IMPORTANCE OF BOOKKEEPING

March 24, 2021

All businesses and organizations whether small or big need to be alert when it comes to bookkeeping.  In order to track and monitor your finances properly, a good bookkeeping system needs to be put in place. Bookkeeping is a very crucial part of the complete accounting process as it gets the business account ready for filing of taxes to the entry of financial transactions. Effective financial accounting and booking are crucial to the success of a business. However, you will require an experienced and well-equipped team to achieve the optimum benefits.

What is bookkeeping?

Bookkeeping involves the classification, organization and recording of each financial transaction that is done throughout the course of an organization operation. Through bookkeeping, a business is able to know its current financial position. Often, most people confuse accounting and bookkeeping. Although these two terms are often used interchangeably, they are very different. Through bookkeeping, accountant uses the information in the books in the preparation of accounting statements. For small businesses, they may choose to work with a simple bookkeeping system for all financial transaction and this is similar to a checklist. For businesses with complex financial transactions, the double-entry accounting process is used.

What are the basic bookkeeping tasks?

Basically, bookkeeping means tracking and recording financial transactions of a business in an orderly manner. Although bookkeeping is essential for businesses, it is also very beneficial for non-profit organizations and private individuals. Individuals responsible for recording all the financial transactions business usually into account:

·         Loans payments

·         Recording expenses

·         Expense payments to suppliers

·         Customer payments for invoices

·         Generating financial reports

·         Monitoring asset depreciation

Types of bookkeeping

There two primary types of bookkeeping and that is single-entry bookkeeping and double-entry bookkeeping.

Singe entry

This is a simple bookkeeping solution for sole traders, start-up and small businesses and this is usually done through the use of excel type spreadsheet or printed papers. The minimum requirement for this type of bookkeeping is having a cash book that will reflect all the payments and receipt of bank account activities.

Double entry

This is a more complex system as compared to single-entry bookkeeping and this can be seen in software like QuickBooks which includes accounts receivable and payable, inventory, cash books, journal entries, trial balances, tracking of loans and ledgers. The reports obtained from this system can either be on the accrual basis or cash basis of accounting.

Importance of bookkeeping

While the necessity of bookkeeping may seem obvious, the primary purpose of bookkeeping is monitoring all the financial transactions of a business. This process allows you to have an up-to-date record of the outgoing amounts, incoming amounts and the amounts owed by business and customers. Other benefits of bookkeeping include:

·         It helps the owner of the business to know whether its making losses or profits.

·         From the records of bookkeeping, it makes it easier for bank managers to determine whether to lend money to a business or not.

·         It helps the business to know the calculations of taxes that need to be paid and also to file returns.

·         Additionally, a well-organized bookkeeping record helps in encouraging a potential buyer if the owner desires to sell the business.

Importance of separating your personal expenses from business expenses

When it comes to monitoring your finances through bookkeeping, there is a need to draw the line between personal expenses and business expenses. As a business owner, you need to understand that a company is an independent entity. Some of the importance of separating one’s personal expenses from business expenses include:

·         It makes it easier to track your business expenses for purposes of filing taxes as businesses are taxed separately from personal finances. Every receipt counts from inventory purchases to operational expenses to office expenditure and this provides a thorough collection of business transactions.

·         It minimizes personal liability. For instance, using personal finances in backing up business expenses is very risky and you may end up signing personal guarantees for loans and leases.

·         It makes it easier for auditing purposes since having separate accounts makes it easier for you to comply with the requirements set by the governments and this also saves time.  

By now you know the importance of bookkeeping and this is a process that will save you time and money. Additionally, it is very important to have separate accounts for business expenses and personal expense.