Bookkeeping refers to the systemic recording and organizing of all financial transactions within a company. A huge part of its role is ensuring the accuracy of records of financial transactions. These records are taken by the accountant who analyzes, reviews, reports, and interprets financial information for the company. Therefore, bookkeeping forms the basis of the company’s accounting system.
Single and Double Entry Bookkeeping
Single-entry bookkeeping may be enough for small businesses with a low volume of activity. This form of bookkeeping keeps a record of cash, tax-deductible expenses, and taxable income in one entry. A single-entry, however, is not enough for complex companies who need to track inventory, accounts payable, and accounts receivable. This is where double-entry bookkeeping is needed.
Double-entry bookkeeping is widely used by businesses of all sizes, including small businesses. In this system, transactions are recorded in terms of debits and credits. A debit is an increase in asset, while a credit is decrease of it. Because a debit in one account offsets a credit in another, the sum of one entry must be equal to the sum of the other. This systems offers a better system of detecting errors, which makes it easier to prepare financial statements.
Balancing the Books
“Balancing the books” is a popular accounting term, which means that all transactions that deal with assets, liabilities, and equity are recorded accurately. The formula for a balanced book is as follows:
Assets = Liabilities + Equity
This formula means that the company’s assets should be balanced against the claims againsnt the company.
Assets
Assets refer to resources owned by the company that can be measured and has a future economic value. These includes cash, investments, inventory, buildings, and vehicles, among others. On the balance sheet, asset usually starts with cash accounts followed by inventory accounts receivable and then fixed assets. Intangible assets like patents and copyrights, however, do not appear in the balance sheet as mandated by accounting standards.
Liabilities
Liabilities refer to the obligations of the company, or the amount owed to creditors. The word “payable” is usually attached to their account title. Liabilities can be thought of as a source of the company’s assets, as well as as a claim against the company’s assets. The liability accounts on a balance sheet include current liabilities, which are typically accounts payables and accruals, and long-term liabilities that are not due within one year like bonds payable and long-term loans.
Equity
The remaining value of an owner’s interest in a company after all liabilities have been deducted is called equity. This may include tangible assets like cash, buildings, and equipment and intangible assets like goodwill and patents. When you deduct all liabilities from assets and the result is negative, then the owner or shareholders no longer have any equity in the business, which means the company is “in the red”.
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If you need help in your bookkeeping, we can help guide you in the right direction. Contact us today at 818-452-2641 or fill out our contact form to schedule a free consultation.