Any business that wants to become successful needs accurate financial records to keep track of progress. Good books help you analyze patterns in your business’ financial behavior, allowing you to create accurate budgets, set realistic business goals, and make smarter business decisions.
Below, we answer the question of what is bookkeeping, discussing its definition, benefits, components, and methods.
What is bookkeeping?
Bookkeeping is the practice of recording, categorizing, and reporting an account’s financial transactions in a financial ledger. The process helps businesses monitor their income, expenses, and overall financial health.
Additional bookkeeper responsibilities include:
- Creating invoices
- Managing payroll
- Conducting bank reconciliations
- Ensuring compliance with local reporting requirements
The difference between bookkeeping and accounting
Where bookkeeping is the practice of recording financial transactions, accounting is the practice of interpreting those records. An accountant will use the information in the bookkeeper’s records to provide financial advice, perform business audits, produce financial forecasts, and more.
Our bookkeeper vs. accountant article can provide more information.
Basic elements of bookkeeping
Bookkeeping encompasses a wide range of activities. Below, we cover the most basic bookkeeping elements.
Debits and credits
A core component of bookkeeping is tracking your cash flow. Bookkeepers achieve this by recording debits, money your business spends, and credits, money your business earns. This paints a solid picture of expenses against income.
Bank Reconciliation
Bookkeepers ensure that the numbers on your bank statement align with those on your bank accounts. They cross-reference bank records with business records to identify and correct discrepancies, such as missed check deposits and incorrect funds.
Tax Preparation
It can be challenging to stay on top of taxes. Not only do you need to ensure that everything is filed correctly, but you also need to ensure compliance with local regulations. A layman might also be unfamiliar with how to qualify for tax returns.
Bookkeeping maintains accurate records of business transactions to ensure preparedness during tax season. With a dedicated bookkeeper, you can keep your tax paperwork organized and legally compliant while maximizing all possible tax returns.
Accounts receivable or invoicing
Bookkeepers help you track down unpaid client payments. They are in charge of creating, sending, and tracking down client invoices. A good bookkeeper will also know how to work with clients and collect late payments. The process prevents you from losing money to untracked invoices.
Accounts payable
Conversely, bookkeepers also stay on top of the money your business owes. It ensures that the payments you submit to contractors, vendors, and other companies arrive on time. The accounts payable practice allows you to build solid reputations with the entities that work with you. Increased credibility allows your business to maintain longevity.
Payroll
Bookkeepers ensure that you pay your workers accurately and on time each pay period. They also assist in organizing relevant employee documents, such as timesheets. They use their expertise in tax to file taxes on your employees’ behalf.
Common bookkeeping concepts
In bookkeeping, you are likely to encounter the following terms:
- Assets: Something that the business owns and provides value, such as inventory, property, equipment, or money owed by customers
- Liabilities: These are sums of money that the business owes, such as unpaid bills and loans
- Equity: This represents a company’s total assets minus liabilities
- Income: This refers to money the business receives from payments, sales, or interest
- Expenses: These are sums the business pays to improve operations
- Account: This record tracks the activity of a particular asset, liability, equity, income, or expense.
Common bookkeeping documents
Bookkeeping involves multiple documents, each serving a different purpose.
General ledger
The general ledger is the document that contains all recorded and categorized transactions. It reflects a company’s assets, liabilities, and equity.
Ledgers consist of journals, which are chronologically arranged records of transactions. Journals contain individual records of transactions called journal entries.
Financial statements
Financial statements are reports that represent a company’s financial activities and performance. They typically reflect a company’s assets, liabilities, and equity. Two common types of financial statements are balance sheets, profit and loss statements, and cash flow statements
- Balance sheet: This is a kind of financial statement that lists everything the business owns and owes.
- Profit and loss statement: This represents the difference between a company’s revenue and expenses within a set timeframe. It helps businesses understand their financial performance over a given time period.
- Cash flow statement: The cash flow statement uses changes in balance sheets to track how much cash went in and out of an account within a specific period.
Trial balance
The trial balance compiles the closing balances of all accounts in general ledgers within a set timeframe. Its purpose is to check whether recorded debits and credits match up.
Chart of accounts
The chart of accounts lists and categorizes every account in the business’s general ledger. It uses a coding system to separate accounts into dedicated categories.
The importance of bookkeeping
Bookkeeping plays a vital role in your business’ financial health. Accurate records help you make better business decisions while complying with government requirements.
It helps you budget accurately
Financial records reflect how much you earn, how much you spend, and what categories you typically spend on. This data is valuable for budgeting. As you analyze past spending and income patterns, it becomes easier to forecast budgets accurately.
For example, if a cafe’s financial records show that sales increase during the Christmas season, it can adjust its December budget to accommodate its inventory needs.
It prepares you for tax season
Every business should expect to file taxes at the end of the year. Bookkeeping records provide all financial information relevant to the process. They also help you calculate solid estimates of what you owe in tax.
It keeps you compliant with government regulations
The government typically requires businesses to maintain accurate financial records. Bookkeeping ensures that financial information is readily available, keeping the business compliant with legal requirements.
It paints a clear picture of your financial health
With proper bookkeeping records, you have a clear picture of how much money goes in and out of your business. The information can help you determine whether to reduce spending or invest in assets that can improve your revenue-generating power.
Let’s say you’re a freelance video editor. Your books show that your income far outweighs your business spending. With this information, you invest in a computer that can accommodate high-paying clients with more complex project needs.
It helps you monitor business goals
Financial data provides evidence that you are meeting your business targets. Without it, you would rely on guesswork to gauge progress.
A company goal, for example, might be to increase profits within four months of operations. Profit and loss statements collected over that period can help determine whether that goal was achieved.
Methods of bookkeeping
Single-entry and double-entry bookkeeping are the two most common bookkeeping methods. The former provides simplicity at the cost of accuracy, while the latter provides the reverse.
Single-entry bookkeeping
Single-entry bookkeeping records just one entry per financial transaction. Entries consist of money flowing in and money flowing out. You add income and subtract expenses until you arrive at a final balance.
Records typically consist of the following information:
- Transaction date
- Transaction description
- Transaction value
- Remaining balance
Suppose you’re a graphic designer recording all transactions within the first week of September.
- 9/01: Your account holds a starting balance of $3,000.
- 9/02: You invest in a better computer, jotting down $1,000 under expenses. You subtract the amount from your starting balance, leaving you with $2,000.
- 9/03: A client pays you $2,000 for a service. You write the amount under income and add it to your account balance, which increases to $4,000.
- 9/04: Your suite of graphic design tools charges you the monthly subscription fee. You write $40 under expenses and reduce your account balance by the same amount, resulting in a total of $3,960.
- 9/05: You pay for your internet subscription. After jotting the number down under expenses, you subtract $55 from your account balance. You end the week with $3,905.
| Date | Description | Transaction Value | Account Balance | |
| Income | Expense | |||
| 9/01 | Starting balance | $3,000 | ||
| 9/02 | New computer | $1,000 | $2,000 | |
| 9/03 | Payment received | $2,000 | $4,000 | |
| 9/04 | Software subscription | $40 | $3,960 | |
| 9/05 | Internet | $55 | $3,905 | |
Single-entry bookkeeping is a cost-effective small business bookkeeping method. Since it does not require advanced accounting knowledge, it helps small businesses save money on professional bookkeeping services.
However, the method leaves less room for more complex bookkeeping elements, such as information on assets, liabilities, and equity. Therefore, only consider single-entry bookkeeping if your small business is cash-based.
Double-entry bookkeeping
Double-entry bookkeeping records two entries per financial transaction: one for debits and another for credits. Each debit will have an equal and opposite credit.
Opposite entries allow you to account for accounts payable, accounts receivable, assets, and inventory.
Like single-entry bookkeeping records, double-entry journals contain transaction dates and descriptions. However, there will also be another column for debits and credits, respectively. You calculate the balance at the end of the sheet.
Let’s reconsider the example above.
- 9/01: Your account holds a starting balance of $3,000.
- 9/02: You invest in a better computer. You lose $1,000 in cash but gain $1,000 in assets.
- 9/03: A client pays you $2,000 for a service. You gain $2000 in credits.
- 9/04: When your suite of graphic design tools charges you the monthly subscription fee, you gain their service as an asset but lose $40 in cash.
- 9/05: Similarly, you lose $55 in cash when paying for internet but gain access to a service worth $55.
| Date | Description | Debit | Credit |
| 9/01 | Cash | $3,000 | |
| Capital | $3,000 | ||
| 9/02 | New Computer | $1,000 | |
| Cash | $1,000 | ||
| 9/03 | Payment received | $2,000 | |
| Service | $2,000 | ||
| 9/04 | Software subscription | $40 | |
| Cash | $40 | ||
| 9/05 | Service | $55 | |
| Cash | $55 | ||
| Total Balance | $6,095 | $6,095 |
Double-entry bookkeeping best suits organizations with complex transactions, such as loans, credit, and accounts receivable. It captures a more complete picture of financial health.
Common bookkeeping challenges
While bookkeeping is an essential part of running a business, the process often costs businesses time and money. Below, we name a few challenges that get in the way of good bookkeeping and provide tips on how to remedy them.
Lack of time
Bookkeeping is a time-consuming process. It involves the manual load of organizing records, tracking accounts payable and receivable, running payroll, staying on top of tax laws, and tracking tax returns. The time you invest in these activities is time away from running your business and nurturing relationships with your clients.
As such, your best option for time efficiency is outsourcing bookkeeping to professionals. As bookkeeping experts, they have strong organizational skills and know their way around your local regulations.
Canada-based businesses should consider outsourcing bookkeeping to EpicBooks to experience first-class bookkeeping services that cover financial reporting, tax preparation, budgeting, and more. Refer to the EpicBooks service page for more information.
Poor organization
If you’re split between running your business and maintaining your books, it becomes difficult to keep everything organized. Worse if you keep records manually through mediums like pen-and-paper or spreadsheets.
Disorganized records eliminate the main benefits of bookkeeping. Inconsistencies in records create unclear or erroneous estimates of overall financial health, leading to misinformed business decision-making. You might also encounter government fees if you fail to submit accurate records during tax season.
Aside from hiring a bookkeeper, it’s best to use a bookkeeping software. Because digital bookkeeping tools automate many processes, such as expense tracking, invoicing, and reporting, they reduce the likelihood of human error.
Basic bookkeeping software typically charges around $20 per month, but free versions are available for businesses that only need basic functions. Read our guide to the best small business bookkeeping software for recommendations.
Security threats
Your books contain some of your company’s most valuable data. If you don’t have good security measures, you risk losing financial data to malicious phishing attacks, malware attacks, and insider threats.
Fortunately, there are multiple ways to secure your bookkeeping data:
- Enforce multi-factor authentication (MFA) on accounting tools: MFA makes it more difficult for third parties to enter your accounts.
- Use trusted bookkeeping software: Cloud-based software typically offers top-level security to ensure that your data never lands in the wrong hands.
- Backup your data: In case your data gets hijacked, data backups help you keep records that would have otherwise been lost.
Leave bookkeeping to the experts at EpicBooks
Bookkeeping plays a crucial role in ensuring business success. Without financial records to view, you have nothing to guide you through budget forecasts, tax preparation, goal monitoring, and other business decisions.
Additionally, bookkeeping helps you stay on top of business money matters. It tracks the money that enters and exits your business, empowering you to make informed financial choices.
EpicBooks provides personalized bookkeeping solutions for organizations navigating Canada’s competitive business landscape. Leave payroll, tax preparation, and more to our premium bookkeeping services and focus on boosting your business. Refer to the EpicBooks pricing page for more information.
