One of the major components of bookkeeping for is keeping track of a general ledger. A bookkeeper's basic record of expenditures and receipts is usually kept here. Ledgers used to be created with pen and paper, but nowadays, thanks to the advancement of technology and the expansion of industries, they are created with specialized software that can be automated and tailored to your business's exact needs.
For example, a larger business that receives tens of thousands of orders per day will need a far more complex bookkeeping system than that of a small village bakery. The more transactions you need to record, the more complex your system will need to be to cope. Osome’s software provides you with this service. Talk to us if you’re interested to know more, otherwise, do read on to find out more about bookkeeping basics in this article.
What is Bookkeeping?
In short, bookkeeping is the process of recording, classifying, and organizing all financial transactions that happen within your business — from the day it’s opened to the day it’s shut down. Such transactions include all and any movements of money that happen within your company. For example:
- Sales of your products or services;
- Supply purchases;
- Cash deposits;
- Money transfers;
- Bill payments;
- Salary and bonus payouts;
- Taxes etc.
Bookkeeping may be a tedious and boring activity, but it’s essential if you want your business to survive and thrive. With bookkeeping, you can:
- Better understand what’s happening to your finances, income, and business as a whole;
- Forecast and plan. If you’re aware of how much you earn and spend, you know how many employees you can hire, how many supplies you can buy, and how much product you can deliver next week or month;
- Accurately report your financial transactions to the government and pay taxes.
Are Bookkeeping and Accounting the Same Thing?
No. Bookkeeping is a process that precedes accounting.
Bookkeeping focuses on day-to-day transactions. In bookkeeping, you collect all documents that contain transaction data, sort it out into “debit” or “credit” categories, and enter this data into the books — such as an accounting journal, cash book, or general ledger.
Accounting analyzes this data to get the big picture and show business owners what’s going on with their finances at large. In accounting, you work with big masses of data that are compiled by the end of specified periods — like the end of a month, quarter, or year.
What Should I Pay Attention to When Doing Bookkeeping?
In bookkeeping, details are everything. To sort out transactions, you need to draw information from source documents like receipts and invoices.
The information includes:
- Date and time of transaction
- Whether it was income or expense
- Customer or vendor names
- Transaction amount
- Transaction type
Knowing which type a transaction belongs to is very important. It lets you know how your business processes are going. You’ll be aware of how much you spend, earn, and how the two affect each other. So when you are designing transaction categories, think about your expenses and sources of revenue. Where does your money come from? What do you spend it on?
Imagine you own a cafe and sell two products — hotdogs and kebabs. Both of these bring you income, but how much? Should you sell more hotdogs and fewer kebabs? If that’s something you want to know, you can establish two income categories — “Hotdogs” and “Kebabs” — and monitor how each of them drives your income.
If you’ve paid for promo campaigns for your hotdogs and kebabs in social media, it makes sense to create an expense category for “Ads''. If you monitor all “Ads” transactions, bookkeeping shows you if your campaigns are efficient and how they translate into kebab and hotdog sales.
Okay, So How Do I Start Bookkeeping?
Bookkeeping may be a pain, but it saves you in the long run if you do it right from the very beginning. Setting it up is easy, too! Here are the basic steps you need to follow to navigate your company’s finances.
- Be prepared to start tracking your transactions from the moment you open your business. Don’t wait until you get your first “substantial” paycheck — a lot of things in your company can go wrong in the meantime, and you won’t notice them without books.
- Always separate company and personal finances. Open a business bank account for your company as soon as you launch your business. Otherwise, you might accidentally deposit your personal income to your business account, or pay for personal expenses with your company’s money. Sorting things out afterwards and paying income taxes will be very difficult.
- Decide who will be responsible for bookkeeping in your company. Bookkeeping is a process that builds a foundation for all subsequent accounting and reporting. It requires focus and a good eye for numbers.
- If it so happens that several people take care of your books, make sure each of them knows what the others are doing. This way, you’ll avoid chaos and mess.
- If you take care of bookkeeping by yourself, put this activity in your timetable. Schedule blocks of time in your week to enter data and review your financial standing. Do your best to sit down with your books at the same time every week — it creates a good habit and protects you from getting overwhelmed.
- Read up on your tax obligations or talk to a tax consultant. You should know what you have to pay for and when. Mark these dates in your schedule and you won’t be taken by surprise.
- Choose a bookkeeping format: whether you’ll be dealing with paper or digital spreadsheets for an accounting journal, cash book, and general ledger. If you’re tight on budget, you can use free software like Google Sheets.
Choose an accounting system - cash or accrual.
Cash accounting means you write down a transaction only when money changes hands and actual payment is made. With this system, you know how much money you can access at the moment.
In accrual accounting, you write down revenue and expenses when they’re earned, even if actual payment happens much later. Accrual accounting gives you a bigger picture of your finances and allows for planning.
Decide on whether you’ll be using a single-entry or double-entry bookkeeping. Double-entry bookkeeping is considered more precise.
Single-entry bookkeeping records income and expenses in a cash register, while double-entry starts with a journal, followed by a ledger, a trial balance, and finally financial statements.
Set up your chart of accounts.
It’s what it says - a chart that lists all your accounts. It displays your assets (a.k.a. anything of value), liabilities (a.k.a. what you owe), income, and expenses with subcategories. A chart of accounts is a very useful digital tool that assembles all your transactions in one place.
- Identify your tracking categories (see above). Think of your KPIs, how your business is structured, and decide what you pay attention to.
- Collect all your source documents a.ka. receipts and invoices. Read our article on how to organize them.
- Now, using all the tips listed above, write down your transactions. First, transfer them from source documents to your spreadsheet or accounting journal or cash book. Indicate transaction date, what was paid or received, what was the transaction amount, and whether it was income or expense. You can find an example of what it should look here.
- At the end of a week or month, transfer the main points to your general ledger. Repeat until you’ve sorted everything out.
- Keep calm. Bookkeeping only looks complicated, but it really isn’t.
Bookkeeping for E-commerce Businesses
If you run an e-commerce company, your bookkeeping will be similar to regular bookkeeping, but it has some specific differences.
Selling on platforms
For instance, the easiest way to launch an e-commerce business is to sell your products on a platform like Shopify or Amazon. Such platforms charge a fee for every sale you make, which affects how much money you make. This has to be reflected in your books.
Working with third-party payment processors
Many e-commerce companies export their products, which involves using third-party payment processors like PayPal, and working with foreign currencies. All of these add some challenges to your bookkeeping routine.
Returns and refunds
Besides, e-commerce allows for returns and refunds, which might go through the same third-party processors or be issued in a different currency. In such cases, you need to know who tracks a transaction — a platform or processor — and when to put it in your spreadsheet.
Automating your Bookkeeping Tasks
As you get more familiar with bookkeeping, you will soon realise it is a very repetitive task of recording data. However, as you grow your business, the amount of paperwork would inevitably increase. You may want to get help by adding to your headcount or engaging a service provider. Osome provides a bookkeeping and accounting service in Hong Kong which makes sure all your books are in place and ready every day, not just at the end of the month. Contact us to know more about how we can help.