Understand Bookkeeping Vs. Accounting
Bookkeeping is needed to keep record of your day-to-day business transactions. Raw financial data is gathered here so that it can be compiled, analyzed and interpreted through accounting processes.
- Bookkeeping = Inputting transactions in a structured, organized manner.
- Accounting = Analysis and interpretation of transactions.
E.g. You bought a new computer for $2,500 and a desk for $500 for your business. From a bookkeeping perspective, both items are capital assets. However, from an accounting perspective, a company policy can set a minimum dollar amount for capital purchases (e.g. $1,000). According to this policy, the desk would be expensed in the year of purchase. This will result in a decrease in taxes payable for the fiscal year.
All businesses need bookkeeping
- For tax purposes: Without proper business records, calculating taxes will be difficult and you may be subject to penalties and interest, or be denied tax deductions.
- To monitor cash flow: Without record keeping, sales may not be invoiced, invoices may not be collected, suppliers may be paid twice, and expenses may not be recorded. At a minimum, all bank transactions must be recorded (the “cash-basis” accounting method).
- To scale up: If outside funding is needed in the form of a loan or investment, financial statements and projections will be required. Bookkeeping data will be used by certified accountants to generate financial statements.
E.g. Cynthia is speaking with angel investors. They want to see her company’s financial statements. She is supposed to bring a set of financial statements that include:
- Balance sheet
- Income statement
- Cash flow statement
* FYI: The three statements above can have alternate names. This is most common with Publicly Traded or Multi-National Corporations.: IAS 1
Many start-ups and small businesses delay implementing proper bookkeeping, but this is a mistake. There are several ways to make bookkeeping less painful, using tools like cloud software can help.
Created by Novus Accounting & MoneySherpa