Learn How To Do Bookkeeping
It is important to learn how to do bookkeeping because it will help you with the classifying and recording of financial transactions (expenses and revenues) of your business or company.
Whether you are an owner of a big corporation or a small business owner, you are required to maintain accurate financial records separate from your personal expenses.
Also, most businesses fail because they don’t properly implement bookkeeping or accounting. That is why if you are a business owner, an accountant, or bookkeeper, you must have the (basic) knowledge of bookkeeping.
Bookkeeping is essential for many reasons. Here is the list of its importance:
- Provides the overall health status of your business
Bookkeeping is the process of collecting the financial data of a business to produce a financial statement. By doing this, you will have a clear picture of how your business is doing and it will help you create future plans.
- Helps you to budget
It is much easier to review financial records and plan your budget when your income and expenses are organized.
- Tax preparation
Bookkeeping helps organize your financial information in one centralized system. You will be ready in filing your yearly tax returns instead of scrambling to find the missing invoices and receipts every tax season.
- Easy reporting to investors
Investors in a business most likely want to check the performance of a business before they pour their money into it. Current investors would also check the business performance to ensure that their expected profit is being achieved. The product of bookkeeping, which is the financial statement, presents the performance and value of a business.
- Allows better financial management
Since bookkeeping produces a financial statement that would help you see a clear picture of the standing of a business, it can help you take control of how you are going to manage your finances.
- Helps with business analysis
Bookkeeping can help analyze the performance of a business, you will be able to see the strengths of your business and the weaknesses that you need to improve.
Nowadays, businesses use different types of bookkeeping and accounting software to help them with the recording of financial transactions.
Even though a person with no knowledge or experience in bookkeeping and accounting can use this software to help them track financial transactions, it is still essential that whoever is using this software should have accounting or bookkeeping knowledge so you can post transactions correctly.
In this article, you will have a better understanding of the basics of bookkeeping. First, we must understand the common bookkeeping accounts and terminologies for businesses.
Basic Bookkeeping Terminologies
Assets– are resources that are owned by a company/business such as cash, inventory, accounts receivable, investments, buildings, and equipment.
Liabilities– are a company’s obligation or amount a company owes such as loans, salaries, accounts payable, and income taxes payable.
Equity– is the difference between assets and liabilities. It is the balance after the liabilities are deducted from the assets.
Revenue– is the assets earned by a company because of a business transaction.
Expenses– are the money spent to produce or generate revenues.
Costs or Cost of goods sold (COGS) – is the total amount a company spends to buy or produce goods or services.
Credit– is the amount that is coming in of an account (incoming money).
Debit– is the amount that is going out of an account (outgoing money).
Accounts Payable– This is the money that a company owes or expenses that need to be paid.
Accounts Receivable– This is the money coming in or earned by the company but has not yet received.
Inventory– refer to the assets or goods of a company intended to be sold.
Sales– this is the term used for the earned revenue of a company from selling goods, products, or services.
Purchases– are expenses made by a company for buying an inventory that is intended to be sold.
Return on investment (ROI)– it is used to evaluate the efficiency of investment by measuring the ratio between the cost and net profit of an investment.
Steps in Doing Basic Bookkeeping (for small businesses)
1. Separate your personal finances from your business finances.
This is a must as a business should be an independent legal entity from its owner. This is because your personal finances and business finances are taxed separately. You might have future problems in auditing when both of your finances are combined. Also, by having an organized account, you can see how your business is performing.
2. Organize your financial records.
Disorganized financial records will only bring you headaches in bookkeeping. You will waste a lot of your precious time searching through your accounts if you need to dig out important data. By organizing your financial records, you will be able to find what you need when you need it. You need to keep important records to:
- keep track of the progress of your business
- prepare precise financial statements and tax returns
- identify the sources of your income and your expenses
- how much is your investment in property
- prepare for the inspection of the Internal Revenue Service (IRS)
3. Set aside a budget for your taxes.
If your business is making money, you need to be prepared to pay for your taxes. According to the founder of Liberty Tax, John Hewitt, you should set aside 30%-40% of what you earn to cover the federal and state tax each quarter.
One tip is to use the savings account of your business to store the budget you have set for your taxes; or if you have a good amount of extra money in your bank, you can use that as a budget to cover your estimated tax for a certain quarter.
4. Maintain a daily record to track your revenues and expenses.
This is important to track your financial activities and progress of your business. Keep records of your sales, revenue and cash transactions and maintain a journal for your sales, cash receipts, and accounts receivable.
5. Keep track of your accounts receivables.
Paying attention to the account receivables is vital to any business. Late paying customers have a huge impact on the overall health of your business. So when your client is overdue with their payment, you need to act right away.
6. Use bookkeeping or accounting software.
A bookkeeping or accounting software will help keep you manage your financial records by keeping it well organized. The software is designed to have easy to use features that make the entire process of bookkeeping hassle-free.
Here are some list of the bookkeeping/accounting software you can use along with its Skill Success online course/s so that you can learn how to use them effectively.
Learning how to use QuickBooks is easy here’s a beginner’s guide for you to follow.
Learning bookkeeping has become much easier to learn with readily available online courses. If you want to gain a thorough understanding of proper bookkeeping, you might want to consider trying the following online courses below by Skill Success: