Bookkeeping and Its Importance

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Bookkeeping is a term that refers to recording financial transactions and activities on a daily basis. It is the process of identifying, measuring, and recording financial transactions. Bookkeeping is a part of the accounting process confined within record keeping. Companies can make key financial, operating, and investing decisions and are able to track all information on their books.

The accounting system of a business identifies, record, classify, summarize, measure, interpret, process, and communicate the information to its stakeholders. Mostly the transaction of a business includes purchases from suppliers, sales to customers, payment to suppliers, etc. These transactions may incur from an individual or a company. All the transactions should be recorded in an accurate way in order to keep the records straight and avoid any misinformation. Without proper bookkeeping, it would not be possible for companies to know their current financial position and the transactions that occur within the company.

Accurate bookkeeping is essential for external users, including the government, investors, and financial institutions as well as those who have reliable information about the company’s financial standing to make better investment and lending decisions. In short, the whole economy relies on error-free and reliable bookkeeping for both internal and external users.

The purpose of bookkeeping is to;

  • Enter the financial transactions resulting from business activities accurately, following good bookkeeping practices.
  • To communicate the financial results of those activities.

Here are a few reasons that show why bookkeeping is important.

Expenses:

The bookkeeper is the one responsible for recording and monitoring business expenses accurately. For example, a business owner can claim expenses that have been incurred as a business expense. These expenses are to be paid from the business bank account on a consistent basis. This ensures the bookkeeper to monitor outgoing cash for tax purposes.

Taxes:

It is the responsibility of a business to provide information on its profits and losses on regular basis to assess the tax it owes. The information provided must be presented in a professional and accurate way. If a business fails to provide the information correctly, or in a timely manner, it may face fines and penalties imposed by the government and could impact the business negatively.

Cash Flow:

It is important for a business to track its spending regardless of its size. It is only possible with accurate financial records. Businesses have to see how much cash is going out and how much is coming in. The key business decisions are based on projected sales or upcoming transactions. If this information is not recorded properly, it may lead a business to collapse. Without proper recording of business transactions, business decisions cannot be effective. Many growing businesses have failed because they were hit by a cash-flow crisis and they weren’t prepared.

Profitability and growth:

Small businesses usually do not record the transactions properly and hence, they cannot calculate their profits or losses over a specific period. Unerring bookkeeping is crucial to ascertain the amount of profit a business is making. It gives an insight to the business owner about the progress the business has made over the years. This helps the businesses to make comparisons and identify patterns that can lead them to profitability and growth over time and avoid pitfalls in the future.

Types of Bookkeeping

Single-Entry System

The single-entry bookkeeping system is used for businesses that have minimal or uncomplicated transactions. A financial transaction is recorded only once under this system. Single entry system records sales and paid expenses when incurred. This system consists of a cash sales journal, cash disbursement journal, and bank statement. When revenue is received, an entry is made to the sale journal and an entry is made to the disbursement journal when an expense is paid. The journal entries should reconcile with the bank account transactions. This system does not comply with Generally Accepted Accounting Principles (GAAP), and also can’t help in the decision-making process.

Double Entry System

Every financial transaction is recorded at least in two accounts under a double-entry bookkeeping system. Each debit must have a similar amount of credit. This system is used by businesses with complex transactions. Companies that collect income through accounts receivable and receive inventory on credit use this method. The double-entry system makes it easy to trace the transaction and allows the accounting equation to maintain an equal balance in asset and liability.

Bookkeeping Software

Many businesses now use accounting software to keep track of their financial activities. This software has eliminated many bookkeeping and accounting tasks or has enabled the users to perform those tasks simultaneously. For example, sales invoice preparation will automatically update the general ledger accounts, update customer information, and store the information electronically for financial and other reports. This software help saves a lot of time and errors that occurred in a manual system.

The basic skills required for effective bookkeeping include knowledge of math, data entry, and computer skills, and details oriented as the bookkeeper is surrounded by financial reports and numbers. While most of the companies do not require bookkeepers to have a certification, it, however, help get the attention and high-income opportunities. Getting a bookkeeping certification from a recognized certifying body is one way to demonstrate one's expertise and qualifications. Taking a bookkeeping training course can help students and professionals to understand the principles of bookkeeping, basic accounting, providing financial reports, monitoring receivables, and develop business communication skills that are essential for the bookkeeping career.