Bookkeeping refers to the process of systematically recording all the financial transactions that a company undertakes.
It is a subset of the accounting function that involves various activities such as recording transactions, listing debits and credits, maintaining and balancing ledgers, generating invoices, and completing payroll.
Bookkeeping is clerical in nature and is indeed the basis for all accounting activities. It ensures the creation of accurate financial records that can then be organised, summarised and reported by the accounting function.
Objectives of bookkeeping
Bookkeeping enables accurate decision-making by internal as well as external stakeholders. It fulfils a range of objectives, which is why bookkeeping is essential:
- Ensuring full compliance with the law
- Enabling accurate financial decisions for the company
- Maintaining complete and up-to-date records of financial transactions
- Offering an accurate picture of the financial position of a company
- Listing all transactions chronologically and identifying any mistakes or frauds
Types of bookkeeping
There are two main types of bookkeeping methods carried out by companies:
- Single-entry bookkeeping is a basic form of bookkeeping that records only one side of the transaction and is suitable for small businesses.
- Double-entry bookkeeping involves listing the corresponding credit for every debit and is the universally accepted system for recording financial transactions.
Depending on the resources available and their comfort levels, some businesses do their bookkeeping ad hoc with Excel sheets or even physical books — although this is not considered a viable option anymore. Others use cloud bookkeeping solutions such as QuickBooks, Sage, and Xero to do their jobs easier.
The importance of bookkeeping
Poring over long lists of transactions and sorting piles of invoices might not seem like the most fun task. However, no matter what industry you work in or how large your company is, bookkeeping is a non-negotiable function.
Right from the day you start a business, you need to maintain books of accounts — not just to meet financial reporting obligations but also for the sake of your bottom line. Here is why bookkeeping is important for the growth of your business:
1. A central source of all transactions
Bookkeeping serves as the record of every financial transaction your business has made from the source of the transaction, such as receipts and invoices. With all purchases and sales listed in one place, drawing up full financial statements becomes easier.
2. Reports preparation
Bookkeeping provides the information necessary to prepare reports on net profit or net worth. This is important for the business’ understanding and serves as a reference for banks or venture capitalists that the business might be seeking funds from.
3. Straightforward budgeting
With all details of incomes and expenses in one place, your business can easily plan future expenses and set reasonable budgets. Otherwise, budgeting becomes all about guesswork, which can lead the business into murky waters later on if there is not enough cash.
4. Flowing working capital
Having accurate and updated books of records on hand allows businesses to know when to remind their debtors to pay up and when it is time to sort things out with their creditors. This ensures an accurate inflow and outflow of working capital.
5. Errors spotted sooner and breezy auditing
One of the bookkeeping benefits is that it allows you to quickly spot and avoid fraudulent invoices in your business while also avoiding making duplicate payments or forgetting to charge a customer.
In addition, with a complete balance sheet and detailed records in place, financial audits become a breeze. This saves time and also improves business reputation.
6. Accurate tax filing
With regular bookkeeping, you will have all their records for the end-of-year tax filing. You will be able to file proper amounts and thus avoid being penalised by the HMRC.
Even if the HMRC does come knocking, you will have all the financial information ready for examination. That is the importance of bookkeeping!
In addition, there are several taxes that a small business will need to pay at different points throughout the year, and bookkeeping allows you to calculate accurately what you owe. In a nutshell, bookkeeping is helpful!
7. Correct tax deductions and VAT payments.
Good bookkeeping helps business owners keep track of allowable expenses and saves them from having to pay unnecessary taxes on them.
Similarly, all VAT-registered businesses must keep complete records of their purchases and sales, including VAT paid and VAT charged. At the end of the financial year, this ensures your business does not overpay VAT to the HMRC.
8. Easier goal-setting
Accurate and up-to-date financial records allow your business to set reasonable short-term and long-term targets. Whether you are planning to set up a limited company or you have your sights set on expanding your territory, bookkeeping lets you know at a glance whether it is feasible for you to do so.
9. Smarter decision-making
Bookkeeping allows companies to see whether they track their income and revenue goals. They can make smarter strategic decisions based on their financial performance over the quarter or year. That is why bookkeeping is important.
Plus, a significant aspect of decision-making involves knowing when it is the right time to respond to a market need or a new opportunity. Bookkeeping gives you a clear picture of the resources available, thereby powering timely responses that you can see all the way through.
10. Legal requirement
Maintaining complete books of accounts and financial statements is mandatory under several laws, especially for industries like banks or insurance companies. Moreover, the new Making Tax Digital initiative means that businesses will have to file all their taxes digitally, which is a much easier task if they already record all their transactions in detail.
Let an accountant manage your books.
Even if your business has an accountant, keeping your books in order is vital for doing their job correctly. With complete records of all your expenses and incomes, the accountant can provide accurate advice on matters like what business structure to follow or how much to pay yourself as the business owner.
Plus, they can recommend the right accounting software for your financial records. Bookkeeping services, in short, are a must-have for effective business functioning and are critical to the financial health of your company.
If you are not already banking on the bookkeeping benefits, do so now. You can train your internal team in bookkeeping best practices or outsource the function to a third-party expert such as Golding Accountancy, that works with businesses of all sizes.
And while you are at it, consider going digital. You will find it much easier to keep up to date, legally and otherwise. Good luck!