The Gist of Bookkeeping

When you think of bookkeeping, what comes to mind? Does it induce anxiety or remind you of “that” task you’ve been putting off? If so, you're not alone. But what is it about bookkeeping that some business owners find daunting? And, more importantly, what exactly is bookkeeping?

Simply put, bookkeeping is the act of regularly recording an entity’s financial transactions in detail. So, what makes bookkeeping so challenging? Is it the “detailed” aspect of the definition?

Running a business involves many activities, such as purchasing goods and services, selling products or providing services, and processing payments and receipts. These activities generate data that an entrepreneur or bookkeeper must accurately maintain. Keeping up-to-date records helps business owners make informed decisions with ease, benefiting all stakeholders, including third parties.

Proper bookkeeping provides a realistic snapshot of a business's performance. For instance, an up-to-date balance sheet represents the company’s financial status at a specific point in time. Investors rely heavily on this document when making investment decisions or assessing a company’s capital structure. The cash flow statement, also known as the profit and loss statement, enables a company to quickly identify how it generates revenue, its cash burn rate, and its profitability.

Another advantage of accurate bookkeeping is the ability to meet government imposed tax and filing deadlines more efficiently. Having a clean and detailed set of financial records that are easily understood can greatly reduce the time and cost of preparing tax returns. So, given these benefits, why do some business owners procrastinate when it comes to bookkeeping? Is it because it seems challenging without a background in accounting?

Depending on how you operate your business, there are two generally accepted methods of bookkeeping: single-entry and double-entry. For sole proprietors, small startups, and entities with minimal activity, the single-entry method is sufficient and often preferred. This method tracks cash sales and expenses over a specified period, saving the debit and credit classifications for later. It focuses on three main reports: the cash sales journal, the cash disbursement journal, and bank statements. These reports allow business owners to document cash expenditures as one-sided entries, unlike the double-entry method, which applies the laws of debits and credits.

The double-entry bookkeeping method requires documenting each transaction in two accounts, following the fundamental law of accounting: debits must equal credits. This method is preferred by more complex entities or those operating on the accrual basis of accounting. It requires journal entries, general ledgers, inventory tracking, cashbooks, accounts payable & receivable ledgers, and more. The accrual method of accounting records and realizes transactions when they occur, rather than when the cash is received or paid (as in cash basis accounting). Depending on the complexity of your business, and sometimes legal requirements, your bookkeeping method should be one of these two.

Now that you understand the two types of bookkeeping, here are some tips to help you stay on top of your bookkeeping tasks. First, get organized. If you’re not already doing this, start by documenting every business-related transaction. For example, “How much did I pay for that coffee meeting with a client I just signed?” Remember, bookkeeping is about keeping detailed records, so getting organized is half the battle.

Second, treat bookkeeping as a regular part of doing business. Dedicating even just fifteen minutes a week to organizing your financial records can make a significant difference. Breaking it down into small tasks can make bookkeeping a more manageable habit and help you stick with it in the long term. Following these two tips will help you keep your general ledger up to date.

Finally, should you do your own bookkeeping or hire an expert? This is a decision only you can make, based on several factors. However, two key considerations are: (1) Do I have the time and expertise? (2) What is my opportunity cost if I do it myself? But be aware that inaccurate or incorrect accounting data can have serious repercussions for your business and its officers, so it's crucial to ensure your financial records are accurate. There are software solutions that simplify bookkeeping, and choosing a good one might help. But if you conclude that you need professional assistance, get in touch with us at Davies CPA Consulting Services and let us know how we can help.