UNDERSTANDING ACCOUNTING AND BOOKKEEPING
Understanding accounting and bookkeeping is critical to your business success. Let’s look at what accounting and bookkeeping is, how it works, and how you can use it in your business.
What Is Accounting and Bookkeeping?
Accounting plays a vital role in running a business because it helps you track income and expenditures, ensure statutory compliance, and provide investors, management, and government with quantitative financial information which can be used in making business decisions.
While bookkeeping is the systematic recording and organizing of financial transactions in a company. Bookkeeping is the recording, on a day-to-day basis, of the financial transactions and information pertaining to a business. It ensures that records of the individual financial transactions are correct, up-to-date and comprehensive. Accuracy is therefore vital to the process.
Bookkeeping provides the information from which accounts are prepared. It’s a distinct process, that occurs within the broader scope of accounting.
Accounting and bookkeeping are a powerful way of recording, processing and generating financial information for decision making in a business.
Whether you refer to it as accounting or accountancy, this powerful system can be used to manage your business finance in such a way that will result in steady growth. It can help in detection of errors, irregularities and fraud.
In addition, accounting and bookkeeping can play a pivotal role in your statutory compliance with regulatory authorities, raising funds from investors or lending institutions such as banks, tax planning and filing of tax returns.
How Accounting and Bookkeeping Works
This is to show you that accounting is a process larger than crunching your numbers. It is a tool that will help you “account for” what your business has done, is doing, and hopes to do in the future. Accounting can be a bit like painting a picture, and a little like solving a puzzle. Despite its bad press, it can actually be fun.
Accounting is the big picture, the system that keeps track of data (including people), records your transaction history, gives you reports — those all-important pictures of your company. Accounting also encompasses payroll, an area of particular concern since huge fines can accompany small mistakes. Of equal weight is the tax status of your company. Accounting is the system that will provide the reports and information you need.
Bookkeeping is the tedious part — the systematic recording of amounts, dates, and sources of every revenue and expense you generate. Think of accounting as a giant sifter and of bookkeeping as the process of pouring stuff into it. Things get stirred around and you get the information you need to run your business.
There are two methods of bookkeeping that can be employed by businesses namely:
Single-Entry bookkeeping is straight forward method where one entry is made for each transaction in your books. These transactions are usually maintained in a cashbook to track incoming revenue and outgoing expenses. The single-entry method is usually employed by private companies and sole proprietorships that do not buy or sell on credit, own little or no physical assets, and hold small amount of inventory.
Double-entry bookkeeping is more robust. It follows the principle that every transaction affects at least two accounts, and they are recorded as debits and credits. For example, if you make a sale for N100,000, your cash account will be debited for N100,000 and your sales account will be credited by the same amount. In the double-entry system, the total credits must always equal the total debits. When this happens, your books are “balanced.”
Using the double-entry method for bookkeeping makes more sense if your business is large, public, or buys and sells on credit. Enterprises often choose the double-entry system because it leaves less room for error. In a way, it ‘double-checks’ your books because each transaction is recorded as two matching but offsetting accounts.
Another important thing in the bookkeeping of your business is the basis of recording transaction. The two bases of recording are cash basis and accrual basis. This decision will depend on when your business recognizes its revenue and expenses.
Under cash-basis, you recognize revenue when you receive cash into your business. Expenses are recognized when they are paid for. In other words, any time cash enters or exits your accounts, they are recognized in the books. This means that purchases or sales made on credit will not go into your books until the cash exchanges hands
In the accrual method, revenue is recognized when it is earned. Similarly, expenses are recorded when they are incurred, usually along with corresponding revenues. The actual cash does not have to enter or exit for the transaction to be recorded. You can mark your sales and purchases made on credit right away.
Both a cash and accrual basis can work with single- or double-entry bookkeeping. However, the single-entry method is the foundation for cash-based bookkeeping. Transactions are recorded as single entries which are either cash coming in or going out. The accrual basis works better with the double-entry system.
How You Can Use Accounting and Bookkeeping
Accounting and bookkeeping can be of use when these three key financial statements generated by your records on regular basis such as monthly, quarterly and annually.
- The income statement provides you with information about the profit and loss
- The statement of financial position (balance sheet) gives you a clear picture on the financial position of your business on a particular date.
- The cash flow statement is a bridge between the income statement and balance sheet and reports the cash generated and spent during a specific period of time.
It is critical you keep your financial records clean and up to date if you want to keep your business afloat. Here are just a few of the ways your business, big or small can use accounting and bookkeeping.
You use the financial statement to evaluating the performance of your business
Your financial records reflect the results of operations as well as the financial position of your small business or corporation. In other words, they help you understand what’s going on with your business financially. Not only will clean and up to date records help you keep track of expenses, gross margin, and possible debt, but it will help you compare your current data with the previous accounting records and allocate your budget appropriately.
The accounting and bookkeeping ensure statutory compliance
Laws and regulations vary from country to country, but proper accounting systems and processes will help you ensure statutory compliance when it comes to your business.
The accounting function will ensure that liabilities such as value added tax, withholding tax, company income tax, pay as you earn (PAYE) and pension funds, to name a few, are appropriately addressed.
Accounting and bookkeeping Help to Create Budget and Future Projections
Budgeting and future projections can make or break a business, and your financial records will play a crucial role when it comes to it.
Business trends and projections are based on historical financial data to keep your operations profitable. This financial data is most appropriate when provided by well-structured accounting processes.
Accounting and bookkeeping Help in Filing Financial Statements
Businesses are required to file their financial statements with the Corporate Affairs Commission as part of annual returns. Listed entities are required to file them with stock exchanges, as well as for direct and indirect tax filing purposes. Needless to say, accounting plays a critical role in all these scenarios.
Let me reiterate why you need to use accounting in your business. Your business is not only to buy or produce and sell but needs accounting and bookkeeping to take decision as to which product is generating highest profit.
What’s more it is only accounting bookkeeping that provides a smart back office for you to have a reflection of what is going on your business and also provides evidence that you are in business.
If you are so overwhelmed, you don’t know where to start, or you don’t even know how to make a head or tail of your business accounting. CLICK HERE and we will come to your aid.