the carpets)
Accounting That Is Done on an Accrual Basis

When using an accrual method of accounting, transactions are not recorded depending on
whether cash is coming in or going out; rather, they are recorded based on when they first
began. When using this method, revenue is recorded when it is earned, and expenses are
recorded when they are incurred; it does not matter when the payment is actually made.
Let's use the identical example as before, but this time calculate everything
using the accrual approach.

Purchase Transaction
On June 10th, you pay $100 to your dealer for some carpets that they sell you. On the other hand,
you are required to make payment on July 6th.

You are to make the entry for this purchase transaction on June 10th, the same day it occurred
(when you buy the carpets)

The Advantages of Using Accrual Accounting

1. Of the two approaches, accrual accounting is the one that is utilised by the majority
of businesses, including all of the major corporations.
2. Businesses that extend credit to customers benefit from using accrual accounting.
Even if you haven't yet been paid for your transactions or invoices, you can still
record such transactions and keep track of them.
3. When you use the accrual technique, you do not record transactions until after they
have been started. Because of this, it is simple to keep track of the money that is
owed to you by clients and by vendors at any one time.
4. Using this strategy, you will have a clearer understanding of how your finances are
now standing. You are able to generate important financial reports for your
company, such as balance sheets and income statements, by using the accrual
basis of accounting. These reports are essential for understanding the current state
of your company.
 The Disadvantages of Using Accrual
Accounting

1. In addition to having its drawbacks, accounting on an accrual system also has

several problems.
2. It is not suitable for the management of cash flows in an effective manner. It is
difficult to keep track of how much cash you have on hand at any given time since
transactions are not recorded at the same time that cash is transferred.
3. If you keep your books on an accrual basis, you have to utilise the double-entry
method of accounting. Every transaction needs to be recorded under a minimum of
two accounts, which makes things more difficult than they already were. Because of
this, maintaining accurate financial records will require the assistance of an
accountant as well as the use of specialised accounting software.

When Is the Method of Accounting Known as

Accrual Used?

When the following conditions are met, the accrual foundation of accounting
is appropriate:
• You have a sizable company, and in order to keep tabs on both your financial status and
performance, you compile financial reports such as balance sheets and income
statements.

• You offer your consumers credit and allow them to pay you later based on the invoice
that you provide them.

• You utilise a method known as double-entry bookkeeping, in which each transaction is

recorded against at least two different accounts.

• You have a large number of staff members.

• You handle a pretty high volume of financial transactions on a daily basis, and rather
than keeping a cash book or using a spreadsheet, you rely on accounting software.
Knowing the Difference is Key

The nature of your company should be a primary consideration when selecting an

accounting strategy for your company. Each approach is advantageous in its own way.
Cash accounting is essential for extremely small firms since it provides a beautiful grasp of
their cash flow and helps to keep track of it. The accrual approach is preferable for use in
larger enterprises since it provides a more comprehensive picture of a company's current
financial status through the use of informative reports. Compare the two approaches and
become familiar with the distinctions that exist between them before making a choice on
which approach you will use for your company. This will allow you to select the approach
that is most suited to your needs.

Summary

We learned about accounting method concepts and standards at the topic's

conclusion. The ways in which revenue is acknowledged vary between the systems. You
must make sure that the method you choose to determine the revenue for your company
is appropriate for the way you intend to conduct it. Every strategy has benefits of its own.
Since it gives them a clear understanding of their cash flow and makes it easier to keep
track of it, cash accounting is crucial for very small businesses. Larger businesses should
adopt the accrual technique since it gives a more complete picture of their present
financial situation through the use of illuminating reports.