Starting a business is thrilling—it’s full of possibilities and energy. But let’s face it, it can get overwhelming. Tracking every single transaction is the last thing on your mind. Like many entrepreneurs, you’re probably laser-focused on building your dream. You are making moves and growing your business, but bookkeeping may feel like a low priority.
Still, it’s worth remembering that while bookkeeping can seem daunting, putting it off can create problems later. Keeping accurate financial records from the start is key to staying organized and avoiding headaches down the line.
Bookkeeping is the backbone of every successful business—it keeps your finances in check and sets the stage for long-term growth.
So, what exactly is bookkeeping, and why is it important?
To make this relatable, let’s kick things off with a story.
Scenario 1: The Dream Startup (Azara)
Imagine this: you’ve finally launched your dream business—Company Azara, designing fashionable clothes for celebrities. Things are going great. After six months, the sales are rolling in. Your bank account looks healthy. You’ve even managed to clear most of your bills. But then comes the moment of truth. You decide it’s time to check how your business is actually performing. You grab a calculator, start punching in numbers. Suddenly it hits you—you can’t remember every transaction from the past six months. Somewhere along the way, you forgot one important thing: keeping proper records of your business transactions.
Scenario 2: The Tax Time Crunch (Kath)
Now, let’s look at someone else. Meet Kath. She’s been running her business for about a year. It’s tax season, and the sleepless nights have kicked in. Why? Because Kath didn’t keep accurate records of her business transactions. She prioritized running and growing her business, pushing bookkeeping aside. Now she feels overwhelmed and struggles to piece everything together.
Both of these scenarios show how one simple mistake—neglecting to maintain proper records of business transactions—can snowball into major issues. It’s understandable, though. When you’re busy building your dream, bookkeeping might not feel like a top priority. However, the stress and confusion that come later on can be avoided with a little preparation.
So, how do you avoid Azara and Kath’s situation?
Start by understanding what bookkeeping really involves.
Why is bookkeeping worth the effort?
Judging from the two scenarios above—Company Azara, and Kath—it’s clear that bookkeeping isn’t just important; it’s essential. Bookkeeping delivers so much more beyond prepping for tax season or reviewing performance. It keeps your business compliant with regulations, reveals its financial health, helps you create realistic budgets and forecasts, and even makes your business appealing to potential investors by showcasing well-organized financial records.
What is bookkeeping, exactly?
As the name suggests, bookkeeping involves keeping a detailed record of all financial transactions in your business. These transactions can be as straightforward as paying wages or buying office supplies, or as complex as recording fair value changes on investments. It might sound like a lot, but bookkeeping is essential—it’s the foundation your accountant will use to prepare your financial statements.
To keep things organized and precise, here’s a simple three-step process for mastering bookkeeping:
Step 1: Recognize the Business Transaction
Businesses are buzzing with activity every day, but not everything that happens is a transaction that needs to be recorded. As a bookkeeper, your first job is to figure out which activities actually matter for the books.
So, what exactly is a business transaction? It’s any activity a company carries out during its normal operations that can be measured in monetary terms and impacts its finances or financial position. In other words, if money is involved, it’s something you’ll need to record. If the transaction affects the bottom line, it’s something you’ll need to include in your bookkeeping. To make this clearer, let’s look at some common activities companies handle daily. We’ll separate the ones that count as business transactions from those that don’t. By going through these examples, you’ll quickly get the hang of spotting the transactions that need to be recorded.
- Made cash sales totaling USD 2,000.
- Paid rent amounting to USD 500.
- Deposited cash into the bank.
- Received an invoice for USD 50 for services rendered by party ABC.
- Conducted interviews for vacant assistant manager role in company.
- Visited one of the company’s offices in a new location.
In the examples above, the first three activities—paying rent, depositing cash, and receiving an invoice—are classified as business transactions. They involve monetary amounts and directly affect the financial position of the business. On the other hand, businesses don’t classify interviewing candidates and visiting the office as transactions. While they’re important for running the business, they don’t have a measurable impact on its finances.
Step 2: Analyze the Impact of the Transaction
Once you’ve identified a transaction, the next step is to dive deeper by analysing to determine the specific financial impact of the transaction. Was an expense incurred? Was income earned? Did a liability arise, or did money leave the bank account? These are some key questions to help you analyse the impact of transactions for bookkeeping or accounting purposes. For example, if a company pays a salary of USD 500, it records this transaction as a decrease in cash and simultaneously records an expense.
Step 3: Record the Transaction
The final step is recording the transaction in the book of accounts. Be sure to include enough details. These should include the transaction date, amount, and transaction description. Keeping records this way keeps everything organized and up-to-date.
When it comes to recording transactions, you’ve got a few options depending on the size of your business, the volume of business transactions and your budget. You could opt for Excel spreadsheets—an affordable and straightforward way to organize your records. Alternatively, investing in accounting software might be a smarter option if you’re dealing with a higher volume of transactions or need features tailored to efficient bookkeeping.
Bookkeeping might not be the most exciting part of running a business, but it’s essential. Whether you use a simple Excel spreadsheet or accounting software, the time and effort you put into bookkeeping will pay off in the long run. So, don’t sweep bookkeeping under the carpet. The earlier you begin keeping records of your business transactions, the smoother your business’s financial journey will be. So why wait? Start today and avoid the stress later.
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