What Is Bookkeeping?

Bookkeeping involves tracking your business’s financial transactions, including both income and expenses. Businesses use these records to prepare financial statements, assess cash flow, file tax returns and gain the insight needed to make informed decisions.

What is bookkeeping?

Bookkeeping is a process that tracks and records business-related financial transactions. Bookkeepers gather information from bank and credit card transactions, invoices, receipts, bills, payroll records and other sources, often recording the data in bookkeeping software. This information can be used to assess a business’s assets, liabilities, revenues, expenses and cash flow.

Bookkeeping is essential for businesses of all sizes, as it allows them to prepare accurate financial statements, file tax returns and make informed financial decisions. These reports are also essential when businesses want to apply for business loans or grants.

What does a bookkeeper do?

A bookkeeper lays the foundation for accounting by ensuring that all financial transactions are accounted for. This allows business owners and their accountants to see at a glance how much money is entering and leaving the business.

Here are a few tasks a bookkeeper may do:

• Data entry and recordkeeping: Bookkeepers record financial transactions, including both income and expenses like advertising, rent, utilities and employee salaries.
• Reconcile accounts payable and receivable: Bookkeepers track accounts payable (money the business owes) and accounts receivable (money owed to the business). This helps ensure that the company’s bills are paid on time and receivables get followed up on and collected in a timely manner.
• Plan for taxes: Bookkeepers may help business owners with business tax planning by estimating their tax liability. They may advise business owners on estimated payments and payroll tax management.
• Update financial reports: Most modern accounting software allows bookkeepers to generate essential financial statements, including balance sheets, profit and loss statements, income statements and cash flow statements.
• Reconcile bank and credit card statements: The bookkeeper compares the balances in the company’s books against bank and credit card statements to ensure they match. If there are discrepancies, they make adjustments and prepare reconciliations.
• Invoicing: Some bookkeepers create invoices and send them to customers.

How much does a bookkeeper cost?

The cost of hiring a bookkeeper varies significantly depending on your business’s needs.

You can hire a full-time or part-time bookkeeper in-house. According to Salary.com, bookkeepers have an average salary of $44,151 and an average hourly rate of $25. In addition to the employee’s salary, you’ll also want to account for your employee’s taxes and benefits.

Business owners can also work with virtual bookkeeping agencies or contractors. Costs can vary significantly depending on the contractor you work with and the scope of work involved. Some contract bookkeepers charge hourly, while others may offer flat-fee monthly packages. These packages often start at around $500 to $750 per month, and up to several thousand monthly.

How do I know if I should do my own bookkeeping?

Some business owners choose to handle their own bookkeeping. Accounting software has made this easier to do than ever before, with features that allow for automated data syncing from credit card or bank accounts.

Business owners may be best suited to tackle their own bookkeeping if they meet the following conditions:

• They understand basic bookkeeping practices and are confident they can maintain them.
• They have the required time to keep up with bookkeeping tasks.
• Their business’s finances are relatively straightforward and easy to track.

Business owners may want to consider hiring a bookkeeper, however, if they’re unfamiliar with standard bookkeeping practices or struggle to stay on top of regular financial tracking tasks. If you may need help calculating quarterly estimated payments, categorizing expenses or ensuring that your books “stay in order,” it’s best to work with a dedicated bookkeeper.

Bookkeeping vs. accounting

Some business owners might use the terms bookkeeping and accounting interchangeably, but there is a difference. Bookkeeping is more transactional — concerned with recording and organizing financial transactions. Accounting builds on the information provided by bookkeeping, using it to analyze costs, assess a business’s financial health and make financial forecasts.

Bookkeepers don’t need specific licenses, certifications or formal education. While some bookkeepers earn credentials — such as becoming a QuickBooks ProAdvisor to demonstrate their proficiency in the software they use — they typically hone their skills with on-the-job training.

In contrast, many employers prefer that accountants have a bachelor’s degree, though you don’t technically need a degree to become an accountant. They may also pursue certifications to expand their skill set and demonstrate their expertise, including completing the education, work requirements and exams to become a Certified Public Accountant (CPA).

Bookkeeping key terms

Terms to know when tracking your business finances include:

• Profit margin: Profit margin is a measure of a company’s earnings relative to its revenue. It’s calculated by dividing gross profit by revenue and multiplying the result by 100.
• Assets: An asset is a resource with economic value, and businesses own assets with the expectation that they will provide a future benefit. Examples include cash, receivables, inventory, real estate, equipment and intellectual property.
• Liability: A liability is a financial obligation that a business owes to another business or individual. Examples of liabilities include accounts payable, accrued expenses and notes payable.
• Equity: Equity is the book value of the business attributable to its owners or shareholders. It’s calculated by subtracting all of the business’s liabilities from its total assets.
• Accounting equation: The accounting equation is a fundamental element of double entry accounting. It states that Assets = Liabilities + Shareholder’s Equity — or, to put it another way, Assets – Liabilities = Shareholder’s Equity.
• Income statement: An income statement is a financial statement that shows the company’s income and expenses over a given period.
• Business debt statement: A business debt statement (also known as a business debt schedule) that lists the company’s monthly debt payments in order of maturity, in the form of a table. It helps the business make informed decisions about cash flow, paying off debt and taking on more debt.
• Double entry bookkeeping: Double entry bookkeeping is an accounting method that involves documenting every financial transaction as a credit and a debit in two different accounts. If you purchase equipment for your business, for example, it may be tracked as an increase in inventory but a decrease in cash assets.

Cash basis vs. accrual bookkeeping

There are two methods typically used to keep a company’s books: cash basis accounting and accrual accounting.

5 reasons to practice good bookkeeping

There are multiple reasons why business owners should practice good bookkeeping, whether they tackle it themselves, hire an internal team member or outsource the work to a contractor. These reasons include the following:

• You may need a loan in the future. Most business lenders require detailed financial reports for loan approval, often including a profit and loss statement.
• Your team can monitor and optimize cash flow. Accurate and updated financial records that track income and expenses can help you better assess your cash flow. You can use this information to make budgetary and financial planning changes to improve cash management.
• You can provide transparent reports to investors. Dedicated bookkeeping makes it easy for business owners to provide transparent reports to investors and key stakeholders.
• You’ll be ready for tax season. Organized financial reports can help business owners calculate their tax liability more accurately throughout the year.
• You’ll be ready for the IRS. No one wants to be audited, but if the IRS comes knocking, you want to be ready. Careful bookkeeping can protect your business, especially with the IRS potentially reviewing multiple years at once during an audit.