Bookkeeping Basics

financial paperwork

Bookkeeping is the recording of all financial transactions your business makes. Bookkeepers record, classify and organize transactions using supporting documentation such as receipts, invoices, purchase orders, etc.

Most businesses and professional bookkeeping companies now use specialized computer programs like Xero. Now that you have decided to move forward with bookkeeping, either on your own or with an outsourced bookkeeping partner, there are some other things to consider.

Cash or Accrual Accounting

One of the first bookkeeping decisions you may have to make is whether to use a cash or accrual accounting system.

  • Cash: With Cash, you record your transactions when the money hits your bank account. In other words, if you invoice someone on June 25th, and the payment comes in on July 10th, the transaction is recorded in July. Where sales are immediate, like for a restaurant, you should used this method.
  • Accrual: With accrual accounting, in the example above, the transaction would be recorded in June since you record purchases or sales immediately, even if the money doesn’t change hands until later. If you are going to offer customers credit or request credit from your suppliers, you should use this system.

The Chart of Accounts

Your chart of accounts includes all transactions on your Income Statement (P&L) as well as, assets, liabilities and equity, which make up your balance sheet. Each account has a number and a name. You may need subaccounts if your business is complex.

Assets, Liabilities and Equity

  • Assets are what you own: your plant, equipment, land, inventory and accounts receivables.
  • Liabilities are what you owe to suppliers, credit card companies, the bank, the IRS, etc.
  • Equity is the investment you and any other investors have in the business.

Your bookkeeper has to make sure each transaction is recorded correctly, so that your assets always equal your liabilities and equity: everything you own (assets) is balanced against claims against you (liabilities and equity).

Revenue, Expenses and Costs

Your income statement includes revenue from sales and other sources, expenses, and costs. You have to put each financial transaction into one of these three categories:

  • Revenue (Sales) is the income your business receives in selling products or services.
  • Costs are the money you spend to buy or manufacture your goods or services. Also referred to as “Cost of Goods Sold” COGS.
  • Expenses are money spent to run the company not specifically related to a product or service sold, such as salaries and wages, or selling and administrative expenses.

Does it all sound like too much to do on your own? If you are overwhelmed, work with a trustworthy bookkeeping company who can help you through the process and relieve you of the tedious, but necessary task of bookkeeping.