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 to new founders. But it’s crucial to get the financial process sorted right from the start. Luckily, living in the era of the fintech revolution, businesses can automate their finances, end-to-end.
Every successful business owner needs to know what accounting is and how bookkeeping works, to ensure powerful, informed decision making.
Table of Contents
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 bird’s-eye view of their income & expenditure at any specific point in time.
In its entirety, bookkeeping is a record of Accounts Payable & Accounts Receivable. To break it down in simpler terms, here are a few significant transactions that it keeps a record of –
- 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 plans to unlock new levels of revenue & income.
Bookkeeping vs 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.
With the advent of finance automation software, managing bookkeeping & accounting is no more a two-person 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.
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.
The single entry system of accounting reflects the 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.
The 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 & which requires a check.
Cash Based vs Accrual Based
Depending on when businesses recognise revenue and expenses, they can choose to follow either the cash-based or accrual-based method.
Under the cash based method of bookkeeping, businesses only recognise revenue and expenses when there is cash involved in the transaction. Credit transactions are not recognised until they mature and bring or remove cash from the business.
This method works better with the single entry system of accounting which maintains a cash book for all transactions involving cash.
The accrual method is best suited for double entry bookkeeping which takes into consideration transactions which do not involve cash as well. Revenue and expenses are recognised as soon as they are made.
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 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 repetitive bookkeeping tasks, finance professionals can invest more time in interpreting financial statements & reports. Finance automation frees them from tedious manual tasks & puts them in control of making key business decisions.
New-age Business Banking in the same way has helped shape the financial operations of businesses today significantly.
- One-stop banking solutions platforms like RazorpayX allow business owners to open current accounts, pay taxes, schedule payments, pay vendors seamlessly and check invoices from a single dashboard. This saves valuable time and effort.
- It is an accounting and banking platform that fills the gap between advanced banking solutions and finance professionals. It allows easy accounting software integration.
- With RazorpayX Payroll, businesses can automate salary payments and provide insurance policies to their employees.
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.
Frequently Asked Questions
What is bookkeeping?
Bookkeeping is defined as keeping an accurate record of day-to-day financial transactions.
What are the two types of bookkeeping?
The two types of bookkeeping are: 1. Single-Entry bookkeeping 2. Double-Entry bookeepiing
What is bookkeeping vs accounting?
Bookkeeping is the beginning of accounting. Bookkeeping focuses on recording and organizing financial data. Accounting is the interpretation and presentation of that data to business owners and investors.
