Bookkeeping 101: Understanding the Basics
Bookkeeping can be a daunting prospect for the uninitiated. Even for seasoned business owners, it’s easy to get overwhelmed with the various terms and concepts around bookkeeping. This is especially true when you consider the number of regulations, laws, and taxes that must be considered.
However, understanding bookkeeping basics doesn’t have to be complicated or intimidating. Here at Protea Financial, we will discuss what bookkeeping is, how it works, why it’s essential, and how you can start your bookkeeping today.
What is Bookkeeping?
Bookkeeping is the process of tracking and recording financial transactions. This information is used to produce financial statements and reports, which can be used by businesses like yours to make decisions about where to allocate their resources.
Bookkeeping is an integral part of any business, as it provides a clear record of what has been spent and earned over time. This information can be used to make informed decisions about where to allocate resources in the future.
Bookkeepers ensure that financial records are kept accurate, up-to-date, and in line with accepted accounting principles. Bookkeeping is often done using computer software, but there are still many businesses that rely on manual bookkeeping techniques.
What Are the Elements of Bookkeeping All Business Owners Need to Know?
As a business owner, it is important to have a strong understanding of the basics of bookkeeping. The elements of bookkeeping include:
- Income: This is money your business brings in, such as sales or services rendered.
- Expenses: This is money that your business spends, such as on inventory, rent, utilities, or payroll.
- Assets: This is anything of value your business owns, such as cash, equipment, or real estate.
- Liabilities: This is any debt or financial obligation that your business owes, such as loans or credit card balances.
- Accounting Principles: This is the set of rules and regulations that guide your bookkeeping.
- Financial Statements: These are regular reports that show the financial position of your business, such as balance sheets, income statements, and cash flow statements.
- Tax Requirements: This includes federal and state taxes that your business must pay or report annually.
- Auditing: This is an independent review of your bookkeeping records to verify accuracy and compliance with industry standards.
The Different Types of Bookkeeping
There are three different types of bookkeeping: single-entry, double-entry, and triple-entry. Here is an overview of each:
Single-entry bookkeeping is the most straightforward type, and it involves recording financial transactions in a single ledger, where each transaction is listed only once without balancing. This type of bookkeeping is suitable for small businesses that don’t require complex financial tracking.
Double-entry bookkeeping requires more effort and time to maintain but is more accurate than single-entry bookkeeping. Double-entry bookkeeping involves recording financial transactions in two ledgers, called the “debit” and “credit” sides. Each transaction must be recorded on both ledgers so that any changes made to one ledger will be reflected in the other. This helps maintain accuracy and ensure that all transactions are balanced correctly.
Triple-entry bookkeeping is the most complex type of bookkeeping, and it requires three ledgers or books to keep track of financial transactions. In triple-entry bookkeeping, each transaction is recorded in three separate ledgers: debit, credit, and third-party ledger. This helps provide an additional layer of security by requiring an independent third party to verify all transactions before they can be considered complete. Triple-entry bookkeeping can be used for large companies
The Benefits of Bookkeeping
Bookkeeping is an important part of any business, and it can offer several benefits to both the business owner and the employees. With proper bookkeeping, businesses can keep track of their income and expenses, which can help them make better financial decisions.
Additionally, bookkeeping can help businesses identify areas where they may be overspending or underspending, and it can also provide valuable information for tax purposes. Furthermore, well-kept books can be valuable if a business is ever audited by the IRS or state tax authorities.
Lastly, good bookkeeping practices can help businesses avoid penalties and interest charges on late payments. This simple practice can help businesses save money over time.
How to Get Started with Bookkeeping
To get started with bookkeeping, you’ll need to set up a system for tracking your financial transactions. This can be as simple as creating a spreadsheet or using specialized bookkeeping software. Once you have a system in place, you’ll need to start recording all your income and expenses. This may seem like a daunting task, but it’s important to keep track of your finances so that you can make sound business decisions.
If you need help figuring out where to start, plenty of resources are available to help you get started with bookkeeping. You can find books, online courses, and even software that will walk you through the process step-by-step. However, the best approach if you are unsure where to start or what information to track is hiring an in-house or outsourcing to a virtual bookkeeper. Virtual bookkeepers are typically more affordable than in-house bookkeepers and usually know just as much, so your business finances are still safely being tracked.
Tips for Staying Organized
Assuming you’re starting from scratch, you first need to create a system for organizing your finances. This can be as simple as setting up folders in your email inbox or computer desktop or using a physical filing system. Whatever system you choose, ensure it’s one you can stick with.
Once you have a system in place, start by creating folders for your income sources and expenses. If you have multiple bank accounts, credit cards, or loans, set up a folder for each. Then, start sorting your transactions into the appropriate folders. As you do this, you may want to create sub-folders to organize your finances further. For example, you could create a folder for “Utilities” and then sub-folders for “Gas,” “Electricity,” and “Water.”
As you organize your finances, remember that some items may span multiple categories. For instance, your mortgage payment will likely include principal and interest payments, which could go into separate folders. Similarly, if a business expense is used for personal purposes (like a home office), track both aspects.
By staying organized from the start, you’ll save yourself many headaches down the road. Not only will it be easier to find information when needed, but you’ll also be less likely to overlook important details.
Let Protea Financial Help You Understand Bookkeeping Basics or Track Your Expenses For You
Bookkeeping is essential to managing your finances and running a successful business. With the help of the Protea Financial experts, you can better understand bookkeeping basics.
Whether you choose to do it yourself or outsource the work to a professional, having accurate records will help you make better decisions and maximize profits. If you are serious about succeeding in business, take some time to learn more about bookkeeping and understand how it can benefit your organization. For more information on hiring a bookkeeper, contact Protea Financial!
Protea Financial Is Here to Help with Bookkeeping Basics and More!
Reach out to the experienced professionals here at Protea Financial today and let us help you with anything from understanding bookkeeping basics to hiring us as your company’s bookkeeper!