The thing that every small business owner needs to know in order to remain profitable, healthy and sustainable is to stay on top of the financial records. Having a monthly bookkeeping regimen is essential for business success. Bookkeeping focuses on three basic concepts, revenue and expenses, assets and liabilities and debits and credits. Bookkeeping often gets confused with accounting as the two encompass the same principles; however, there is a difference. Accounting is really about financial reporting, analyzing of data and filing of tax returns. An accountant relies on the bookkeeping of a business to be accurate and compliant. Bookkeeping on the other hand is recording, organizing and managing all of the business transactions and receipts. The main goal of bookkeeping is to keep the records up to date and accurate. This is vital, as the books will show how a business is doing on an ongoing basis and they enable the accountant to do the tasks they need to perform without experiencing expensive time delays. Let’s investigate the three financial concepts.
Revenues and Expenses A good bookkeeper needs to organize and record all transactions. It is all about of the ins and outs of the business; the revenue and the expenses. Revenue is the amount of income received for goods and services delivered, and are tracked by invoices. Expenses are the items that a business purchases to operate and earn income and these are tracked through receipts. There are various types of expenses such as advertising, phone, inventory, supplies, wages etc. In tracking revenue and expenses you can see if your business made a profit or incurred a loss.
Assets and Liabilities A business’s assets and liabilities are another important factor in bookkeeping. You have probably seen the formula; assets = liabilities + owners’ equity. This equation is what makes up the balance sheet which shows the financial health of a business at a certain point in time. It is important for any business to know what the company has and owns as well as any debts that are owed. It gives a clear picture of the liquidity of the company at any given point. Being highly liquid means you are able to pay off the company debts quickly, or using your current assets (amongst other things). This is statement of your company’s short term health and efficiency. To learn more about short term health and efficiency, then read this article on Business Checkups.
Debits and Credits Finally, the last concept we are going to talk about is double entry bookkeeping which refers to recording business transactions twice, once as a debit and once as a credit. Double entry bookkeeping is important because any business transaction usually affects two accounts, a debit and a credit. For instance, if you are purchasing inventory with cash, the two accounts affected are cash and inventory. The inventory account is debited (occurs when increasing an asset or expense and decreasing a liability) and the cash account is credited (occurs when decreasing an asset and increasing a liability or revenue).
The key to bookkeeping is to be organized and know how to record and learn from these three flag posts. The revenues and expenses will give you a snapshot of the businesses profitability. The assets and liabilities can serve well in forecasting a business’s health and understanding debits and credits can help with staying accurate and organized which is great for sustainability of a business.
Image “Bookkeeping With Calculator” courtesy of adamr/ www.FreeDigitalPhotos.net
About the author: Robyn Bolt is the owner of Sum Bookkeeper, an Oakville, ON bookkeeping company that specializes in tax preparation, reporting and data management for small to medium enterprise.