Introduction
The act of recording and monitoring a company's financial transactions is known as bookkeeping. Bookkeepers regularly compile this work into reports that demonstrate the financial health of the company. They might also carry out broader duties including billing, paying bills, filing tax returns, keeping track of KPIs, and giving strategic counsel.
Traditionally, bookkeeping has been used to describe the ongoing maintenance of a company's financial records. In the past, bookkeepers did nothing more than acquire and review the data used to create accounts. The next chapter will examine how their role has changed throughout time.
Accounting is the process of analyzing, summarizing, and reporting the information that bookkeepers collect. Accounting reports provide a picture of a company's financial performance and estimate tax liabilities.
Accounting degrees demand extensive study and training in finance and company management, as well as tax and other rules that businesses must follow. Although some bookkeepers might have acquired comparable abilities, that level of education is not necessary to be referred to as a bookkeeper.
Importance
1. Aids You in Accurate Budgeting
Any firm needs bookkeeping because it makes budgeting much simpler. Reviewing your financial resources and charges is straightforward when your income and expenses are organized appropriately.
Your business's financial roadmap is created by your budget. With a budget in place, you can prepare for upcoming costs for your company's growth. It's far more difficult to obtain an accurate budget if you don't maintain correct and current books because most calculations are guesswork.
2. Keeps You Tax Prepared
At the conclusion of the tax year, businesses must file their taxes, which is irritating. You'll have financial data prepared for tax season and the taxman won't be on your tail if you have a bookkeeping procedure in place.
Therefore, by maintaining precise balance sheets over time, bookkeeping routinely implies you'll be able to predict the conclusion more accurately when HMRC requests a financial statement from your business for tax purposes.
3. Keeps Records Organized
Missed deadlines and a few minor mistakes may occur as a result of the stress of scrambling at the last minute to discover a critical piece of work. Any size business cannot afford to make a mistake, and regular bookkeeping may assist.
You may keep organized records by doing your books frequently, staying on top of things, and not waiting until the last minute. Finding the information you urgently need in no time will get considerably simpler over time.
4. Business Targets Are Simpler to See
Every firm wants to expand, but doing so at the desired rate may be hindered by unsatisfactory financial records. It's difficult to set growth goals for oneself when there are no precise figures or statistics to analyze.
Again, it will be because you're speculating on everything, thus you'll be unhappy that you fell short of your earlier goals. You may map out your business goals more precisely and experience progress by staying on top of your books and maintaining regular financial records.
5. Complying with laws and regulations
Every time the government announces a new effort, it is primarily to make life simpler for them. Most recently, the government has expected firms to comply with the Making Tax Digital (MTD) project.
Businesses will be required to begin filing their taxes digitally using applications and software, as it states right on the tin. You'll need to use an app in addition to doing your books in this situation.
In all honesty, the procedure is fairly simple if you utilize an intuitive software. Additionally, it will spare you from any fines and eliminate the requirement for you to spend money outsourcing your books.
6. Provides Additional Peace of Mind
Unorganized books, issues with HMRC, and approaching tax deadlines can all cause a lot of stress and anxiety. The last thing a business owner needs is to worry about bookkeeping matters on top of their regular duties.
You won't be awake at night worrying about your books after they are finished and organized. Knowing that the financial data for your company is prepared for examination frees you from worrying about HMRC. You may concentrate on other aspects of your business since your mind will be at ease.
7. You Pick Things Up as You Go
It makes no difference whether you are an expert in bookkeeping or a complete beginner. You will have many opportunities to acquire new things and fill in knowledge gaps if you practice digital bookkeeping. With an app, free workshops and resources from HMRC, or even reading web content, it can be done practically.
You may learn a lot more about your company's finances from bookkeeping than you might believe. You will benefit from all you learn in terms of making wiser business decisions.
Types of bookkeeping
1.Single Entry System of Bookkeeping
In a single entry system of bookkeeping, a business's transactions only impact one account, meaning only one account's value will change as a result of a transaction. A cash book that details the payments and receipts for cash transactions is created under this method.
The only ledgers that are kept in a single entry method of bookkeeping are the cash book and the personal accounts of the creditors and debtors. Without using the double-entry accounting rules, every transaction of the company is recorded in the cash book. Under this approach, the nominal accounts and real accounts are not recognized.
The records for taxes paid, account payable, cash, receivables, and a select few additional accounts are kept up to date using this system. Single-entry bookkeeping systems are typically preferred by small firms since they are simple to maintain and have few requirements.
Features of Single Entry Bookkeeping System
Original Certificates
Under this approach, the initial vouchers are crucial. They assist in gathering data such as the total amount, the transaction date, the discount (if applicable), the parties, etc.
Money Book
The cash book is kept in accordance with the single entry system of bookkeeping in order to record the business's cash receipts and payments throughout a specific time period. There is only one cash book kept, and it contains both personal and professional transactions.
Personal Account
To calculate the total amount of credit purchases and sales during a specific time period, the single entry system keeps track of the personal accounts of all creditors and debtors. Personal accounts are kept track of under this arrangement, although real and nominal accounts are not.
No Set Rules
For calculating the profit and creating the various financial statements under the single entry system of bookkeeping, there are no set rules or principles that apply consistently. It is therefore simple to maintain. However, as there are no set rules, its applicability may differ from one business to another.
Estimation of Profit or Loss
Based on the information at hand, the business's profit or loss is estimated. As a result, the precise gains or losses cannot be determined. The revenue or loss are projections. As a result, it is impossible to determine the business's overall financial situation.
Last Accounts
In the single entry system of bookkeeping, it is challenging to create the final accounts since actual and nominal accounts information are not readily available. Based on the available data, estimates were used to compute the assets and liabilities. The Statement of Affairs is therefore prepared rather than the Balance Sheet.
Advantage
A highly easy and cost-effective way of bookkeeping is the single entry system. The following are some of this system's benefits:
Basic and Easy
The single entry system of bookkeeping is simple to use and maintain. It does not have a predetermined set of guidelines and regulations to go by while documenting financial transactions. Because of how easy it is to use, anyone with a basic understanding of accounting can maintain this system.
Economical
The single entry system of bookkeeping is a method for keeping track of and recording economic transactions. It is not necessary to recruit skilled accounting personnel or professionals to record the company's financial activities. Due to the small quantity of financial transactions, it also does not necessitate keeping many books.
Simple Profit Calculation
The one entry bookkeeping technique makes it simple to compute the profit. It is simple to determine the business's profit and loss at any one time because it is based on the income statement.
Disadvantage
The one entry approach has a number of shortcomings despite being straightforward and affordable. The following are the single entry system's drawbacks:
Unsystematic and unscientific
Because it does not adhere to any set principles or criteria for documenting financial transactions, the single entry system is an unscientific and ad hoc method of maintaining financial records.
Incomplete System
Since the single entry system does not record two components of a business's financial transactions, it is regarded as an incomplete accounting system. It doesn't keep track of transactions involving the real and nominal accounts; it just keeps track of the cash account. Due to the fact that it only records a portion of all financial transactions, it is unable to provide the management of the firm with all the necessary information.
Inaccuracy in Arithmetic
The single entry method is unable to provide mathematical precision for the books of accounts since it is not founded on the concepts of credit and debit. A trial balance to verify the mathematical accuracy of the books of accounts is not possible under this approach. Due to the lack of mathematical correctness, there is a risk of committing.
Double entry Bookkeeping System
Steps of double entry
At a glance: The principles of double-entry accounting
1.To post your financial transactions, start by creating a chart of accounts.
2.enter each transaction using debits and credits.
3.Make sure each entry has a debit entry and a credit entry .
4.Verify that the financial statements balance and accurately represent the accounting equation.
Advantage Double entry Bookkeeping System
1. Because each transaction has two sides, the total of one side must equal the total of the other side. This enhances the reliability of records.
2. The business owner and other interested parties have access to the most information possible.
3. Every revenue and expense transaction is documented, ensuring that accurate information about profits and losses is given.
4. Indicates the company's financial standing at any given time.
5.Reduces the possibility of errors and makes it simple to find them if they are made.
6.Acts as a thorough record of the company.
7. Verifies the accounting books' mathematical accuracy.
8. It is possible to calculate the profit or loss that was incurred for any given time period.
9. Any organization can make use of the double entry system.
10. Displays all of the amounts due or payable.
11. Transactions of an internal or external nature are easily handled.
12.Having access to the financial statements from the prior year makes it simple to compare them to those from the current year.
13. Displays the current value of the cash on hand.
supporting management decision-making.
Disadvantage of Double entry Bookkeeping System
1. Because money is an immovable unit of measurement, inflation cannot be controlled.
2. No events that cannot be quantified in monetary terms are recorded.
3. If the incorrect amount is entered in the record, it can be challenging to locate errors.
4. The system is dependent on the accountant's subjective judgment, which might be biased or inconsistent.
5.It's difficult to maintain and takes a lot of time, making it inappropriate for small firms (especially those where only the business owner manages the business).
Conclusion
What do you hope to achieve with your bookkeeping?
Bookkeeping has two main objectives. maintaining a record of your earnings and outgoing costs to increase your likelihood of turning a profit. assembling the relevant financial data to enable you to submit the required tax returns to the federal, state, and municipal taxing authorities.
Don't they seem straightforward, then? If you keep these objectives in mind anytime you feel overwhelmed by your financial condition, they will come true. Your financial information is not required to be stored in a specific order. You can store your data on paper ledger books, in a low-cost program like QuickBooks, or even in a high-end accounting application. As long as you document all of your transactions, it is irrelevant. As long as your accounts accurately reflect the revenue and expenditures of your company, there is no "right method."