Basic Steps of Bookkeeping

Basic Steps of Bookkeeping

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One of the least enjoyable parts of being a business owner is bookkeeping. While most entrepreneurs outsource this activity and hire a bookkeeping firm in Singapore to do this, it is still important to understand what bookkeeping entails so that you understand your company’s finances.

In this article, we will explain what bookkeeping is, why it is important, the differences between bookkeeping and accounting, and more.

What Is Bookkeeping?

Bookkeeping is the practice of recording your business’s financial transactions. This means that you must record any transaction that has financial implications for your business.

Bookkeeping consists of the following activities:

  • Preparing financial statements. These include the balance sheet, the cash flow statement, the statement of retained earnings, and the income statement
  • Posting debits and credits
  • Making invoices
  • Maintaining and balancing subsidiaries, general ledgers, and historical accounts
  • Completing payroll

Why Is Bookkeeping Important?

Without bookkeeping, you do not have the financial information you need to run your business successfully.  Bookkeeping is required to determine how much money entered and exited your business, accurately recording each financial transaction. This helps the firm in assessing its financial resources in order to better plan and strategise for the future.

Moreover, without bookkeeping you do not have the information you need to produce financial statements which you may be required to present to your directors, the Inland Revenue Authority of Singapore (IRAS), and other government authorities in Singapore.

What Are Some Important Bookkeeping Terms That I Should Know?

  • Revenue/income. The terms are used interchangeably because they refer to the same concept. Revenue/income is simply any earnings that your business gains through the sale of its products or services.
  • Expenses. We all have expenses, both in our personal and business lives. Think of items like your utility bill, employees’ salaries, business travel costs, insurance, the cost of ordering supplies and materials for your products, and more.
  • Equity. This is your financial interest or stake in the business. You can calculate your equity by subtracting the business’s liabilities from its assets.
  • Assets. Assets are tangible and intangible items that you can use to generate revenue for your business. In general, anything of value in your business is an asset. Examples include cash in your bank account, accounts receivable, inventory, furniture, buildings, equipment, intellectual property, and so on.
  • Liabilities. Any debts that your business owes to vendors or customers are defined as liabilities. These include accounts payable, short- and long-term loans, credit card balances, and more.
  • Debits and credits. Any transaction posted in your ledger, or your accounting software will be a debit or a credit.
  • General ledger. The general ledger, one of the most important components of bookkeeping, is a document where you record (i.e., “post”) the amounts from sales and expenses receipts. Your ledger can be in digital format (online) or on paper.
  • Double-entry accounting. This is how experts recommend that you register your transactions. With double-entry accounting, every debit entry has a corresponding credit entry. For example, increases in your assets and expenses are debits while increases in liabilities, revenue, and equity are credits.  

What Are the Key Differences between Bookkeeping and Accounting?

Accounting is a more subjective practice than bookkeeping. Accountants interpret financial data to create a bigger picture analysis of your business so that you, the business owner, can make informed business decisions. Accountants also prepare business tax returns for you and give you advice on how to minimize your annual tax bill now and in future years.

Bookkeeping, on the other hand, is purely objective. Bookkeepers do not give you interpretations of your finances, they simply record what happened, when it happened, and which accounts the transactions affected. This detailed recording can assist your business in tracking each transaction and identifying activities that performed exceptionally well or poorly. With accurate records, financial statement preparation becomes much easier, with less time spent on financial analysis.

Sprout With Us!

Sprout Asia's accounting team can provide professional assistance to businesses in need of accurate financials. With our dedicated and knowledgeable team, as well as cloud softwares, we are able to reduce time-consuming aspects for you, allowing you to focus more on your business.

Connect with us now for a complimentary consultation if you have any questions on Sprout Asia's accounting and bookkeeping services.