Wednesday, 14 Feb 2024
Bookkeeping is a common term used by business owners while dealing with the finances of their organisation. It involves recording all the transactions taking place in the company and managing the cash flow. It is an expert task that can be effectively performed by qualified professionals with experience in the field. Without bookkeeping, managing the financial data and tracking the incomings and outgoings is impossible.
Every small and big business needs a specialised bookkeeper to ensure the working capital is used correctly and not wasted. Since entrepreneurs have little knowledge of maintaining ledgers and books accurately, they must become financially literate to understand the basics of this task.
Let us help you learn about the definition, types and importance of bookkeeping for a deeper insight into this activity. It will help you recognise the significance of keeping the books up-to-date and following the regulations for compliance.
Bookkeeping is an ongoing activity that involves recording all business transactions methodically to maintain correct records and prepare precise financial reports. It helps to gather all the financial data in a structured format for easy comprehension and decision-making. Recordkeeping gives an insight into the financial health of the business, which allows the business owner to spend capital in the right manner.
Most entrepreneurs hire an experienced bookkeeper Melbourne, who holds expertise in managing finances for businesses in the same industry. Some start-up founders take up the responsibility on their shoulders. However, they soon realise that managing the task may not be possible because it requires significant time and effort. Also, it does not make sense to delegate the task to an inexperienced employee to save the cost of hiring a professional. They will make mistakes because of their inexperience, which can lead to losses and non-compliance issues.
Bookkeeping has two types that differ on the basis of the method of recording the transactions. They are as follows:
As the name suggests, single-entry bookkeeping is recording every transaction only once in the books. It is the simplest way of recordkeeping used by small businesses with minimum employees because it is more affordable. Melbourne bookkeepers maintain these logs in Excel sheets with the cataloguing of each transaction.
It is easy to manage because the transactions are limited, and the business does not offer credit transactions. The balance on the system is the capital available to the business. Thus, entrepreneurs can make informed decisions and check their income and expenses.
Double-entry bookkeeping involves recording each transaction in two accounts. These can be managed by professional bookkeepers Melbourne because of their complex nature. The two records are made as debit and credit, and the balance of both accounts must be the same. It uses a chart of accounts comprising 5 accounts – assets, liabilities, equity, income and expenses.
The double-entry bookkeeping system is more insightful and offers a clear picture of the financial health of the business. It helps prevent fraud and maintain accurate records for a business with a large workforce and clients. It provides precise financial information and reduces errors.
Bookkeeping is an indispensable part of running a business. Here is what makes it crucial.
Looking at the financial reports generated from the records maintained by bookkeepers helps to identify the return on investment of various activities and projects. If it generates the desired revenue, it must be continued. However, if it leads to losses, it must be immediately discontinued. Thus, the entrepreneur can make business improvements with this information.
Data related to the tax and superannuation amount of the business must be recorded efficiently to lodge tax returns and reports to the ATO. These records must be kept safely for five years and should be provided to the ATO whenever asked. Most professional bookkeepers in Melbourne suggest using accounting software to keep the data protected and error-free. Thus, the business complies with the regulations and avoids penalties.
Bookkeeping allows the entrepreneur to prepare a financial plan for the next few quarters and the year. It is a projection of the expected income and expenses that the business will incur. Thus, business owners can use the information to secure the required funds for paying bills and generating the desired income for business growth and development. It helps them decide whether they can afford to make an investment or should wait for a better time. Thus, bookkeeping helps navigate business challenges without causing upheavals.
Most businesses need to secure financing to grow their entities. It increases the availability of capital to buy equipment, enter new markets or hire experienced employees. Banks and moneylenders will check the financial records and history of the business before approving the loan. Thus, if the entity does not have accurate records, it cannot get funding.
Up-to-date financial records of the business are also needed by the stakeholders. They need to ascertain how their money is being utilised. The financial reports give them the information they need on time. Bookkeeping software helps them access the information anytime and from anywhere.
Bookkeeping is the first thing that comes to mind when discussing business transactions. Entrepreneurs must understand its importance and types to leverage its benefits.
