WE DO THE BOOKKEEPING.....YOU DO YOUR JOB
As an Accountant I want to talk about how to keep track of the money (coming in and going out) in a company. That is called bookkeeping and we’re going start with the basics.
Bookkeeping Explained is keeping track of the money flow in a company. It’s critical to keep good books and records for a business, no matter how small it is. I’m not going to lay out exactly how to do that, but I am going to discuss a few important principals. As an Accountant I want to emphasize the first important principal is every financial transaction of a company needs to be recorded. This process has been made much easier with the advent of Bookkeeping software. For most startups, QuickBooks will do in the beginning. As the company grows, the choice of Bookkeeping software will become more complicated, but by then you will have hired a financial team that can make those choices.
The recording of financial transactions is not an art. It is a science and a well understood science. It revolves around the twin concepts of a “chart of accounts” and “double entry Bookkeeping.” Let’s start with the chart of accounts.
The Bookkeeping books of a company start with a chart of accounts. There are three kinds of accounts: income/expense & equity accounts and asset/liability & equity accounts. Income and expense accounts represent money coming into and out of a business. Asset and liability accounts represent money that is contained in the business or owed by the business. Equity accounts are used for capital investments and divestitures.
Any revenue that a company receives would be an income account. The salary expense of an employee you hire would be an expense account. Your cash in your bank account would be an asset account. The money you owe on your company credit card would be called “accounts payable” and would be a liability.
When you initially set up your chart of accounts, the balance in each and every account is zero. As you start entering financial transactions in your Bookkeeping software, the balances of the accounts go up or possibly down.
The concept of double entry Bookkeeping is important to understand. Each financial transaction has two sides to it, and you need both of them to record the transaction. Let’s go back to that revenue example above. You receive a check in the mail from your customer. You deposit the check at the bank. The Bookkeeping double entry is you record an increase in the cash asset account on the balance sheet and a corresponding equal increase in the advertising revenue account. When you pay the credit card bill, you would record a decrease in the cash asset account on the balance sheet and a decrease in the “accounts payable” account on the balance sheet.
These Bookkeeping entries can get very complicated with many accounts involved in a single recorded transaction, but no matter how complicated the entries get the two sides of the financial transaction always have to add up to the same amount. The entry must balance out. That is the science of Bookkeeping.
Since the objective of this page is not to turn you all into accountants, I’ll stop there, but I hope everyone understands what a chart of accounts and a Bookkeeping entry is now.
Once you have a chart of accounts and have recorded financial transactions in it, you can produce reports. These reports are simply the balances in various accounts or alternatively the changes in the balances over a period of time.