What is Bookkeeping?

What Is Bookkeeping?

The process of recording and preserving financial transactions for a company or a person is known as bookkeeping. It does this by tracking and documenting all financial activities and records to ensure that all financial information is accurate and updated.

The main reason businesses will hire bookkeepers is to record financial transactions, whether digital or in a literal book. This includes capturing all income received and expenses incurred by the business as well as any other financial transactions.

Some common transactions recorded include sales, purchases, payments to suppliers, wages, loans, and more. To find this information, bookkeepers will use source company documents such as receipts and bank statements to record this properly.

A company's bookkeeping and book balancing will follow the same system as its accounting, which is usually the double-entry system. The double-entry system just means that every transaction will affect at least two accounts, hence the name.

How the double-entry system works is for every debit entry made in one account, there's a corresponding credit entry in another account. This system ensures that the accounting equation (Assets = Liabilities + Equity) remains balanced.

Not only is the person in charge of the books, the bookkeeper, responsible for accounting all of the financial transactions but they must maintain a general ledger. The ledger is a comprehensive record of all accounts used by the business.

The general ledger tracks all transactions related to each account. Its purpose is to easily provide a summary of specific accounts to analyze financial activity.

Proper book balancing forms the foundation for generating accurate financial statements. Bookkeepers compile data from the general ledger to prepare key financial statements such as income, balance, and cash flow statements.

All legal and regulatory requirements must be met by bookkeeper records. To avoid any compliance issues with legal and regulatory requirements, a company’s financial data must meet all accounting standards.

By maintaining well-organized financial data, bookkeepers can be a key part of providing reliable financial information to support various stakeholders in understanding a business's financial position and performance.

Understanding Bookkeeping

As stated before, book balancing is the general process of storing a company’s financial data and keeping a record of important monetary business data. It involves documenting all financial activities to provide a clear picture of an entity's financial health and performance. 

Bookkeepers ensure that each number in a dataset makes sense. Well, what does that mean? They are responsible for tasks such as recording journal entries and performing bank reconciliations.

They will not necessarily interpret the data but instead just relay a company's financials. They act as the first point of contact to address any financial statements or data issues within a company.

To understand bookkeeping involves grasping its key components and processes. Here's a breakdown to help you understand bookkeeping:

1. Components

a. Transactions: The main aspect revolves around recording financial transactions. Some examples of these transactions include sales, purchases, expenses, income, payments, and receipts. Each transaction affects specific accounts.

b. Accounts: Accounts refer to an accounting practice that represents different financial categories. 

Common accounts examples include cash, accounts receivable, accounts payable, inventory, fixed assets, and equity. Each account has a normal balance that reflects either a debit or a credit.

c. General Ledger: The general ledger is a summarized repository of each account and its respective transactions. It provides a comprehensive record of financial activity that allows an individual to see each transaction of an account in one flow.

d. Double-Entry System: The Double-entry system is the most common method of bookkeeping. It ensures that every transaction affects at least two accounts to maintain the balance of the accounting equation: 

Assets = Liabilities + Equity

2. Processes

a. Recording: Financial transactions are documented chronologically using source documents like receipts, invoices, and bank statements. They categorize transactions and assign them to the appropriate accounts.

b. Posting: Once recorded, transaction details are transferred to the respective accounts in the general ledger. This involves debiting and crediting accounts based on the double-entry system.

c. Reconciliation: Regular reconciliations, such as bank reconciliations, are very common. They are used to compare recorded transactions with external records. This helps identify discrepancies and ensures the accuracy of financial documents.

d. Reporting: Bookkeeping helps accountants generate financial statements that provide a snapshot of the entity's financial position and performance. The key financial statements include the income statement, balance sheet, and cash flow statement.

To gain a better understanding of balancing books, consider studying basic accounting principles, familiarizing yourself with financial statements, and utilizing book-balancing software or tools to practice recording transactions. 

Additionally, seeking guidance from accounting professionals or enrolling in bookkeeping courses can enhance your understanding and proficiency in balancing practices.

Importance of Bookkeeping

Bookkeeping can commonly be overlooked when contemplating a business's success factors. However, it plays a significant role in ensuring all financial information is accurate and current.

Book balancing provides businesses with organized records of their financial transactions, enabling them to make informed financial decisions. A stable business starts with reliable book balancing.

Without bookkeepers, companies could not meet legal requirements or have any record of their finances.

Let's break down some more specific reasons why bookkeeping is so important to a company’s success:

1. Financial Decision-Making

The updated financial data provided by book balancing provides valuable financial information that enables informed decision-making. Accessible, reliable financial data helps business owners and managers analyze revenue, expenses, and profitability.

2. Financial Monitoring and Control 

Bookkeepers will continuously monitor the control of financial activities. This is done typically by tracking income and expenses, overspending, cost inefficiencies, or revenue decreases. 

Regular review of financial data helps detect and address issues promptly, promoting better financial control and efficiency.

3. Compliance with Legal and Regulatory Requirements

Compliance with legal and regulatory obligations is necessary to file tax returns, meet financial reporting requirements, and provide information during audits or inspections. 

When done properly, businesses can avoid penalties, fines, or legal issues resulting from non-compliance.

4. Financial Analysis and Planning 

Financial statements derive from these auditing records. Accountants will use these records to create income statements, balance sheets, and cash flow statements.

This information facilitates budgeting, forecasting, and long-term strategic planning.

5. Obtaining Financing

Financial institutions and investors require accurate and detailed financial records to evaluate creditworthiness, assess the viability of the business, and make informed lending or investment decisions. 

Proper book balancing enhances credibility and increases the chances of securing financing.

6. Tax Compliance and Planning

Financial records enable tax return preparation and timely filing, ensuring that businesses meet their tax obligations. 

7. Business Performance Evaluation

By comparing financial records, identifying trends, and calculating key performance indicators. 

This evaluation helps set realistic goals, measure progress, and implement improvement strategies.

8. Transparency and Stakeholder Confidence

Transparency of financial records builds stakeholder confidence. Transparent financial records enable clear communication with stakeholders, including investors, lenders, suppliers, and customers. 

Book balancing is important because it provides accurate and reliable financial data that supports decision-making, financial control, compliance, planning, analysis, and stakeholder confidence.

Bookkeeping Vs. Accounting

Bookkeeping and accounting are closely related but have distinct differences in activities within the financial management of a business. While bookkeeping and accounting share similarities, they have distinct differences in their activities within the financial management of a business

They represent two distinctly different aspects of the financial process within a business.

Bookkeeping focuses on accurately recording financial data, while accounting involves translating that data into meaningful information for business decision-making

Both aspects are crucial for the financial health of a business, and understanding the difference can help a business effectively manage its finances.

Bookkeeping

The practice of Bookkeeping is a systematic process of recording, organizing, and maintaining financial transactions and records. It focuses on the day-to-day financial activities of a business and provides a foundation for accurate financial reporting.

Bookkeepers do not need any other additional schooling after college to be able to work. However, one should obtain a Certified bookkeeper designation from the American Institution of Professional Bookkeepers.

Key aspects include:

• Recording Transactions: Record financial transactions such as sales, purchases, expenses, and payments using source documents like invoices, receipts, and bank statements.
• Data Entry: Enter transaction details into the general ledger, categorizing them based on established accounts using the double-entry system.
• Reconciliation: Perform regular reconciliations to maintain the accuracy of financial records.
• Financial Records Maintenance: Organize and maintain financial records, including general ledgers, subsidiary ledgers, and supporting documentation like invoices and receipts.

Accounting

Accounting, known as the language of business, builds upon the foundation of book balancing and involves more complex analysis, interpretation, and communication. Accounting requires more schooling as well as certain certifications to be able to work. 

The CPA, Certification of Professional Accounting is an exam all accountants must pass and complete their bachelor's at a respected college. 

Some accountants go on to complete their masters and even engage in several other exams to obtain different certificates depending on their specialties. 

Key aspects of accounting include:

• Financial Analysis: Accountants analyze financial data, interpret trends, and generate reports to evaluate a business's financial health and performance. They use financial ratios and trend analysis to make recommendations for decision-making.
• Financial Reporting: Accountants will prepare the three main financial statements, which are the income statements, balance sheets, and cash flow statements. Stakeholders use these statements to assess the business's financial position and performance.
• Tax Planning and Compliance: Accountants help businesses plan and manage their tax obligations by understanding tax laws, identifying deductions and exemptions, and ensuring compliance with tax regulations.
• Financial Strategy and Planning: Accountants contribute to strategic financial planning, budgeting, and forecasting. They analyze financial data to help set goals, develop budgets, and make informed decisions regarding investments, cost management, and resource allocation.

Bookkeeping and accounting are commonly mistaken for each other; however, they are not two interchangeable terms. Book balancing is the foundation for accounting, providing organized financial records that accountants use to generate meaningful insights and reports.

Bookkeeping focuses on recording and organizing financial transactions, while accounting involves analyzing, interpreting, and communicating financial information to facilitate decision-making, compliance, and strategic planning.

Both are extremely important to the success of a business but vary in responsibility.

How to Become a Bookkeeper

There are multiple routes to becoming a bookkeeper. Each route will require a combination of education and experience. At first glance, the road to bookkeeping can seem a little overwhelming, so we simplified the process into steps. 

Here are a couple of steps to get started:

1. Education and Training

• High School Education: A high school diploma or equivalent qualification is a good start and a necessary requirement to being a bookkeeper. 
• Post-Secondary Education: While not required, pursuing a certificate or associate's degree in bookkeeping, accounting, or a related field can provide extra experience.
• Professional Certifications: Obtaining a professional certification, while not required, should be considered to enhance your credentials. Examples of certifications would be the Certified Bookkeeper designation and the Certified Public Bookkeeper designation 

2. Skills Development

• Bookkeeping Software Proficiency: Learning popular bookkeeping software such as QuickBooks, Xero, or Sage can improve your chances of getting hired and performing well.
• Attention to Detail: Bookkeepers are known for being detail-oriented to record and organize financial transactions accurately.
• Organizational Skills: Well-organized financial records must be maintained to stay on top of deadlines for payments and reporting.

3. Practical Experience

• Gain Experience: Seek entry-level positions or internships that provide hands-on experience after graduating.

4. Career Advancement

• Continuing Education: Staying updated with changes in accounting regulations, software advancements, and industry best practices is an excellent way to increase your performance.
• Specialization: Consider specializing in specific areas such as payroll, taxation, or industry-specific auditing to broaden your expertise and increase job prospects.

The potential earnings of bookkeepers will vary based on location, experience, qualifications, and the organization's size, like most jobs. 

In May 2020, The U.S. Bureau of Labor Statistics reported the median annual wage for bookkeepers as $42,410. However, like most careers, entry-level bookkeepers will probably earn less, while experienced professionals can earn higher salaries.

Salaries can also be influenced by industry demand and the level of responsibility involved. Each company is different. Additionally, bookkeepers who become certified or pursue advanced qualifications could have better earning potential.

Researched and authored by Emily Rustom | Linkedin

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Accounting
• Accounting Policies
• Double Entry
• GAAP Hierarchy
• General Ledger (GL)