Q
What is Bookkeeping and why it is important?
The act of daily documenting your company’s financial transactions into arranged accounts is known as bookkeeping. It may also refer to the various recording methods that companies may employ.Bookkeeping is a crucial step in the accounting process for a number of reasons. Updating transaction data allows you to produce accurate financial reports that can help gauge the performance of your company. Additionally, thorough records will be useful in the event of a tax audit. This manual will take you step-by-step through the various bookkeeping techniques, how transactions are recorded, and the key financial statements involved.
Methods of Bookkeeping
Before starting bookkeeping, your business must determine which approach it will use. Consider your business’s daily transaction volume and revenue before making a decision. If your company is small, using a sophisticated bookkeeping system intended for large corporations may lead to unnecessary problems. On the other hand, major organisations will not be able to get by with less reliable bookkeeping techniques. Let’s analyse these strategies to help you choose the best one for your company.
Double Entry Bookkeeping
A stronger method of bookkeeping is double-entry. Every transaction must affect at least two accounts in order to be recorded, and it adheres to this rule. For instance, if you sell something for AED10, the same amount will be credited to your sales account and deducted from your cash account. In the double-entry system, the total credits and total debits must always be equal. Your books are “balanced” when this occurs.
If your company is large, publicly traded, or performs purchases and sales using credit, it makes more sense to keep your books using the double-entry system.Businesses often choose the double-entry approach due to its lower possibility for error. By recording each transaction as two matching, yet contrasting accounts, it effectively “double-checks” the books.
Cash Based
Next, decide whether to use a cash-basis or an accrual-basis for your bookkeeping. The timing of your company’s income and expense recognition will determine your choice. When cash is received into your business, you record revenue in a cash-based accounting system. When they are paid for, expenses are recognised. When cash is received into your business, you record revenue in a cash-based accounting system. Likewise, expenses are recognized when they are paid for. In other words, every time cash flows into or out of your accounts, it is recorded in the books. This implies that until cash is exchanged, purchases or sales conducted on credit will not appear in your records.
You can better understand and assess your firm’s performance by creating financial statements such as balance sheets, income statements, and cash flow statements.
Revenue is recognised when it is earned under the accrual method. Similarly, revenues are typically documented at the same time as expenses. For a transaction to be recorded, physical cash does not need to enter or leave. You can immediately record your sales and credit-based purchases.
For either single-entry or double-entry bookkeeping, a cash basis or accrual basis can be used. However, the single-entry approach typically serves as the foundation for cash-based bookkeeping. Cash inflows or outflows are recorded as a single entry for each transaction. The double-entry system complements the accrual basis more effectively.
How to record entries in bookkeeping?
You can better understand and assess your firm’s performance by creating financial statements such as balance sheets, income statements, and cash flow statements. To ensure these reports accurately reflect your firm, you must have properly documented records of your transactions.While balancing your accounts, it is also beneficial to keep the data as up-to-date as possible.
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Dorothy Finley
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