Bookkeeping

Bookkeeping

Did you know that 60% of small businesses stop operating within the first three years of their startup journey (The Australian Bureau of Statistics)?

There are various reasons why over half of new businesses fail, but a lack of good bookkeeping and financial management is certainly a contributing factor. 

We get it, bookkeeping isn’t the most enthralling part of running a business. But it’s true when we say bookkeeping is one of the fundamental building blocks of running a successful business. 

As a business owner, you need to have a solid understanding of how bookkeeping works (even if you decide to outsource) if you really want to drive your business forward.

Let’s get into the basics of bookkeeping.

What is bookkeeping?

Bookkeeping is the practice of recording, tracking and storing the financial transactions of a business. 

There are two bookkeeping methods:

• Single-entry bookkeeping
  Single-entry bookkeeping is when only one entry is made for each transaction. The single-entry method does not track accounts payable or accounts receivable and is generally only used by very small businesses that do not have many accounts and mainly deal with cash. 
• Double-entry bookkeeping
  Double-entry bookkeeping works on the principle that every transaction is a transfer of money from one account to another e.g. if you paid $20 for stationery, your “Cash” account will be debited (decreased) by $20, and your “Supplies” account will be credited (increased) by $20.

A question we often hear is, “Are accounting and bookkeeping not the same?” 

Understanding the difference between bookkeeping and accounting is tricky, especially as many accountants also perform bookkeeping duties. 

What is the difference between bookkeeping and accounting?

An easy way to distinguish the difference between accounting and bookkeeping is that bookkeepers record the day-to-day financial transactions of your business, whereas accountants analyse and report on the records that bookkeepers have gathered. 

Think about it like this: a car engine is designed by an engineer to achieve specific goals, e.g. minimal fuel usage and fast acceleration. The engine is then built and maintained by technicians and other engineers. 

Bookkeeping is the process of building and maintaining the financial engine of a business, while accounting is the process of designing and improving the financial engine to work optimally and achieve its goals.

In bookkeeping, you record all financial transactions of a business, ensure they are accurate and generate reports such as cash flow and profit and loss statements. 

In accounting, you devise financial strategies such as tax, funding and payroll, based on your goals. 

You can find out more information about accountants and BAS agents here on SavvySME.

What are the basics of bookkeeping?

It’s good to know some of the basic lingo that is essential to good bookkeeping.

General ledger/accounts: The “books”

• Ledger: The place where you record and categorise business transactions
• Accounts Receivable/Assets: Things which a business owns e.g. inventory or money that is owed to a business
• Accounts Payable/Liabilities: Money owed by a business e.g. unpaid invoices, tax and loans
• Payroll/Wage Expense: Money paid to staff members
• Income: Money that is received from selling your products and /or services
• Expenses: Money spent on running your business
• Shareholder/Owner Equity: Money that is provided or withdrawn by an owner or shareholder. 

When people talk about “the books”, they are referring to a general ledger or a set of accounts. 

These accounts are where all the transactions that your business makes will be recorded and are often referred to as a chart of accounts. 

What is the chart of accounts?

A business has a set of accounts to track its finances. Below are a few examples of common accounts you may have:

• Accounts receivable: Money you receive
• Accounts payable: Money you pay others
• Payroll/wage expense: Money to pay staff members
• Sales account: What you get from selling your products and services
• Purchases account: For things needed to run your business

You must decide whether you will be using the cash or accrual method of accounting. 

What is the difference between cash and accrual accounting?

Cash accounting means you need to record the transaction when actual money changes hands, is received or transferred.

Accrual accounting is recording the transaction when it happens, instead of when actual money changes hands, is received or transferred, which could happen at a later date.

Should I use double-entry or single-entry bookkeeping?

Most businesses use the double-entry bookkeeping method. It works on the principle that every transaction is a transfer of money from one account to another. 

For example, if you paid $20 for stationery, your “Cash” account will be credited by $20, and your “Supplies” account will be debited by $20.

The total amount of credit must equal the total amount of debit for both accounts to be balanced. Overall, your chart of accounts must follow this rule:

Assets = Liabilities + Equities

However, smaller businesses may use the single-entry bookkeeping method because they do not have a large chart of accounts, or they mostly deal with cash.

Do I need to keep evidence associated with these accounts? 

Every transaction you make will be associated with evidence, such as an invoice, bill, receipt or electronic transaction. 

These financial records are important for you to prepare your tax return and trace any errors or fraud when they arise. 

The Australian Tax Office (ATO) requires businesses to keep evidence of their financial transactions for up to 5 years prior.

How does bookkeeping work? 

You need just a few things to set up a bookkeeping system. Good bookkeeping has a few essential moving parts: software, storage, a good bookkeeper and standard procedures. 

1. Software

Most businesses use bookkeeping and accounting software for bookkeeping because of the convenience, accuracy and time-saving benefits they get. 

You can opt to use the old school pen and paper system instead, but we highly recommend using computer systems. 

Pen and paper will increase your workload tenfold and there's a higher chance of recording inaccurate information or losing data. 

2. Storage for your financial records

Keep your paper records in a filing cabinet and then scan them to your cloud software. You can opt for physical filing only, but this won’t give you a backup if you lose or damage the files (it's really not worth the risk). 

Most accounting software offers a cloud storage system that can link all of your accounts to keep things nice and easy.

3. A good bookkeeper

You can choose to hire an in-house bookkeeper, outsource or do the bookkeeping yourself.

4. Standard operating procedures and rules

It's Important to establish proper processes and rules to maintain your books. You should schedule regular reviews and audits to ensure everything checks out.

Can I do my own bookkeeping as a small business owner?

If you have the knowledge, time and good systems in place, you can certainly manage your own books. 

However, if for you (like many other business owners) time is of the essence, then outsourcing to a professional bookkeeper is likely one of the best decisions you will make for your business.

A bookkeeper takes the burden out of bookkeeping and has the professional expertise to ensure your books are in tip-top shape.

If you’re thinking about hiring a bookkeeper, we’ve put together some practical information on how to hire a bookkeeper for your small business.

Or, simply tell us what you’re looking for and we’ll introduce you to the best bookkeepers in your local area.

You can also browse our Q&A section to get expert advice from bookkeepers right here on SavvySME.