A Guide to Different Types of Bookkeeping
Bookkeeping is the process of collecting and organizing data on all of your business’s financial transactions. Every expense, payment, as well as any profit is accounted for. This includes sale invoices, payroll ledgers, accounts receivable, assets, and liabilities.
Bookkeeping is essentially your business’s cash flow management. It shows how well the company is performing and which areas need attention. Documenting all cash flow in detail gives you a complete overview of your financial activities and your business’s financial state.
This overview of the types of bookkeeping will touch upon the difference between single-entry and double-entry bookkeeping, what methods of bookkeeping exist, and how important regular recording of financial transactions is for running a successful company.
Basic Bookkeeping Transactions
Incoming and outgoing finances are the two main types of business transactions under your bookkeeping.
Incoming finances are your income/revenue, which is all the money earned, sales, and profits. In turn, they become assets, which are all the existing property owned by your business. Any preexisting cash and property are also included.
Outgoing finances are the company’s liabilities - mandatory payments, taxes, and loan installments - and expenses: money used to pay for services, employee salaries, and operational costs.
After these two main bookkeeping categories, we have equity or the difference between the company’s assets and liabilities.
How Does Bookkeeping Differ from Accounting?
Bookkeeping needs to be done first, before the accountant can analyze the company’s books. It is an essential part of any business finance management.
Accounting is the later process where all collected and complete financial data - the trial balance - is analyzed. Accounting includes drawing financial statements based on which timely business decisions can be made. Accountants are also responsible for financial advice and tax returns.
Methods of Bookkeeping and How They Work
Let's take a look at the specifics of the single-entry and double-entry method.
The single-entry method records individual transactions as they happen. Once a sale or payment is received, or an expense is made, it’s documented as a stand-alone entry, plus its minimal details.
This bookkeeping method is best suited for smaller businesses. It’s also adequate for operations where there’s little to no physical sales or inventory involved, i.e., digital transactions, services, and those with little or no physical goods to exchange.
Single-entry systems offer multiple advantages: They are simple and therefore save you time and money. Besides, they usually don’t require additional staff or training.
Of course, there are some downsides as well. These include possible loopholes that can be exploited to cover up mistakes and fraudulent transactions, especially if no software or app is used and everything is manual. Furthermore, there is no fast way to check for balances, liabilities, and on-time payments, which can result in penalties and late payments. Also, arithmetic errors in the account totals are relatively common.
Using these simple bookkeeping systems for small businesses is a feasible solution, but it most likely won’t be enough for complex operations, where ready financial snapshots are often necessary to help make informed and timely decisions.
Double-entry systems are more complex since every transaction is entered twice: in the left-hand account under Debit and in the right-hand account under Credit. Double-entry bookkeeping is used for larger and more complex business operations, and it works like an error-detection tool since the sum of debits must always equal the sum of credits. If it doesn’t, it points to an error. Using the double-entry system makes it easier to monitor all activities and ensure all your books are balanced. The rough total of your capital gap is easily determined.
However, it’s a time-consuming and costly process, and utmost accuracy is needed when making entries. It usually requires extra training, staff, and software for it to be fast and effective. Also, due to the complexity of the system, finding where the error is and correcting it can be challenging.
Compared to the single-entry bookkeeping system, double-entry is a more thorough, time-consuming approach to bookkeeping. Most smaller businesses don’t have time, resources, and extra people to work on detailed bookkeeping. But the results help companies cover everything being exchanged. It also provides instant access to all data.
These are the two basic systems a company can use for bookkeeping. In the past, all entries had to be made manually. With the advancement of technology, various kinds of accounting software and apps have come to the bookkeepers’ aid.
Digital Bookkeeping Systems
Businesses can reap many benefits from using bookkeeping apps. All primary operations are automated and can be carried out remotely from your phone anytime, anywhere.
The main features and automated functions of these apps include:
- Tracking all outgoing payments and fund transfers
- Digital tracking of all incoming finances
- Reports available anytime for mass sending
- Encryption of financial and confidential business data
- Apps for both iOs and Android devices
- Affordable monthly rates starting at $9
- External functions such as e-filing and online banking
Bookkeeping software such as Quickbooks, Freshbooks, and Zoho have basic accounting features in addition to their comprehensive tracking and management systems.
Smaller businesses employing the single-entry method can use these apps to speed up the process further and increase accuracy. If you own a small business and are bent on cutting costs, the chances are that with one of these apps, you won’t even need to hire a bookkeeper - you’ll be able to do the bookkeeping yourself.
Virtual bookkeeping means that independent, remote bookkeepers will manage and balance your books instead of a physically present bookkeeper. This is often a time- and cost-saving option for companies. A virtual bookkeeper can manage and monitor your finances in real time beyond office hours.
It can be a good solution for companies with a bigger budget allocation specific to these tasks, covering many departments and their complex financial dealings for the company. Often, there are inventories and accounts payable and receivable that need to be checked and prioritized.
How Bookkeeping Benefits Your Business
There are many advantages to bookkeeping. Financial insights from tracking all your financial transactions will help you manage the business, maintain supplies and payrolls, and keep payments on time. This way, you’ll avoid costly penalties and other negative consequences of late payments.
All numbers will match when your books are balanced at the end of a month, quarter, year, or another specified period. These detailed lists of numbers may look complex and intimidating, but when laid out and checked, they’ll enable you to easily assess priorities.
Even just a simple bookkeeping system can help detail the financial state of your company. Your working capital gap is a good indicator of this - it’s the total difference between your assets and liabilities.
Positive cash flow is maintained and received on time. From here, you can allot budgets and give priority to specific expenses or additions to inventory or assets.
Being able to execute the business’s balances correctly and on time will help the company deal with loans, bank payments, and other obligations more efficiently.
All of the bookkeeping methods discussed here will help you control your company’s finances and can be a big help to avoid penalties and bigger financial issues when going through an audit process.
Bookkeeping is the process of recording and collecting all financial transactions of a business. These are either incoming or outgoing finances passing through the company’s dealings. The main types of bookkeeping transactions and accounts include the company’s income, assets, liabilities, and expenses.
Bookkeeping systems enable you to check for all incoming (credits) and outgoing (debits) money documented and later analyze all the data to assess the performance and financial balance of your business.
Different methods are used depending on the level of financial activity and operations. The allotted time, resources, and budget also determine the most effective financial management system:
Single-entry remains the most common and basic method. All kinds of simple and non-formal businesses use this system with or without software or virtual bookkeeping services. The single-entry system is mostly used by small- to medium-sized and online businesses, many of which have no inventories and complex financial activities, making basic bookkeeping sufficient. The transactions are frequently entered manually.
These businesses operate on a minimal scale: As their operations are not particularly complex and demanding, they don’t need to use double-entry systems. Most of their basic sales and expenses have no time-dependent conditions to consider.
On the other hand, larger companies with inventories, various departments, detailed financial transactions, and other complex forms of incoming and outgoing finances usually employ double-entry and digital types of bookkeeping.
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