One of the first decisions you have to make when setting up your bookkeeping system is whether or not to use a cash or accrual accounting system. If you are operating a small, one-person business from home or even a larger consulting practice from a one-person office, you might want to stick with cash accounting. If you use cash accounting, you record your transaction when cash changes hands.
Using accrual accounting, you record purchases or sales immediately, even if the cash doesn't change hands until a later time, Sometimes firms start their business using cash accounting and switch to accrual accounting as they grow.
If you are going to offer your customers credit or if you are going to request credit from your suppliers, then you have to use an accrual accounting system. You also have to decide, as a new business owner, if you are going to use single-entry or double-entry bookkeeping.
Single-entry bookkeeping is much like keeping your check register. You record transactions as you pay bills and make deposits into your company account. It only works if your company is relatively small with a low volume of transactions. If your company is larger and more complex, you need to set up a double-entry bookkeeping system. Two entries, at least, are made for each transaction.
At least one debit is made to one account, and at least one credit is made to another account. That is the key to double-entry accounting. Companies also have to set up their computerized accounting systems when they set up bookkeeping for their businesses. Most companies use computer software to keep track of their accounting journal with their bookkeeping entries.
Very small firms may use a basic spreadsheet, like Microsoft Excel. Larger businesses adopt more sophisticated software to keep track of their accounting journals.
Lastly, the business must set up its chart of accounts. The chart of accounts may change over time as the business grows and changes.
The chart of accounts lists every account the business needs and should have. Each account has a number and a name. Subaccounts are also listed. Effective bookkeeping requires an understanding of the firm's basic accounts. These accounts and their sub-accounts make up the company's chart of accounts. Assets , liabilities , and equity make up the accounts that compose the company's balance sheet.
Assets are what the company owns such as its inventory and accounts receivables. Assets also include fixed assets which are generally the plant, equipment, and land. If you look you look at the format of a balance sheet , you will see the asset accounts listed in the order of their liquidity.
Asset accounts start with the cash account since cash is perfectly liquid. After the cash account, there is the inventory, receivables, and fixed assets accounts. Those are tangible assets. You can touch them. Firms also have intangible assets such as customer goodwill that may be listed on the balance sheet.
Liabilities are what the company owes like what they owe to their suppliers, bank and business loans, mortgages, and any other debt on the books. The liability accounts on a balance sheet include both current and long-term liabilities. Current liabilities are usually accounts payable and accruals. Accounts payable are usually what the business owes to its suppliers, credit cards, and bank loans. Accruals will consist of taxes owed including sales tax owed and federal, state, social security, and Medicare tax on the employees which are generally paid quarterly.
Long-term liabilities have a maturity of greater than one year and include items like mortgage loans. Equity is the investment a business owner, and any other investors, have in the firm. Accounts Receivable: On the flip side, accounts receivable is the account that keeps track of all the money that third parties owe to you.
Again, it can be customers, banks, companies or anyone that purchased or borrowed from your business. Assets: Assets are simply all the things you or your company owns to help you successfully run the business. It can range from cash, buildings and land right through to tools, vehicles and furniture.
Balance Sheet: A balance sheet is a detailed report which breaks down the financial situation of your business. The point of a balance sheet helps to show what your business owns and owes. Bookkeeping: Obviously, this is one you need to know or should already know.
Bookkeeping is the recording of financial transactions on a day-to-day basis. It helps to make sure that records of individual financial transactions are accurate and up-to-date. Capital: This is simply the money or other assets which personally belong to you as the owner and not the actual profit you generate from your business or self-employment. Depreciation: Depreciation is when an asset loses value over time which can happen through wear and tear, for example.
Equity: Equity is all of the money you invest in the company as the owner plus all the accumulated profits. As a small business owner, your equity is shown in a capital account. Expenses: This is all of the money that you spend to operate your business which isn't directly related to the sale of goods or services. General Ledger: A general ledger account is an account you use to store, sort and summarise all of your transactions.
These accounts are arranged in the general ledger which also features the balance sheet and the income statement. Income Statement: This is the financial statement which presents a summary of your financial activity over a certain period of time. After working out the revenue earned, the costs of goods sold and the expenses, it works out your net profit or loss. Journals: Journals are the place bookkeepers store their records of daily transactions. Liabilities: Liabilities are basically all of the debts you owe.
They may also manage expenditure reports, accounts receivable and deliverable, and loss reports. The ability to organize financial information is central to the position. Bookkeepers manage financial information, including confidential financial reports. They must bring integrity and transparency to the job, ensuring that financial reports follow laws and regulations. Bookkeepers help clients identify potential fraud and prevent the misuse of funds, which also requires integrity.
Explore programs of your interests with the high-quality standards and flexibility you need to take your career to the next level. Becoming a bookkeeper can take as little as one year, depending on the educational path the prospective bookkeeper takes. However, earning an accounting degree or pursuing certifications can add several years to the time required to join the profession.
While these pursuits add time, they also help bookkeepers advance professionally. We outline required and suggested steps for becoming a professional bookkeeper below. Although some bookkeepers do not earn a degree, most employers prefer candidates who complete college coursework in accounting or a related field. Prospective bookkeepers can train for their profession in several ways, such as through an associate degree in bookkeeping or accounting, which usually takes two years to complete.
During an associate program, students gain math and accounting skills. Graduates work as bookkeeping or accounting clerks. Accounting majors build skills beyond bookkeeping, including auditing, public accounting, and cost accounting skills.
Transfer students with an associate degree can often complete the four-year degree in two years. The degree prepares graduates for entry-level positions as accountants. Many two-year and four-year colleges offer undergraduate certificates in bookkeeping, which typically take one year to complete and give students the foundational skills necessary to work as a bookkeeper.
Earning an undergraduate certificate in accounting also meets the qualifications for many bookkeeping positions. Bookkeepers can advance their career by pursuing certifications and licenses. These voluntary credentials let bookkeepers showcase their skills and demonstrate their strengths to potential employers. A certification can also help bookkeepers increase their earning potential. Pursuing certification helps bookkeepers demonstrate their skills and stand out in the job market.
Some certifications require a degree, while others do not. Bookkeepers can pursue certifications such as the certified bookkeeper credential offered by the American Institute of Professional Bookkeepers.
The credential recognizes candidates with at least two years of bookkeeping experience and passing scores on a four-part examination.
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