What is Book Keeping for Small Business and How to do it?
While running your business it becomes difficult to keep a track of all the things and business affairs that are going around. Losing a track of all such matters may incur you a loss in the long run and you would never know how well your business is performing or in case it is not performing, where is it that you are making the mistake? Where are your business’s unnecessary expenses spent on and the ways to avoid them? The answer to all these questions is Book-Keeping.
What is Book Keeping?
According to its literal definition, ‘Bookkeeping is the recording of financial transactions and is part of the process of accounting in business. Transactions include purchases, sales, receipts and payments by an individual person or an organization.’ It is used to maintain the records of all your transactions and this record book, or software would in turn help you in managing your expenses and growing your business effectively.
Why Is Book-Keeping Important for Small Businesses?
As a Small Business owner, you need to have knowledge of your expenses and income, and yet you also need to adopt a system that does not cost you a lot of money, Book Keeping is an effective way to note for the same, few of the important reasons for doing Book Keeping is as follows.
1. Track of all Details
As we discussed earlier, in handling your business, it becomes difficult to realize your expenses and income. Book Keeping technique would help you to keep a record of all your transactions, thus acting as a guide whenever you require.
2. Avoiding Unnecessary Expenses
Book Keeping can help you understand your expenses, thus thereby making you aware of those areas where expenses can be avoided, or where the funds are directed in the wrong way, thus helping you save your capital.
While handling the tax matter for your business, Book Keeping can help you to quickly go through all the transactions that you have made and help you in analyzing the total amount of tax that has to be filed. Book Keeping will help you with its organized form.
Types of Book Keeping
After understanding the importance of Book Keeping, it gets us all hyped to mark it as an important task to be done, but the question is, how can you ensure Effective and Organized Book Keeping? There are various techniques through which you can maintain an organized structure. Let us have a look at each of them.
1. Cash Accounting system
Cash Accounting system is a type of Book Keeping method that is favored most by Small Business owners. In Cash Accounting System, a transaction is noted only when there is a flow of cash. That means, whenever cash is exchanged with customers or parties, only then is the records made, making it easier for Small Businesses.
2. Accrual Accounting system
In the Accrual Accounting system, you keep a track or make an entry in your Book Keeping guide instantly, that is, right after the transaction is spoken of. In such a case, even though the money has not been transferred or received, you can still make the entry. This type of bookkeeping practice is for Small Businesses that allow lending and credit.
3. Double Entry system
This type of method is mostly preferred by large businesses. But even a few small businesses opt for a double Entry System. This type is more complicated and has different features. For example, it has two different accounts, two columns, making each transaction located at two different locations.
How to do Book Keeping?
Once you have chosen the type of technique, or system that would suit your business better while maintaining Book Keeping, the next question, would be the How? The important terms, the formula, and so on. There are few basics and Important terms used in Book Keeping to maintain records, let us understand all of them
As we all know, Assets are classified as all the things that you own, such as your Cash, buildings, lands, machinery, resources, and so on. These are your belongings that help you in growing your business. Assets can be tangible, and Intangible, such as Goodwill.
Liabilities are the debts that the business has to pay back to their creditors, or suppliers, and so on. In Book Keeping, Liabilities account include both Long-term and Short-term liabilities.
3. Revenues or Income
The amount of money that is earned by the business while making sales can be termed as Revenue or Income.
Described as the value that denotes the owner’s or holder’s interest in the business is called as Equity. It is derived by subtracting Assets with Liabilities, and the value derived is the total amount of Equity.
Expenses can be counted as all the money spent to run the business. This does not relate to any of the sales you make but rather the money spent on your activities, such as paying salaries, or rent.
The basic part of maintaining Book Keeping is to get your accounts tallied, which proves that your method or the accuracy of recording the transactions was successful. The debits and credits should match, indicating that the books are balanced. In the end, the scenario that you should watch out for should be, Assets = Liabilities + Equity.
In case your numbers do not match as per the above equation, then there is a very high chance that you missed or miscalculated a certain part of your Book Keeping system. Your Book Keeping is considered as perfect, and successful once you match those numbers. In an event of a mismatch, you have to go through the process again and tally it properly.
Book Keeping is a process of maintaining records of your transactions for future reference. There are two types of Book Keeping techniques, single entry, and double-entry system. For an effective Book Keeping, you need to classify your entries into Assets, Liabilities, Income, Expenses, and Equity