Bookkeeping is the process by which a company’s accounting records are built and maintained. It is the process of recording, organizing and storing your company’s accounting data which can be used to produce reports or verify details when needed. This is achieved by recording each and every transaction a company undertakes. Common examples include collecting payments from customers and depositing funds in the bank, paying for services, purchasing long-lived assets, receiving loan funds, making loan payments, distributing funds to owners and many others.
A transaction occurs when an obligation arises for cash or other economic resources to flow from one party to another. This is important because it means that transactions often occur before or after cash actually changes hands. When you receive a bill you have to pay, that transaction has occurred and you need to record it in your books even if you’re going to pay it later. The same applies when you issue invoices that you’ll collect payment for later, when you pay for a year’s worth of insurance up front or when you know you’ll be billed later for an ongoing service. This is known as accrual-basis accounting because you record a transaction when the requirement to pay happens, or accrues, rather than when a cash flow occurs. This produces much more accurate financial reports which can be used for more effective decision-making.
If the question is “why do we do this?” or “so what?” the answer is that without timely, accurate, bookkeeping there is no way we can produce reliable financial reports for internal and external users. It’s like trying to use a map without being certain the map is accurate; you could move forward on the faith that it’s right, but you risk getting lost, hitting unrecorded obstacles, bypassing key resources or mismanaging your supplies because the map is not to scale. It is far better to gather reliable information before you plan your journey just like it’s far better to ensure your accounting records are accurate before you need to rely on that information to make judgments about the health, future and success of your business.
Businesses are also required to submit numerous reports to outside users such as government, government agencies, industry regulators, financial institutions, lenders, investors and potential investors. If these reports are inaccurate you may risk fines, penalties, broken relationships or even allegations of negligence and fraud.
In short, bookkeeping is the foundation of accounting and without the building blocks (accurately recorded transactions) we can’t build financial records in which we have the necessary confidence to move forward.
An added benefit of modern bookkeeping is that with all of the details recorded in each transaction you incidentally create a large database which is ripe for business analytics. This review process can reveal key insights about a myriad of things such as customer preferences & behaviour, hidden weak links & inefficiencies, or unsung heroes & unexploited advantages.
High quality bookkeeping is not a discretionary item for your business – it is a necessity. Sign up for our email list to receive blog posts like this one every month and enhance your understanding of bookkeeping and payroll – core functions for your business. If you decide that a professional, reliable, remote bookkeeper is just what your business needs then we hope you’ll choose Toronto Bookkeeping Plus – we’re here for you!
