Bookkeeping 101: Essential for Your Business’s Health

Bookkeeping 101 is a primer on the basics of business. Every business leader starts their business with the idea that their company will eventually become a successful, profitable entity. Starting from the point of setup and continuing through operations and sustainability, all of a company’s business activities should be geared towards maximizing profitability and financial efficiency. According to the Bureau of Labor Statistics (BLS) over 20% of businesses fail within the first two years of opening their doors.  Business failure can be the result of many things such as operational issues, internal or external challenges, people issues, vendor/supplier issues, and/or financial mismanagement.

This Bookkeeping 101 guide is here to help you gain a better understanding of what bookkeeping is and how your company can use it to ensure the successful creation and maintenance of your company’s finance and accounting function. This post will also help you understand what you need to do so that your company does not become one of those unfortunate 20%   

New Technology Can Save You Time

Technology is constantly changing the world that we live in. The workplace is no exception, as business operations and workflow software has changed rapidly as a result of technological advancement. Cloud-based software has given business leaders the ability to manage their bookkeeping (and other financial) functions from wherever they want, whenever they want.  Gone are the days when a business owner accessed their information from a specific computer, at a specific location, during a specific time.  Business leaders are now armed with an incredible amount of computing power. This can help them manage their company’s vast amounts of data.

Later in this post we’ll cover important information about how bookkeeping software helps with these actions.  Throughout this post, we’ve highlighted a specific software package, QuickBooks Online (or QBO). We believe it is one of (if not THE) best bookkeeping systems currently available on the market.   But first, here are some bookkeeping basics that every business leader should know.

Bookkeeping vs. Accounting

While working with all types of business leaders, we’ve discovered that many believe that bookkeeping and accounting are the same thing. However, there are many distinct differences between the two functions.  Bookkeeping is the foundation upon which a company’s accounting function is built. In its simplest form, the bookkeeping function involves collecting documents and recording transactions for every financial transaction that a company makes. Bookkeepers use a “journal” to record all of the company’s financial transactions. They then classify them into the credits and debits depending on the nature of the transaction. The bookkeeper uses the company’s chart of accounts to organize the recorded debits and credits.  If some of these words and definitions sound “old school”, it’s because they are. 

Paper journals and giant charts made of binders and many sheets of paper are no longer around. But they used to be commonplace. Instead, everything has become digitized into one or several comprehensive systems that helps with the management of each of the functional areas of bookkeeping.

Get the COA and GL in order

The chart of accounts (COA) refers to the list of accounts a company maintains in its general ledger or GL. The general (or nominal) ledger helps to organize complex transactions obtained from sub-ledgers into a chart of accounts for easier management of a company’s debits and credits. The sub-ledgers include, for example: cash management, accounts receivable, and accounts payable (this list is not exhaustive). The GL is an important document that underpins a company’s management of its non-financial and financial data. The bookkeeping team should be providing business leaders with financial information obtained through the process mentioned above to create financial reporting. Business leaders can then use these reports, along with other information and data they’ve compiled, to “steer the ship” based on how they want to manage and run the business. 

Bookkeeping and Accounting

The difference between bookkeeping and accounting is subtle but profound. A bookkeeper must focus on accurately recording the financial information related to a company’s business processes. Therefore, bookkeeping is an essential process that promotes and enhances an accountant’s role – as well as the role of other positions within a company. Notwithstanding, understanding the fundamental aspects of accounting and accounts could assist you in becoming better at bookkeeping and accounting.

Bookkeeping Terms

In bookkeeping, financial transactions are categorized into different types. First, you have to create accounts that can record the transaction of a particular category. Examples of accounts include cash, inventory, salary expense, and accounts payable. Once these accounts exist, a bookkeeper will help to determine the type of account into which to put each transaction. For instance, transactions that fall under the accounts payable account are booked as liabilities. Below are the common types of accounts:

  • Assets: These are cash and non-cash resources that your business owns
  • Liabilities: These are debts and obligations owed by your business. They may be short-term debts like accounts payable or long term debts like loans
  • Income or Revenue: These are the sales of products or services, and other sources of income
  • Expenses: refers to the cash that businesses incur while paying for services or products. They include utilities, rent, and salaries 
  • Equity: Equity refers to the owners’ value in the business or amount of shares a company issues in case of a large enterprise.

Bookkeeping How To

Cash Basis vs Accrual

There are two accounting methodologies, the accrual basis and cash basis systems. Cash accounting is optimal for small to medium sized businesses. It can provide business owners with actionable information that they can put into use quickly. The bookkeeping involved in cash basis accounting includes recording a transaction whenever you debit or credit an account. Alternatively, accrual accounting involves recording transactions regardless of whether the cash transaction has occurred. Both methodologies have advantages and disadvantages. Cash basis accounting can be great for companies that are just getting off the ground. They usually need to make sure that they have the funds and planning in place to operate day to day. Accrual accounting is often suitable for larger businesses that have a long-term, strategic orientation. 

Double or Single Entry

Another important issue to consider when setting up your bookkeeping procedures is whether to use double-entry or single-entry bookkeeping. For most ordinary businesses, using double-entry accounting for each transaction is the best approach. This is where the bookkeeper records debit amounts for one account and then credits another account. In single-entry bookkeeping, very small or informal organizations can make a single entry for every deposit and payment made for an account.

Bookkeeping Software

The next step involves using a software package to make tracking and recording transaction information easier. Using a computerized system is crucial to bookkeeping because of the multiple benefits it provides. This includes cloud storage of critical data, analysis, and easier reconciliation of accounts. Smaller companies often start by using Microsoft Excel since it has the functions to perform single and simple double-entry transactions. However, as companies grow in revenue, employees, and transactions they often move to an accounting system out of necessity.  

Chart of Accounts

The last step involves setting up the chart of accounts, which should expand as business activities increase over time. A good chart of accounts that captures all of the potential transactions the business engages in can save significant time and effort when undertaking bookkeeping and accounting functions. Some bookkeeping companies use similar charts of accounts across all of their clients. Some use industry-standard chart of accounts. Other will use customized chart of accounts.  

QuickBooks Online Setup

When setting up QuickBooks online, the system should mirror what goes on with your everyday business processes. QuickBooks should reflect all of the transactions that occur during business operations. Some functions, such as receiving payments and sending invoices, can occur from within QuickBooks since it streamlines such functionalities to save time and resources.  Often times, companies decide to use apps or software that integrates with QuickBooks Online in order to automate functions or actions that are specific to their business or industry. Often times a company will use QuickBooks as their core database for financial data. They then “plug in” other stand-alone software options that provide more robust options than what QuickBooks offers. An example includes using Expensify for employee expense reimbursements or Gusto for employee payroll processing.   

Getting Started with QBO

The initial step for setting up QuickBooks Online involves adding company information such as contact details, business address, and company name. It’s important that this information is accurate. Sales forms and invoices will have the details for easier correspondence between customers and suppliers. 

In QuickBooks, the Accounts and Settings menu contains all the fields to enter pertinent company information. In the advanced section of the menu, you should find a section for inputting the start and end of the fiscal year to aid in developing financial reports. At the end of the year, the “close the books” function in the advanced sub-menu allows you to seal the inputted information from editing by other people. Finally, in the same menu, you should set up the currency used for the transaction and the accounting method you will use (either accrual or cash). After following the above steps, your online QuickBooks application should be ready to receive transactional inputs.

Take what you’ve learned and go with it

The above information should be a good start for setting your business up for bookkeeping success. The process provided is an easy yet effective one that makes it easier to record and follow transactional data. When using QuickBooks Online, you can press the F1 button at any time if you are stuck accessing some of the advanced features such as processing receipts or payments. Doing so will bring up a menu that contains easy-to-follow instructions that will make your bookkeeping experience easier.

If you have additional questions about bookkeeping, or how bookkeeping interacts with the HR function within your organization, you’re welcome to reach out to us at info@getsuitless.com for additional support.

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