Accounting And Bookkeeping – Mastering Financial Management

Fractional CFO and Bookkeeping

Accounting and bookkeeping are the backbone of the financial management of a business. Maintaining accurate financial record-keeping is a crucial part of the growth of your business. Bookkeeping is the recording of daily transactions of your business, while accounting analyzes and reviews these financial data to devise strategies and improve the performance of your business. They both contribute towards the success of your business and help your business to maintain financial health and stability. This article comprehends their basic details, how they can be processed in your business, and their importance in the financial growth of your business.

 

Accounting and bookkeeping

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Definition 

Accounting and Bookkeeping is the financial process of keeping an organized record of every cash flow transaction of your company on a daily basis. It is an essential part of maintaining the financial stability of your business. When all the business transactions are kept on record, you can prepare accurate financial reports which will help you in evaluating your business performance. 

Organized and updated financial records will also be very helpful while you perform tax audits for your business.  It ensures that your business’s every financial operation is recorded consistently and accurately. Bookkeeping includes several activities like the following:

  • Documentation of Transactions – Recording all the business transactions and cash flow like receipts, payments, sales, and purchases is the basic activity of bookkeeping.
  • Accounts Payable and Receivable – Bookkeeping will keep track of the amount of money the company owes to suppliers i.e. accounts payable and the amount of money the customers owe to the company i.e. accounts receivable.
  • Maintaining Ledgers – A ledger is where you keep detailed financial records of all the accounts. It is kept in a ledger format and it will include records like inventory, cash, and payroll accounts.
  • Reconciliation – This will ensure the accuracy of your business by comparing the internal financial statements with the external financial statements. The external financial statements can be bank statements or other related documents.

 

Accounting

Accounting comes after bookkeeping, as this process involves the scrutinizing of bookkeeping records. It is the systematic process of summarizing, reporting, and analyzing financial information. In this process, you will get financial insights about your company’s performance and financial health. 

This type of financial record-keeping ensures that companies have proper records while decision-making, regulatory compliance, and maintaining financial creditworthiness. Accounting will improve the reliability levels of a company’s financial statements. The financial statements that accounting takes in the processing are the balance sheet, income statement, statement of retained earnings, and cash flow statement.

Accounting is the process that consolidates your company’s financial information to make it clear and understandable for either shareholders or stakeholders. Stakeholders and shareholders can get to know about the business performance with these standard financial reports. Accounting includes several activities like the following:

  • Financial Analysis – It is the interpretation of financial records to provide insights for measuring the company’s financial performance, profitability, operational efficiency, and liquidity.
  • Preparation of Financial Statements – For evaluating the financial performance and position of the business, you need to create several financial statements such as balance sheets, cash flow statements, and income statements.
  • Auditing – Using accounting regulations and standards to evaluate the financial statements and records to make sure of financial compliance and accuracy. The main purpose of financial record-keeping is to evaluate these financial statements and ensure that they meet the business goals and objectives. 
  • Budgeting and Forecasting – Forecasting in the business is a vital activity that needs to be taken into consideration. You can plan future business financial activities based on the previous year’s financial performances and the expectations of future business conditions.
  • Compliance – Your business must adhere to the relevant financial regulations, standards, and legal requirements. This makes your business trustworthy in the eyes of stakeholders, customers, and investors. Hence ensuring compliance for your business is important.
  • Tax Preparing and Filing – Every business has to provide tax returns periodically. Proper preparation and filing of tax returns and ensuring compliance with tax laws and regulations is very important to avoid any sort of tax-related legalities in the future. 

 

Professionals In Accounting And Bookkeeping

Bookkeeper

A professional who is responsible for performing the bookkeeping in a business. They will record the financial cash flow of your business. A bookkeeper keeps your financial records well-structured and organized accurately. Some of their responsibilities include:

  • Records every financial transaction of the business
  • Conduct bank reconciliation monthly
  • Sending customer invoices and recording received payments
  • Processing payroll
  • Generate financial statements
  • Prepare financial books for accounting purposes
  • Prepare yearly financial and tax documents for the accountant

 

Accountant

Accountants provide a higher level of services for the company. They do the consultation, tax advisory, and analysis of business financials. They will be more qualified than bookkeepers. They keep track of business transactions like income, expenses, and tax liabilities. Some of their responsibilities are:

  • Performing audits
  • Analyzing the cost of business operations
  • Preparing adjust entries
  • Advise in the financial decision-making process
  • Review, summarize, interpret, and analyze financial statements
  • Maintain financial health and forecast business financials
  • Tax filings, tax planning management, and tax advisory

 

Importance Of Accounting And Bookkeeping

In simple words, if a business wants to manage its financials efficiently, then accounting and bookkeeping play an important in due process. Both accounting and bookkeeping provide your business with summarized and analyzed financial information about your business. 

It will be easier to devise new business strategies and stay competitive in the industry using these financial record-keeping techniques. Hence businesses that perform proper bookkeeping and accounting will save money, have reduced risk, prepare plans for the future, manage and monitor growth, and comply with regulatory requirements.

  • Tax Management – Accurate tax filing and complying with regulations and legal authorities is crucial in a business. A company that follows tax law requirements will comply with state and federal laws. It will ensure that your business is trustworthy during auditing performed by tax authorities.
  • Accurate Financial Transactions – With accounting and bookkeeping your business can maintain accuracy in the financial transactions. It gives a clear picture of your sales, income, and expenses happening daily in your business. Both processes ensure that transactions are recorded and maintained properly and on a timely basis.
  • Informed Decision-Making – These two processes will evaluate the entire financial record of your business and provide the company management with the required information. This information or results is vital in making strategic decisions in the business. Such strategic decisions will help the company to meet its goals and business objectives.
  • Stakeholder Confidence – Making your business transparent and trustworthy to the outside world is the key to the success of any business. Accurate results attained from the evaluation of financial record-keeping will provide the stakeholders, investors, and creditors with reliable financial documents and information.
  • Financial Health – Maintaining good financial health is important for the steady growth of any business. Accounting and bookkeeping allow you to track the financial health and performance of your business. This process will help you to identify the business strengths, weaknesses, opportunities, and threats. 

 

Types Of Accounting In A Business

There are two types of accounting which are explained below: 

  • Financial Accounting

This type of accounting includes the preparation of financial statements accurately. Its main purpose is to evaluate the performance of the business. It can also be used by internal management to make informed decisions for your business. Several accounting standards and principles are used in financial accounting – International Financial Reporting Standards (IFRS). Following proper accounting standards makes your business creditworthiness in the eyes of stakeholders and shareholders as it will make your financial records easy to understand and interpret.

  • Managerial Accounting

It analyzes the results from the financial accounting and prepares reports on the business operations. These reports will in turn help the business management to make informed decisions and devise strategies. This model allows the business to attain maximum efficiency by evaluating the accounting information and deciding the future strategies for your business. 

 

Bookkeeping Systems In A Business

Types of bookkeeping systems: 

  • Single-entry Bookkeeping

It is a basic system of bookkeeping where the daily receipts of business transactions are recorded. It records one entry for one business activity or transaction made. It is based on the cash book of a business and is easy to maintain. It is suitable for small businesses. They do not prepare balance sheets, conform to the principles of accounting, and provide limited information on business financials.

  • Double-entry Bookkeeping

In this model, a credit entry and debit entry are recorded and transactions are recorded for each revenue or debt made in the business. It records double entries for every business financial transaction made. It is suitable for large organizations and requires special accounting software. It provides balance sheets, and financial information and confirms the principles of accounting.

Identify And Avoid Mistakes In Bookkeeping 

You must be aware of some of the common mistakes that can occur during the financial bookkeeping of a business. Some of them are: 

  • Mixing the Business and Personal Financials

It is a common business mistake where you might mix up the personal and business finances together. This will lead to errors in filing taxes, mistakes in financial reports, or missed deductions. Also, fixing these mistakes is time-consuming and costly. They can even lead to legal problems like the misuse of business records. 

One of the easy solutions to avoid the mistake of mixing up personal and business finances is to create clear-cut boundaries between them. Make sure to have separate accounts and bank cards for your business. In this way, you can get business transactions and their statements separately.

  • Inaccurate Financial Record-Keeping

Mistakes in the business record-keeping are most common and often seen in different types of business. In the long run, it will lead to big financial problems and affect business credit. It will also make accounting a time-consuming problem. This may lead to poor decision-making processes and will affect the business analysis of financial statements. It can result in wrong tax filing, affect the ability to get credit from suppliers, missed deductions, or overpayments. 

The best solution to avoid this mistake is to maintain a well-structured record-keeping and regularly review the process of bookkeeping. It will allow you to find out errors quickly and maintain your financial health and transparency. You can hire skilled and experienced bookkeepers to perform the record-keeping for your business. Investing in financial software for managing your business financials is another good option to avoid this mistake.

  • Avoiding to Reconcile Bank Statements

If your financial records do not match with your bank statements, it will lead to major accounting problems. The practice of reconciliation is a crucial part of maintaining an accurate financial bookkeeping system. Lack of bookkeeping knowledge and not taking this problem seriously can lead to big business losses and even create a cascade of mistakes in the future.

Establishing the reconciliation practice periodically is a good option to avoid this mistake. You must compare and make sure the financial books are in line with your bank statements every month. It will improve the accuracy of your financial records and will provide you with a clear picture of your business transactions. Conducting this practice monthly will give your business a chance to rectify any mistakes right away and keep your records accurate.

  • Overlooking Petty Expenses

It is usual in every business to neglect small or petty expenses. The problem occurs when these small expenses of your business add up to big expenses over time. This will make big mistakes in your financial records, and accounting process, and even you cannot reconcile them because such an expense will never be recorded. It can lead to big financial problems in your business.

The only solution for this problem is to keep track of your expenses, no matter how small they may be. Various tools and software are available to help you in tracking your business expenses. It will make sure to record all your expenses in the business. This systematic process will ensure that your business is mistake-free and maintains proper accounting records, tax filings, bank statement reconciliation, and other major financial activities. 

  • Mistake of Failing to Preplan the Tax Amount

No business can avoid tax filing. Proper tax filing acts as the variable to measure the credibility and transparency of a business among stakeholders. Hence preplanning them is very crucial in your business. If you do not calculate and plan how much tax amount your business will have to file, then there will be a burden of unexpected huge amounts during the due process of tax returns. You might incur into large amount of taxes and might not be able to pay them off. 

Regularly performing tax management strategies will help a business avoid the unexpected burden of huge taxes. If you plan your business tax, you will know what credits or deductions your business will be able to claim. Make a habit of marking a portion of your income from sales or project profits for tax payment purposes. You can also hire an expert tax consultant or accounting professional to ensure these processes.

 

Conclusion

In conclusion, mastering the process of both accounting and bookkeeping is unavoidable in the business. If your business wants to maintain financial stability and steady growth, then this article provides a comprehensive capsule about the basic financial record-keeping processes.  In today’s competitive industry, your business needs a strategic plan for updated competitive edge, and sales strategies. This will help in getting financial insights to make an informed decision-making process. With financial functions like maintaining records and statements, complying with regulatory requirements, reviewing, interpreting, optimizing, and mitigating risks, both accounting and bookkeeping will enhance the growth of your business.

 

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FAQs-

1.What Is The Importance Of Bookkeeping?

You can measure your business performance if you keep proper bookkeeping. It will give financial information to devise a benchmark to meet business goals and revenue through strategic decisions. 

If your business is a small start-up with less income, you can cut down the cost of appointing a full-time accountant and instead a part-time bookkeeper for the purpose. It is a good use if you spend extra money or time on this process, given its level of importance in your business. 

2. Is Accounting And Bookkeeping The Same Process?

It seems like accounting and bookkeeping are the same thing at first look, but there is a line of difference between them. While bookkeeping is the proper recording of daily cash flow transactions of your business, accounting is the process of analyzing, interpreting, and summarizing financial data from these recorded transactions or documents.

3. What Are The Software Used In Accounting And Bookkeeping?

Modern software and tools aid the management of financial evaluations and related processes accurately and efficiently. Different software are used for the process of bookkeeping and accounting in the business. 

They can help in tracking payments, creating invoices, analyzing financial performance, debt collection, timesheets, payroll, purchase reconciliation, tracking expenses, accounts payable and receivable, billing, and many more.

The most commonly used are Xero, Sage, FreshBooks, Microsoft Visual Basic, Advanced Excel, Business Intelligence Software, Enterprise Resource Planning, and QuickBooks.  

4. Is Outsourcing Of Financial Record-Keeping A Good Option?

If you have a small business with a small budget and you have sufficient knowledge about the financial processes, then you might be able to perform these processes by yourself. But in the case of having a big business or an exponentially growing business, outsourcing these services is a good option.

Outsourcing these services can provide benefits like reduced cost, saving time, access to modern technology, and acknowledgment of expert professionals. This will allow you to give more focus to other business operations. 

5. What Qualifications Are Required For A Bookkeeper And Accountant?

A bookkeeper must have mathematical skills and familiarity with different bookkeeping software. A degree related to finance is the best qualification for a bookkeeper. Hands-on experience in different businesses is also the most sought-after qualification. 

Accountants must have a finance-related degree. Moreover, several certifications need to be obtained by an accountant such as a Certified Public Accountant (CPA) or Certified Management Accountant. 

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