Bookkeeping 101 - The Basics
Happy Friday Everyone! We made it to the end of another work week. I hope you had a good week. The weather has been crazy here. One day it feels like we are in the Arctic Circle and the next it feels like spring.
Over the next couple of weeks, we will be walking through various topics related to bookkeeping. Today we will look at part 1, what is bookkeeping?
To put it simply bookkeeping is the process of recording all the transactions your business does each day. Transactions include anything related to money flowing into or out of the company. For example, when you make a sale that is money coming into the company or revenue. When you pay your electric bill that is money flowing out of the company and is called an expense. The object of being in business is to have more revenue than expenses. A surplus of revenue is profit. To illustrate this let us pretend you are reviewing your books for January. In January, you had $1,000 of revenue and $500 of expenses this leaves you with a profit of $500 (1000-500) or a 50% ((1000-500)/1000) profit margin.
The best practice is to keep your books current. I recommend maintaining your books at least once a month by adding all recent transactions to the general ledger. As the bookkeeper, what I do is log each sale and each expense in what is called the general ledger. You can think of the general ledger as a book that shows all these transactions.
The general ledger is made up of different accounts. Each account acts as a bucket catching the various types of revenue and expense entries. For example, if you owned a car dealership with a repair shop attached you may have one account called car sales revenue and another called service revenue, or you may just have one account called revenue. On the expense side, you would have several “buckets” such as; insurance expense, rent expense, payroll expense, advertising expense and so on. Each account or bucket captures transactions that are similar in nature. An expense would not hit a revenue account and vice versa. Each type of expense should hit its own bucket; therefore, you should not see insurance expense hitting a payroll expense account.
After you have entered all the revenue and expense entries to your general ledger, the next section you would review are the assets and liabilities. For something to be considered an asset, its value or benefit lasts longer than a single time use or single accounting period. Cars, computers, office equipment, buildings, and prepaid expenses are a few items that could be considered an asset. Liabilities are obligations that you owe. Liabilities include items such as loans, taxes, or payroll. Assets and liabilities make up what is called the balance sheet. The balance sheet is just a report that shows all your assets, under asset accounts, and all your liabilities under payable accounts.
One final step is the monthly reconciliation. Reconciliation is the process of reviewing your general ledger cash account against your bank’s monthly statement. The goal here is to ensure that both your records and the bank’s statement have the same ending total for the period.
I hope this simplified overview has given you a better understanding of bookkeeping. If you are a new business, this is the perfect time to set your books up right from the get-go. By setting up your books from the onset, you will save a lot of time and hassle down the road. If you are an already established company but haven’t been keeping up, it is not too late to get your books in order. At Finergy Inc. we are always happy to help with these tasks. Call or email us today and we can get your books in order.
Check back next week when we look at the benefits of properly maintaining your books throughout the year.
*We hope you enjoyed our blog. Please note that the intent of this blog is to provide general information and should not be construed as financial, financial tax, accounting, legal, consulting or any other type of advice regarding any specific facts and circumstances, nor should they be construed as advertisements for financial services.