Do you know what the difference between bookkeeping and accounting is, or if there’s any difference at all? If you don’t, you’re not alone.
Bookkeeping is not just another word for accounting – they are actually considered two separate activities.
Bookkeeping focuses on recording and organising financial data – a bookkeeper will keep an accurate track of the money coming into and out, carrying out tasks like managing the day-to-day cash flow, preparing for year-end tax returns and help keep the finances running efficiently.
Accounting is the interpretation and presentation of that data.
Whether you’re a small business owner with a simple business model and only a few employees, or a larger fast growing business, engaging a professional bookkeeper is the most cost-effective way for you to comply with your financial and tax requirements.
This article will guide you through everything you need to know about bookkeeping.
What is bookkeeping?
Bookkeeping is pretty much what it sounds like – managing your business’s books. This means tracking and recording any financial transactions that happen in the business, making sure they are recorded correctly, they are up-to-date and comprehensive.
Bookkeeping is the foundation, covering the essential financial information, which later on can be used to prepare accounts. Let’s have a look at some of the basic tasks that bookkeepers do:
- Recording business expenses
- Recording sales receipts
- Paying suppliers
- Producing invoices
- Providing financial reports
- Posting credits and debits
- Reconciling bank accounts
- Producing regular reports to show the financial position
- And many more…
This is not to say that an accountant will not be able to do these same tasks – bookkeeping is more like a subset of accounting, meaning that accounting will cover that and other, broader areas of business and finance.
Completing your bookkeeping
You are not legally required to hire a bookkeeper to do your books – you’re more than welcome to do them yourself. However, you do need to understand some of the basic business accounting and bookkeeping terms as well as understand the correct bookkeeping principles.
As a business owner, you can’t be expected to be good at bookkeeping. After all, it takes several years of training to become professionally knowledgeable and qualified.
But if you are starting out with a small business and want to set up a simple bookkeeping system yourself, here are the steps you can follow to get started:
1. Set up your business accounts – First things first, you will have to decide where you want all your financial information (or accounts) to be stored and handled. There are two main options: you can simply use an Excel spreadsheet but you’ll probably find it easier to use accounting software.
Most small business accounting software these days, such as Xero, is cloud based, so there is no software to install and you can log into the software from any internet enabled device. Some software for small businesses with very basic requirements is free to use, but it’s most likely that you’ll need a version with a monthly subscription
We always recommend using accounting software rather than Excel. It will be set up to give the accounting information you need and eliminate the possibility of formula errors that can easily occur in a spreadsheet. Accounting software will save you time. However, it is all down to your own preferences and budget.
2. Choose the method of bookkeeping – There are two main methods of bookkeeping: single-entry and double-entry. The latter is a lot more commonly used in businesses, but either one will work. There’s no quick and simple way to explain the difference between the two, but there are hundreds of videos online that do it brilliantly. If you use accounting software the choice will be made for you.
3. Record every financial transaction of your business – This is what completing your bookkeeping really means: you make sure that all your financial transactions for a given period of time are recorded accurately and up to date. It’s essential that each credit and debit transaction is entered correctly and into the right account.
You may also need to balance your books if you’re using the double-entry method, meaning that your total debits and total credits are matching at the end of the time period.
Again, there are tonnes of resources online that can teach you how to do this. Once your books are complete, you’ll be able to create your financial reports using that information.
How often should I do my bookkeeping?
Ideally, you should update your bookkeeping as often as possible. Doing it on a weekly basis would be ideal. You should never leave your bookkeeping until the last minute as then it will become a long and draining process, trying to record months of data in one go.
Besides, recording everything on time minimises the risk of your receipts and other documentation getting lost and impossible to track and it will keep you aware of your financial position.
You’ll need to make sure that information is organised and stored securely at all times. Many cloud accounting software systems will store your documents electronically so you don’t need to keep the paperwork. So, staying on top of your bookkeeping by doing it on time and keeping it organised is key.
What financial reports should I be reviewing?
There are a number of financial reports you can create for your business using the information from your bookkeeping. These reports allow you to understand what your accounts actually mean and summarise the overall financial health of your company.
Reviewing this information will help you make important business decisions swiftly (e.g. cutting down on expenses, negotiating better rates with suppliers, chasing your debtors, etc.).
Here are a few of the most important reports created in bookkeeping:
- Balance sheet – This report shows you the summary for the assets, liabilities and equity of your business at a single period of time. Using a balance sheet, you can see the current financial health of your business and whether you should be reserving cash or could potentially expand.
- P&L (Profit and Loss) statement – Also called income statement, this document shows all of your business’s revenues, costs and expenses over a given period of time (e.g. one quarter). This is useful to compare how well your sales are doing against expenses as well as make forecasts for the following year.
- Cash flow statement – Similarly to the P&L statement, cash flow statement breaks down the income and outgoings of your business as well as its ability to pay bills. However, like its name suggests, the cash flow statement does not include any non-cash items, such as depreciation.
Outsourcing your bookkeeping
Although you can do your business bookkeeping yourself, most business owners choose to outsource it. A trained and experienced qualified bookkeeper will ensure that your books are accurate and up to date.
This is important, as most of the issues in business bookkeeping (when they don’t add up) are caused by simple human errors that are easy to miss. Not only that, but these mistakes can be a pain to find later on. Bookkeepers are trained to be accurate and careful as well as have an in-depth understanding of the correct ways to deal with more complex matters like VAT.
Another reason people choose to outsource bookkeeping is because it actually saves money in the long-run. Although the immediate expense may seem greater, the saying “time is money” has never been more true. Doing your own bookkeeping can be extremely time-consuming, especially once your business starts growing.
As a business owner, you’ll want to spend all of your time on things that are actually important, or will generate profit and growth. In this case, spending hours on completing your bookkeeping is a waste of your valuable time. Besides, professional bookkeepers will already have all the necessary accounting software, so you don’t need to invest in those yourself.
How we do your bookkeeping
Outsource your bookkeeping and accounting to us at ASfB and we will professionally manage your accounts so that you can focus on your business.
We use the latest cloud-based technology and time saving automation so that we can spend more time on making sure you understand your numbers and helping you to make better informed business decisions.
Our software will automatically import all of the transactions from your bank into your accounts and reconcile with the invoices and receipts. Data entry of invoices and expense receipts is automated.
We’ll provide you with the essential reports that will give you valuable insights into your financial business health and performance and we’ll make sure all your financial needs are met, including dealing with your VAT returns on time.
We will become an extension of your business that works with you as if we are your colleagues. Your Virtual Accounts Office – Your Financial Heartbeat.
Do you need help with your bookkeeping?
If you are looking for bookkeeping services in Bournemouth – you’ve come to the right place.
Talk to us about your business and your needs and we’ll present you a clear proposal outlining the best options for you and your business.
We are growth accountants and we work with ambitious businesses of all sizes, so find out now if we are the right fit for your company.
We’d love to hear from you!
Call us on 01202 755600 or drop an email to firstname.lastname@example.org to get in touch.