As a business owner there are many jobs that need to be delegated, you cannot do everything yourself, even if you try, some things simply require a specialised skill-set that you don’t possess and couldn’t even if you had a life time to learn; bookkeeping is not one of those things.
Although there are of course very many brilliant, qualified bookkeepers available to take on the task of keeping your company’s books for you and your accountant would doubtless also do it for a nice fee, the keeping of your business’ records is something that is arguably best left to you the business owner.
Many business owners however bulk at the idea of bookkeeping, usually citing ‘too little time’ as the reason; they prefer to spend money on outside intervention. If a business owner really does want to keep a tight control on their business, keeping its records themselves is the only way to go; it is only by entering its financial information everyday that a business owner will spot any potential difficulties before they arise.
Bookkeeping does not have to be difficult, it is after all, nothing more than a record of the financial transactions for your business; it can be a very simple exercise, using a spreadsheet or specially designed accounts software, it doesn’t really matter as long as the user is comfortable.
One of the most common types of bookkeeping talked about is ‘double entry bookkeeping’; which immediately sounds like an incredibly complex system, and indeed it is something that has to be learned, but once mastered it is a very useful system. Quite simply this system enters each transaction twice once as a ‘debit’ and once as a ‘credit’, each transaction will appear as both a credit and a debit.
There are five categories in bookkeeping that are used to sort the types of entries made, ‘Assets’, which are gains such as purchases, things you acquire for the business; ‘Liabilities’ sums owed to others; ‘Owner’s Equity’, the net worth of a business, which is the amount of the assets once the liabilities have been deducted, ‘Income’ which refers to sales revenue and other money coming in to the business and finally ‘Expenses’ money being paid out.
Strangely the convention in bookkeeping is to reverse the credit and debit terms from the way they are usually viewed, on for instance, a standard bank statement, so that when assets increase the asset account is ‘debited’, and when they decrease a ‘credit’ is made to the account, so it follows that an increase in a liability will correspond to a credit on its account and a decrease a ‘debit’.
An increase in ‘Owner’s Equity’ produces a credit to the account and a decrease a debit. The same is true of ‘Income’, when income increases the account is credited and debited when it decreases, which of course means that an increase in ‘Expenditure’ causes the account to be debited and credited for a decrease.
The main reason for the existence of ‘double entry bookkeeping’, is to keep account of not just the sums involved in a business transaction, but the results produce by those transactions, so that one is able not merely to see what money is coming in and out, but why and what is happening to it; it also acts as a double check so that important transactions don’t disappear through the cracks.
Once you understand what to enter and where to enter it, bookkeeping should be a very simple part of the day to day running of your business.