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Bookkeeping may seem like a mysterious process, filled with debits, credits, and convoluted documents – but if you take the time to understand some basic concepts, managing your business’s financials will become much less intimidating. Whether you hire a professional to do your bookkeeping, or you go the DIY route, you’ll benefit from understanding the truth behind the numbers.
Bookkeeping (in 3 steps)
Depending on the volume of transactions a business has, bookkeeping can range in both the level of complexity and the time commitment. But no matter how big or how small your business is, the process can still be broken down into these three general steps. Take a peek at the bookkeeping process here:
- Keep receipts or other appropriate records of both income and payments made by your business. Receipts are especially important if you operate primarily in cash. These records not only inform step two, but they also support your claims come tax time.
- Summarize your income and expenditure records on a regular basis; this is called posting to the general ledger. Depending on your business’s sales volume, you can opt to do this daily, weekly, or monthly. Generally, the more sales you make, the more often you should post to your ledger.
- Use the summaries from your ledger to create financial reports, like a profit and loss statement and balance sheet. These financial reports aggregate the numbers in your general ledger to help you see the big picture for your business, and allow you to make strategic decisions going forward.
Bookkeeping Terms to Know
Now that you understand the basic steps that make up the bookkeeping process, let’s take a look at some concepts that will inform your business’s bookkeeping:
Chart of Accounts: These are the accounts that a company has available for recording transactions in the general ledger. Typical accounts include things like assets, liabilities, revenues, and expenses. Companies are able to set up their chart of accounts to best suit their needs, including adding accounts when necessary.
General Ledger: All of the account transactions over the lifetime of a business are summarized in the general ledger.
Income Statement: Also known as a profit and loss statement, it shows your net profit or loss over a specific accounting period (generally monthly, quarterly, or annually).
Balance Sheet: This financial statement summarizes a company’s assets, liabilities, and shareholder’s equity at a specific moment in time. Basically, the balance sheet displays what a company owns and what it owes.
Understanding bookkeeping basics is a great way to increase your financial confidence. Even if you hire a professional to handle your books, you’ll still benefit from gaining insight into the process. You’re in charge of your business’s future, and being educated on the bookkeeping process will ensure that you can make the wisest, most informed decisions possible.