Bookkeeping and your System

What is Bookkeeping?
The simple definition of bookkeeping is,"It is the practice involved in the recording of transactions affecting the operation of a business." Bookkeeping involves a system which records the transactions occurring in a business on a day to day basis. The information recorded in this manner makes up the bookkeeping records.

The bookkeeping records enables the business owner or managers to assess the performance of the business, prepare its financial statements and produce reports and data that allows the business owner to run a more successful business. These records also allows the accountant/advisor to give advice or make recommendations so the business can improve its operation and its profitability.

Importance of Bookkeeping
Putting in a bookkeeping system is one of the most important tasks to do as a new business owner. You will probably need the services of a qualified accountant, or someone experienced in accounting, to ensure the system incorporated will adequately provide good information. This will carry your business to the next stage of the bookkeeping process, which is called accounting.

With a good bookkeeping system, you will be able to extract information to improve the management of your business. It will also provide a source of valuable financial data to enable your accountant to assist you in all other areas of the business. The information the bookkeeping system produces must therefore be accurate, as well as easy to extract.

How Bookkeeping and Accounting Works
The subject of bookkeeping and accounting is very specialised and cannot be covered in a simple web site such as this. There are many courses available for business owners who wish to update their knowledge in this area and these courses are highly recommended.

Unless you (as a business owner) understand what is happening on the financial side of your business, you will always be dependent on what your accountant has to say. Unfortunately, your accountant is not always available on a day to day basis, so problems can arise which are not picked up until later on, if you don't have a basic understanding of bookkeeping and accounting principles.

Basic Information to be Extracted
The information you need to pull out from the system will depend on the type of operation that you have, but in general, most businesses need to record or have the facility to extract information in the following areas:

  • Sales
  • Cash received
  • Sales returned
  • Purchases
  • Cash paid out.
  • Purchased returned.
  • Payroll and Tax
  • Equipment owned.
  • Plant and equipment leased.
  • Debtors (money owing to the business).
  • Creditors (money owing by the business).
  • Details of loans and other debts the business has.
  • Details of assets and investments owned by the business.

These and other records will help your accountant produce the financial statements at the end of each period or at the end of the year. Essentially, the information produced by the bookkeeping records will allow the accounting process to begin.

The accounting process is where the accountant will extract the information and come out with the main financial reports such as:

  1. Profit & Loss Statement (or Revenue Statement). This statement shows the flow of income into the business and the flow of expenses out of the business for the period in question. It will also arrive at a profit made by the business, or a loss for the period.

  2. Balance Sheet. This is a balance or statement showing what the business owns (assets) and what it owes (liabilities) at any particular period in time. It will also be used to show where the funds of the business have come from and how they have been used.

  3. Cash Flow Statement. This statement will show the flow of cash into the business and of cash out of the business and is basically a duplication of the bank account of the business.