Bookkeeping is a core business function in managing the finance of all businesses. It involves recording, storage, and retrieving all the financial transactions of a company so that money coming in and going out may be tracked accurately regarding incomes, expenses, assets, and liabilities.
The standard bookkeeping method offers a proper way to maintain books of accounts by showing consistency, accuracy, and completeness in financial information. This detailed guide deals with the key concepts, steps, and best practices involved in standard bookkeeping.
1. Learning Bookkeeping Fundamentals
What is Bookkeeping?
Bookkeeping is the systematic recording of financial transactions, such as sales, purchases, receipts, and payments. It forms the foundation of accounting since credible bookkeeping is necessary to produce credible financial statements and other reports. Unlike accounting tasks, which include analysis and interpretation, bookkeeping pays more attention to recording data.
Objectives of Bookkeeping
The following are considered the significant objectives of bookkeeping:
• Record all the financial information systematically.
• Ensure data that is accurate in the financial records.
• Offers information for financial statement preparation.
• It helps track a company’s business performance for decision-making.
• Complies with tax laws and regulations.
Why Bookkeeping is Important?
Bookkeeping serves important purposes in businesses since it:
• Provides financial clarity: Maintains a structured representation of financial information, hence enabling firms to know their income inflows and profitability.
• Legal Compliance: Bookkeeping allows businesses to observe tax filing and auditing standards and other regulatory requirements more easily.
• Supports Decision-Making: Adequate bookkeeping will empower businesses to understand how financially healthy they are for good strategic decisions.
• Budgeting and Planning: Businesses can budget and prepare for events such as a rainy day with the use of proper financial records.
2. Types of Bookkeeping Systems
There are two basic bookkeeping systems that businesses can use depending on their needs and the level of complexity involved.
Single-Entry Bookkeeping
In single-entry bookkeeping, any transaction is recorded once, though it could either be an income or an expense. This is a very simple form of accounting, and it is easily used for small businesses or sole proprietors whose transactions are minor.
Advantages of Single-Entry Bookkeeping
• The system is very simple to maintain,
• Requires minimal accounting knowledge,
• and is cost-effective.
Disadvantages of Single-Entry Bookkeeping:
• There is very limited information about the financial performance of the business,
• More prone to error,
• Not used for large businesses.
Double-Entry Bookkeeping
Most businesses use the double-entry system of bookkeeping. Under this system, with regard to every transaction, there is at least one debit and one credit to at least two accounts. Thus, it will maintain a balance.
Pros –
• Gives comprehensive and accurate view of finances
• Supports complex financial reporting
• Reduces errors
Cons –
• Requires more knowledge of accountancy
•Time consuming
•Possibly involves higher costs for accounting software
3. Key Principles of Standard Bookkeeping
The standard method of bookkeeping follows several principles that should be mainly ensured for accuracy and consistency.
Principle of Accuracy: The records of bookkeeping must reflect a true and fair view of the business’s position financially. Every transaction must be accounted for with minute details such as dates, amounts, and descriptions.
Principle of Completeness: All kinds of financial transactions must be recorded; no transaction can go unrecorded. This therefore ensures that the statements provide a complete view of the financial activities of the business.
Principle of Consistency: The accounting system applied should be consistent from one period to the other. This enhances comparing financial information over various periods and has more credibility attached to it.
Principle of Objectivity: Every transaction should be accounted for according to object evidence and which can be proven. This includes keeping the supporting documents such as receipts, invoices, and statements from the bank for every account entry. Regular entries into bookkeeping give up-to-date records of finances. This leads to a prevention of backlog and reduces the chances of errors occurring.
4. Standard Bookkeeping Process
Bookkeeping flows in steps, ranging from identifying transactions to the production of financial reports. Below is a closer look at the standard process:
Step 1: Identify and Gather Source Documents: All this relates to supporting documents such as an invoice, a receipt, or a bank statement for every transaction. Collecting the source documents is the bookkeeper’s first action in recording bookkeeping.
Step 2: Journalizing the transaction: A journal is another word for the book of original entry. Journals record transactions first before posting them to any book. In double-entry bookkeeping, journals can be pre-arranged according to the type of transaction like sales, purchases, cash transactions, etc.
Step 3: Posting Entries to the General Ledger: Journals are posted to the general ledger after recording transactions. A general ledger is a detailed record of all accounts, including assets, liabilities, equity, revenue, and expenses.
Step 4: Adjust Entries for Accuracy: Adjusting entries are made at the end of an accounting period. Accruals, deferrals, depreciation, and other adjustments that would post revenue or expenses into the proper period.
Step 5: Developing the Trial Balance: A trial balance is used to ensure that debits equal credits. This step will ensure accuracy in recorded entries and is likely to highlight errors before preparing financial statements.
Step 6: Preparing Financial Statements: Using the adjusted trial balance, the major financial statements are developed, namely:
Income Statement: Reports the income of the firm, the expenses for the period, and the profit or loss over the period.
Balance Sheet: Illustrates the assets, liabilities, and equity of the firm on a particular date.
Cash Flow Statement: Represents cash inflows and outflows, comprising all transactions pertaining to the operating, investing, and financing activities.
Step 7: Close the Books: Temporary accounts within the accounting period, such as revenues and expenses, are closed and their balances are transferred to retained earnings. This position accounts for the next period.
5. Components of the Traditional Bookkeeping Method
The traditional bookkeeping method employs several significant elements that help structure and classify financial information:
Chart of Accounts: A COA is an alphabetical list of all the accounts a business employs. Every account would have a different number, which would make it easier to group or classify assets, liabilities, equity, revenues, and expenses.
General Journal: The general journal has all the financial transactions in chronological order, mentioning date, accounts involved, amounts, and a brief description.
General Ledger: General ledger collects data that have been recorded in journals. It has an account-based structure. This will be the main book where all financial data is consolidated and categorized by account type.
Trial Balance: A trial balance is a worksheet showing all accounts and their balances at any point in time. It is used to check whether debits and credits are accurate in the general ledger.
Financial Statements: Financial statements are final outputs of bookkeeping, which summarize the financial performance and position to stakeholders. The three primary financial statements are the income statement, balance sheet, and cash flow statement.
6. Best Practices in Standard Bookkeeping
The following best practices ensure accuracy and efficiency for the standard method of bookkeeping:
Select Reliable Accounting Software: Applying an accounting software like QuickBooks, Xero, or FreshBooks will help most bookkeeping activities to be automatic, increase the accuracy levels, and save much time on physical data entry.Consistency will be the key to good bookkeeping. Make sure you have adequate time to record transactions, reconcile accounts, and review financial reports.
Reconcile Regularly: Periodic reconciliations of accounts, such as bank reconciliations, help reconcile the recorded transactions with the records maintained at the bank. This helps catch errors or discrepancies much earlier.
Separate Accounts for Business and Personal Transactions: Maintaining a separate account for business and personal transactions prevents confusion; an accurate record is maintained, and more importantly, it makes preparation for taxes less burdensome.
Back Up Financial Data: The financial data should be frequently backed up either in the cloud or external drives, so if technical issues occur, records will not be lost due to data loss.
7. Bookkeeping and Its Common Problems
Bookkeeping is not a complicated method at all; however, there may be some common problems to be faced. This section guides you through how to overcome many of them.
Error in Data Entry: Inaccurate financial statements are caused by human errors in manual data entry. Data entry through accounting software or automated data entry tools minimizes the possibilities of these errors.
Cash Flow Management: Poor management of cash flow can lead your company to bankruptcy. Regular monitoring of your receivables and payables in your bookkeeping system will give you some insights into how well you manage cash flow.
Being Compliant with Regulatory Requirements: Tax rules and accounting regulations never stop changing. Therefore, this knowledge of regulation changes and updating records helps in keeping compliance.
Time Constraints: Bookkeeping is just one of the activities most small business owners have to wrestle with. Outside professionals or automated tools are great time savers and accuracy insulators.
Conclusion
Standard bookkeeping is one of the most important practices through which the integrity of financial records is upheld, any business decision is made, and compliance with all regulations is achieved.
A systematic process based on key principles by a business is a guarantee for the reliability of the financial information obtained.
Standard practices include accounting software and reconciliations made often to ensure streamlined bookkeeping, avoid errors, and have more time for other activities in business.