9 Basic Types Of Bookkeeping That Every Bookkeeper Should Know

Bookkeeping is an important segment of the whole accounting system. It is the basis for accounting as it contains the proper records on all financial transactions. Whereas, accounting involves organizing, summarizing, classification, and reporting financial transactions. Don’t be afraid if you are unsure about different types of bookkeeping. This article combines the most important information that you need to know about bookkeeping and how to master bookkeeping-related tasks. 

What is bookkeeping? 

To understand ‘bookkeeping’ in a simple way, it means recording and tracking the financial number of the business in an organized way. Bookkeeping is essential for businesses but is also useful for individuals and non-profit organizations. 

Bookkeeping is a detached process from accounting that occurs within a broader scope of accounting. While accounting is the overall practice of managing the finances of a business or individual, bookkeeping refers more specifically to the recording tasks and practices in financial activities. Bookkeeping provides information to conduct accounting tasks and helps interpret the accounting information for decision-making by internal and external users. If the bookkeeping is accurate, the business’ accounting will be proper. Thus, a strong relationship between the two functions is fundamental to drive the business forward to the next level. 

You may like to read: Accounting Vs. Bookkeeping: What Are The Differences?

1. Bookkeeping tasks

Bookkeeping involves tracking the following transactions, including but not limited to:

  • Supplier’s expenses
  • Loan payments
  • Customer payments for invoices
  • Asset depreciation
  • Financial reports 

In one way or another, the 9 types of bookkeeping mentioned below consist of these kinds of transactions

2. Bookkeeping software

Every industry benefits from the development of technology, and bookkeeping is no exception. Bookkeeping used to involve an excessive amount of paper or computer files, such as ledgers, charts of accounts, double-entry systems, and multiple Excel spreadsheets. Storage quickly becomes an issue and it can be a challenge to organize them. 

Technological advances facilitated a move to a computer-based system, with software available to purchase and download from a computer. Even then, these programs could be pricey and slow. 

The continuous development of technology has brought what is available today: 100% online applications, backed up in the cloud, with unlimited storage. No downloads and buggy updates required, no more concern over losing important documents due to computer crashes or viruses, and no more problems with online or offline storage. 

Shoeboxed is the ultimate expense and receipt-tracking app that helps accountants save time and hassle doing accounting, get reimbursed fast and maximize tax deductions. By receiving customers’ receipts by mail or scanned documents, Shoeboxed extracts the most important data to one organized place for easy and at-a-glance expense tracking. It allows customers to view and export their data anytime and organize them in their categorizations. Furthermore, Shoeboxed ensures that all customers’ receipts are legibly scanned, clearly categorized, and easily located. Used by millions of SME businesses worldwide, Shoeboxed proudly helps customers free their desks and drawers from paper receipts and brings the best solution in document storage for years!

2. Basic types of bookkeeping

1. Cash

There is nothing as basic as a cash account. Every business transaction – whether it is incoming or ongoing – will pass through a cash account. The more active the business is, the trickier it is to keep tabs on its cash flow. 

For this reason, many bookkeepers use two records (cash receipts and cash disbursements) to track the activities more closely. 

2. Accounts Receivable

If your business has a debt contract with customers that allows them to pay later (for example: a 30-day credit period), accountants must have an Accounts Receivable aspect to their bookkeeping. This account allows accountants to track the payment status, whether they have been collected or are still overdue. 

Accountants must pay attention to this account because if some orders get lost or slip through the nest, they may have to correctly make up the difference for the invoices for balance. Organizing this account is critical to send out up-to-date bills and provide the best customer service when it comes to payment. 

3. Inventory

All of the company’s products that are in stock must be accounted for in the inventory account. Regular stock takes should also be carried out to make a record of every item that is in stock. Then accountants can account for every penny that is currently sitting there waiting to be sold. Ensuring that you have accounted for everything is vital to accurately forecast how your business will perform over an accounting period. 

4. Accounts Payable

Account Payable is probably not everyone’s favorite because it allows you to see clearly whether what money is leaving for or what money has left the business and when. 

Like other types of bookkeeping, you need to take good care of this account so that your business will not make any late payments, you will not overspend and leave yourself short for the monthly outgoing. And most importantly, keeping an eye on this account ensures that you do not pay anyone more than once. 

5. Loans Payable

If your business has ever taken out any loans, you must manage them well in the Loans Payable account. This account will track and articulate everything that you still owe and the payments’ due date. 

6. Sales

This account tracks all your incoming revenue from your sales transactions. It records these transactions in a regular, timely manner, which is vital to know the true position of the business. You should not leave it for too long before you record sales, especially if you are getting a significant volume of orders per day because it is easy for things to be missed or mixed up. Some common mistakes are that sellers forget to send products to customers or that stock will not be updated in a timely manner.

7. Purchases

The Purchases account is where your bookkeeper tracks all materials or goods you have purchased for your business. This account is associated with the above Sales account. Both accounts are essential to calculate the Cost of Good Sold (COGS) and your business’s profit, so they both need to be accurate.

8. Payroll Expenses

Payroll is commonly the most considerable cost for business owners. It is crucial to keep this account up to date and accurate to pay employees the right amount each month, and to calculate taxes and other government reporting requirements. Not paying the accurate amount of tax can put you in deep trouble, so every accountant needs to make sure that you do everything properly. 

9. Retained Earnings

The Retained Earnings accounts record all money that is reinvested into the business from profits. Retained earnings appear as a running total of money that has been retained since the business started. It is simple to look after this account, and it is of great importance for investors and shareholders, who may require to see where their money is going and the business’s overall success. 

Final thoughts

Bookkeeping is one of the top priorities for the success and growth of any business. Therefore, always make sure that you don’t miss out on any component. Identifying and keeping an eye on these 9 basic types of bookkeeping helps you align your business’s important documents and promote efficient growth. 

Bookkeeping can be somewhat challenging for new accountants because there are too many things to remember and organize and too many documents that you need to review, store and organize frequently. No worries – we are here to free your desk from papers. Shoeboxed offers the perfect receipt organization solution. By turning your receipts into data, our method is the easiest way to protect and store your business’s important documents. ?Go paperless with accurate and verified data now!

Like what you read? Don’t forget to subscribe to the Shoeboxed blog for more interesting entrepreneur stories, DIY accounting and other financial knowledge. 

Bookkeeping For Entrepreneurs Best Practices

As an entrepreneur, to be honest, is good bookkeeping your priority when running your business? While it is not the most exciting work, organizing records and tracking transactions are essential parts of every business, however small it is. 

What should entrepreneurs know about bookkeeping? Are there simple tips on proper bookkeeping that business owners can follow? 

This article will help you to answer these questions.

Bookkeeping for entrepreneurs: A basic guide

1. Choose a business model

Before having your first books, as an entrepreneur, you should register your business and select a suitable business model that fits your needs. Depending on what you choose, the requirements for filing tax may be different and you don’t want to mess around by being ignorant. Many entrepreneurs start off as the only owners of their companies. Apart from the easy registration procedure, sole proprietorship also allows them to pay business taxes as part of their personal income tax. For those who would like a clear boundary between them and their business to avoid the risk of company debts, a limited liability company or a corporation can provide better legal protection. 

Although in these cases, separate tax filing tends to be a complicated process which makes bookkeeping more demanding with multiple financial documents to prepare, the tax benefits that they offer, including lower tax rates, are among the reasons for their popularity with entrepreneurs.

2. Adopt a suitable accounting and bookkeeping method

For aspiring entrepreneurs who are new to managing finances, taking on accounting and bookkeeping is quite a problematic quest, even to the bravest of all. They need a reliable map that guides them through this adventure. In other words, we can say that finding out an exemplary method for each task and being consistent with it is highly important. When it comes to accounting, there are two options to choose from:

  • Cash-basis accounting: To put it simply, under the cash accounting method, you record what you receive and pay right at the moment the money exchange occurs. It is quite straightforward, so even beginners can try this method to keep track of their business revenue and expenses.
  • Accrual-basis accounting: The timing of recognizing revenue and expenses in the accrual accounting method is not as immediate as in cash basis accounting. It documents revenue and expenses when transactions occur even if cash hasn’t been paid out yet. Since accounting for items such as unearned revenue and prepaid expenses is involved, many entrepreneurs find the accrual method helpful in providing an accurate portrait of a company’s profitability in the long term.

After deciding on an accounting system to stick to, you will also need to ensure you are doing proper bookkeeping. Tracking all business transactions by keeping every receipt and invoice in order is not easy work. But without it, you won’t be able to see the income and expenses of your business, let alone make informed decisions on financial matters. Most solo entrepreneurs may have the first-hand experience of becoming their own bookkeepers, and that’s certainly beneficial in several ways when the business owners acquire some bookkeeping knowledge. However, as their business grows and the bookkeeping workload increases, at some point, they won’t be able to manage it by themselves. 

The best possible option would be to have a full-time bookkeeper. Hiring a part-timer may cut down some fees, but nothing compares to having someone dedicated to the job and who knows your business. If you wish to integrate technology into accounting, it’s a good time to opt for a cloud-based solution. With a variety of accounting services available nowadays that help you to manage bookkeeping online by, for example, linking to your business bank account, you can save so much time on tracking transactions.

3. Track your expenses

One of the basics of bookkeeping is to track all business expenses. It involves developing a filing system for your receipts and financial documents, ranging from tax returns, bank and credit card statements, office bills (utilities, internet, phones, supplies, etc.) to receipts from travel, travel, and business meals. Keeping all that paperwork in place, either by storing its physical or digital copies takes a lot of effort as it is piling up every day. It will be too late to start preparing these records only when the tax season comes near. So ideally, you should organize everything regularly.

4. Monitor payment

As there are many payment options to meet the demand of both payers and payees, entrepreneurs need to develop flexible tracking methods to maintain good bookkeeping. If you are just used to paying by checks and cash and accepting paper receipts, you may need to consider other payment ideas to broaden your clients’ choices.

Credit card and debit card payments are becoming the norm, and we are also increasingly familiar with online payment. Managing all transactions manually will no longer suffice in this digital era, so businesses everywhere are going paperless and automating their bookkeeping process.

5. Know your tax obligations

As mentioned in the first section, tax requirements for each type of business vary based on how you register it. In fact, tax obligations also depend on other factors, such as different state regulations and characteristics of specific industries. Here are some typical taxes that most entrepreneurs will need to cover:

  • Self-employment tax:  If you start out as your own boss, this tax is obligatory because you will need it to pay your medicare and social security fees.
  • Employment tax: Once you become an employer, you are responsible for covering your employees’ Medicare and social security expenses through your contribution to employment tax.
  • Income tax: You can file your business tax as part of your personal income taxes if your company is a sole proprietorship. For complex entities like a corporation, business income tax is filed separately. A limited liability company provides an in-between option where you can choose to pay taxes either as your own or as a business cost.
  • Sales tax:  To collect the accurate amount of sales tax and submit it to the government, you need to refer to how your state of location regulates it. As a rule, sales tax is charged to the end-user of a good or service, so if your business is only part of the manufacturing chain, make sure to obtain a resale certificate to avoid paying the sales tax.

Why bookkeeping for entrepreneurs is important to know? 

  1. To manage budgets

Bookkeeping lets you know where and how much money is coming into or going out of your business. By keeping records of revenue and expenses, entrepreneurs can understand the financial situation of their business and look for ways to improve its overall performance. Specifically, business owners can evaluate how efficiently budgets are allocated at that moment based on past records, invest more in activities that are working well and make necessary changes to those that are not as profitable. Managing budgets and financial planning becomes easier when you have a functional accounting and bookkeeping system in place.

2. To prepare better financial reports

No one can underestimate the importance of financial statements in the business field. Accurate reports can tell your company’s financial health and play a crucial role in the decision-making process that dramatically impacts its growth. If there is a key to creating good reports, it must be the accuracy and reliability of the input data. This is when bookkeeping comes into play as its records contain precious raw data, which is then consolidated and analyzed in financial reports. Entrepreneurs will have to work with the following documents frequently, and even when they are not always supposed to write such statements, they must know how these are created and what bookkeeping records they use.

  • Income statement: The income statement reports the revenue and expenses of a business over a period of time, based on which you can see whether the company is making a profit or how much loss it is generating.
  • Balance sheet: The balance sheet shows details about a business’s assets, liabilities, and equity at a specific time. You will need this report to know whether what your company owns and owes are on balance.
  • Cash flow statement:  A cash flow statement gives you information about the cash and cash equivalents coming into and going out of your business. The cash flow may fluctuate daily, so it requires constant updates on everyday transactions.

3. To get ready for tax season

Keeping all the records organized will make filing your taxes so much easier. With every earning and expense accounted for, the preparations for tax season will go smoothly, and entrepreneurs can rest assured that they are compliant and ready for the visit of the IRS anytime.

Bookkeeping for entrepreneurs: Amazing tips!

We’ve combined some of the most amazing tips on bookkeeping for you right here! 

  1. Create a separate business account

To do proper bookkeeping, you may need to consider opening a business bank account different from your own, which helps you legally separate your business and personal finances. Even if your company is incorporated and you can pay business expenses with your personal account, this adds more complications to bookkeeping and claiming tax deductions. When the line between personal and business data is blurred, it won’t be easy to track the progress of your business and plan for the future. It is expert advice that you should also apply for a business credit card for the same reasons.

  1. Keep all receipts

Not only receipts but also invoices and proofs of all payments are needed to back up the validity of your tax deduction, which helps you reduce the amount of taxable business income. Providing such evidence is not a problem for credit card purchases because you can get receipts and bank statements every month as supporting documents. With cash expenses, the conventional way would be manually recording them in a notebook or spreadsheet while keeping the paper receipts for rechecks. Or you may wish to use an accounting app, snap photos of your bills, and store them safely in the cloud-like what Shoeboxed mobile app offers. Shoeboxed also helps you keep physical copies of crucial documents at your request.

  1. Digitize your financial data

The most apparent advantage of going paperless is probably saving space in your office. A digital bookkeeping system allows entrepreneurs to work more effectively with less paper to store and easily retrievable data. Since a growing number of businesses are now interested in this trend, it may be too late if you persist in the old way and resist changes. However, there are some vital paper documents that you will need to retain for legal purposes. Hence, it is best to keep both physical and digital copies of such records as contracts and licenses.

  1. Pick the right tools

Not many entrepreneurs are trained as accountants, so there is no need to use an accounting system that requires expert-level knowledge to begin. Do some research and choose a program to fit your business needs and bookkeeping practices. Similarly, you should pick the software whose features are compatible with your current system. For example, Shoeboxed’s receipt scanning and expense tracking services are designed to work well with major accounting programs like QuickBooks and Xero. The combination of these wonderful tools will help you finish the daunting work of data entry, categorization, and organization in no time!

  1. Take advantage of professional help

Although entrepreneurs can make do with bookkeeping and accounting to some extent, most businesses will need someone committed to the job if they are to thrive. Find a professional accountant who you can trust and let them be your best business partners. Learn from their specialized knowledge and experience to facilitate your plans. It is not always about financial reports and tax prep; a good accountant can offer insight into the business that helps to guide its development and success.

Conclusion

People say that a successful business should make a lot of money, but that is incomplete. A business can’t grow unless it manages the money earned well. More focus must be placed on adopting good bookkeeping practices. This is not a duty of only bookkeepers and accountants – entrepreneurs should be part of it too, for the sake of their company.