Without a doubt, accountants are essential in cash management for businesses. They are indispensable, whether in small business finance or significant business matters. Business bookkeeping is necessary for small, medium and large companies. It is one of the top small business services. Moreover, SME accounting is constantly improving and upping its game, making it more convenient for small-scale and medium-sized enterprises to keep up with the times and manage their finances better.
If you own and run a company, you may think that the expenses pile up, making it hard to turn a profit. If you want to somehow leave yourself with a certain amount of money after paying bills, you must find means to simultaneously lower costs and increase earnings. Bookkeeping is the act of recording your company’s financial transactions into an organised record every day. It can also relate to the various record-keeping procedures available to choose from. Bookkeeping is an essential part of your accounting operation for several reasons. Keeping detailed transaction records will help you generate thorough financial reports that assist you in measuring business operations. It will also be helpful if a tax revenue audit occurs. This guide will introduce you to the different bookkeeping methods that accountants utilise.
Methods of Bookkeeping
First, you must consider which bookkeeping method to use for your business. When making a selection, think about how many transactions the firm makes daily and how much money is made. A bookkeeping method for more prominent businesses may present additional complications if you’re a small company. On the other hand, the weaker approaches to bookkeeping won’t be enough for big corporations. Now we will clarify how accountants choose accounting systems for the different business types.
A single-entry bookkeeping process uses a single transaction entry for each bookkeeping process, such as recording sales receipts and paying expenses. Single-entry bookkeeping works well without extensive training and can be done using cash books. Any small company that does not buy or sell on credit will generally benefit from the single-entry method. It also works well with sole proprietorships that do not own physical assets or have substantial inventory.
A more advanced double-entry bookkeeping system adheres to the tenet that purchase or charge that affects two accounts is recorded as a debit in one account and a credit in the other. For example, if you make a sale for $20, accountants will debit bank accounts for $20, and accountants will credit savings accounts the same amount. To keep record-keeping straight, the sums have to equal the balance. When that occurs, the books will be balanced. The double-entry system will be the most beneficial to your business if your business is concerned with a large number of sales, you hire many people, or you credit your customers. Instances of double-entry bookkeeping are frequent, so check them out if you have the chance.
Cash-Based or Accrual Based
Now you need to consider whether you want to opt for an accrual-based or cash-accounting basis for bookkeeping. This choice will depend on when your company recognises its earnings and expenditures. In cash-based accounting, you enter an account’s source of revenue when you get income or pay out an account. Expenses are then recognised if bills are paid, meaning purchases and sales made using credit don’t go into your bank account until you obtain payment. In the accrual method, revenue is acknowledged when it is gained. Likewise, expenses are recorded as incurred, typically alongside corresponding revenues. The actual cash doesn’t have to enter or exit for the financial transaction to be registered. You may record your sales and purchases on credit straight away.
The cash and accrual accounting approaches can work well with single or double-entry accounting. However, the single-entry accounting system is commonly utilised for cash-based bookkeeping. Transactions are recorded as single entries, either incoming or outgoing cash. Accrual accounting has a more significant benefit in using the double-entry bookkeeping system.
How to Record Entries in Bookkeeping
Creating financial statements like balance sheets, income statements, and cash flow statements can help you recognise where your company is currently and formulate a better picture of its performance. You should accurately document all of your transactions if you want the reports you’re creating to accurately reveal your company’s performance. Keeping these records updated and as current as possible is also beneficial when dealing with your financial accounts.
Recording transactions begins with source materials such as receipts, invoices, bills, and cash register tapes. Once you collect these source documents, you can record the transactions using journals, ledgers, and the trial balance. You may only need a cash register if you’re a small business. Next, information can be collected and consolidated, resulting in financial statements.
A cash register is an electronic financial instrument used to calculate and record the amount of money a business spends. A log is typically used to record the sale amount collected once the sales transaction is complete. The funds collected for the transaction are subtracted from the balance of the register, which serves as the transaction’s single-point-entry financial account. Cash registers can also help you record recent sales in your sales journal.
You can find cash registers in businesses of all sizes, but they aren’t usually the primary method of recording transactions. For that reason, they’re typically used in small businesses but lack more complex functionality suitable for larger organisations.
The company’s account log is called the book of the first entry. It is a journal that chronologically records company activities for the first time. The journal can be either physical (in the form of a book or diary) or electronic (stored as spreadsheets or data in accounting programs). It reveals all transactions chronologically, along with what accounts were credited or debited and the balance. While the journal is not usually checked for compensation at the end of the fiscal year, the journal entry impacts the ledger. Accountants should balance the ledger, so keeping an accurate journal of their activities is essential. This type is beneficial for double-entry bookkeeping.
A book or audit is known as a ledger. Additionally, it’s also called the revision of intermediate entry. For example, after you purchase transactions in a register, they are arranged in separate accounts and blended into the ledger. These records are transcribed chronologically by accounts, starting with assets, liabilities, equity, income, and expenses. Similar to the journal, it can be a physical or electronic spreadsheet.
A ledger is a chart of accounts that shows a list of the participants’ names and the funds in which they participate. The duplicate accounts appear in the ledger after being transcribed, usually in the same order in which the accounts first appear. Unlike a journal, auditors examine ledgers to keep them balanced by the end of each year. If the total amount of debits exceed the number of credits, it is called a debit balance. If the amount of credits exceeds the number of debits, a credit balance results. Double-entry bookkeeping’s ledger is essential for recording transactions that alter two sub-ledgers each.
The trial balance comprises the summarised and compiled ledger entries. The trial balance is like a test to check if your books are balanced. It lists the accounts correctly: assets, liabilities, equity, profits, and expenses, ending with the account balance.
An accountant may generate the trial balance to summarise your company’s state and validate the registers. Accountants can find the balance of your association on this trial balance. It is not always accurate, though. Any poorly interpreted or transposed journal entry can cause a wrong trial balance.
The next step is to generate financial statements. This is accomplished by gathering the info you accumulated over a specific time and summarising it in economic words. These financial statements will provide insight into your company’s performance over time and show areas where you can improve. The main reports that all companies must dissect are the income statement, the balance sheet, and the cash flow statement.
Correct bookkeeping leads to continued success for your enterprise. Rigorously improving the core elements of your operation without the appropriate accounting process would be incredibly difficult. But regular bookkeeping is essential; you must not implement the wrong system in your company. Some companies may use old-fashioned accounting methods such as physical journals and paper diaries. However, as more high-tech tools become available, even small businesses can find significant value through computerised options like those offered by MoolahMore.
The money management system, MoolahMore, helps you keep financial records of your business and efficiently complete routine accounting tasks. Its quick and automated resolution system takes care of cash management, accounts payable receivable, bank reconciliation, and generating financial statements, leaving you with more time and energy to focus on growing your business.
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