Bookkeeping is one of the oldest business practices still relevant for businesses. It’s the systematic recording and maintenance of the business transactions that take place within a company. If you’re running a company or are interested in bookkeeping, you need to be familiar with the process. In this article, learn how to do bookkeeping and the various steps involved in the process.
What Do You Understand By Bookkeeping?
Bookkeeping refers to recording and maintaining the financial transactions that the company makes to keep functioning. Depending on the company, there will be several books of accounts. Bookkeepers record transactions in these books of accounts to prepare the financial statement. The company eventually releases this statement to the shareholders and tax authorities.
The two most important ones are single-entry and double-entry bookkeeping. In the subsequent sections, learn about the entire bookkeeping process.
There are various bookkeeping accounts, and you should be familiar with the following ones:
- Assets – Anything that a business owns and has value is called an asset. Cash is the most important asset, and so are balance, inventories, and other accessories in your company.
- Liabilities – It is the debt that you owe to someone. Account payable (A/P) is the most common liability a company holds. If the business has taken up loans, it is considered a liability as well.
- Revenue – This is the money earned by the company in a certain period. Balance is not usually recorded under revenue since customers will not have paid you yet.
- Expenses – Expenses are all those transactions incurred by the company to keep functioning. It includes the bills, salaries, and raw materials procured.
- Equity – By subtracting liabilities from assets, you get equity.
It’s also helpful to learn what debits and credits are. Every transaction you post in the ledger will either be a credit or debit.
Steps of Bookkeeping
To understand bookkeeping, you need to become familiar with four general steps. They are:
- Set up Chart of Accounts or a Ledger Book
Chart of Accounts (COA) is the foundation of every accounting and bookkeeping initiative. It helps you record all the financial accounts within your company. You can either invest in a digital COA or buy a paper ledger book, which is not recommended. The digital versions are pre-formatted, and you can start by entering the accounts.
- Record Financial Transactions
This is the most important and lengthy step. You need to record every financial transaction in the COA system. It can be as simple as preparing an invoice for a customer or preparing an electrical bill to be paid.
When preparing these, you should record every information possible, including date, transaction amount, balance, description, etc.
If you’re using a single-entry bookkeeping system, you’re required to enter each transaction only once. You just have to track the incoming and outgoing cash.
In the case of double-entry bookkeeping, you record a transaction twice, one as ‘debit’ and the second as ‘credit’. When doing so, you’d have to follow the accounting equation, which is “Assets = Liabilities + Owner’s Equity”.
- Reconcile Bank Accounts
In the third step, you’d have to reconcile the bank accounts. Doing so offers you an accurate cash balance. If you’re using bookkeeping software, you can automate the process by linking it to your bank account. You can then reconcile on a daily or weekly basis, which makes the month-end process much easier.
- Run Financial Statements
After adjusting your statements, the final step is to print the financial statements out. If you’re using a manual ledger, you’ll close the individual accounts and combine them into main accounts.
As already mentioned, you’d have to spend the majority of the time recording the transactions. So, if you wish to know how to do bookkeeping, you should start reviewing the statements available online.