What is bookkeeping and how does it help small business?

What is bookkeeping and how does it help small businesses? Bookkeeping is the day-to-day recording of a business’ transactions. The process involves recording, analysing and interpreting of financial transactions. Bookkeeping primarily records the financial effects of transactions and is part of a broader aspect of the accounting process.

In the normal course of business, a document is produced each time a transaction happens. Sales and purchases come with invoices and receipts. Deposit slips are produced when depositing money into a bank account. Cheques are written up when paying money out of a bank account. Pay slips are produced when paying salaries of staff. Bookkeeping first involves recording the details of all these source documents into multi-column journals. For example, all credit sales are recorded in the sales journal; all cash payments are recorded in the cash payments journal.

After a certain period, usually at the end of each month, each column in the journals are summed up and these totals are then posted to their respective ledgers. For example, the total sum of in the sales journal will be leave a credit entry in the Sales account, and a corresponding debit entry will be made in each individual debtors’ account (showing the business who owes them what amount).

Bookkeepers follow a strict double entry principle in which for every transaction, there is a debit entry affecting one account and a corresponding credit entry of the same amount that affects another account. For example, purchasing a $200 printer from Officeworks with a credit card will create a $200 debit entry in the Office Equipment account and a corresponding credit entry of $200 in the Bank account. This shows the business that they have increased the value of their office equipment by $200 and their bank total has reduced by $200.

As a partial check that the posting process was done correctly, a 3-column working document called an unadjusted trial balance is created. It shows the names of every non-zero account in the first column, a debit column in the second and a credit column in the third column. All the accounts with a debit balance has its balance posted in the second column whereas accounts with a credit balance is posted in the third column. The debit and credit columns are added up and if they do not tally, it shows there is a mistake somewhere in the journal recording or posting to accounts. The mistake is then discovered and rectified.

A bookkeeper does all of the above to set up financial statements so that an accountant can easily perform legal and tax management in a timely manner.

A skilled and compliant bookkeeper should be able to produce financial records that give the business accurate information about its financial activities. These records are critical to the future success of any business. Not only are these records necessary for the business, they are also required by law. Australian legislation states that businesses must have up to date financial records to ensure that they pay all necessary taxes.

Records that are accurate and true must be kept for a period of at least 5 years from the date that the documents were prepared, obtained or the transaction completed, whichever occurs the latest. Some records, such as payroll, must be kept for a minimum of 7 years.

 

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