Bookkeeping Basics 101

What is Bookkeeping – Definition

Bookkeeping is the process of recording daily financial information about a business throughout its life. It is a vital business function that forms a significant part of the accounting process. Understanding the basic principles of bookkeeping will give a good grounding on the journey through business bookkeeping

Bookkeepers are responsible for the systematic recording of business accounting transactions.

Basic Bookkeeping Activities make it easy for businesses to keep track of spending and see the financial position of their business at any given time.

Why is Bookkeeping So Important

Every business needs bookkeeping its one of the few services they can go without.

• Business Financial Position – Proper bookkeeping gives a reliable measure of your business’ performance. For a business to continue trading it needs to be making a profit and have enough money to pay its bills.
• Taxes – You will need to know the net profit or loss of your business to do your taxes. To get this figure you will need to record all of the income and expenses accurately. It is important as you don’t want to underpay or overpay taxes or miss out on tax benefits
• Borrowing Money – Getting a business loan requires you to show your financial statements. This may include cashflow projections, profit/loss and a balance sheet. Proper bookkeeping will furnish you with the information required to produce these important reports.
• Business Strategy – The business plan is normally put together before the business starts trading. r a . Accurate bookkeeping will help you see if you can buy that new equipment you need. Sales trends can help you prepare for busy times and help with ideas for quiet times.
• Legal Requirements – It is a legal requirement to keep business transaction records for a minimum of six years. This includes all documents relating to income and expenditure.

Bookkeeping Past and Present

Accounting dates back to 7000 BC in ancient Mesopotamia and Egypt. Clay tokens were used for trading goods are believed to be found at Tepe Gawra, present-day Mosul, Iraq. These dated from around 4000 BC.

Luca Palcico often called the “father of accounting” was the first to codify the double-entry system in his book “Everything about Arithmetic, Geometry, and Proportions (1494)”. Palcico works set a universal standard which has enabled others to study and use it today.

The demands of large scale manufacturing, meant that accounting became an integral part of a business, from this the profession of accounting was established.

Manual bookkeeping with the help of technology progressed into computerised and cloud-based systems. Improving accuracy, efficiency, convenience and financial reporting.

Bookkeeping Vs Accounting, what is the difference?

Bookkeeping is a vital process of recording daily transactions and organising financial documents. Accounting uses the data generated from bookkeeping records to make sense of a company’s finances and progress.

Simply put, a bookkeeper tracks finances, and an accountant analyses them. There is some overlap between bookkeeping and accounting tasks.

Basic Bookkeeping Terms

Knowing the terminology and what is means is crucial to understanding the financial health of your business and gives you the knowledge to make informed business decisions.

Accrual or Cash Accounting

There are two main types of accounting method commonly used by businesses to realise transactions.

• Accrual Accounting; a sale is recognised when the goods/services are exchanged or are received from the supplier
• Cash Accounting; a sale is recognised when the payment is received and an expense when the payment is made

The Accounting Equation

The Accounting Equation is the fundamental basis of the double entry bookkeeping method and the balance sheet. The equation states that the business assets must always equal the liabilities plus the capital [assets = liabilities + capital]

Assets, Capital and Liabilities

Every Business has three key financial parts that must be kept in balance, The formula used to keep the books in balance is the accounting equation

• Assets: Are items the business owns, such as vehicles, machinery, stock, also money that is owed in from debtors.
• Liabilities: Money owed by the business to creditors, VAT, Payroll liabilities and loans
• Capital or Owner/Shareholder Equity: Is the balance of what is owed to the owners. It comprises of money withdrawn money invested and profits.

Income and Expenses

There are two parts that form the basis of the profit and loss statement

• Income: Sales of goods/services, grants and commissions.
• Expenses: Salaries, insurance, training, electricity, postage, cost of goods sold (*COGS e.g materials, tooling, sub contractors etc)

Debits and Credits

To understand bookkeeping, you need to forget everything you know about debits and credits. Debit from your personal bank account normally means a decrease, the opposite is true with the business bank account when in fact a debit is an increase.

Double or Single-Entry Bookkeeping

Keeping the books can be either in single entry or double entry method, the choice is dependent on the business. For example a sole trader with few transactions may use single entry accounting whereas a Ltd Company would use double entry accounting.

• Single entry accounting/bookkeeping which is is a simplistic, non-scientific method. With business transactions recorded once, either as a sale or an expense. Primarily based around the production of the income statement.
• Double-entry accounting/bookkeeping,  The double entry system records each business transaction twice. The result is one debit and one credit entry which affect two different accounts

Chart of Accounts (COA)

A chart of accounts (COA) lists all financial accounts used in an organisation to track income, expenses. It is essential for bookkeeping activities, as it lists all the accounts a business needs to keep track of its money.

Business Types

There are three main business structures in the United Kingdom, all of which trade to make a profit. Choosing the one that fits with your business plan is crucial for success. Each one has different rules and legal obligations

• Sole trader
• Partnerships
• Private Limited and Unlimited Companies

Maintaining Ledgers

The books are known as journals and ledgers. Normally you would have one book for sales, one book for purchases, and a general one used for everything. Sometimes there would be a separate cash book, which records the cash paid and cash received

• Sales Ledger – Individual Customer Accounts and their balances – Sometimes know and Customer Ledger/Debtors ledger
• Purchase ledger – Individual Supplier Accounts and their balances – Sometimes know and Supplier Ledger/Creditors ledger
• Nominal Accounts Ledger – This includes all the nominal accounts, which includes every account within the chart of accounts
• Cash Book – This can include, the current account, credit card, petty cash etc
• Accounts – Referred to a collection of all of the above

Day to Day Bookkeeping Activities

As a bookkeeper you need to work in a orderly manner and be aware which jobs need to be done daily weekly, monthly or annually, this why checklists are so useful.

You will need to do certain jobs on a daily basis depending on the size of the business. Analysing the jobs that require completing and list them and then decide in the order they need to be completed.

In order to finish your work as a bookkeeper, you must complete the accounting cycle’s tasks, called this owing to the workflow being circular. These are entering transaction through to closing the books.

Source Documents

Source documents are the original business documents involved in the transaction and are the main documents used when posting to the ledger/reconciling your credit card or bank account etc. They include: sales invoices, sales credit notes, purchase invoice, purchase credit notes

Posting to the Ledgers

• Sales Ledger: When a sale is made a sales invoice automatically generated in the sales ledger.
• Purchase Ledger: When a purchase is made, the business will receive a purchase invoice this a posted to the purchase ledger.
• Nominal Ledger: When credit card is paid from the company bank account it will show up in the nominal ledger
• Cash Book: Transactions Include Bank Payments and receipts
• Customer Payments – Normally a remittance is received
• Supplier Payments – Sending a remittance to the supplier to let them know the invoices being paid and the date to be paid

Control Accounts

There are two main control accounts in a business:

• Debtors Control Account- This account contains all the customers that owe the business money the transactions are in the form of sales invoices, sales credit notes and customer receipts
• Credit Control Account – This account contains all the suppliers that the business owes money to the transactions are in the form of purchases invoices, purchase credit Notes and supplier payments

Sales Invoice

When a customer has purchased goods on credit a sales invoice is issued. It may be part of the bookkeepers role to raise and post sales invoices. If there is a query with a sales invoice, a credit note may need to be issued.

Selling on Credit

If your business offers credit to customers then there will be certain credit control measures in place or an official procedure to check and control who they offer credit to, how much credit the offer and the terms the customer must adhere to

Sales Discounts

Most Business Offer discounts to customers at some point to increase sales. They are usually in the form of a % discount

• Trade Discount
• Supplier Discount

Bank Reconciliation

Reconciling your bank accounts is a way of checking that all transaction have been accounted for and a correct. The easiest way to check these accounts are correct is a bank reconciliation

Petty Cash

Reconciling your petty cash is a way of checking that all transaction have been accounted for and a correct. The easiest way to check these accounts are correct is by carrying out a petty cash reconciliation

Purchasing

Purchasing involves some basic duties which may be carried out by the bookkeeper. Therefore you may be required to do any of the following depending on the size and structure of the business:

• Check prices on goods from various suppliers
• Ask for a written quotation from the supplier
• Raise a Purchase order and send to the supplier
• Receipt the goods when they are delivered
• Match the delivery/advice note with the purchase invoice
• Enter the purchase invoice on the accounts and file
• Chase up any undelivered goods
• Ask for a credit for damaged goods

Keeping Track of Stock

Some Businesses keep stock on he premises and its the job of the bookkeeper to record incoming stock, outgoing stock and stock on hand at the and of the accounting period.

Understanding VAT

A VAT registered business will account for input VAT on purchases and output VAT on sales. You also need to submit a Quarterly VAT Return to HMRC

Bookkeeping Corrections and Adjustments

After you have entered your bookkeeping day to day transactions you may find that you need to carry our corrections such as pre-payments, accruals, depreciation, wages journals, bad debt write off, losses, gains and error corrections.

Trial Balance

A trial balance lists all the accounts in the nominal ledger. It consists of debits and credit and the total of debits and credit should always match

Payroll

Payroll is a complex task and has many regulations to comply with. Luckily most modern payroll systems make this task much simpler than it used to be. That being said along with payroll duties may come, benefits in kind and company pension duties.

Bookkeeping Systems

Manual systems

These consist of paper ledger books and excel based spreadsheets. Manual systems general work on the single entry accounting method of bookkeeping.

Computerised Systems

Computerised systems are based on the double-entry accounting method of bookkeeping and are available in cloud based or stand alone (downloaded to your PC) depending on the software. Some bookkeeping software systems are free to download and use but may not include MTD feature required for VAT registered businesses.vities