Bookkeeping and Accounting for Small Business
When you first get started in a small business, you'll hear the terms bookkeeping and accounting bantered about almost interchangeably. However, these terms do not mean the same thing. Small businesses have both bookkeeping and accounting functions, and they are synergistic. It's important to understand the two of them because organized financial records and balanced finances are central to the success of a small business.
Bookkeeping is the process of the daily record-keeping of all of a company's financial transactions. Bookkeepers record the sales, expenses, and cash and bank transactions of the business in a general ledger. The first thing you need to do when you start a business is realizing that this ledger and its accuracy are central to your company's finances. Recording these transactions is referred to as posting. A bookkeeper may also generate invoices and/or complete payroll. The complexity of the bookkeeping process depends on the size of your business and the number of transactions conducted daily, weekly, and monthly.
The two methods of bookkeeping are single-entry and double-entry. Most businesses use the double-entry bookkeeping system where every entry to an account requires a corresponding and opposite entry to a different account. For instance, a $10 cash sale would require posting two entries: a debit entry of $10 to an account called "Cash" and a $10 credit entry to an account called "Revenue."
Bookkeeping can be done on a spreadsheet or a lined piece of paper. However, much of the bookkeeping process today is automated, and the software used also intertwines some components of the accounting process.
The key attributes of a good bookkeeper are being a stickler for accuracy and completeness. Because human error can happen to the most thorough bookkeeper, a bookkeeper usually works under the direction of an accountant.
Accounting has been called the language of business. It is the process of measuring, processing, and communicating financial information. Accounting provides the business owner with information on the company's resources, the financing of those resources, and the results the business achieves through their use.
The function of accounting is to prepare a record of the company's financial affairs. Accounting also includes the interpretation of the numbers prepared by the bookkeeper to determine the financial health of the business. It also includes the presentation and financial health and control functions of the company. A further function of accounting is the preparation of tax and other required financial materials.
Accountants are trained, licensed professionals, referred to as Certified Public Accountants (CPAs). CPAs must pass the Uniform Certified Public Accountant exam and have experience as a professional accountant. In small businesses, the accountant may also be the owner or chief financial officer (CFO).
The accounting function can also be outsourced to a private entity. In some small businesses, the bookkeeping and accounting functions are both outsourced.
Even if you, as a small business owner, outsource either or both your bookkeeping and accounting functions, it’s important that you maintain some understanding and control over both of them.