Bookkeeping is the recording of all financial transactions, including financial records of purchases, sales, receipts and payments, as well as accruals for payables or receivables. The goal of bookkeeping is to record all of the company’s financial transactions in a detailed way that provides useful information without being overwhelming.
Bookkeeping also involves storing and retrieving the records of the company’s financial transactions. It requires knowledge of debits and credits and a basic understanding of the financial statements. Bookkeeping can be done manually using spreadsheets, but, increasingly, bookkeeping software is used.
In bookkeeping, it is important to consider who will be using the records. Senior managers will have significantly different needs for analyzing the company’s performance, compared to the accountant who prepares and files the financial statements or various tax returns and government remittances. Also, if an auditor is to use the records, they may need to be able to track the details of transactions in their testing.
Bookkeeping basics for startups: Four key steps
For small businesses, there are four main steps in the bookkeeping process:
- Gather the source documents, including cheque records, deposit records, bank statements, bills from vendors, receipts for purchases and invoices issued to customers
- Enter the information from the source documents into journals and accounts
- Perform end-of-period procedures: balance accounts and perform reconciliations
- Close the books for that period
Financial records: Key bookkeeping accounts
The most common bookkeeping accounts used by small businesses include:
- Cash (regularly a debit balance): Most business transactions will go through your cash account. The transactions can be divided between cash receipts (debit to cash) and cash disbursement (credit to cash). At the end of each month, you should reconcile the bank account for any outstanding transactions or errors (for example, when you write a cheque, it should be recorded in your accounting records. However, it may not clear the bank on the same day and if it is still outstanding at the end of the month, it should be listed as an outstanding cheque). The total reconciling items should account for the difference between the dollar amount on the bank statement and the dollar amount in the accounting records.
- Accounts receivable (a debit balance): This is money due from your customers, mainly for products and services sold for which the company has yet to receive payment. A sub-ledger shows the details of each account and all of the sub-ledgers should be reconciled to the total accounts receivable listing to ensure they balance. (This may be done automatically by some bookkeeping software.)
- Inventory (a debit balance): This may be the ready-to-sell, work-in-progress or raw-goods inventory. Physical counts of inventory should take place periodically to make sure that the accounting records agree with the actual inventory on hand. Tracking and allocating portions of inventory can be very complex. Variances between actual and accounting inventory can result from inaccurate tracking of raw inventory used and finished goods sold, or can be the result of theft.
- Accounts payable (a credit balance): Similar to accounts receivable, your payables usually represent money owed by the business to its suppliers. It can also include amounts payable to its employees or to the Canada Revenue Agency for taxes, including GST/HST or payroll deductions. Again, it is important to reconcile the accounts and ensure that what is recorded here is for current and ongoing obligations.
- Loans payable (a credit balance): These are amounts that have been loaned to the company. Often in small companies, these will be from shareholders or friends and family. It is important to be aware of any interest that is to be charged on these loans, even if the company is not currently paying it.
- Sales (a credit balance): Income earned by a company for selling its products or services.
- Expense accounts (debit balances): These accounts record all of the expenses incurred by the business. Expenses should be divided into general types such as office expenses, rent, insurance and cost of goods sold, which is a calculation based on inventory purchased and used in the period. Expenses can be further divided into groupings for each project or function (e.g., “rent: manufacturing division” or “supplies: Project A”).
- Payroll expenses: For many companies this is one of the biggest expenses. These accounts include salary paid to the employees, vacation paid, employee benefits and the company’s portion of Canada Pension Plan (CPP) and Employment Insurance (EI) contributions.
For more information, please contact Marta Klakov at [email protected].
Marta Klakov, CGA