16 Sep What Is Bookkeeping?
Bookkeeping is a meticulous process that allows you to categorize every financial transaction, ensuring transparent and accurate financial records. Whether you're keeping track of revenue, expenses, or liabilities, bookkeeping is essential for maintaining compliance, making informed business decisions, and ensuring your company's growth and stability. Continue reading to learn more about bookkeeping solutions.
Bookkeeping Definition
Here's an analogy to help you picture what bookkeeping is. Imagine your finances are a big bag of M&Ms; bookkeeping sorts all those M&Ms by color. In other words, bookkeeping solutions categorize and transfer your financial information into organized records, making everything neat, tidy, and easy to understand.
Importance of Bookkeeping
Categorizing financial information correctly in a business is crucial for two main reasons:
First, the IRS requires it, so bookkeeping is a matter of compliance. Secondly, proper categorization allows you to use those numbers to make informed business decisions and fully understand your company's financial health.
Cash vs. Accrual
The difference between cash and accrual accounting comes down to timing. Cash accounting records transactions only when money is actually deposited into or withdrawn from your bank account. In contrast, accrual accounting takes it a step further by including accounts receivable, accounts payable, and amounts charged to credit cards. The latter bookkeeping solution offers a clearer picture of your financial situation from one month to the next.
The advantage of accrual accounting, especially in construction, lies in how it handles timing. For instance, if you complete a job in one month but don't get paid until the following month, cash accounting would show the expenses for materials and other costs on your profit and loss statement for the current month, making it seem like you took a loss. Meanwhile, the income from the job wouldn't appear until the following month, which could give you an inaccurate picture of your financial performance. Accrual accounting avoids this by matching income with expenses to reflect your business's actual financial health.
Importance of Accurate Record-Keeping for Tax Compliance
Accurate record-keeping is essential for tax compliance because, during an audit, auditors will scrutinize every receipt and transaction in your bank statements and books. If they discover errors in categorization, they can charge you additional taxes, fines, and penalties for late payment on those amounts. Proper record-keeping helps you avoid these costly mistakes.
Beyond tax compliance, accurate records are essential for making sound business decisions. Without the right numbers, it's difficult to make informed decisions.
How Bookkeeping Supports Financial Decision-Making
When reviewing a profit and loss statement, two critical figures to focus on are income and cost of goods sold (COGS). If your bookkeeping is accurate, COGS should typically be a consistent percentage of your revenue. For example, if your sales double, your COGS usually double along with it. This relationship allows you to determine how much you need to sell to cover all your selling, general, and administrative expenses, break even, achieve a specific profit margin, or even purchase new equipment. These are just a few ways you can use your financial data to make informed business decisions.
In addition to the profit and loss statement, the balance sheet offers a snapshot of your business's overall value. Balance sheets show what your company owns (assets), what it owes (liabilities), and the difference between the two (known as equity).
Benefits of Professional Bookkeeping Services
Opting for a professional for bookkeeping services is a crucial decision for a couple of reasons:
First, most business owners, particularly those running small businesses, often need help understanding accounting concepts like debits, credits, and the relationship between the profit and loss statement and the balance sheet. This can lead to miscategorization and inaccurate financial records.
Second, time is a significant factor—business owners typically excel in their specialty, not accounting. They make money when they focus on what they do best and lose money when they spend time on bookkeeping tasks.
Common Bookkeeping Mistakes
One of the most common bookkeeping mistakes comes from using third-party software to process credit card payments. The problem arises when the software sends sales data to QuickBooks, but the deposits made to your bank don't match those sales due to transaction batching and fee deductions by credit card companies. This discrepancy can make it challenging to match the sales recorded in QuickBooks with the bank deposits, complicating fee tracking and the reconciliation process.
Conclusion: Three Types of Bookkeepers
There are three types of bookkeepers you'll find.
First, a tax company that offers bookkeeping as an additional service. They will likely hire someone to handle data entry while occasionally reviewing their work. The downside of using a tax accountant for bookkeeping is that they often rely on journal entries to correct QuickBooks, which can lead to issues with accounts payable, receivable, and inventory.
Second, a bookkeeper who has taken a course in bookkeeping and QuickBooks but may not fully grasp the underlying accounting principles. The drawback of a bookkeeper who has only completed a course is that they may lack a deep understanding of accounting, making it harder to identify and correct errors in financial reports.
Third, you can hire an accountant who also specializes in bookkeeping. At Foundation Accounting & Consulting, we understand both the accounting and bookkeeping processes. If you're ready to spruce up your bookkeeping processes, contact Foundation Accounting & Consulting and ask about our bookkeeping services!
