Many first-time entrepreneurs have followed their gut feeling and decided to quit their jobs to enter into the exciting world of entrepreneurship. As a founder, you might be having the exceptional domain knowledge to shape your idea into reality but you also need to keep a track of the financial aspects of the business. If you are into building a software product, there is a possibility that break-even may take time as you need customers for the product!
It is vital to keep a regular check on the financial things related to the business so that you can take corrective actions when required.
What is bookkeeping?
The process of recording, storing, and retrieving the financial records of your business is called bookkeeping. Your business would require bookkeeping irrespective of whether it falls into the for-profit or not-for-category.
There are plenty of tasks that are performed as a part of the bookkeeping exercise, some of them are below:
- Processing of employee’s salaries, Provident Funds (PF), etc.
- Keeping a track of accounts payable and accounts receivable
- Paying the suppliers of your business
- Sending out invoices to clients for the services or goods being provided to them
- Receiving and verifying invoices from the suppliers
- Providing financial reports that give detailed insights into the financial health of the business
Normally businesses choose a particular period for opening & closing of financial books. In many countries (like India), the start & end of a financial year i.e. 1st April~31st March is chosen as the accounting period. Countries like UAE, Bahrain, etc. choose calendar year i.e. 1st January~31st December as the accounting period.
Business accounting software for bookkeeping
Employees who are doing the bookkeeping for the organization should have sound financial knowledge. Along with experience with business finance, they should also have know-how about reading & preparing financial statements, income statements, balance sheets, etc. Normally, organizations make use of a business accounting software or a bookkeeping software like Tally.ERP 9 to take care of the tasks involved with bookkeeping.
Types of bookkeeping
There are two methods of bookkeeping:
a. Single-entry system – This is the normal practice followed by most organizations as any financial activity or transaction involves the creation of an entry. This makes it easy for business owners or key members of the organization to keep a track of the financial records on a daily basis.
It is a bookkeeping method that relies on single-sided accounting entry to maintain financial information.
b. Double-entry system – Unlike the single-entry system of bookkeeping, the double-entry system involves the creation of double entries for each financial transaction. It is not cash-based and transactions are entered when revenue is earned or debt is incurred. Many modern-day businesses make use of the double-entry system of bookkeeping.
It is a bookkeeping system that is based on the fact that transaction has two aspects and both the transactions have to recorded in the books of accounts. In simple words, to receive some value, an equal value needs to be given. Under this system, in every transaction that an account is debited; some other account is credited.
The bookkeeping equation also referred to as the accounting equation is below:
Sole- proprietorship business
|Assets = Liabilities + Owner’s Equity|
|Assets = Stockholders’ Equity + Liabilities|
Principles of Book-keeping
The backbone of the principles of book-keeping lies in the fact that the records are created for the financial transactions on a day-to-day basis so that there is no discrepancy at the end of the day/month/quarter/financial year.
Below are the principles of book-keeping:
1. Matching Principle – According to this principle, when revenue is recorded; the expenses corresponding to the same are also recorded in the books.
For example, if you own home-made chocolate business, you should charge the inventory (packaging material, raw chocolate bars, etc.) for the number of chocolate boxes being sold at the same time you record revenue from the sale of those chocolate boxes.
2. Expense Principle – A business incurs expenses when it seeks any business-related services or when it accepts goods from another business entity. It does not depend on when the actual bill for the service/product is created, corresponding expenses are recorded when any type of service is performed or goods are received.
3. Revenue Recognition Principle – This principle defines when an entry for a financial transaction has to be entered as revenue in the account books. According to the revenue principle, when the absolute buyer receives the item or service is performed by the organization; it is considered as revenue to your organization.
Hence, revenue is recorded when any type of services are performed or goods are sold to the customer and not when payments are received for the corresponding goods/services.
4. Objectivity Principle – As the name suggests, subjective data should not be considered for bookkeeping. Only the verified data in the books should be used for bookkeeping.
5. Cost Principle – As per the cost principle, the resell cost of an item should not be considered for bookkeeping. On the contrary, the historical cost of the corresponding item should be considered. This is irrespective of whether the cost of the item is depreciating or appreciating.
It’s a wrap
In a nutshell, bookkeeping is an inseparable activity related to business accounting. Businesses make use of feature-rich & user-friendly bookkeeping software like Tally.ERP 9 to perform that activity. Above all, bookkeeping aids with business analysis which in turn is used to analyze business performance.