Bookkeeping Practices 101: A Full Guide

Understandably, you would probably think accounting is what keeps people’s businesses afloat. As it turns out – it’s bookkeeping. It’s common to get the two confused, but bookkeeping is a building block of accounting. 

It can be hard to keep track of a business’s expenditures without proper bookkeeping practices. Accounting analyses a business’s financial dealings, but an accountant needs the bookkeeper’s findings to do their work. 

As you might have gathered by now, it’s a good idea to have a bookkeeping and accounting process. The purpose of developing these practices is to know where your money is going and avoid legal complications. 

You’re aware that bookkeeping is important, but do you know what it is? There’s more that goes into the practice than “keeping track of funds.” Below is information about what bookkeeping is and some good bookkeeping practices.

The article will also explain accounting, generally accepted accounting principles, and the different types of accounting. Read on below if you’re curious for more information. 

What Is Bookkeeping? 

Bookkeeping is when someone records and maintains the transactions and records for their business’s original books. People with this job have the task of keeping all their company’s transactions organized by chronology.

It’s also imperative to keep these records according to a system. The systematic organization helps people find each transaction more easily.

Bookkeeping – as mentioned before – focuses on a company’s daily monetary exchange. The original books have to be updated each day so that the eventual accounting is simpler to accomplish. 

What Are Original Books? 

There’s one more thing we need to mention before moving on, though – what are original books? Original books or original books of entry are accounting journals that have precise recordings for particular transactions.

There are books for purchases, sales, cash, etc. These differ from the general ledger, which summarizes the accounting books. All detailed transactional information would be in its corresponding journal.

For example, a cash transaction would be detailed in the cash journal but summarized in the general ledger. However, general ledgers are considered original books is if there’s a meticulously presented transaction inside. 

Why Is Bookkeeping Important? 

In a nutshell, bookkeeping is vital because it can keep your business from going under. For starters, bookkeeping helps with budgeting. Managing income is easier when you’ve got all your monetary transactions organized.

Organization and tax preparation are less of a hassle with proper bookkeeping. Proper bookkeeping practices help you locate your financial records with little trouble.

When it comes time to do your taxes, you won’t have to launch an enormous search for your invoices and receipts. Getting loans and grants is also a lot less hassle when your records are easily in reach. 

You can track your company’s growth and profit with good bookkeeping too. A key factor of an enterprise’s growth is its business cycle. A business cycle is a period of economic growth and recession. 

Someone who can track their establishment’s growth and profit may better understand the business cycle. This deeper understanding may pave the way to better financial decisions. 

Good bookkeeping can provide you with a more streamlined cash flow. If you know where are your money is going and coming from, you can keep track of fees and payments more efficiently. 

But how can you ensure that your bookkeeping is done correctly? You know what bookkeeping is and what they do, but how do you bookkeep well? 

The following section in this article is dedicated to explaining the best bookkeeping practices you should seriously consider for your business. Here are ten of the best things you can do to keep your business afloat. 

Nine Bookkeeping Practices Companies Should Consider

Lousy bookkeeping can utterly destroy a business. Things can go poorly for you if you don’t organize your records. At best, you can face fines issued by the IRS.

At worst, you may lose your business due to poor budgeting. An inability to keep track of your finances can lead to poor budgeting. You may have difficulty maintaining your business if you can’t muster enough money. 

Running a company is more than the service you’re offering. You have to stay on top of the financial side of things. To that end, here are the nine best things you can do to sustain functional bookkeeping. 

1. Personal and Business Income and Purchases Should Stay Separate

There’s an old saying that says business and pleasure should stay separate. Generally, it’s not that big a deal if you use corporate funds for personal purchases or personal accounts for corporate expenses. 

There are two things to keep in mind, though. One – don’t make a habit of using your designated accounts for non-designated purchases. For example,  reserve your personal funds for buying private things. 

It’s not a problem to adjust for and record these expenses. Issues arise when there’s a constant mix of personal and business finances and purchases. Bookkeeping is easier when you separate the two. 

2. Back-Up Accounting Software

You have your pick of cloud-based or desktop accounting software. If you choose the latter, remember to back the data up, so you always have access to the most recent version in case of an emergency. 

Computers can crash, and power outages can happen. It’s always better to err on the side of caution. If you’re not the type to remember to back up your files often, consider choosing cloud-based software instead:

  • Freshbook
  • Xero
  • Quickbooks
  • Intuit
  • ZipBooks
  • Sage
  • Odoo

Above is a brief list of cloud-based software. Cloud-based software is capable of autosaving whatever you’re working on. Whenever the program autosaves, it creates a new version of the file.

If something happens to the current file, you can find and restore an older version. You’ll have to reenter the latest data, but it’s better than starting your data entry from scratch. 

3. Bookkeep on a Schedule

Running a business is challenging. You have a lot to do, and you might not feel up to checking over your finances. However, constantly putting off financial upkeep is a mistake. 

Maintaining your books is as simple as setting aside a particular time each month to look over the company transactions. Payroll and tax notices come with a lot of paperwork, but you need to make sure everything is in order. 

4. Make Sure Employees and Contractors Give You Their W9s

A W9 sends taxpayer identification numbers (TINs) from one individual or business to another individual bank, financial institution, or client. The W9 is a basic form with the employee or contractor’s name, address, and TIN. 

If you were self-employed, you’d send it in exchange for a 1099 form. After your employer sends the 1099 form, you fill it out and give it back to them. The employer then gives it to the IRS. 

You wouldn’t issue a 1099 form unless someone made $600 during the year. Regardless, you should still keep all W9s for recordkeeping. 

5. Look Over Financial Reports

You should review monthly financial reports once you receive them. Your software is (likely) capable of comparing each profit and loss period to help your spot economic trends. 

Accounts payable and receivables are an excellent assist in keeping tabs on finances. Accounts payable (AP) is what someone owes after purchasing services and goods on a particular date. 

Accounts receivables are money owed by outside entities to an establishment after they’ve (the external party) credits services or goods. If you have paper accounts receivable files, be sure to keep them. 

These “source documents” are immensely helpful if questioned about your invoices. Source documents are the origin of business transaction details and list amounts paid, names, transaction details, and the date. 

6. Keep Track of Automatic Banking Downloads

Another handy feature most accounting software does is log automatic transaction downloads. If you weren’t aware, an automated transaction refers to transactions done electronically. It’s easy for these logs to pile up.

Remember, proper scheduling is crucial to keep financial records in order. Try to make time to classify your automatic banking downloads each week or sometime during the month. 

7. Make Sure You Reconcile Bank Accounts

Account reconciliation compares two sets of records, so you’re sure the numbers match and are correct. During reconciliation, you would also ensure that the general ledger records are precise and comprehensive.  

As you may have guessed, accounting software can also assist with the reconciliation process. This built-in software feature can help you catch any anomalies in your bank accounts. 

8. Set Up Internal Controls Among Employees

Internal control is a process that helps you streamline your company’s operation. Putting specific measures in place may help you better run your company. Internal controls promote efficiency and effectiveness. 

Internal controls come in two categories – detective and preventative. Detective controls help find issues after making transactions. Preventive controls help keep things from going wrong before transactions. 

Inventories for counting supplies and cash or monthly reconciliations are detective controls. Meanwhile, two preventive controls are pre-approving transactions or separation of duties.

Separating duties means no one person has control over every aspect of the business. Think of internal controls as a form of checks and balances; they help you keep things in order. 

9. Talk With a Professional

If you’re a budding businessperson, you’re may not be too versed with bookkeeping. Even if you have been bookkeeping for a while, it doesn’t hurt to talk to a professional. Outsourcing may be an advantage for some people.

If you’re worried about balancing your books, giving the job to someone else can lift a huge burden off your shoulders. It can be challenging to find time to handle financial records, and something may go wrong in the process. 

However, it’s still a good idea to understand the bookkeeping process. You should know how reconciliation works and keep up with automatic banking transactions. Try to work with the professional.

Accounting Vs. Bookkeeping: What’s the Difference? 

Accounting deciphers and summarizes a company’s financial transactions to create economic guidance and comprehension reports. The time spent accounting information is called an “accounting period.” 

The accounting period is when people gather the financial information for accounting functions. Three examples of accounting functions are paying off bills, paying employees, and writing finance reports.

Accounting periods take place over a calendar or fiscal years. Fiscal years are year-long periods for reporting finances and budgets. 

The overall goal of accounting is to accumulate financial information and make it easy for everyone involved to understand. There are enormous differences between accounting and bookkeeping, though. 

Bookkeeping is one facet of accounting, while the latter uses bookkeeping information to create financial reports. Bookkeeping provides information for accounting, and accounting uses information for educated judgment calls.

Accounting also requires a more varied skill set. You would have to be business-minded to be an accountant. While bookkeeping is primarily clerical, you don’t need to have too strong a business command. 

Types of Accounting

You don’t have to use the same form of accounting as your fellow businessperson. There are different methods you can choose from. This article is going to discuss two kinds: Accrual and cash accounting. 

Accrual Accounting

Accrual accounting details transactions when initiated instead of waiting for payment. The moment customers buy from you is when you file the charge. Accrual accounting lists financial exchanges whether money is spent. 

One advantage to using accrual accounting is its inherent accuracy. Bookkeeping records will better reflect bank account numbers and accounts payable and receivable. 

Cash Accounting

Cash or cash basis accounting records transactions when you obtain or pay money. Cash accounting is more prevalent among small businesses. “Small” is a relative term, however. 

Any business that averages more than $25 million in annual gross receipts must use accrual accounting. Gross receipts measure all a company’s income yearly without deductable subtraction. 

Accrual Accounting Vs. Cash Accounting: Which One is Better? 

As mentioned before, accrual accounting is very accurate in painting your financial picture. The sooner you list your transactions, the easier it is to keep track of what customers owe and how much money you’ve got. 

Accrual comes with tax benefits as well. You can make a claim the year the expense is created instead of when you make payments. However, this benefit isn’t guaranteed and depends on your financial situation. 

On the other hand, cash accounting is more manageable and makes accounting for smaller businesses less troublesome. Cash accounting makes it easier to keep track of how much money you have at all times. 

The simplicity of monetary tracking may help you budget better. Cash accounting has tax benefits also. You only pay taxes on funds you’ve acquired or spent. 

Truthfully, what method is best for you depends on many factors. Cash accounting may be best for you if you need accounting made easy. But you should take into account current and long-term finances also. 

Remember the tax benefits each method has and consider what would work best for your company. If you’re not sure, speak to an accounting professional for guidance

What Are Generally Accepted Accounting Principles? 

There are guidelines for engaging in bookkeeping, but are there specific rules you need to follow while accounting? As it turns out, there are accounting guidelines you need to know. Keep reading to learn about these practices.

Generally accepted accounting principles or GAAP is accounting guidelines handed down by the Financial Accounting Standards Board (FSAB). The FSAB is a nonprofit that established company reporting standards in the US. 

The FSAB also teaches stakeholders how to implement GAAP standards for efficient accounting. Seven full-time members run the organization and are required to give up positions within the companies they used to work for. 

What Is GAAP? 

Generally accepted accounting principles are a mixture of definitive standards and common accounting reports and recordings methods. The point of GAAP is to make finances understandable and transparent. 

The opposite of GAAP is pro forma accounting. Pro forma isn’t part of GAAPs guidelines. The term translates to “for the sake of form” and often excludes ordinary one-time expenses for businesses. 

Unlike the Generally accepted accounted principles the FASB put forth, Pro forma isn’t a legal form of financial reporting. You could use pro forma to emphasize specific items but not to mislead. 

For example, you can use pro forma accounting to showcase hypothetical past financial conditions and potential future ones. You are not allowed to use these projections in place of genuine financial reports. 

The FSAB implemented GAAP to keep businesses in the United States on the same page. Standardized guidelines make it easier to compare and contrast finances among companies. 

The Ten Principals of GAAP

GAAP has ten guidelines that provide a basic outline US businesses should follow when reporting their monetary transactions. There’s a legal expectation that companies and nonprofits follow the following procedure. 

1. The Principles of Regularity and Consistency

Combining two rules may technically be cheating. But there’s not much to the first principle of regularity aside from an obligation to uphold GAAP regulations. The principle of consistency requires constant reports.

To specify, the second principal asks accountants to use identical standards from each period. The second principle also dictates that finances are easily comparable between every report.

If there is a change in a reporting style, an accountant has to explain why in their financial statement footnotes. The general rule of thumb is that if there’s no reason to modify how you report your finances, don’t. 

2. The Principle of Sincerity

The third principle is supposed to hold accountants to a standard of transparency. The idea is that accountants will report all financial transactions with candid accuracy. 

3. The Principle of Permanence of Methods

GAAPs fourth principle states that all US business accountants use uniform reporting methods. Similar to the second principle, the point is to promote transparency. It’s easier to compare information gathered by similar means. 

4. The Principles of Non-Compensation and Prudence

The fifth principle of non-compensation states that accountants should openly report negatives and positives. Companies should not expect their debt reimbursement for these reports.

Prudence, the sixth principle, calls for the emphasis on non-speculative financial data. All information provided should be as objective as possible. Keeping data objective helps improve your financial report accuracy. 

5. The Principles of Continuity and Periodicity 

Continuity and periodicity are the third set of simple principles for accountants to live by. Continuity, the seventh principle, says that business will continue even during asset valuation. 

GAAPs eighth principle – Periodicity states that companies must report financial transactions at the right time. You wouldn’t report April’s revenue in July, for example. Remember, every entry has its proper place. 

6. The Principles of Materiality and Utmost Good Faith

Principles nine and ten are the final two generally accepted accounting principles. Materiality asks that accountants do their utmost to provide all their company’s financial information in the reports. 

“Utmost good faith” came from the Latin phrase uberimae fidei. GAAPs tenth principle is probably the FSAB organization’s most important. All the final guideline asks is that companies stay honest about all transactions. 

Are You In Need of Bookkeeping Assistance? 

A bookkeeper’s goal is to keep track of a company’s day-to-day finances. The daily records are eventually collected and complied for accounting purposes. Unlike accounting, bookkeeping is primarily clerical. 

One of the most crucial bookkeeping practices to keep in mind is that it’s ok to ask a professional for assistance. You should also make a habit of keeping personal and business accounts separate. 

If you’re still unsure about bookkeeping or accounting, give us a call at Bennett Financials. We’re in the business of helping your business thrive.