Bookkeeping is a fact of life if you’re a business owner, as you’ll need an efficient way to keep track of each transaction, from a sale to the amount you’re owed by a particular supplier. A legible record of your business’s financial history can help you keep an eye on your bottom line and can also make life much easier if your business is audited by the IRS. However, there’s more than one method of bookkeeping, and each has its own set of advantages to consider. Choosing the right method for your business can save you time and effort when you want a quick overview of your business’s financial health.
What Are the Different Types of Bookkeeping?
Depending on the size and complexity of your business, you may find single- or double-entry bookkeeping is better suited to your needs.
Single-entry bookkeeping is ideal for small businesses with simple finances, such as sole proprietorships that don’t have large accounts payable or receivable to track. Each transaction is recorded as it is made in ether a cash sales or disbursements journal, including monies received and anything your business pays out. These records include any taxable income or potential tax deductions and are then reconciled with the business’s bank statements. This system is a simple and easy way to monitor cash flow, but it’s difficult to determine specific expenses or revenue streams and their relative importance, making it unsuitable for larger enterprises.
Most business use a double-entry bookkeeping system, which can account for the value of inventory and long-term assets and liabilities many smaller businesses lack. Each transaction, including amounts paid or received for goods, services, supplies, inventory, payroll, and more, is recorded in two separate columns as a negative debit and a positive credit. These two columns must then add together to equal zero and must reconcile with bank statements. This process allows businesses with complex financials to better understand the financial health of their business, as the status of can easily each transaction can be easily viewed.
What Is the Difference Between Accounting and Bookkeeping?
While many people think bookkeeping and accounting are interchangeable, they each serve a specific purpose that is vital for businesses. Bookkeeping is a process for tracking and organizing records of a business’s transactions, while accounting refers to the process of analyzing this information. Bookkeepers recording daily sales and payroll while accountants take this information and note current trends or work to reduce a business’s tax burden. A bookkeeper can organize your day-to-day financial information while an accountant can provide you a higher-level analysis of it.
How to Choose a Great Bookkeeper
Bookkeepers tend to work behind the scenes but occupy critical positions within businesses, so you’ll want to make a commitment to find the right one. A good bookkeeper pays attention to detail and is credible. They must also be trustworthy given their level of access to your company’s financial records. You may also want to find one who is familiar with your industry, as they will be familiar with the types of transactions and may even recommend a software package better suited to your needs. Depending on the complexity of your finances, you may find it wiser to hire a contractor or outsource your bookkeeping to an accounting firm rather than hiring someone in-house.
Related: How Much Does Bookkeeping Cost?
Few business owners look forward to bookkeeping, but it’s a critical process that can give you a granular view of your business’s financial health. In addition to organizing your records, a bookkeeper can save you money by helping you to identify individual expenses and more easily track and collect on accounts receivable. Not all bookkeepers or even bookkeeping is the same, so you’ll want to take the time to decide on the right method and partner to handle this task before choosing one. By working with a capable, knowledgeable bookkeeper you trust, you can gain valuable insights into your business that can help you make better decisions for it.