What is Bookkeeping?
Bookkeeping is the accounting process of keeping track of all relevant information regarding the transactions and financial activities of a business. Accurate and thorough financial bookkeeping is vital for any business as the success of a business is dependent on the bookkeeper accurately recording financial transactions based on supporting documentation.
This documentation may be a receipt, an invoice, a purchase order, or another type of financial record as evidence that the transaction took place. Bookkeeping can be done by hand in a journal, or more often using a spreadsheet program like Excel.
Many businesses now use specialized bookkeeping computer programs to keep track of their financial transactions. Bookkeepers are responsible for updating the chart of accounts, the general ledger, and the company journals, which provide information about all financial transactions.
Bookkeeping differs from accounting as the accounting process uses the books kept by the bookkeeper to prepare the end of the year accounting statements and accounts.
As bookkeeping can be time consuming and have a hugely damaging effect if done incorrectly, companies of all sizes tend to hire a professional bookkeeper to accurately keep track of all financial records.
A Step-by-Step Guide to Bookkeeping
Bookkeeping is a step-by-step process which allows you to keep track of all the transactions in your company’s books. Monitoring a transaction every step of the way means that bookkeepers and business owners can stay aware of their bottom line at all times. Try the following steps guide to bookkeeping to ensure bookkeeping success for your business:
- Source documents are the starting point in the bookkeeping process so it’s important that you gather and prepare all source documents for every single transaction, operation, or business activity.
- The bookkeeping process begins by determining the relevant information about each transaction. Decide which information is relevant and enter in source documents the financial effects of the transactions and other events of the business. Every transaction has a financial effect that’s important to record, the business is either better off or worse off as a consequence of its transactions.
- Using the source documents for every transaction, the bookkeeper enters the first entry into a journal as well as into the business’s accounts. These journal entries record the whole transaction in one place.
- Perform end-of-period procedures. These steps are important for getting accounting records up-to-date and ready for the preparation of management accounting reports, tax returns, and financial statements.
- Compile the adjusted trial balance. A complete listing of all accounts is the basis for preparing reports, tax returns and financial statements.
- Close the books. Bringing the bookkeeping for the financial year just ended to a close and getting things ready to begin the bookkeeping process for the coming financial year.
How to Establish an Effective Bookkeeping System
An effective bookkeeping system is built on a few key elements which are fundamental to keeping your books in order. With these building blocks in place it’s much easier for a bookkeeper to set up a solid system for keeping track of all the business’s transactions. Here are these important components:
- Chart of Accounts: List of all accounts in the books; the road map of a business’s financial transactions
- Journals: Place in the books where transactions are first entered
- General Ledger: The book that summarizes all a business’s account transactions
It’s important to note that the bookkeeping process should allow for communication of the financial results of the firm at the end of the year for income tax purposes and the preparation of financial statements by the firm’s accountant.
Even though the step-by-step guide to bookkeeping is fairly straightforward to explain, it’s another thing to dedicate a huge chunk of your time to ensuring this information is meticulously gathered and stored.
Hiring a professional bookkeeping service can actually save you money by reducing the chance of errors and ensuring bills get paid on time. Focus on what’s important to your business, ensure your taxes are paid correctly and keep your cash flow in good shape by hiring an expert.
At BNA Consulting we provide bespoke Bookkeeping Services for a wide range of clients and are the go-to company for Bookkeeping Services in London.