Record keeping is an essential part of every company. Knowing how to keep accurate financial records, along with possessing the ability to understand the information contained in those records can make or break any type of business. This is precisely why it is important to have a general understanding of bookkeeping basics. Even if you have chosen to have a professional handle your records, you still should understand some basic principles as it will help you track what is going on with your finances.
What Is Bookkeeping?
Bookkeeping is simply a record of all financial transactions that take place within a business. These records are kept in journals, which can either be single entry journals or double entry journals.
Single Entry Bookkeeping
Single entry journal bookkeeping is the most basic form of record keeping. This is similar in nature to filling out the register in your checkbook when you make a payment. Every type of financial transaction is entered into the journal, and is classified as a debit or a credit. All incoming money is a debit; all outgoing money is a credit. No matter how small the transaction is, it must be recorded in the journal. Single entry journals keep only simple information, based upon the assumption that all the money is coming out of or going into a single account. This type of bookkeeping is ideal for businesses that are very small and do not have multiple accounts or complex transactions.
Double entry Bookkeeping
If your business is larger, it will be more efficient to switch to a more involved form of bookkeeping. Double entry journal bookkeeping is one type of system that works quite well for larger businesses. This type of record keeping actually tracks all transactions going on the principle that all money has to come from one place and end up in another. In other words, if a transaction is marked as an expense, the money used to pay for it must be shown coming from another area. In order to keep track of such information, the journal is typically set up with two separate accounts. An entry for each transaction is then made in each account, hence the double entry. For example, if you receive a payment for goods or services, you would enter this amount as a debit into the “cash” column. You would then make an entry into the “accounts receivable” column as a credit. The payment is added to the cash account and subtracted from the accounts receivable account.
Another fundamental bookkeeping principle is reconciliation. This simply means that you need to create a report called a trial balance, usually at the end of each month. The trial balance will contain all of the information that you kept track of in your journals in order to make sure the information is complete and accurate. Each credit and debit will be totaled for all categories in the trial balance. When all of the information has been entered correctly, the total debits and total credits will be equal. If the totals are not the same, the account is not balanced, which means an error has occurred. If you end up with an error, you will need to go back into your journals to find where the mistake originated. You will be able to easily find this mistake as long as you have kept complete records.
These bookkeeping basics remain the same for everyone; no matter if you tend to your records yourself, if you use a software program, or if you outsource your bookkeeping to a service or professional. Understanding these basics will put you in a better position to track your own data, as well as your overall financial position. The better you are at keeping complete records that document every single transaction, the better able you will be to spot financial problems before they happen.