What is bookkeeping? A guide for modern businesses
Published on January 30, 2020
Running a business can be exciting — especially when you're just getting started. However, you'll quickly come to realise some of the less thrilling parts of it — and bookkeeping is definitely one of them.
While you might want to focus on growing your company, building your product and getting it out there, keeping your administration comprehensive and up-to-date is just as important. And you're not just doing it for the tax authorities, either — it can provide a vital look into the heartbeat of your company, offering a view on how well it's performing and where you can make improvements.
In order to better understand why it's so important, we're going to take a closer look at the history of bookkeeping, its future and how to effectively implement it in your business.
What is bookkeeping?
An important part of any company, bookkeeping refers to the continuous tracking and indexing of all financial transactions. It has a long history — ever since humans started doing business, we started recording transactions as well. It started off as a very basic way of keeping track of money moving between people by writing everything down in a system of physical ledgers and individual account charts.
Today, however, bookkeeping covers a lot more than that. In a modern business it can include a large variety of tasks, such as:
Managing incoming financial streams, like customer payments
Keeping track of payments to suppliers
Payments of outstanding loans
At its core, bookkeeping is primarily about recording incoming and outgoing transactions. While they're not written into physical books anymore, they still need to be entered into a digital system together with an associated document — depending on the nature of the transaction this can be anything from a bank statement to an invoice.
These platforms often work by using a laborious double-entry system that validates both the debit part (taking money from one account) and credit part (depositing it into another account) of the transaction.
The difference between bookkeeping and accounting
It's important to note the difference between bookkeeping and accounting, as the two are often confused. Accounting refers to everything regarding the financial process of a company, including the recording, interpreting, classifying, analyzing, reporting and summarizing of financial data.
Accountants deal with tax laws and issues, build lots of reports, and try to take insights from financial data.
By contrast, bookkeeping is more strictly about recording data. As the team at Shmunky explains, "the primary objective of bookkeeping is to record all the financial transactions in a systematic order, while accounting assesses the financial situation of the business."
Accounting can also be far more specialized. You'll frequently come across tax accountants, internal auditors, and financial accountants. And tax accountants, specifically, will often be experts in the tax laws for their own country or state.
The bookkeeping process - while it has its own quirks and specificities - is replicable from country to country. You don't need the same level of precise knowledge and experience to do the job well in a new industry or location.
Why bookkeeping is important
What sounds like a seemingly small part of a company actually has a huge impact on the way it operates. Every business deals with money in some regard, and keeping thorough records of all incoming and outgoing transactions is crucial to its operations.
It's especially important to make sure that you're doing it accurately, and that you work with professionals when you don't understand certain things or the workload becomes too much.
If you're a freelancer or a solo entrepreneur, there are lots of software solutions that can help you with bookkeeping. These apps offer everything you need, without having to hire someone to do it for you.
It quickly gets more complex when your business is growing, though. The number of employees working for your company, the business volume and the amount of purchases all influence the amount of daily transactions that need to be tracked.
Once you notice that your company is experiencing significant growth, you might not be able to deal with bookkeeping by yourself. Even though you might want to save money, at this point it could make sense to hire a bookkeeper who can take care of your financials.
The more money is passing through the company, the more you need to ensure that everything is handled properly — a tiny mistake might not mean much for a startup, but it could be disastrous for a large enterprise.
There are more reasons to let someone else do your bookkeeping, like harder-to-track taxes because of a higher transaction volume, and the introduction of other financial products like investments, assets and loans that make everything that much more complex.
With today's digital tools it's also possible to automate large parts of your bookkeeping. While it's still recommended for larger companies to have a full-time bookkeeper on the team, there are lots of innovative tools that can help them to be much more efficient in their job.
Best practices: 5 bookkeeping tips
Aside from simply knowing what bookkeeping is, it's vital to fulfil this function to a high level. Of course, you'll want team members with experience and a keen attention to detail.
On top of that, here are a few principles to keep in mind.
1. Fix errors immediately
As the old saying goes, "a stitch in time saves nine." The best time to correct errors is right away. These could be wrong numbers in your ledger or missing proofs of purchase. They won't get easier to fix over time, and can create much bigger headaches down the road.
Yeater & Associates declare that "it is a mistake to not reconcile monthly but an even bigger mistake to not fix errors right away when you notice discrepancies. Even if it is $0.01 between the books and what’s in the bank fix it right away or this error will carry over to other months and be a lot harder to solve later."
2. Stay on top of documents
Depending on your country, you're required to keep records of transactions for five, seven, sometimes 10 years. Most obviously, that means receipts.
Per Crunch, limited companies in the UK need to keep receipts for six years. "Yes – 72 long months. The self-employed (sole traders) have it slightly easier – they must keep their records for at least 5 years after the 31 January submission deadline of the relevant tax year.
"This lengthy period is for HMRC’s benefit, rather than yours. HMRC can choose to investigate your accounts up to six years in the past, and if they decide to come calling you must be able to back up every expense claim you made during that period."
3. Know your invoices from your receipts
Here's a very precise distinction that can trip up both bookkeepers and they teams they serve. The essential difference is that invoices represent payments that haven't yet been made, whereas receipts are a record of executed transactions.
ScaleFactor spells this out even more clearly: "Think of invoices as detailed bills that should outline everything the customer has received from your company. An invoice reminds customers that they owe you money. They’re helpful for speeding up cash flow, keeping financial records, and ensuring that you’re getting paid.
"A receipt is proof that a transaction happened. It’s what you give your customers after a transaction is complete."
4. Anticipate trends
Seasonality plays a role in virtually any job. For bookkeepers, there will always be specific periods when payments start flying in thick and fast, and where outstanding work can be a serious blocker.
It's vital to see these moments coming, and to make sure you have a clear backlog before the pressure hits. For most consumer businesses, writes GrowthForce, the end-of-year holidays require real foresight and planning:
"Hopefully you haven't waited until now to address unpaid invoices for the year, but its still a good time to make some friendly collections calls and resolve outstanding invoices. It's also important to re-evaluate your collections strategies so you can be sure to stay on top of your business's cash flow for the new year."
5. Be strategic with spend categories
"Broad categories are all the IRS really needs come tax time," writes Grow the Books. "Many bookkeepers use general categories. It’s something you will see as a standard across the board."
But as the authors go on to explain, a minimal strategy won't yield maximum results. You should create ledger categories to reflect information you can actually use in decision-making:
"Want to know if you should continue offering a service or product? Categorize your income based on type of service so you know where your revenue is coming from. Want to know what types of software it takes to run your business? You can create software categories for sales, marketing, or operations to really understand where your money flows and what you want to make a priority moving forward."
How spend management can modernise your bookkeeping
One of the most important parts of your bookkeeping is accurately tracking all expenses. Again, change can make it harder and harder to keep tabs on your employee’s purchases.
The beauty of good spend management tools is that your data comes pre-formatted, and is always accurate. Every payment is logged against a specific spender, with the amount and general ledger code set from the start. So reconciliation takes a fraction of the time you're used to.
And best of all, spenders attach receipts digitally at the time of payment. Which makes it virtually impossible to lose important documents.
The times of dealing with stacks of endless expense reports and tedious paperwork are over. Start being smart about your expenses, discover our features, and talk to us about improving your expense management today: