Bookkeeping is merely keeping tabs on all financial transactions of business expenses. So it goes without saying that whether you are operating a small business or a multibillion dollar enterprise — you need to implement bookkeeping techniques.
Of course, how you go about doing your books is up to you. But even if you don’t use a third party bookkeeping service, you must keep reliable records of your business transactions. If you don’t, not only could you lose out thousands of dollars in potential deductions — you can also lose compliance with the IRS.
In bookkeeping, each transaction must be identified as per its type. For instance, income or expense. Furthermore, each transaction has a financial component, and once this amount is known, it is ready to be recorded.
A bookkeeping cycle runs for one financial year that consists of 12 months.
Understanding Business Accounts
In the world of bookkeeping, an account doesn’t refer to an individual bank account. Instead, an account records all financial transactions of a specific type that includes sales or payroll.
There are five types of accounts:
- Assets are the cash and other resources that are owned by the business. They include accounts, receivable, inventory, and fixed assets.
- Liabilities are the obligations and debts owed by the business. This includes what company owes to their suppliers, loans, mortgages, and any other debt on their books.
- Revenue is the money earned by the business and is usually through sales.
- Expenses refer to the cash that flows out from the business to pay for some items or services like salaries, wages, or utilities.
- Equity is the value remaining after you remove liabilities from assets. This also represents the owner’s held interest in the business.
Moreover, there is an accounting equation to make sure your books always balance. The accounting equation also signifies that everything the business owns is balanced against the company.
Accounting Equation: Assets = Liabilities + Equity
Preparing Financial Reports
Now that you have balanced your books, you need to take a closer look at what those books mean. This will summarize the flow of money in each account and further create a picture of your company’s financial health.
- The Balance Sheet summarizes your business assets, liabilities, and equity at a single period.
- Profit and Loss Statement (P&L) or income statement breaks down business revenues, costs, and expenses over a period of time.
- Cash Flow Statement is similar to a P&L statement. However, it does not include non-cash items like depreciation — cash flow statements show where your business is earning and spending money.
*This article is posted by and in partnership with CountDesk.