What Is Bookkeeping

Single-entry Bookkeeping

Single-entry bookkeeping is straightforward — you simply make one entry for each transaction in your books. This method allows you to keep a cash book to track incomings and outgoings. You can perform single-entry bookkeeping yourself, making it useful for very small businesses.

Double-entry Bookkeeping

Double-entry bookkeeping is a more secure method. It balances your books by assuming each transaction (recorded as debit or credit) affects two accounts — your cash account and your sales account.

For example, if you make a sale, your cash account will be debited and your cash account will be credited, so they equal each other. Double-entry is useful because it minimises errors and most businesses use this system.

Cash-based or Accrual-based

You also need to decide between cash or accrual-based bookkeeping, which depends on when you recognise revenue and expenses. Both work with either single or double-entry records, though the former is better suited to cash-based and the latter to accrual-based.

If you recognise revenue when you receive cash and recognise expenses when you pay them, you should use cash-based bookkeeping. This means you record cash entering and leaving your accounts in your books.

If you recognise revenue when it’s earned and recognise expenses when they’re incurred, you should use accrual-based bookkeeping. This means cash doesn’t have to enter or leave your accounts for you to record transactions, so you can recognise sales and purchases on credit immediately with this method.

Cash Registers

If you have a bricks-and-mortar business like a shop or restaurant, you may use a cash register as part of your bookkeeping process. A cash register keeps count and reconciles cash transactions and allows you to balance the drawer, which accounts for all transactions on any given day. A cash register audit is essential for spotting errors.

Journal

When entries are recorded in a journal, they are recorded as raw business transactions in date order. A journal tends to be divided into columns for dates and types of transactions, ie. debits or credits. It’s the first place where data is recorded. A bookkeeping journal is also known as a day book.

Ledger

A ledger is the book that bookkeepers use to record all accounts. Transactions that first appeared in a journal are put into a ledger. It keeps track of five accounting items: assets, liabilities, owner’s capital, revenue and expenses.

These items are usually displayed in a two-column table, with debit entries on the left and credit entries on the right. Sometimes, descriptions and dates are added. From here, account balances are calculated and entered into a trial balance, before they are added to a company’s official financial statements.

Trial Balance

A trial balance is a bookkeeping tool in which the ledger balances are sorted into equal debit and credit account column totals. A business usually prepares a trial balance at the end of every reporting period. The purpose of a trial balance is to ensure the entries in a company’s bookkeeping system are correct.

Cash Flow Statement

A cash flow statement is one of the key reports in measuring a business’ performance. It helps in making cash forecasts for short-term planning. A cash flow statement shows incomings and outgoings and the source of cash from operating, investment and financial activities over a set period of time.

Balance Sheet

A balance sheet is another key report on company performance. It shows a business’s assets, liabilities and shareholders’ equity at a set point in time. It gives an overview of what your business owns and what it owes, as well as any amount invested. A balance sheet basically shows you your business’s financial position, so you can understand its worth.

Income Statement

An income statement is also known as a profit-and-loss statement or earnings statement. It shows a business’s revenue, expenses and profitability over a period of time. An income statement is the final key report of a company’s performance. It ultimately shows how profitable, efficient and sustainable a company is and is incredibly useful for planning.