Bookkeeping is the heart of every small business’s finances. It is almost impossible to track how well your business is doing without bookkeeping services.
Here are key things to note to ensure your business has an effective bookkeeping process.
Understand the Role of a Bookkeeper
Bookkeeping entails identifying, recording, and reporting financial transactions. Your business’s financial transactions include purchasing items from vendors, invoicing clients and customers, processing payroll accounts, issuing receipts, carrying out bank and credit card reconciliations, or writing off obsolete inventory.
Accountants can work as bookkeepers and may be more skilled to perform more sophisticated tasks, such as sub-ledger to general ledger reconciliations, accounting system reconciliations, and financial management reporting.
A bookkeeper ensures financial transactions are recorded accurately, and your financial books are balanced.
When hiring a bookkeeper, key competencies to look out for are attention to detail, proficiency in bookkeeping tools, accounting knowledge, integrity, and numeracy.
Have a Standard Accounting Process
Accounting for business earnings can be done using cash or accrual accounting methods. Generally, the accrual accounting method is a more effective process for recording and reporting business income and expenses.
Under the accrual accounting method, you can record revenue when you have delivered a product or service to a client or customer, regardless of whether there has been an exchange of cash.
When this occurs, your accounting records will include an accounts receivable account to record the credit sales of goods and services.
Likewise, you can claim business expenses when you incur them, even if you have not paid for them. This allows an accurate match of revenue to costs for profit recognition.
Practice Accurate Record Keeping
Every business transaction that results in financial impact must be recorded during your business’s bookkeeping process. Examples of bookkeeping records and supporting documents include:
- Bank statements
- Receipts from vendors
- Sales documents
- Payroll runs
- Rent/lease payments
- Tax documents
Storing physical and digital copies of business and financial transactions is also essential.
The Canada Revenue Agency (CRA) requires businesses to keep their records for at least six years. After filing your tax return, the CRA can request an audit of your supporting documents.
A good bookkeeping process gives your business an organized repository of documents and accounting transactions for a seamless CRA tax audit.
Connect the Dots to Your Bottom Line
Bookkeeping ensures you report your everyday business transactions and keep records for financial management purposes. Bookkeeping allows you to prepare financial statements that show how much revenue your business makes in a period.
Your invoices and receipts recorded during bookkeeping provide the information you need to report an income statement showing your cost of goods sold (COGS), gross profit, operating expenses, and net income.
With your financial records, you can also prepare a balance sheet that shows your financial assets and liabilities at a given time. This financial statement will include records on business properties and equipment, cash in the bank, inventories, monies your clients owe, loans from the bank, monies you owe vendors, and how much you have invested in your business.
A cash flow statement is also an essential financial statement your business needs. You can prepare a direct or indirect cash flow statement to show cash inflow from customers and cash outflow for vendors, payroll, and taxes.
Your financial statements help you measure how well your business is doing and understand your financial performance over time.
Use Accounting Software for Automation
Depending on the size of your business, accounting software can aid in an effective bookkeeping process. Manual bookkeeping can result in accounting errors, and bookkeeping software enhances the process.
Bookkeeping software can be bespoke, purchased off-the-shelf, or online. Examples of bookkeeping software include Xero, Sage, and Quickbooks Online.
Hiring an accountant to assist your business with bookkeeping and taxation can be beneficial for your business. Periodic bookkeeping helps companies identify accounting errors and prevent theft. Monthly bookkeeping processes are crucial to identifying issues and resolving them on time.
DW & Associates Chartered Professional Accountants help clients set up and manage an effective bookkeeping process that covers accounts payable, accounts receivable, invoicing, and payroll management. Contact our team of accountants for a consultation.