For decades, bookkeepers kept ledgers on paper of the financial transaction records. Nowadays, we have software that makes the paper outdated, but it still performs the same purpose. The purpose is to form a record of the transactions of a business that can be summarized in multiple ways for different uses. Some of these uses are reports for the owners, and your tax preparer.
There is a basic process of bookkeeping involving a checkbook attached to a check register. And the process can become complex for larger corporations, and usually involves many ledgers.
There are many factors that determine how complex a small business’ bookkeeping will be. These factors include the number of investments it has, tax requirements and the number of involved accounts. Most importantly, the business type is a factor as well. Some businesses may be more concerned with their inventory transactions, while others are more focused on depreciation and purchases.
The Accounting Connection
Accounting is a discipline that interprets and analyzes financial transactions. Bookkeeping is only a branch on this tree. A defining difference between a bookkeeper and an accountant is a degree. There are other differences between the two, however. For example, Accountants are knowledgeable about many legal aspects where bookkeepers will not be.
An accountant will work with compiled data presented by a bookkeeper. Their responsibility is to plan long-range for the company while offering advice that is normally not expected from bookkeepers. Both fields of work have become simplified by modern software, overlapping their duties more than ever. Some companies find it more appropriate only to have a bookkeeper instead of hiring an accountant.
An accounting period is a time that the books are opened and closed for the year. This is an impactful period for the financial aspect of a business. Even analysis and taxes are impacted by the accounting period. The most common period is the calendar year. Some agencies for the government will use September 1st to August 31st. A seasonal sales company will normally have an accounting period that reflects its expenses and revenues. The IRS, however, does require a specific period for some of their partnerships and different company types to use.
Methods of Bookkeeping and Accounting
There are two different common systems used for bookkeeping; Single entry and Double Entry. Single entry is a record detailing every transaction. Double-entry records everything twice, providing balances and checks not accessible through single-entry systems.
The accounting method, however, is different. This can be either a transaction record that is cash-basis or accrual-basis. Cash-basis method records when the transaction happens. The other method, often a favored method by accountants, records transactions in the determined accounting period.
The documentation in paper ledgers, or electronic, gathers all the information it needs from receipts and various other sources for a single summary. It is common practice that some companies that choose not to have an accounting service manage their books will post daily. Others will only post on specific dates. Posting regularly will help keep a business up to date. The information sources that help determine the summary require proper documentation keeping. This means businesses have a specific length of time to hold on to important documents and receipts. The length of time is dependent on the tax requirements and company.
Account charting is a chart that lists all the accounts a company uses. For a smaller business, you may only find to find a few accounts, whereas a large business could very well have many. It is a bookkeeper’s job to determine which accounts get charted a certain way. The idea of the chart is to provide all the financial information of a business at a glance.
While this may all sound very complicated, it is. However, these complexities are easily mastered by an experienced bookkeeper.
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