Accounting & Bookkeeping Basics: A Beginner’s Guide for Entrepreneurs| Punch Financial
It’s certainly not easy being a jack of all trades as a business owner or entrepreneur. When deciding to take on the risk of starting a company, you probably did not plan on spending most of your time learning bookkeeping basics, payroll administration, financial statement preparation, and scrambling to meet tax-filing deadlines. Spending too much time on these bookkeeping and accounting activities takes time away from important tasks to running and growing your business, such as innovation, sales, customer service, and pursuing opportunities to expand.
Nevertheless, as an entrepreneur is your own bookkeeper helps you learn key financial information about your company, such as cash flow, and that knowledge that can help you make crucial decisions. To achieve that goal and achieve financial insight, it is necessary to maintain your own books.
Another plus of maintaining accurate books is that every transaction will be recorded and categorized for your CPA. That is important because if you can provide accurate information and supporting documents to your CPA on April 15, you may be able to claim additional deductions and possibly secure a larger tax return. If you can maintain well-kept books, you can provide lenders or investors a complete view of your company’s financial status. They will then be able to make financial projections about your company’s ability to pay back a loan.
What is Bookkeeping?
Bookkeeping is recording a company’s financial transactions to describe where the money is being spent, where revenue is being generated, and which tax deductions can be claimed. That may sound straightforward, but it can be complex. Transactions include purchases, sales, receipts, and payments by an individual, an organization, or a corporation. A tool called a chart of accounts helps organize your finances into five major categories: assets, liabilities, equities, revenues, and expenses.
The two major bookkeeping systems are single-entry and double-entry. Double-entry is more complex but also more heavy-duty. Transactions are entered into a journal or ledger, and each item is entered twice, both as a debit and credit. Bookkeeping transactions can be documented by hand in a journal. The data can be entered into a spreadsheet program such as Microsoft Excel or a specialized bookkeeping accounting software program.
What’s the Difference between an Accountant and a Bookkeeper?
The bookkeeper’s role may seem similar to an accountant’s responsibilities, but they are quite different. A bookkeeper enters all the company’s financial transactions into a ledger or software. The bookkeeping process includes several steps from writing original journal entries that credit and debit the appropriate accounts to posting entries to ledger accounts and adjusting entries at the end of each accounting period.
In contrast, accountant reviews interpret, analyze, and report financial information for the business. At year-end, the accountant also prepares financial statements and the proper accounts for the firm.
Over the reporting period, the accountant’s responsibilities are called the accounting process, a series of activities beginning with a transaction and concluding with the books' closing. The year-end reports completed by the accountant must also adhere to standards established by the Financial Accounting Standards Board (FASB); these rules are called Generally Accepted Accounting Principles (GAAP).
Why Does Bookkeeping Matter?
Driving a car without knowing a city and/or not having a GPS will make it extremely difficult to reach your destination. The same principle applies to business. Without robust and accurate bookkeeping, you do not know how your business is doing and whether you earn a profit. Tax time will also be difficult without a clear picture of its results and a lack of proper documentation.
It’s Required During Tax Time
To prepare your taxes, you will have to show your bookkeeping records to an accountant or tax preparer. The records include journal entries, a profit and loss statement, and a balance sheet. Other documents should include last year’s business tax return, payroll documents, bank and credit statements, and depreciation schedules. You can print these items out or send them digital files.
Additionally, to make a thorough accounting of all income and expenses associated with your enterprise, it will help if you’ve saved as many documents as possible, including gross receipts, checking and savings account interest, sales records, employee wages, insurance premiums, and office rent.
You’ll Want to Know Where Your Money is Going.
Just as you need to take care of your personal health, you must take steps to ensure your company’s financial health. To properly chart your company’s finances, you must maintain financial statements, reports that summarize important financial accounting information. There are three main types of financial statements: the balance sheet, the income statement, and the cash flow statement.
Tracking expenses is an important part of creating a budget for your business and maintaining your financial statements. Keeping a daily record of your expenses by logging receipts, invoices, and other outgoing expenses improves your budget's financial health. In turn, a budget helps you monitor where your money is going, makes it easier to target problem areas, helps you pivot when necessary, and helps you reach your financial goals. The better you understand the elements of your budget, the better you can stay on top of your financial health. Stated plainly, you must have solid financial information to prepare a meaningful budget.
Bookkeeping is Needed to Borrow Money and Obtain Financing
It turns out that bookkeeping and business capital have quite a bit in common. Cash is necessary to grow your business, but you first need to secure top-notch financing to obtain capital to grow your business or convince a venture capitalist to invest in your firm. But before banks or investors are willing to dole out a business loan, line of credit, or other funding, they want to ascertain that your company is safe and reliable. They will examine your assets and liabilities, credit score, cash flow history, financial projections, business plans, and more for due diligence. And how do you keep these critical financing factors in tip-top condition? With fundamental bookkeeping habits, of course.
To qualify for business financing, it is imperative to have proper financial documentation. And even if you have your finances neatly organized in a silver three-ring binder, the numbers must prove to lenders that you and your business are a worthwhile risk and can pay back the loan. A banker may even want to look at some of your bookkeeping procedures and documents to verify if you are operating your business in a sound, professional manner. Fortunately, bookkeeping not only helps document and organize your finances, but it arms you with the information necessary to improve your business’s health and qualify for financing. After all, capital is the lifeblood of a business.
Our CFO and Controller leadership team has extensive knowledge of several industries' financial considerations and has provided value to early-stage startups and Fortune 500 companies alike. Our consultants can implement all the systems and procedures you need for a stable financial future so you can concentrate on growing your business.
Contact us for a free consultation, and we’ll outline how our services can help your business reach the next plateau of success.
