What is Bookkeeping?
Bookkeeping is the process of recording all financial transactions that take place in a company. A company makes various financial transactions through expenses incurred and the revenues generated, which all must be recorded. This recording helps the company understand the patterns of costs and sales while also aiding in forecasting and decision-making. The financial data recorded by a bookkeeper is used to develop financial statements such as a profit and loss statement, balance sheet, income statement, cash flow statement, and others. Bookkeeping is an integral part of every company and must be done with great care. The following are some bookkeeping basics that should not be ignored!
Cash
Cash accounts include all the money that is in-hand and has been received from various sources. Be sure that the account includes only the amount that has been received, not transactions that are pending. For example, a check that has yet to clear cannot be added to the cash account. Bookkeepers generally maintain two journals: Cash disbursements and cash receipts.
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Accounts Receivables
Some customers do not make payments immediately. Some business operations require that the customer pays at a later date. Accounts receivable includes the amount yet to be received reflected against the products or services that will be delivered to the customer. Simply put, this is the money due from customers who have received products. It is important to note that accounts receivable only include the income that the company is guaranteed to receive.
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Inventory
A company must always have raw materials and finished products present to meet unexpected demand. This stock is called the inventory. These items are tracked, and their value is included in the inventory account. A bookkeeper must calculate the worth of all inventory efficiently. This assists in reordering raw materials at the proper times and ensures that goods are not lost or forgotten in the warehouse.
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Accounts Payable
Accounts payable is a company’s money to an outside source, such as a supplier. This money is paid for a service received. For example, a company has ordered raw material from a supplier, and the goods have been received. The company now owes money to the supplier, which is added to accounts payable. Think of this record as the reverse of accounts receivable. An accurate representation of accounts payable helps the company clear payables on time, ensuring strong relationships with suppliers.
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Owner’s Equity
An owner’s equity account is one of the most important accounts, as it includes the amount pooled by each owner into the company. One person typically owns small businesses, and the profit is enjoyed by him only. However, for large-scale companies, the company must pay dividends to shareholders. This account includes the funds invested in the businesses and tracks all money that has been drawn out. It is crucial that his account be carefully managed as it determines the profitability of the shareholders.
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Retained Earnings
After paying the dividends and clearing the payables, the company may be left with some money which is called the Retained Earnings. It is a cumulative account which means the value shown on the account is the total money retained by the company since its start. The account is easier to manage because it does not require any clearing. It is an essential account as it is of interest to potential investors and lenders who may want to invest in the company.
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Sales
The sales account is of utmost importance to a company. It includes all incoming revenues from product and service sales. It is vital to record sales on time because busy companies often lose track of receipts. The sales account determines a company’s ability to sell its products to target customers. Additionally, the sales account may be credited against cash or accounts receivables, depending upon the terms of the sales.
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