Hello, are you here for the bookkeeping for beginners deep dive?
Well, you’ve come to the right place, and we’re so glad you’ve made it. ICYMI, we had a riveting discussion about quarantine hobbies, and some of you have noted that amateur bookkeeping for beginners has piqued your interest. Perhaps you’ve always been an academic, or trivia is what you live for, but many of us lack those qualities.
Bookkeeping is a nebulous word—we understand the meaning of the word “book” and “keep,” but what exactly does it mean when they’re mish-mashed? Bookkeeping is a subfield of accounting in which financial transactions are recorded for a business. That’s a long-winded way of saying it’s all your financial info and data. This is super important because it’s necessary to build a robust and booming business. Now you know and knowing is half the battle.
Let’s say you started your own artisanal candle business. *bravo, that’s so lit* However, your business is more than just wax and wicks. You’ve got invoices from suppliers, manufacturing costs, operating costs, and payroll, among other things. Who is going to organize all your essential oil purchases? A bookkeeper. What about all of your online sales? A bookkeeper. Who monitors all of your financial reports, records receipts, and fixes accounting errors? You got it, a bookkeeper (you are so smart). As you can see, small business bookkeeping is pretty important stuff. If this sounds a little too complex for you, don’t worry, you can always outsource to a pro. But if you’re ready to take it on headfirst, let’s start with the bookkeeping basics.
Bookkeeping vs. Accounting
You might be wondering, is bookkeeping merely another word for accounting? Is this a tomato/toe-mah-tow situation? While the two overlap in the dimension of finance, they aren’t the same. Bookkeeping is a transactional and administrative role that handles the day-to-day recording of financial transactions. Accounting takes this a step further by providing businesses with financial insights based on their bookkeeping data. It’s like a one-two combo in the realm of boxing. A left jab followed by a right-hand blow to KO your opponent, or in this case, tackling your finances. A bookkeeper provides the foundation that accountants build upon. Nevertheless, both are necessary and lovely people.
Bookkeeping Basics: The Duties of a Bookkeeper
Although we wish bookkeepers were the heroines in a fairytale, they are more like the Lumiere, Cogsworth, Mrs. Potts, and Chip characters in a novella. They are the sidekicks in the journey—supporting the main character (that’s you) achieve their greatest desires, and they have a long list of tasks to help you. A bookkeeper is a record keeper of all financial transactions. Think of a financial historian that maintains a general ledger recording amounts from sales and expense receipts.
The duties of a bookkeeper include, but not limited to:
Billing and recording receipts from clients
- Paying suppliers
- Recording invoices from suppliers
- Processing payroll
- Monitoring individual accounts receivable
- Recording depreciation
- Providing financial reports
Double-Entry System of Bookkeeping
Now that we’ve cleared up what bookkeeping is let’s venture into the two basic types. That’s right; there are two of them. Single-entry systems are recorded in one entry with a journal or log, making it ideal for small businesses just starting. Double-entry systems use two corresponding entries, a debit, and credit. When you debit an account, you credit the other.
The sum of debits should correspond to the sum of credits for all accounts. Simply put, double-entry accounting is a bookkeeping system in which financial transactions are recorded twice—in two separate accounts. Debits are entries that increase asset and expense accounts or decrease revenue, equity, and liability accounts, while credits do the opposite. Sound confusing? Don’t worry; we’ll do a deep-dive in a bit. For now, know that this makes double-entry a popular system to use, as you can more easily check for errors.
The Bookkeeping Equation
In the way we all learn the Pythagoras theorem in middle school or become knowledgeable in the law of gravity, thanks to Sir Issac Newton, there’s a particular equation that bookkeepers and accountants hold near and dear. The bookkeeping equation, also known as the accounting equation or balance sheet formula, ensures your company’s assets equal the sum of your company’s liabilities and shareholder’s equity. The balance sheet form makes sure your accounts are balanced. The balance sheet is a financial document that shows how much a company owns and owes and is used to get an idea of how the business performs. There are three main components to a balance sheet: assets, liabilities, and shareholder’s equity.
Here are the three components that make up the bookkeeping equation:
Assets = Liabilities + Shareholder’s Equity
- Assets are what your business owns, and the resources used to produce revenue. Some examples include cash, stock inventory, equipment, or land.
- Liabilities are what your business owes, including accounts payable and short-term and long-term debts.
- Shareholder’s equity is the difference between assets and liabilities. Sometimes seen as your company’s actual value, and can be in the form of stock, retained earnings, and additional paid-in capital.
Okay, that was a lot of math stuff, but we’ll get there together. Using the bookkeeping equation, you can surmise how your business is financially operating, clearly manage your finances, and determine if your reports are on point. Keeping up with your books is far more critical than Keeping up with the Kardashians. It’s the bread and butter to your small business bookkeeping.
Assets and Liabilities in Bookkeeping
We know that you work your ass-ets off to build your business; that’s why it’s crucial to protect yourself. When you think about assets, you might think of your star employee, stocks, property, or collection of porcelain figurines. When you think about liabilities, you may think of a customer falling in your store and breaking a hip. If these examples came to mind, you would be correct, but it’s not the entire picture. We touched briefly on what assets and liabilities are but let’s talk about how they fit into the equation.
Assets are what your business owns, which falls into two categories—current and fixed assets. Current assets can be turned into cash when you need a quick fix, and includes cash, accounts receivable, investments, and inventory. The more your business has, the better for your pockets. Your business is less likely to have to borrow money in an emergency. Fixed assets are the physical components that have financial value towards the company, things like equipment and tools. Here’s another thing. Assets are categorized as tangible or intangible. Tangible being physical assets like computers, hence the word tangible. Resources having no physical presence but have financial value, like copyright and brand recognition, are intangible assets.
Liabilities are what a business owes—at this very moment and in the future. For example, money owed to suppliers, bank debt, wages, and taxes would be considered liabilities. In business, liabilities are inevitable unless everything is handled with cash (think Breaking Bad and that carwash used to launder drug money). There are two types of liabilities as well, current and long-term. Current liabilities need to be paid back within a year and include credit lines, loans, salaries, and accounts payable. Long-term liabilities can be paid back after a year and include mortgages and bonds.
The bookkeeping equation uses assets and liabilities to determine how much a business is worth. The higher the equity, the better. When the numbers are in the negative, this means your business is in trouble and calls for damage control. A company must have more assets than liabilities to stay afloat. Assets give your bank account a plus, while liabilities give it a minus. It’s all about checks and balances, ladies and gentlemen. And we hope to tip the scale in your favor.
Bookkeeping Debit Versus Credit
We touched on debits and credits in bookkeeping entries, but what are they exactly? Debit entry is a positive number, while credit entry is a negative number. Debits increase the asset or expense account while decreasing liability, revenue, or equity accounts. Credit does the exact opposite of debit. It increases liability, revenue, or equity accounts while decreasing assets or expense accounts. Since they are used at the same time, you need to get your charts organized.
Most business accounting software keeps debits on the left of the main ledger column while credits are recorded on the right. For example, imagine the mega-talented Ariana Grande decides to become a tattoo artist. She tattoos three clients for a total of $1,000 and is paid in cash. When logging this information online, Ariana (or her bookkeeper) records this sale under assets, making it a debit. Later on, Ariana takes out a loan for $2,000 to get the latest tattooing machine. This would be recorded under liabilities, making it a credit. It will also be logged in as credit under assets for the same amount. They are both used as a way to monitor the money in your business account.
The Best of Bookkeeping for Beginners
Phew! Who else is ready for a gimlet, amirite? Bookkeeping is involved. We know it’s a lot to take in, but it’s necessary to better your business. Even if you aren’t handling it yourself (which we highly recommend and would gladly take over for you), bookkeeping is essential. If you are familiar with Greek mythology, you might know the wrinkly old Fates. Consider the bookkeeping equation your Fates—they guide the hero to their destiny, and that’s exactly what small business bookkeeping does. The Fates weave destiny (literally), and the balance sheet is your loom of financial insight. It can be kind; it can be cruel, but it’s telling of what’s to come. Of course, it won’t predict the future for sure, but it gives a pretty good picture of your business finances. And sometimes, it’s best left up to the pros. As you can tell, we love to nerd out on numbers. We’ll get your books sorted out so you can stay up to date with your financial reports. Your happily ever after begins here.