While essential to a company’s financial health, bookkeeping can be a responsibility shrouded in mystery. Having an understanding of this important function and how it can help your accounting department can empower you to be a better business owner.
What is bookkeeping?
Bookkeeping is a method of recording the financial transactions that are used by businesses on a daily basis. These transactions can include purchases, receipts, sales and payments that are made by a certain individual or an association.
A bookkeeper’s primary task is to keep track of financial records and the resulting impacts of a particular transaction. A bookkeeper keeps the books up to date and presents the accounting team with a trial balance sheet, which is then further validated and used to prepare financial statements.
What kind of process does a bookkeeper go through?
When a transaction occurs, different types of receipts or invoices are typically produced. Bookkeepers utilize different kinds of books to keep records of transactions. Different segments have different journals—a cash payment would be recorded in a cash payment journal for example, while sales would be recorded in a sales journal. Different columns are made for different accounts in the journals. For some, the transactions are recorded once only, and for others, they are recorded many times. People who keep track of their check books use this kind of a system.
At the end of the month, the columns are added in order to calculate the net amount for the month. After that is done, the summaries are transferred to the respective accounts in their given account books. The process in which summaries or the individual transactions are transferred to the respective accounts is known as posting.
What systems do bookkeepers use?
While there are several different types of bookkeeping entry systems, two types dominate the business world: the single-entry bookkeeping system and the double-entry bookkeeping system.
Single-entry system: This system uses the basic income and expense accounts that are recorded in an expense journal. This is the perfect method of entry system for small businesses. There are different accounts that are maintained for cash accounts (received or paid), normal cash or any other transactions such as travel and inventory expenses.
Double-entry system: For this type of the entry system, two different entries are necessary in order to complete each transaction. These take place for assets, liabilities, equities, expenses or even revenue accounts. This system is used to maintain a set of rules that record all the financial information when a transaction occurs for several accounts.
What terminology does a bookkeeper utilize?
Bookkeepers must keep track of many abbreviations within the bookkeeping entry systems in order to effectively do their jobs. Some of the main terms include:
- A/C – Account
- A/R – Accounts Receivable
- A/P – Accounts Payable
- B/S – Balance sheet
- CP – Cash Payment
- TB – Trial Balance
- P/R – Payroll
- PL – Profit and Loss
The difference between bookkeeping and accounting
While bookkeeping and accounting are often confused for each other, in reality they are quite different. Bookkeepers track ongoing financial transactions in order to keep your business running smoothly. Accountants assess the data presented by the bookkeeper, providing final reports that can help you better measure your company’s financial health.
Are you interested in outsourced accounting or bookkeeping services? Contact NuVest Management Services to help find your solution.