Bookkeeping

Why is bookkeeping important for businesses?

Proper bookkeeping helps you maintain accurate financial records, which businesses need by law to do for taxation purposes. Besides the legal requirement, good bookkeeping offers practical business benefits.

How to get started with bookkeeping?

The first step is to familiarize yourself with bookkeeping terms and phrases. (You can find a glossary of bookkeeping terms below).

Bookkeeping Glossary

• Account: A place to record financial entries transactions. You enter business credits and debits related to the operation of your business.
• Accounting: The process of organizing and entering financial data into a bookkeeping system for your business.
• Accounts payable (A/P): These are funds owed by your business to other businesses or authorities. Money that you owe is also known as a liability.
• Accounts receivable (A/R): This is money owed to your business by your customers or other entities. Money owed to you can also be called an asset.
• Assets: This is any item of value owned by your business. It includes cash and accounts receivables, as well as any equipment or vehicles owned by your company.
• Budget: A financial plan that estimates what you will earn during the year and what your earnings will spend. Once this plan is in place, you can then compare the actual figures to what was estimated.
• Capital: This refers to cash or other assets a business owner has to start and run.
• Credit: A credit is a bookkeeping entry that decreases assets and expenses and increases income and liability.
• A creditor: A person or business to whom your company owes money.
• Data: Financial information entered into your bookkeeping system.
• Debit: A debit is an entry in your bookkeeping system that increases assets and expenses and decreases income and liability.
• A debtor: A person or company that owes your business money.
• Deductible expense: This is a purchase that reduces the amount of income tax you owe the government because it reduces your profit.
• Depreciation: A decrease in the value of assets owned by your business over time; is due to wear and tear or the natural obsolescence of a physical asset and can be claimed as a business expense and can reduce your income tax.
• Double-entry: This bookkeeping system records financial information twice: once as a debit and once as a credit.
• Equity: The net assets of your business minus your liabilities.
• Expenses: Refer to purchases made by the company’s business or costs the company incurs to reduce the amount of tax owed to the government.
• Fiscal year: A financial year is comprising 12 months. Your company’s fiscal year can follow the calendar year, or it can begin with any month and is used to calculate income taxes at the end of those twelve months.
• General ledger accounts: Displays all financial transactions (debits and credits) in the ledger or primary accounting record a company uses.
• Gross profit: The business’s income minus the cost of sales is gross profit. If the prices of sales exceed the revenues, this is known as gross loss.
• Liability: Any debt owed by the company to other businesses or authorities. Liabilities can include loans or credit card balances.
• Net profit: The amount of money a company has after subtracting all expenses from gross profit.
• Opening balance: This is the amount of money a company carries forward on the first day of the month. This amount should match the ending balance of the previous month.
• Payable: Any bill that is due from your company is part of your accounts payable.
• Petty cash: This is a small amount of money kept on hand for small purchases, such as stamps, pens, etc. These purchases are typically not recorded in the general ledger.
• Profit: Refers to the difference between a company’s earnings and what it pays in expenses.
• Receivable: Funds that businesses owe you and should include in your accounts receivable report.
• Reconcile: A process in which you review your records against the bank statement to ensure they match. It is also a way to ensure you paid all invoices you owe.
• Recurring: A transaction for a preset amount that occurs at a set time, i.e., weekly or monthly.
• Remittance: Refers to payments that a company makes about an invoice or bill.
• Statement: A summary of financial information. Examples of usual statements can be a profit and loss report or a bank statement, which lists all of the transactions in a bank account for a period.

Do I need to reconcile all of my bank accounts?

Any active accounts should be reconciled at month-end, even if there are only a few transactions.

What if I can’t reconcile the two balances?

If you’ve entered adjustments for both your bank balance and your GL balance, and there is still a bank reconciliation problem, you will need to continue to review both your bank statement and your G/L to locate the missing item. This approach may require going back several months to find the issue, which is why reconciling each month is so important.

How do I get started with bank reconciliations?

If you’re doing a bank reconciliation for the first time, it can be helpful to look at a bank reconciliation example to ensure that you’re doing it correctly.