What Is Bookkeeping? A Small-Business Guide

No matter the industry or size, all businesses need to track and manage their financial operations. Bookkeeping is integral to that mission, ensuring that a company’s transactions — everything from paying suppliers to receiving payments from customers — are properly recorded every day. Small businesses typically have less of a financial cushion and are more easily affected by dips in cash flow than their larger counterparts. Effective bookkeeping helps small businesses stay on top of their spending, keeps financial records organised and improves decision-making, among many other benefits that lead to a financially healthy outcome.

Put simply, bookkeeping brings structure and transparency to a business’s financial operations and is part of the overall accounting function. This article explains how, including an overview of the bookkeeping process, the advantages of effective bookkeeping and how automated accounting software helps companies simplify and speed up their bookkeeping tasks.

What Is Bookkeeping?

Bookkeeping is the process of recording, organising and maintaining a company’s financial records. This can be performed manually by recording transactions in a written journal or spreadsheet or using accounting software — an approach that is increasingly popular among small businesses because it gives them more time to concentrate on growth. The bookkeeper’s job is broad, with daily duties ranging from paying suppliers, to delivering financial reports, to billing clients, to recording receipts and tracking accounts receivable.

Key Takeaways

• Bookkeepers are responsible for recording their business’s daily financial transactions, for use by accountants for higher-level financial operations.
• The benefits of effective bookkeeping include detailed financial records, improved reporting and simplified regulatory compliance.
• Accounting software cuts time and cost from the bookkeeping process while reducing the risk of human error.

Bookkeeping Explained

Bookkeeping handles the daily maintenance of a business’s books and records, with every financial transaction diligently recorded by one or more bookkeepers. Unlike accountants, who analyse their company’s financial data from the highest level, bookkeepers are historians of transactions. They build, maintain, organise, sort, store and ensure the completeness of a business’s financial records. Recorded transactions cover every payment, sale and loan that a business takes on, and can be easily retrieved for use in the preparation of taxes, financial statements and other reports.

Bookkeeping tasks vary based on a company’s needs and accounting processes. For instance, a small, privately owned business may focus on maintaining simple financial records, like invoices, payroll, bank statements and tax returns, whereas a larger company may have more complex bookkeeping records as it grows and takes on additional lines of business with different delivery models. In a public company, bookkeepers must follow more specific guidelines as set forth by the U.S. Generally Accepted Accounting Principles (GAAP), especially when it comes to financial reporting and governance.

That said, some bookkeeping tasks are common to all sizes of businesses. Here are a few examples:

• Record payables and receivables:

  Recording accounts payables (AP) and receivables (AR), along with processing related invoices, is a core bookkeeping function. Every business should record its sales, purchases, expenses and cash transactions in a general ledger.

• Reconcile accounts:

  Bookkeepers make sure that the financial accounts in their spreadsheets or accounting software are accurate and up to date. That requires regular reconciliation of financial accounts against third-party documents, such as a company’s credit card statements and bank statements.

• Determine unadjusted trial balance:

  At the end of an accounting period, a bookkeeper closes the account balances and adds up credits and debits. If the dollar amounts don’t balance, the bookkeeper will have to track down the errors and offset them with adjusting entries.

Bookkeeping Process

The bookkeeper’s mandate is to record all daily financial transactions and make it easy for accountants and other business stakeholders to find the information they need. Generally speaking, the bookkeeping process follows these steps:

1. When a financial transaction is completed, a bookkeeper assesses and assigns it to the right accounts in the company’s journal using debits and credits.

2. The bookkeeper then transfers transaction details to the general ledger, which tracks every transaction completed by the business over a given accounting period.

3. At the end of the accounting period, the bookkeeper closes the financial books and makes sure every debit transaction has an equal credit transaction before the data can be used in financial statements.

There are two primary bookkeeping methods: single-entry and double-entry.

Single-entry bookkeeping

As the name implies, single-entry bookkeeping involves one account entry for each transaction recorded in a business’s financial books. It is used by businesses that do their accounting on a cash basis — reflecting when cash actually changes hands — as opposed to an accrual basis (more on this distinction soon).

Double-entry bookkeeping

Most companies use the double-entry accounting method, whereby every transaction affects at least two accounts in their financial records – a debit account and a credit account. Bookkeepers must preserve a balance between debits and credits. Public organisations in the U.S. are required to use double-entry accounting in compliance with GAAP.

Components of the Bookkeeping Process

The bookkeeping process involves a half-dozen moving pieces and ensuing financial documents. Ensuring accuracy, timeliness and consistency in every place a transaction must be recorded is essential to a successful bookkeeping operation.

• Chart of accounts

  A chart of accounts lists every account in the business’s general ledger. An account is a financial record that tracks the activity of an individual asset, liability, equity, revenue and expense. Accounts are categorised based on a coding system that makes it easy to identify them.

• Journal entries

  The goal of bookkeeping is to present an accurate, real-time view of a business’s financial standing. Journal entries are used to record the details of each financial transaction, including how much was credited or debited to a particular account. Entries are eventually posted to the business’s general ledger.

• General ledger

  The general ledger is a numbered record of a company’s financial transactions and is used for tracking purposes and preparing three core financial statements, listed below. Under the double-entry bookkeeping system, a debit to one general ledger account must be balanced with an equal and opposite credit in another account.

• Cash flow statement

  A cash flow statement documents the cash (and cash equivalents) moving into and out of a business over a given time period. Cash flow statements help companies assess their liquidity.

• Income statement

  An income statement reports a business’s revenue, expenses, gains, losses and earnings for a specific accounting period. Some companies refer to their income statement as an earnings statement or a profit and loss statement, P&L for short.

• Balance sheet

  A company’s balance sheet provides a full picture of its financial position at a given moment in time. It tracks every asset, liability and equity.

Cash Basis vs. Accrual Basis

Which accounting method is best? The answer depends on how a business wants to time its revenue and expenses. Cash basis accounting — the simpler of the two methods — records transactions when money changes hands on a given account, such as when the business pays a supplier for service rendered. This approach is attractive to small businesses because it ensures that their financial statements closely reflect their current cash position.

Accrual-based accounting records expenses when they are incurred and sales when they are earned, regardless of when payment is exchanged. This is useful for businesses that extend credit to their customers or use credit to purchase goods and services from suppliers, as well as for companies that hold large volumes of inventory. In these cases, there is a time gap between when a sale or purchase is made and when subsequent payment occurs, making the cash-basis method of bookkeeping less accurate and thus less useful. 

The accrual-based method is considered the gold standard because it more accurately reflects a business’s financial position. What’s more, public companies are obligated to use this approach, as is any business that must produce GAAP-compliant financial reports.

Bookkeeping vs. Accounting

Bookkeeping lays the groundwork for accounting. The main difference between the two is their focus. Bookkeepers are tasked with day-to-day tactical responsibilities. They log and track a business’s financial transactions — ensuring that records are accurate and organised — reconcile accounts and close the books at the end of an accounting period. Meanwhile, accountants have a strategic, big-picture role and typically oversee bookkeepers. Accountants analyse and interpret the information prepared by bookkeepers to generate the business’s financial statements, tax returns and other high-level financial reports. The insight they communicate to business stakeholders about the company’s financial health is used to inform decision-making.

Another difference is the required level of education. Bookkeepers don’t necessarily need to possess a college degree or certification to gain employment, though one or both can certainly help them stand out when applying for jobs. Accountants, however, need a bachelor’s degree in accounting, finance, business or another mathematics-related field. Many go on to become licensed certified public accountants (CPAs), which requires passing a rigorous, four-part exam.

Why Businesses Need Bookkeeping

Bookkeeping oversees the daily documentation of a business’s financial activities as journal entries, which are then posted to the general ledger. This complete view of every business account is used by stakeholders to understand the company’s financial position and, in turn, make strategic business decisions regarding cash flow, budgeting and more.

In addition, up-to-date books are helpful when a business is applying for loans or building a business case for potential investors. They’re also integral to the creation of time-sensitive financial statements and reports, and to ensure compliance with specific tax codes and/or the U.S. Securities and Exchange Commission (SEC) requirements.

In the event of an audit, bookkeeping helps businesses back up their expense claims and applications for tax deductions with granular financial records.

Balancing the Books: Assets, Liabilities and Equity

Bookkeepers are responsible for closing a company’s books. To do so, total assets must balance the sum of its liabilities and shareholders’ equity. This is known as the accounting equation, and the information appears on the company’s balance sheet.

• Assets: Assets refer to anything a business owns. They include current assets, like cash or a retailer’s inventory, that are typically used within a year’s time; and fixed assets, including tangible assets, like an office building or machinery, and intangible assets, like patents or trademarks acquired from a third party. Fixed assets are also known as long-term assets because they generally have a useful life of more than one year.
• Liabilities: Liabilities refer to financial obligations a business must pay. Common liabilities include bank loans, money owed to suppliers and unpaid rent for office space or storage facilities. Short-term liabilities are financial obligations that must be paid within 12 months, like employee wages. Long-term liabilities, such as a mortgage, have a maturity of more than one year.
• Equity: Also known as shareholders’ equity (SE) or net worth, reflects the value of a company that remains after subtracting liabilities from assets.

Advantages of Bookkeeping

Not only is bookkeeping crucial to support core financial processes, but it also serves to make accountants’ lives a little easier. Among its advantages:

• Detailed records: Detailed, centralised financial records make it easier to oversee and track business accounts, which ultimately speeds reporting. Comprehensive records also simplify financial or tax audits because relevant information can be located more quickly and at lower cost.
• Improved compliance: Competent bookkeepers make sure their work complies with the latest legal and accounting requirements applicable to their business and industry, thereby avoiding fees or penalties for being out of compliance. That means all accounts, ledgers and financial statements adhere to the latest tax codes, SEC provisions and any accounting regulation specific to a business’s industry.
• Better planning: Solid bookkeeping data leads to better accounting and business decisions based on a complete understanding of the company’s performance. With a detailed record of their business’s accounts, finance teams can be confident in the data used to inform their reporting and future planning.
• Transparent reporting: Bookkeepers keep their business’s general ledger updated at all times. For their part, accountants can present that data to business stakeholders when creating financial reports, be it for a monthly close or ad-hoc information requests.
• Faster analyses: Accurate, up-to-date records help accountants do their job more quickly, whether they are creating financial statements or helping to develop a budget for a future project.

Challenges of Bookkeeping

As with all financial processes, bookkeeping comes with its challenges. This is especially true in resource-constrained small businesses. Below are three of the most common challenges associated with bookkeeping.

• Making time: Small companies don’t necessarily have dedicated bookkeepers on their payrolls, which means owners or other employees must take time away from other core business functions to handle bookkeeping tasks. Alternatively, they can use accounting software or hire an external consultant to take bookkeeping tasks off their plates. Bookkeeping consultants are also less expensive than accountants, in most cases.
• Using records passively: Many businesses view bookkeeping as a tick-box exercise that keeps them compliant and helps them to file accurate tax returns. But that’s only half the story. Up-to-date financial records help key stakeholders make informed business decisions based on a better understanding of their organisation’s financial health.
• Getting bogged down in manual processes: Manual processes are the enemy of accurate bookkeeping for a growing business. With an ever-expanding list of transactions to record, companies can get only so far with paper records and spreadsheets. Software-based bookkeeping cuts significant time and effort from the bookkeeping process while reducing the risk of human error.

Common Bookkeeping Abbreviations

Financial documents are full of abbreviations. Below are some of the most common abbreviations used in bookkeeping and accounting records, in alphabetical order:

• AE: Accrued expenses
• AP: Accounts payable
• AR: Accounts receivable
• ATB: Adjusted trial balance
• BS: Balance sheet
• CA: Current assets
• CAP: Capital
• CF: Cash flow
• CL: Current liabilities
• COA: Chart of accounts
• COGS: Cost of goods sold
• CR: Credits
• DR: Debits
• FA: Fixed assets
• FE: Fixed expenses
• GL: General ledger
• LTL: Long-term liabilities
• NI: Net income
• OE: Operating expenses or owner’s equity
• P&L: Profit and loss statement (also known as the income statement)
• PPE: Property, plant and equipment
• TB: Trial balance
• VE: Variable expenses

History of Bookkeeping

Bookkeeping has been around for thousands of years. Archeological records reveal ancient civilisations used some form of bookkeeping as early as 6000 B.C. Modern bookkeeping can be traced back to the 15th century, when Italian mathematician Friar Luca Pacioli developed the first double-entry system.

No surprise, bookkeeping has evolved tremendously since that time, especially with the invention of computers in the 20th century and the more recent uptake of automated, cloud-based accounting software. Companies have also changed the media they use to keep records, in line with the shift from a cash-based economy to one built on credit and digital transactions.

• Petty cash books

  Petty cash is a small amount of cash that companies keep on hand to pay for incidental or emergency expenses. A traditional petty cash book is a physical ledger that records all a business’s cash expenditures. Modern petty cash accounting uses spreadsheets or accounting software. The need for petty cash is becoming a thing of the past, as most businesses make their purchases with a credit card or via bank transfer.

• Journals

  Before the age of software, businesses would record financial transactions chronologically in a handwritten journal. It was common to use different journals for different transactions, i.e., one for purchases, another for sales and another for cash payments and receipts. Then the entries would be added to the organisation’s general ledger. These days, much of the process is digital.

• Daybooks

  Daybooks are a remnant from the days of physical journals. To avoid recording every single financial transaction in a single journal, businesses staged the process by recording the day’s credits and debits in a smaller daybook before transcribing them in an overarching bookkeeping journal.

Bookkeeping Examples

At its core, bookkeeping offers businesses a way to track their credits and debits. Bookkeepers document financial transactions, recording each credit or debit in the relevant account and posting those entries in the business’s general ledger. At the end of an accounting period, they ensure that all accounts are balanced — i.e., that every debit has an equal and opposite credit.

One simple way to log these activities is with T-charts, also known as T-accounts. Each chart represents a specific account, named at the top. Below the account’s name are two columns, one for debits and one for credits, with space for bookkeepers to log the date of each transaction during the accounting period.

Consider a wholesale distributor that orders $50,000 of  inventory on Jan. 1, 2023. The order is logged as a $50,000 debit in the T-chart for “Inventory.” Meanwhile, a $50,000 credit is added to the “Accounts Payable” T-chart, representing the liability taken on by the business until the inventory is paid for. The “Accounts Payable” chart gets a second entry for a $50,000 debit, bringing the overall balance to $0. Finally, once the vendor bill is paid, it gets logged in the company’s “Cash” T-chart as a $50,000 credit entry.

Automate Bookkeeping With NetSuite

Bookkeepers increasingly use accounting software to perform their jobs. The accounting workflows in NetSuite’s cloud accounting software automate many bookkeeping tasks, making it easier to close the company’s books and  wrap up the accounting cycle. These tasks include recording financial transactions, preparing customer invoices, processing vendor bills and reconciling bank and credit card statements — all of which are time-consuming and prone to error when handled manually. GL entries and account balances are updated in real time, rather than in batches, which improves financial visibility, helps accelerate the financial close process, and improves the accuracy of financial statements.

Is QuickBooks the right bookkeeping solution for you?

Bookkeeping software is a must-have. And QuickBooks is often the obvious choice. Before you decide, download this expert guide to understand its strengths, weaknesses and your alternatives.

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Bookkeeping is an essential accounting process that handles the detailed recording, organising and tracking of a company’s day-to-day financial transactions. It is a time-consuming, labor-intensive activity that demands nothing less than 100% accuracy so business leaders and their stakeholders have confidence in their financial statements. Automated accounting software reduces the time and complexity of maintaining a company’s books. It’s also a key component of NetSuite ERP, which integrates, streamlines and automates essential business functions, providing real-time visibility into the company’s financial performance.

Bookkeeping FAQs

What exactly does a bookkeeper do?

Bookkeepers record, organise and track a company’s financial transactions. Their duties range from invoicing customers and paying suppliers to closing the books at period end.

What is the difference between accounting and bookkeeping?

Bookkeepers are financial record-keepers, logging every transaction and balancing every account to ensure records are clear, accurate and up to date. Accountants interpret these records to prepare budgets financial statements and other important documents. Bookkeeping is primarily tactical, whereas accounting is mostly strategic.

What qualifications do you need to be a bookkeeper?

Bookkeepers don’t necessarily need to possess a college degree or certification to gain employment, though one or both can certainly help them stand out when applying for jobs. Accountants, however, need a bachelor’s degree in accounting, finance, business or another mathematics-related field. Many go on to become licensed certified public accountants (CPAs), which requires passing a rigorous, four-part exam.

What is an example of bookkeeping?

Bookkeeping tasks vary tremendously. One example is the reconciliation of general ledger cash balances against bank and credit card statements to ensure that every business transaction has been accurately recorded.