Good bookkeeping is essential for your business to run efficiently. Whether you engage an online bookkeeping service or prepare your bookkeeping in house, Bookkeeping allows a company to know how much money it has, how much it owes, and if it has a profit or loss at any given time. Bookkeeping simply means keeping records of the money and financial obligations that your business receives and spends.
How Does an Online Bookkeeping Service work?
If you own a business, you’ll need to keep track of all your receipts and payments if you want accurate accounts at the end of each month, quarter or year. This can be pretty time-consuming, but the right systems and some professional help from a bookkeeping service can smooth the way.
In general, there are three stages to recording financial information:
- Recording business transitions like spending and receiving money and issuing invoices.
- Next, these individual transactions are brought together into sub-categories for your business. The sub-categories are call codes, and they fall into one of 5 main categories—Income, Expenditure, Assets, Liabilities and Equity.
- A Summary of these codes are then compiled into a Profit and loss and a Balance Sheet and form part of your Financial Statements.
For example, let’s say you’re a plumber and you make a cash sale of $1,100, including GST. You also pay for some materials for the job from Bunnings for $550.
If these are the only transactions, your Profit & loss will look like this:
Sales ………..$1, 000
Profit ……….$ 500
And your balance sheet will show:
Bank …………………..$ 550
GST Liability……….$ 50
Retained Earnings $500
Now Imagine hundred or thousands of these transactions. Each transactions records two entries, which is known as double-entry accounting. With GST, one of these two entries is split into two to show the GST component. It sounds complicated; keeping track of all of this manually would be a nightmare. But don’t worry! Systems like Xero Online Bookkeeping Service records all of this with ease.
Is Bookkeeping Really Necessary?
Bookkeeping is essential because it will give you an accurate picture of your business’s financial position with up-to-date information. Manual lists are not accurate and will not comply with ATO standards. These are referred to as Single entry systems. They do not contain the checks and balances provided with a double entry bookkeeping system.
A good bookkeeping system like Xero does come at a cost with a monthly subscription fee. But without exception, our clients save on accounting fees when they use a cloud system like Xero. When implemented correctly, the system records transactions accurately, leaving few corrections for our Accountant to complete!
So I should discourage clients from using a system that seriously reduces the fees that I charge to clients… right? Actually No. The Team at A2B & B2B are experts at Bookkeeping and Accounting. And we can fix anything! But no one likes the ‘fix it’ kind of work… No one.
Think about the life of a humble Bookkeeper or Junior Accountant at your online Bookkeeping Service. Natural traits include patient, detail orientated, meticulous, compliant. So they arrive at work and check their job flow and….
- when the client is organised,
- When not!
No one likes messy work! We can do it, and it is very rewarding when we tidy up a mess for a client and changing their life by helping them stay organised.
We help you get organised and take the pressure off you. It’s different for every client. You decide how much Bookkeeping help you want from us, and we will show you how to do the rest. Suppose you want to prepare your own BAS, no problem. We have a BAS check service, or we can do a basic check once a year at tax time. It’s your call and:
- A Win for you, lower accounting fees, and you get to be financially organised.
- A Win for our team, their job flow looks
- A Win for our business (A2B & B2B), we don’t do ‘fries with that’ … That’s not what we do. It’s not all about more fees for us. Many of our clients have been with us for 20 years! And their kids are starting businesses and becoming clients!
Good Bookkeeping is necessary to help you make informed decisions about how your business is doing so far and help predict future success or failure. If you do not keep track of your transactions, you will never know if you are making a profit or a loss.
Different Methods of Bookkeeping
There are various ways to keep track of your financial information, and it all depends on the size and type of business you have. The most common bookkeeping methods include:
- Cash basis – This is only ATO permitted for a limited number of sole traders.
- Accrual basis – This method is required for most businesses. You must monitor all transactions, no matter what they are, as soon as they happen, which will then be aggregated into different account codes for your business.
Different Systems of Bookkeeping
This bookkeeping system is the simplest and most basic way to record your business’s financial information. All transactions are recorded in a list as they occur with no adjustments. The main disadvantage of this system is that it only provides you with minimal information about your business, which means it will be hard to get an overall picture of its financial position. Also, errors can occur as the single entry system has no checks and balances. It is not ATO compliant.
Double-Entry Bookkeeping is a more advanced system. It records earnings rather than cash as income. One of the important advantages of this system is that it provides plenty of information about your business that can help you make informed decisions. Double entry systems include Xero and are ATO compliant.
Understanding Different Accounts
There are five main types of accounts, and each one is used for a different purpose. Each transaction that occurs is recorded in two account codes (plus GST if applicable). This is double-entry Bookkeeping. Each account code fits within one of five main categories described below :
All the things your business owns are listed in this account, including land, buildings, money owed to you, any equipment or machinery and bank accounts. This account is used to record your business’s financial position at any given time.
This is where all your business’s debts are recorded. This can include money owed to you, loans, overdrafts, and GST and payroll liabilities. These accounts are used to record your business’s financial position; however, it does not include the value of any assets you have. Everything is recorded at cost, not at market value and the two can be very different.
Income or Revenue
This is where all your business’s income is recorded. This can include the money you receive from selling goods and any other services you provide. It also includes earned income from invoices that you have issued and have not yet been paid. A business’s revenue is used to help determine how much profit it has made.
Expenditure or Expenses
All your business expenses are recorded in these accounts, which includes money spent or incurred on goods and services as well as repairs and over overheads. A business’s expenditure is used in calculating profit.
Equity or Capital
These account is used to record the value of capital contributed and retained in the business over time.
Understanding Financial Statements
Financial statements are used to provide a summary of how your business is performing. These Statements organise and present the account codes and the categories and include:
A Balance Sheet provides information about what you own (assets), less any debts owed (liabilities) at a particular point in time. This will show you the ‘Book’ value of your business, which is known as its equity or capital. A growing value of equity is a good indicator of business success. This is taken at a point in time.
Profit and Loss Statement
Also known as a P&L or income statement, this shows how much money your business has made (income) less its expenses. If you have made a profit after all your costs are taken out, this will be shown in the P&L. A loss will be recorded if your expenses exceed your income. This is taken over a period of time, like one month or one year.
Cash Flow Statement
This shows whether your business is making (positive cash flow) or losing (negative cash flow) money and how this has changed over time. The statement can also show where the cash is coming from and going to, which means you will help you make adjustments if needed. If your customers are slow to pay you, your Cash Flow Statement will let you know. You can use this information to make informed decisions about when and how much money you need to run your business successfully. Cash Flow AND Profit & Loss are important indicators to manage.
10 Things Every Bookkeeper Must Know
Here are Bookkeeping Basics that would help business owners understand the concept of Bookkeeping.
1) The process of Bookkeeping ensures accuracy, compliance, and transparency in accounting functions.
Bookkeepers should maintain proper records for each transaction that takes place. This should include details about what was bought or sold and the financial value of the transaction. Your Bookkeeping system should be such that you can easily verify and validate each entry made in the system to check for accuracy and completeness . Bookkeepers make sure all transactions are recorded in Books of Accounts. Systems like Xero allow the Bookkeeper to attach the relevant document like invoice or receipt to the transaction. This really helps when additional information is needed and in times of ATO audit.
2) Bookkeeper’s need to maintain separate records for each Bookkeeping function they undertake.
Bookkeepers need to maintain a separate records for Sales and Purchases and Expenses and Assets like Sales Invoices, Payroll, and Accounts payable.
3) Bookkeeping Basics includes maintaining proper Batch Sequence Numbers for all transactions.
Bookkeepers need to maintain good Batch Sequence Numbers for all transactional entries they make in Bookkeeping. The Bookkeeper should ensure that each batch number has a unique number so far as Bookkeeping’s concerned. Again Xero provides a compliant system.
4) Reconcile Bank Book with Cash Book to ensure that all transactions are recorded correctly.
A Bookkeeper reconciles the Bank Balance shown in the Bank column of Cash Book with the Balance Shown by the respective bank on a statement sent by the bank at regular intervals. This helps the business owner know if there were any discrepancy between the Balance shown in the Bank code of the Cash Book and the Balance demonstrated by the bank. If there is any discrepancy between both Balances, then your accounting records are incorrect! Again Xero provides a seamless bank reconciliation process.
5) Closing entries must be made at the end of an accounting year.
These should be prepared and processed by your Accountant. Cloud systems make this easy and cost-effective.
6) Managing the payroll of employees.
Payroll is an essential element in Bookkeeping for businesses with their own workforce. A Bookkeeper needs to make entries in the payroll system for salaries or wages paid to employees; bonuses paid, superannuation contributions made by the company etc. This helps business owners know the amount of money they have spent on salaries, wages, and bonuses paid to employees. This also allows you to analyse the profitability of their business or its growth.
7) Understanding depreciation of assets.
Depreciation is an important element in Bookkeeping for businesses that have their own infrastructure called fixed assets. A Bookkeeper needs to make entries to record depreciation of these assets. Understanding the impact on their Profit & Loss Account after making depreciation entries based on an asset’s useful life (years) is vital for business owners.
8) Prepare and maintain financial statements for business owners
Your Accountant will prepare your financial statements for the business owners. These financial statements would contain important data like Profit & Loss Account, Balance Sheet etc. They also help in analysing the operations and performance of the company.
9) Prepare budgets for businesses.
Many small businesses do not have their own budget planning or forecasting system in place. A professional Bookkeeping Service can help set up one for you, based on your requirements and resources. This helps business owners determine the business’s performance and plan the future courses of action accordingly.
10) Prepare and manage petty cash.
Petty cash is a crucial element in Bookkeeping basics for small businesses that do not maintain a separate bank account for petty expenses and office supplies. A Bookkeeper helps business owners to make entries in the Journal Books about expenditure made towards office supplies, telephone bills etc. They need to prepare and manage Petty Cash (cash required to spend on small expenses like postage, carriage etc.). Cash Petty Cash systems are very outdated and not recommended. We recommend a separate small bank account. You can refer to this small account as the petty cash account. Arrange one or two debit cards for the account and allow authorised employees to utilize the card for approved expenditure. The petty cash account should also feed into your Xero Booking Service to simplify the administration of Petty Cash.
Additional Tips for Bookkeepers
- Familiarise yourself with Bookkeeping terms and principles. Bookkeeping has its own set of terms and regulations that you need to get familiar with.
- Research Bookkeeping software. Bookkeeping software helps bookkeepers build their skills in handling the complete bookkeeping process. We recommend Xero.
- Read about legal guidelines and Bookkeeping standards. Bookkeepers need to make entries in the Book of Accounts consistent with legal guidelines and Bookkeeping industry standards. Bookkeepers should always keep themselves updated about these legal guidelines and Bookkeeping standards.
- Learn Bookkeeping from different tutorials, articles, books etc. Bookkeeping tutorials are available on websites, journals, and magazines.
The Bottom Line
Bookkeeping is an integral part of running a business. A Bookkeeper needs to be proficient in the above basics and also understand different software used for recording entries in books of accounts, maintaining journals etc. Knowledge of the software will help them handle their tasks efficiently and effectively. Bookkeeping is a time-consuming job, and it requires care, attention, and patience to make entries carefully in the books of accounts with utmost diligence.
Hopefully, this article will help you understand the Bookkeeping basics and its role in your business.
Professional Bookkeepers can take care of your accounting and bookkeeping tasks and help you meet the ever-increasing demands of the business.