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Bookkeeping forms the foundation of all the financial processes of a business. Accurate bookkeeping is as important as finding the right strategy to turn an idea into a successful venture.
Any mishaps in bookkeeping will set you up for a tremendous financial loss.
Managing your business finances can be daunting when you’re just starting out. Yet, it’s crucial to get the financial process sorted right from the start.
Luckily, living in the era of fintech revolution, businesses can automate their finances, end-to-end.
In this blog, we are going to cover everything you need to know to get started & automate your bookkeeping.
First things first.
What is bookkeeping?
Bookkeeping is defined as keeping an accurate record of day-to-day financial transactions.
Be it a kirana store or a unicorn; bookkeeping is important for businesses of every size & revenue. It ensures that businesses stay up to date with their financial transactions & assess where the business is heading.
It allows businesses to have a birds-eye view of their income & expenditure at any specific point of time.
- Purchase and sale of goods and services
- Petty cash inflow and outflow
- Monthly expenses like rent, electricity, salaries, taxes, etc
- Advances paid to any vendor or as loan to a third party
- Advances received from third parties
As a business grows, it becomes important to keep track of every rupee spent to accurately measure the performance of a business. Bookkeeping provides critical financial information that helps business leaders make strategic decisions & alter their business plan to unlock new levels of revenue & income.
What is the difference between bookkeeping & accounting?
To put it in simple terms, bookkeeping is the starting point of accounting.
Traditionally, bookkeeping was limited to maintaining a company’s book. A bookkeeper’s job was to only record the transactions. An accountant’s job, on the other hand, was to adjust the entries, analyse the data & prepare comprehensive financial reports & statements.
Now, bookkeeping & accounting have converged into one.
With the advent of finance automation software, managing bookkeeping & accounting is no more a two person’s job. Any finance professional can enter the details of invoices, purchase orders, etc. The software then automatically reconciles the data, adjusts the entries, and updates the accounts to create financial reports.
[Suggested Read – A 7-step checklist to help you wrap up FY 2020-21 error-free]
Single entry v/s double-entry bookkeeping
Single entry bookkeeping refers to recording a transaction only once in the journal. Small businesses use this to keep a daily or weekly record of cash flow. This method is ineffective as it doesn’t allow accurate vetting of financial transactions.
Here’s an example –
Suppose, you are a business owner and have Rs 10,000 cash in your hand as on 1st of December 2020. Till 31st December, you have following inflows and outflows.
- Salary payments of Rs 4,500 to your office staff
- Received Rs 3,000 as an advance from a customer
- Purchased a table fan of Rs 1,000 for your office
Here’s what your single entry bookkeeping system will reflect.
|Date||Particulars||Value (in Rs)||Cash balance in hand|
|Debit (Dr.)||Credit (Cr.)|
|1st Dec||Rs 10,000|
|3rd Dec||Salary paid to office staff||Rs 4,500||Rs 5,500|
|14th Dec||Advance from a customer||Rs 3,000||Rs 8,500|
|21st Dec||Purchased a table fan||Rs 1,000||Rs 7,500|
Although this method reflects current balance in your books but does not provide the bifurcation of transactions into expenses, fixed assets or advances. You will have to pass a different entry of all these transactions to provide an accurate financial report.
Double-entry method overcomes this problem
In this method, each financial transaction is recorded twice, in two different categories – debit and credit. Here, every debit entry in an account should be equal to the corresponding credit entry in another account. If not, it leads to accounting errors in the books, like the error of omission or error of commission & requires a check.
In accounting, every business transaction follows the equation of Asset = Liability + Equity. By recording both these, i.e., the credit & debit, this equation will be balanced.
To understand this better, let’s use transactions from previous examples. Under the double-entry bookkeeping method, the following entries will be passed.
Salary payments of Rs 4,500 to your office staff
Salary A/C Dr. Rs 4,500
To Cash A/C Cr. Rs 4,500
Here, salary is reported as an expense under Profit & loss Account and cash account is debited with the same amount. This way, businesses do not have to pass two entries to record one transaction and can get accurate financial reports.
Bookkeeping, back in the day
Before the days of finance automation, businesses recorded their day-to-day transactions manually. The traditional way of bookkeeping required maintaining separate journals for sales, purchases, etc., by hand.
The different transactions were then matched with separate accounts (ledgers) like sales, employee expenses, loan payments, etc. Each account’s balance was calculated manually to prepare financial reports.
Maintaining such sensitive financial data in physical books or spreadsheets is inefficient & risky. It’s prone to human error & requires a lot of manual bandwidth which can be better utilised in scaling the business.
Till date, small businesses with fewer transactions use the manual methods but are slowly warming up to the idea of automated methods.
The era of automation
Automated bookkeeping software provides a smart way of recording financial transactions, right from vendor payments to employee expenses.
It automates the categorisation of your transactions, reconciles your bank statements & prepares actionable financial reports.
While the software automates the repetitive bookkeeping tasks, finance professionals can invest more time in interpreting the financial statements & reports. Finance automation frees them from tedious manual tasks & puts them in control of making key business decisions.
Bookkeeping is a crucial, yet small piece of your overall company’s finances. We at RazorpayX are empowering businesses to manage their entire finances from a single platform with our business banking solution.