What Is Bookkeeping? Taking A Look At What Bookkeepers Do & Why You Need Them
Do you ever wonder what does a bookkeeper do? Whether you hear the term “bookkeeping” during an office meeting or you come across the word when you’re reading about jobs, you’ve probably heard the term at least once. But do you know what it is? Is it about keeping books? No, there is much more to what bookkeeping really is.
Bookkeeping has been going on since time immemorial. The earliest instances of bookkeeping were found on clay slabs in ancient Babylonia, giving us a picture of how humans have long had a knack for wanting to keep track of things. It is thanks to the bookkeeper that, since before 2600 BC, a business manages to keep its financial and inventory accounts in check.
What is a Bookkeeper?
A bookkeeper is an individual who deals with the recording, storing, and retrieving of financial affairs of a company, organization, or an individual. It sounds simple, but there is a lot more to it than that. Some of the common types of tasks that a bookkeeper may be involved in include:
- Billing for goods sold and services rendered to customers or clients
- Processing payment for employees
- Processing finances for tax purposes
- Recording customer receipts after transactions
- Paying suppliers for their goods
- Recording and double-checking invoices from suppliers
- Recording any adjustments such as depreciation (allocating certain expenses to a certain number of accounting periods, depending on the length of time that asset is expected to be used/useable)
- Providing detailed financial reports, such as providing financial statements
- Keeping an eye on individual accounts receivable
As you can see, bookkeeping has a lot to do with financial accounting. A bookkeeper will often also manage the balance sheet of an organization, and maybe an income statement.
When it comes to making sure that your company or organization has it’s “books balanced,” this is but a glimpse at what a bookkeeper does to ensure that. Let’s take a deeper dive into the matter to better understand what all these different tasks are about, and what actually happens. It’s handy to have a bookkeeper because they provide something of a financial snapshot for a business owner to periodically get a grasp on how their business really is doing.
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Enter the General Ledger
This is the master document, the business bible, of sorts. That is because in the general ledger is the summarization of all your business’s financial information. In the general ledger, everything is recorded; from spending and earnings, to accounts payable (money that you owe to others), accounts receivable (money that is owed to you, probably customers or clients), and inventory for your business.
While this is all done on the computer now, the reason for the name is because of how bookkeeping was once literally done all in a hefty book ledger. Bookkeepers used to painstakingly record all of the company’s transactions by hand in these enormous volumes, until they would run out of space and would need to start a new ledger.
Now, ledgers are done on the computer and are divided into more digestible sections known as sub-ledgers. Depending on your business, the sub-ledgers can differ from one organization to the next. It really comes down to the needs and dealings of your company. But the most common examples of sub-ledgers include:
- Accounts Payable (Money that your company may owe to someone)
- Accounts Receivable (Money that someone owes your company, likely clients or customers)
- Inventory (Your company inventory, along with any transactions that might affect it)
- Cash Assets
Why Do You Need a General Ledger?
Whether you’re a business owner or looking to be a bookkeeper, the importance of the General Ledger cannot be stressed enough.
Firstly, it’s how you get your financial statements. Whether it’s weekly, monthly, or every six months, your financial statements are how you and your company will know your business’s performance. How much income is being made? What’s coming into the company, and what’s leaving? What’s the total balance by the end of the month? These questions all get answered in the General Ledger and it keeps the business owner informed of the overall situation.
Secondly, it’s also needed when you file for taxes. The government is going to want to know your business’s earnings, what you have been paying out, and who you’ve been paying. All of these things will go into how your taxes will look.
Last, but not least, it keeps everything in one place for basic organization. I say basic, but it’s also very effective. Whether you’re using bookkeeping software, or you are just using Microsoft Excel, the General Ledger is your ultimate organizer of all things financial.
Inside the General Ledger, every financial transaction is called a “journal entry,” which is an artifact from the days of when things were handwritten in large volumes. But these journal entries can give you a time and place of everything that financially takes place in your company, and all it takes is just looking into your General Ledger.
Some bookkeepers may keep various smaller books to keep track of certain transactions. Some examples are:
- Sales daybooks can be used for recording sales invoices
- Sales credits daybooks can be used for recording sales credit notes
- Daybooks of purchases are used for recording purchase invoices
- Daybooks of debits purchases are used for recording purchase debit notes
- Cash daybook, or a cash book, is used for recording all money received and paid out. This could actually be two books or one, depending on the bookkeeper.
- The general journal daybook, which is essentially your general ledger
For bookkeepers that want to keep track of smaller movements of money, such as that managed by a cashier, a petty cash book might be created. This cash book keeps track of a certain amount of money that is given to the cashier, for it to then be spent on small expenses like postage, stationary, and other minor things.
Managing Business Income and Expense
How do you keep track of all the sales you make, all the clients that pay you for services, and all the inventory you sell to customers? That is what bookkeeping is for. Income can range from a variety of sources. Whether it’s cash or a credit card being used as payment, what sales tax is involved, what service or good is being sold, all of this gets recorded in Income and Expenses.
Another part of expenses includes costs to your business such as paying your employees, building insurance for your office, supplies for that office, the costs of making the goods that you sell, and even the rent that you might be paying for that office space. Anything that impacts the balance sheet in a negative manner can be an expense, and your bookkeeper will keep track of that.
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Since we mentioned credit just now, it is important to be aware that there is another form of account than just writing down every single business transaction in a single ledger and later adding things together. But when you need to track more than just transactions, when you need to track liabilities, assets, and multiple tracks of financial movement, the double-entry method can help you make sure that everything is kept track of.
By using double-entry, there are two accounts that are used, and the terms “debit” and “credit” are used to describe money being transferred to and from an account. In this manner, you can get a better picture of where money is going, and how money should be added up. It provides an extra layer of security by providing a means to better double check all transactions and “balance the books.”
An added feature of double-entry is that it helps give you a better picture of how well your business is doing. With double-entry, it’s easier to itemize the profits in your accounts, and get a clearer picture of what’s doing well, and what might need improvement. This can help with any business today where inventory or services are involved.
One example: Say, if you bought $3,000 dollars in inventory and you had paid with credit. Your books might say that you have $3,000 debit for inventory (they have become an increase in your assets) and you may have an entry for accounts payable that should read $3,000 (for the credit that is owed, a decrease in assets in that you will be due to pay for it with your cash). In this case, you’re keeping track and balancing both the asset value your company has as well as how much you owe for those assets to another party.
To give a clear idea of what debits and credits are for in double-entry, consult this list:
- For increases in assets
- For Increases in expenses
- A Decrease in revenue
- For decreases in assets
- For Increases in revenue
- For Decreases in expenses
As you can see, rather than just having a single entry for a transaction, double-entry gives a lot more detail as to where the money is going, what the money was for, and how it affects the big picture. This can reduce chances of bookkeeping errors, it increases the level of accountability that your business holds to its financial dealings, and it adds transparency to your finances as a whole. This can benefit any company in the long run.
If your business is very simple in its dealings, sometimes the single-entry can be just fine. Just be aware of the risks.
A bookkeeper also looks out for any discrepancies between a company’s bank statement and the bookkeeping records. These are called bank reconciliations.
When a bookkeeper finds that things are not balancing out between the books and the bank statement, the bookkeeper must investigate and find where the transactions in the books and the transactions in the bank statements don’t match up.
Usually the discrepancy is due to a bank fee for one reason or another and is nothing to be concerned about. However, a bank reconciliation must be done to ensure that the books still balance. When one of these discrepancies is noted, the bookkeeper will have to add it to the books to ensure that everything is accounted for and the balance sheet reflects truly what it should be showing. This practice can help ensure that cash is being properly monitored to the dollar, and that no missteps are made. This can help avoid an overdraft, for example.
Bank reconciliations are also useful in detecting fraud. If you notice that there is a massive difference between your bank statement and your books, there might be a case of fraud going on. This is when your bookkeeper would do a bank reconciliation to spot it, and then your company management can do something about it. Examples of fraud could be check tampering and sneaky withdrawals by business partners or employees.
But sometimes, the bank does make errors, and when this happens, you can speak to the bank to ensure it is corrected.
What Are Accounts Receivable?
As mentioned earlier, accounts receivable is money that is owed to your company. This is usually by customers and clients who owe you for products or services that were sold. An added duty for the bookkeeper when assessing the accounts receivable is also to follow up on overdue invoices as well as deciding when unpaid invoices should be designated as bad debt.
It is up to the bookkeeper to ensure that the money the company is supposed to be receiving and earning is all kept track of. Anything that goes late or missing, the bookkeeper would be the first to know.
What is Bad Debt?
When there are overdue invoices, often times an effort to collect will be made, whether by the company or by a hired third-party agency. An overdue invoice becomes bad debt when the credit that was extended to the customer goes bad. This can be due to the customer either going bankrupt, or maybe has a financial problem that’s so bad that the balance is simply uncollectible. When an invoice gets listed as bad debt, it becomes a company expense on the company’s financial statement.
What Are Accounts Payable?
When your business owes money to someone or some entity, it gets listed as accounts payable. It is one of the bookkeeper’s many duties to ensure that he or she keeps track of what the company owes and to who, but also making sure that each of those are paid off and the transaction concluded.
By keeping track of these, the bookkeeper keeps the company safe from reneging on obligations to pay, suffering from bad reputation due to late payments to vendors or suppliers, and even avoiding trouble with the government. Sales tax and income tax are both things that are owed to the government that fall under accounts payable.
Accounts payable are what would be listed under the company’s expenses.
More on Depreciation
You may have noticed that depreciation was mentioned earlier. Depreciation extends to any assets that don’t last forever—they depreciate. Bookkeepers will usually list these assets as expenses but may spread the asset out over multiple financial periods depending on how long the asset is expected to be used or last.
The reason a bookkeeper takes depreciation into concern is because it’s to take into account the fact that a specific asset is only useful for the span of its life. Since such assets also don’t usually have direct links to revenues, companies may feel that the costs of a depreciating asset. A good example would be a computer that may get outdated after five years—it is a cost that can be spread out over those five years of its life, shifting the asset cost from the Balance Sheet to the expenses in the Income Statement.
It is important to bear in mind that while depreciation can positively impact a statement of cash flows, it should not be seen as a source of cash. It is merely an artifact of the process of depreciation. However, as a result of depreciation, on an income tax return, it will reduce taxable income, which reduces income taxes. This, in effect, does provide you with a bit of extra cash.
More on Financial Statements
Financial statements have been mentioned quite a few times now. These statements come in various forms, but they are all intended to provide the company with the information it needs to know the whole financial situation of their company up to that point. Some examples of financial statements include:
- Balance Sheet: This is the financial snapshot that gives you an idea of how the company stands financially up to a certain point in time.
- Income Statement: These show you your revenue as well as expenses over a certain period of time. These can provide the best look at your company’s bottom line.
- Statement of Changes in Equity (total recognized gains and losses): These show you the changes in your retained earnings, your share capital, and reserves, all across a certain period.
- Cash Flow Statements: These can give you a look at both cash and cash-like equivalents that have entered or left your company.
Together, these statements can provide a very comprehensive look at your company’s health and the direction it may be going, better preparing you for what you might need to do or want to do to further your company’s financial goals.
All this, thanks to your bookkeeper. Without these statements, you might miss when you’re having a very profitable season, or when a quarter is going badly, and something might need to be done to ensure it doesn’t happen again. Want to know how much inventory you have or when the most inventory was purchased by certain customers? Your bookkeeper can produce a statement for that.
How Does a Bookkeeper Prepare Your Income Statement vs a Balance Sheet? Enter the Income Statement
While they sound similar, the income statement and the balance sheet do have different purposes, but work towards the same goal. They best work when they are both used together to create a complete picture, and that is what bookkeepers aim to do when they generate these statements.
The income statement is specifically to show how your revenues and expenses work towards your profitability over a period of time. This could be a monthly statement, a quarterly, or an annual statement. Maybe you’ll have your bookkeeper make monthly and annual statements; it all depends on the needs of the organization.
The way the income statement is created is by the bookkeeper first collecting all the journal entries made across the period of time that is being taken into account. Then, the bookkeeper takes into account the totals of all expenses and all revenues. While this process sounds simple, it is also vastly time consuming because of the number of transactions your business could make within even just a month of time. An annual income statement could take longer, of course.
Once the numbers are totaled up, your bookkeeper may have the income statement first showing the kinds of revenues your business has generated, listing them also by the category of revenue. For example, a hypothetical department store called Barrel O’ Stuff and Stuff might have their revenues listed as:
Revenue from Clothing: $100M (million)
Revenue from Shoes: $50M
Revenue from Furniture: $12M
Company Total Revenue: $162M
Next, would come the expenses. Once the bookkeeper has totaled the expenses, the expenses would be written out the same way, with the expenses categorized and listed:
Expenses for Buying from Clothing Suppliers: $26M
Expenses for Buying from Shoe Supplies: $18M
Expenses from Furniture Manufacturer and Supplier: $7M
Expenses from Office Parties: $1M
Company Total Expenses: $52M
Once that is all accounted for, the bookkeeper will then end the income statement with the company’s total profit, which is the difference between the company’s revenue and the company’s expenses. Of course, you want your profit to be in the positive range, meaning you made more money than you spent on getting the supplies to sell. Usually, profit would simply be shown like this example:
Total Company Profit: $110M
As you can see, the income statement shows you the bottom line of your company’s growth during that period of time. It also can help illuminate where certain expenses are going and how they are affecting that bottom line, in the case that the company may decide that some expenses might need to be cut. For $1M dollars in this hypothetical company, they must be having some really lavish parties! Think they might need to cut down?
Enter the Balance Sheet
While the income statement helps show what the company has been making and spending during a certain period of growth/decline—the balance sheet is what will show you the big picture of how everything else is affecting the company’s well-being.
When a bookkeeper creates a balance sheet, the bookkeeper is taking into account various factors such as company assets, liabilities, and even owner equity. These factors come into play because they do have an effect on the company’s true value at the time of the balance sheet’s creation.
The key differences between a balance sheet and an income statement are how the income statement looks at revenue and expense categories, while the balance sheet looks at assets, liabilities, and equity categories. Also, instead of using journal entries over a period of time, the balance sheet takes into account the entirety of the company’s journal entries. The entire sum of the company’s financial doings is looked at.
Let’s continue to look at our imaginary company, Barrel O’ Stuff and Stuff. Their balance sheet could possibly look like this:
Company Bank Account: $110M
Accounts Receivable: $167M
Office Complex: $60M
Office Equipment: $12M
Satellite Office: $30M
Total Assets: $379M
Then the bookkeeper will take the liabilities and equity into account:
Accounts Payable: $52M
Long-term Debt: $55M
Total Liabilities: $107M
Share Capital: $38M
Retained Earnings: $540M (Retained earnings are the total amount that the company has made across its entire existence, after taking the sum of revenue and the sum of expenses into account).
Dividends: -$74M (These are dividends given out to shareholders, and so are detracted from the company)
Total Equity: $272M (This is calculated by subtracting the total liabilities from the total assets)
What is a Statement of Cash Flows?
Since an income statement is prepared under the accrual basis of accounting, the revenues that get reported might not have been collected yet. Remember how it was mentioned earlier that some accounts payable might not be paid off yet, and some might even go into bad debt?
Enter the cash flow statement. In the statement of cash flows, all the information has already been put in to help reflect how your cash actually stands in your company with what’s been actually coming into your company and what’s been going out. Because of that, it is easy to see whether you’re making more money than you are spending.
One way that cash health is determined is by assessing the cash being generated from operating activities, or what the company is doing to make business. The operating activities cash is then compared with the company’s net income. When the cash from operating activities shows higher than the net income, that means your company’s net earnings are healthy and high in quality. Inversely, a net income that’s higher than operating activities cash will look bad because people will be asking how is your company making such a bottom line when your business isn’t generating enough?
A bookkeeper that keeps up with his or her statements of cash flows can also help a company in attracting investors. This is because when a company’s cash flows are showing to be exceedingly healthy, a company can find the room to increase their dividends. And long-term investors love their dividends.
You might think financial reporting is just connected to financial statements, but there is so much more to financial reporting that a bookkeeper is responsible for. While a bookkeeper does produce notes to financial statements and the financial statements themselves, as a part of financial reporting, there are other aspects to financial reporting:
- Quarterly and annual reports that go to stockholders
- Press releases and conference calls about quarterly earnings
- Financial information that gets posted on a company’s website, like information for investors
- Financial reports that go to governmental agencies, including quarterly and annual reports that go to the SEC
- Prospectuses that pertain to the issuing of common stocks and securities
About Financial Notes
Financial notes are information that is added to the external financial statements (like balance sheets, income statements, statements of cash flow, etc). Financial notes are needed because not all information can be given through just number figures. Sometimes, added notes are needed in order to fully disclose information that’s needed.
Some of these notes can include a summary of an organization’s accounting policies regarding the use of estimates, inventory, revenue recognition, property, equipment, goodwill, other assets, foreign currency translation, discontinued operations, fair value measurement, recent accounting pronouncements, and more.
Other notes that can follow those main ones can include details on income taxes, employee benefits, leases, stock options, hedging, commitments and contingencies, inventory, and more.
It is actually important for each financial statement to include notes so that no information is misunderstood or omitted by mistake. To increase company accountability, full transparency is needed to be maintained, and it is the bookkeeper’s duty to help ensure this happens.
Why Do You Need a Bookkeeper?
A bookkeeper has a lot of responsibilities when it comes to playing a part in keeping the company running smoothly. While it’s just one of many roles, it’s a vital one, and it takes a lot of attention to detail to ensure that the books remain balanced every month, every year, and so on.
When certain details are missed, when money somehow goes missing, it can lead to various complications that can negatively affect the company. From missing potential fraud going on internally to getting audited, from the government breathing down your back because of missing taxes to investors leaving your company behind, the challenges are endless, and it can seem daunting to anyone who doesn’t know how to properly manage a company’s accounting. That’s why a bookkeeper is so important.
Yes, there are computer programs that can help with your bookkeeping needs, and they can do quite a lot of the calculations needed and they can do it automatically with just some input. But a human bookkeeper can double-check their work, investigate further into discrepancies, and provide crucial communications to investors, government agencies, and business partners that software just can’t do as well.
So, if you’re trying to decide if you need a bookkeeper, or you’re thinking of becoming a bookkeeper yourself, understand that a bookkeeper is vital to a company’s survival and to a company’s ability to thrive with less complications.
Thinking of Being a Bookkeeper?
If you want to become a bookkeeper, it is highly recommended you pursue an education in becoming a certified public accountant, or CPA, for short. Each state has their own state board of accountancy that ultimately determines the requirements for becoming a licensed CPA. But generally, you will need to complete a 150-credit college degree program, and then sit for the CPA exam.
It goes without saying that, with the complex responsibilities for being a bookkeeper, becoming a CPA can be very challenging, and less than half of the students who enroll will actually succeed. Then half of those that sit for the CPA exam, will not make it through.
Other ways to get to the CPA exam would be to get a bachelor’s degree in accounting at a college or university and then transfer to an MBA degree program. One could also earn their bachelor’s first and then pursue a graduate degree in taxation.
Once you have passed the CPA exam, you will need to take an ethics exam. Each state has requirements regarding ethics, so it is good to find out more about your particular state’s requirements and find out what exactly you’ll need to take to fulfill your ethics requirement.
Finally, there may be experience requirements.
Made It Through Your CPA Exam and Ethics? What’s Your Next Step?
If you made it through your CPA and ethic exams, and passed the experience requirements, congratulations! But you should also consider acquiring membership at your state’s CPA society and membership at the American Institute of Certified Public Accountants. There are a lot of practical benefits to being members of these two groups:
- Learn about current issues within your state.
- Get continuing education opportunities to refresh your knowledge base or learn new insights into state laws and taxes, federal laws and taxes, and even new technology developments.
- Get access to monthly publications that can provide you information on important issues and matters.
- Support for the accounting profession.
We hope this explanation of the many important duties and responsibilities has been helpful, whether you’re looking to hire a bookkeeper, or perhaps become a bookkeeper yourself!
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