Category Archives for Bookkeeping Basics

What Are Bookkeeping Functions?

The functions of a bookkeeper may be many and varied however there are a few straightforward procedures that every bookkeeper will know about such as recording, balancing and securely filing financial transactions.

Small business owners who are just starting out are often led to believe that they need to employ a bookkeeper in order to maintain their financial records. However if you learn about what you need to do yourself you can often do a large amount of the basic information inputting yourself and may only need to hire a bookkeeper or accountant as you come to file your information with the IRS in the USA or HMRC in the UK.

It might be helpful to compare and contrast what an accountant does to help you to see the role of the bookkeeper. Accountants tend to use the data generated by the bookkeeper to show subjective insights into the functioning of the business. The bookkeeper will create accounts from the raw data provided during the financial business life of the company as it goes about trading. The role of the bookkeeper, therefore, may be seen as a more administrative position. The accountant will analyse that information and provide insights into the company that the bookkeeper would not perhaps normally consider. The accountant would also be the person who will help with strategic tax planning and financial forecasting. She would do a meta-analysis of the business and her knowledge will bring in aspects other than the more fundamental daily transactional business activities that are the territory of the bookkeeper.

Bookkeeping involves recording transactions in a consistent and rigorous way. The bookkeeper will follow a strict procedure and in this way she will create a file which, on paper or in a digital format, accurately represents the actual financial business dealings of  the company. The bookkeeper will log and add supporting information and notes to debits and credits (incomings/outgoings). She will issue invoices, perhaps do some or all of the payroll activities in the business and she will organise and update historical business information and work on the ‘general ledger’ to ensure its accuracy and coherence.

The ‘general ledger’ is a written, detailed account of what the business is spending and earning. A bookkeeper will add in data (called ‘posting’) to the general ledger. For instance when a sale is made the ledger (which may be an actual physical paper file which is updated or a computerised accounting software package) is adjusted to add in the new cash input. When an item or services are purchased the ledger will be updated to reflect the new expense in the records. One critical funtion of the bookkeeper is to check and maintain the balance of the account e.g. what has come in, what has been spent and what, now, is the actual balance of these (on paper) mathematical activities?

The bookkeeper will use differing methods of recording the data according to his preference, the way the company specifies it or the system has been set up. Some people use simple paper ledgers (as discussed above). These days most people opt for using computerised programmes that will also work out the totals of the incomings and outgoings for you. Spreadsheets can also be used to log the data or it may be that parts of the accounts are done on paper, some in a spreadsheet and some using a dedicated software package. The bookkeeper will need to track what’s happening in the business finances however this is done.

If the bookkeeper is the business owner and is a sole trader he will have a wide variety of tasks to perform. He will need to work on all the invoicing and payments as well as creating the financial statement at the year end (with or without the help of an accountant). However if the bookkeeper’s role is to work in a specific department within a large company he may well have just one specific function for which he is wholly responsible (e.g. purchase ledger (which means to check on all the items bought by the company and follow up on the payments made and organise everything to do with that)).

Whatever size of business you work in a bookkeeper’s role could involve reconciling the bank account. To do this you will need to view the transactions that have appeared in the bank and log those against what is going on in the daily business. You will then be in a position to alert the business owner if the bank account is likely to need more funds (e.g. if it might become overdrawn/exceed the overdraft limit). Reconciling the bank account means marking what has come into or gone out of the bank compared with what you have noted in your accounts. By reconciling the bank account you then know which are the outstanding invoices and payments that you need to chase up.

The bookkeeper’s role is to keep his accounts according not only to basic bookkeeping principles but also with regard to the company’s rules and specifications and most importantly following legal requirements. If in doubt the bookkeeper should refer to HMRC or his local tax consultant. A bookkeeper will need to bring to light any practices which could lead to errors in the business books and then work with the business managers to rectify the system and update any official bodies and so on. Mistakes need to be put right as soon as possible to avoid penalties which could further impact company finances.

The bookkeeper will need to have great data entry skills and thoroughness. She will need to have a head for figures and double check her work at all times. She will know what is happening in the monetary core of the company and be discrete and keep the information safe and away from third parties. Confidentiality will be maintained in everything she does. Her filing systems will be orderly and also updated as and when for instance when data needs be destroyed once it has served its purpose. She will also make sure that the relevant information is never deleted or corrupted.

The function of the bookkeeper could also involve recording the value of property and other financial fixed assets. He or she may also take on further responsibilities such as chasing up late payments, purchasing (buying) and generally constantly working to become increasingly efficient so helping to improve the profit of the business and contribute to the net income or the ‘bottom line’ (the actual money made after all the sales and expenses have been calculated).

A bookkeeper will work according to a number of rules that are generally the same no matter the nature of the business. Almost every type of business entity in the world will need some sort of coherent and clear system which shows the financial transactions and therefore whether the company is making any money or not. Bookkeeping, therefore is a fantastic profession to persue and is one of the most versatile career paths you can follow.


What Are Bookkeeping Principles?

Bookkeeping principles are rules that the business accountant or bookkeeper follows in order to create accurate records of the business’s financial activities. A bookkeeping system tracks money as it flows in and out of the company in the form of income or expenses. The data generated shows you how well your business is doing. Bookkeeping principles tend to be the same whether you record the data on a computer or in written format.

Basic bookkeeping principles need to be understood by anyone who is running a small, medium-sized or even large company since they are the means by which you will understand exactly what is happening in your business – even if you are not the one doing the books.

If you can see the basic business cash balance and understand the way that the accounts are organised to show the reality of the company finances you will know whether you have a healthy or a failing company and therefore what, if any, action you need to take.

Bookkeeping principles follow some very standard rules. There are daily information logging procedures that every bookkeeper will practise. Get to grips with these and you will always have a good working knowledge of what’s going on in the business.

Every bookkeeper will make what are officially called ‘Journal Entries’. These are really only formal written records of the money coming in and the money going out. So, for instance, when you sell something you will log that cash income. When you buy goods or services you will also be making a record of that money which is flowing out of the business.

When you report your financial activities you may use one of several different accounting procedures. You will use either accrual or cash accounting. If you follow the accrual method you will be reporting on the money you are owed or have not yet paid. So you are reporting on what is still to be claimed or spent as if the transactions have been finalised even though they have not. In the cash accounting method you report on the invoices that are actually paid (e.g. you have received the payment and it is in your bank account) and the bills that you have paid (e.g. the money for the expense has left your bank account and the payment is totally paid up). Whichever method you use will depend on your business and how you choose to account for it but you, as the business owner will need to understand which procedure you follow.

When you are working on your accounts you will be using double-entry bookkeeping. For a complicated-sounding name really this only means that for each thing you buy or sell you will need to record where the money came from and where the cash is going to. The ‘Credit’ or where the money came from, would be for instance, say you sold a product to a customer in a shop, the money would come ‘From’ cash given to you by Mrs. White. The cash would go ‘To’ or ‘Debit’ the bank account. If you did not use double entry you would have random transactions e.g. Mrs. White gave you £10 / $10 and somewhere else in your accounts you have have £10 / $10 being deposited in your bank account but we would not know how that money came to be generated. The ten pounds does not magically appear in an account; it was a payment for some thing. A double-entry system is designed to clearly show where the money you place into the bank account came from and how it was generated.

Similarly things that you purchase are made as double-entries too. So, you use part of the £10 / $10 you had earned from that previous sale (from Mrs. White) to buy an item. You say the money came ‘From’ the bank account (a ‘Credit’ in this case) and went ‘To’ (a ‘Debit’) the cost of the thing you bought. If you can understand double-entry bookkeeping principles you have pretty much the basics for any accounting system be it kept on paper or in computer software.

When running a business you will need to grasp the bookkeeping principle of cash flow. In a nutshell you can’t spend what you have not yet received in payments. Or you can, but you may incur debts that could destroy your business completely. Cash flow is all about the movement of the monies into and out of your business bank accounts.

Once you have grasped the basics of double entry and cash flow you will need to understand the profit and loss account. Here you will see the total amount of money you actually received and then the total amount of expenses that you accrued in order to run the business. Hopefully you did not spend everything you earned and you have made an excess of money, a profit. This is a snapshot of your business as at that date.

There is one more area that you will need to account for in recording your business transactions and that is your liability to pay any tax or VAT. In order to do this you will need to  create a ‘tax’ or ‘VAT’ account. Your company will accrue taxes with just about every transaction made and you must keep strict records showing what you owe. It is good practice to put the owed monies aside so that you have the funds available without fail when they become due either quarterly or annually. You should always fill any tax forms out accurately and pay any taxes or VAT payments on time.

Bookkeeping principles have not really changed much since the very first accounting records were made. Once you have become familiar with the above terms you will have come to understand almost all of the elements for doing your bookkeeping. The principles apply throughout the world and follow a common-sense pattern which has simply been formalised and been given jargonistic terms.

What Are Bookkeeping Tasks?

The tasks a bookkeeper needs to do may be highly specific or they may be extremely varied. A bookkeeper’s day-to-day tasks will depend on if he is working for a tiny start up or a major global company. For instance at the very basic level the bookkeeper will need to log all incoming and outgoing transactions (together with the ‘evidence’ – the paper trail of receipts, invoices and other material). She may also need to create the system itself if the company is just starting out and/or prepare VAT returns or sales tax information. In such a business, the bookkeeper will most likely be required to do a wide range of differing tasks. However if the role of the bookkeeper is to work with a large number of peers in a huge company he may be needed to focus on one specific area and become an expert in that. In a nutshell the role of the bookkeeper is to organise and produce information essential to the financially healthy running of the business.

The tasks of the bookkeeper include things which are done daily, monthly as well as quarterly and annually. Daily tasks involve checking the petty cash, logging and preparing invoices (plus storing these in a paper or a digital and secure filing system), paying bills and raising purchase orders as well as updating the payroll information. The data should be recorded using either computing software (such as, MYOB or QuickBooks) or some other format. Some companies use spreadsheets to log the data. In a few cases the information is recorded in journals – literally written down in specially ruled books. However you do the books you need to be accurate and diligent in keeping up with the daily tasks. Some bookkeepers use a checklist so that at each day, month, quarter and year end they have fulfilled their requirements.

Depending on the company requirements monthly duties could involve an analysis of the month’s overall profit and loss standing as well as double checking the figures ready for the quarterly tasks which may involve the quarterly sales tax payments or income payments. At least once a month the bookkeeper would need to oversee the invoices – are they all paid? Do reminders need to go out?

At the year end the task of the bookkeeper will be to complete the year’s trading figures ready to send on to the accountant for her information. The bookkeeper may also need to conduct stock reviews especially at the year end in order to account for the expenditure of the company and so that the value of goods that remains within the business can be verified. The bookkeeper would also need to monitor and log fixed assets and work out the cost of goods sold at the year end so that money is allocated to expenses according to the reality of the business and expenditure is spread realistically over the life of the company.

The tasks of the bookkeeper are vital in that he will be the one who logs exactly what’s happening with the cash flow, any trends in the sales or the losses and the exact status of the bank account (crucial as if the business owner is not wholly aware of what is happening there then the company can run into trouble overnight). Any bookkeeper tasked with maintaining up to date cash flow records will need access to the company bank and or credit card accounts in order to carry out bank reconciliations. This involves marking off what incomings and outgoings are logged with the bank or credit card. Typically bank account statements lag behind real time. This is where the good bookkeeper comes into her own; she will know exactly what cash is available and when.

One very important task of the bookkeeper is to keep a track of unpaid bills and invoices. For instance without the bookkeeper keeping a true account of the monies flowing into and out of the business it’s all too easy to spend cash that’s not there. If someone has been late paying their invoice the bookkeeper may be tasked with contacting the person to find out how the money will be paid. In future the bookkeeper may be asked to work out with the customer a payment plan to avoid late payments being made in the future.

Bookkeepers also work on paying the bills. These should be paid on time and double checked that you are not over or underpaying the amount. In this way the bookkeeper safeguards the good name and the good will of the company which can make the difference between surviving or sinking in difficult trading times.

At all times the bookkeeper is tasked with being accurate and honest. He or she will need to check the figures and report precisely what is going on in the company. They would need to let management know about any irregularities. Without a clear and comprehensible picture of the business trade and how it is progressing it will not be obvious if the company is making a profit. Without a profit the business will not be viable. The bookkeeper in many ways is the heart of the business and should be respected and supported for the work that they do.

The bookkeeper also needs to be able to hand over good, clear records of the life of the business to the accountant as and when so that they can work on the financial statements for the business. It may be that external auditors double check the ongoings within the company. The bookkeeper may also be tasked with creating the paperwork for them.

In conclusion the tasks of the bookkeeper will vary depending on the nature of the business and the level of expertise of the bookkeeper. In all cases the bookkeeper will need to have the same qualities of attention to detail, ability to deal with complexity and to be thorough and discrete with sensitive data.

What Are Bookkeeping Skills?

What Are Bookkeeping Skills?

Being a good bookkeeper means being able to represent an exact picture of the financial aspects of your business on paper or electronic files. You need all sorts of skills to become a great bookkeeper; soft and hard skills, and above all an interest in having an overview of the financial functioning of the business.

The hard skills you need to be a brilliant bookkeeper are, among other things, to have an understanding of numbers and an eye for detail. You will need to have a certain level of maths. You will need to learn or hone your natural talents for accurate record keeping.

The soft skills you will need to be a first class bookkeeper are to have a strong commitment to the work and to be able to obtain an overview of the company; to see the bigger picture. As the bookkeeper you will find that you are able to see trends in the flow of finances and part of your role will be to work with your findings to enable the business to grow and prosper. As well as being key to communicating the overall financial health of the business you will need to attend to the nitty gritty, the details. Of course no-one is perfect and you may make mistakes sometimes. Your role will also involve double-checking all your accounts and correcting any errors you or anyone else may have made in doing the record-keeping.

Basic bookkeeping skills are learned and used by accountants, although a bookkeeper is not an accountant. The accountant will use information compiled by the bookkeeper to create the end of year accounts. Being an effective bookkeeper also means you have to be a great communicator. Your work should be clear and logical. The accounts you keep should follow basic bookkeeping principles that are understood throughout the industry.

You will need to learn bookkeeping and accounting language. You will need to learn the definitions for phrases such as debits and credits, accounts payable and receivable, accruals and auditing as well as the Balance Sheet. You will learn to closely track the activity in the bank and link it to what is happening in the business: e.g. bank deposits and reconciliation. A bookkeeper will also need to have a good grasp of how the value of equipment changes over time (‘depreciation’). You will also have to work your way through financial statements and learn about journal entries and in some cases VAT and the way that this is managed in the accounts.

You may need to train and obtain some qualifications. There are numerous courses available; some people train in-house as they work. Others prefer to apply for their first bookkeeping role having completed a course. You may be thinking of starting your own business and as a result need to become your own bookkeeper.

These days it is essential to be computer literate and to have a grasp of current technology as so many companies now use computer programmes to keep their accounts. So this is where your hard skills learning to touch type and using computing software will be useful. Your soft skills will also be relevant as you will need to have a good overall understanding of the company in order to oversee the maintenance of the figures and to present them in a coherent and comprehensible way to third parties.

A bookkeeper needs above all great data entry skills. Accurate recording of figures and the relaying of the numbers onto the ledgers or into the computer programme is key to the job of bookkeeper.

The information should be stored safely and securely. If the data is kept on physical copies these should be stored in lockable cupboards and another hard copy should be kept off-site. Therefore keeping brilliantly well-organised records is one of the key factors in being a great bookkeeper.

If you use technology to keep your company books then you need to secure your electronic data just as well if not more so than paper copies. An encrypting programme/software should be employed to reduce or minimise the chances of your company information falling into the wrong hands.

So a bookkeeper needs to be orderly, methodical and strictly accurate.

The theory of bookkeeping is to have a paper/data trail to show where the money you are making came from and also where it is going to. So you must be disciplined in your approach. No transaction should be omitted; every entry should be clear and concise reflecting the reality of the business.

All receipts should be stored neatly and in a numbered sequence which is then logged for future reference. This will help ensure that any query will be easily resolved. In effect every transaction should be clearly logged. Your skills as a bookkeeper are to be able to show a third party what was spent where and how the funds were used and accrued. Again every incoming financial transaction should have an invoice logged against it. These also are numbered in a logical and sequential way.

A bookkeeper needs to be able to have a handle on the whole financial picture of the company and as the bookkeeper your efficient work and clear logging of records will save the company time and money, so increasing its overall profit margin.

In conclusion, bookkeeping skills are many and varied however there is one basic requirement that I have not yet mentioned which is essential above and beyond all others: you need to be open and honest. That way you will create fantastic records and also give the business the tools it needs to grow and prosper. In some ways the bookkeeper is the key to a successful company. Without a clear picture of the finances any company is bound to flounder. Your dedication to keeping accurate and clear records is essential to the ongoing life of the company. Your bookkeeping skills will become core to the welfare of the business and as a result you will be irreplaceable and respected.