The 9 Bookkeeping Basics Every Bookkeeper Should Know
Start your bookkeeping career the right way with these nine bookkeeping basics for beginners!
Bookkeeping Basics 101: 9 Bookkeeping Basics for Beginners
Assets are the things the business owns.
Tangible and intangible assets are part of the Balance Sheet. Intangible assets include royalty and goodwill, while tangible assets include the following:
- Cash Account – This is the cash on hand and cash on banks.
- Marketable Securities Account – This covers all cash equivalents such as government or corporate bonds.
- Accounts Receivable – This is the money to be collected from customers for the products they purchase and services they purchase or avail. Bookkeepers carefully track and update this to ensure they send accurate invoices or bills on time.
- Inventory – These are the products not yet sold, which business owners should always keep track of. Previously recorded inventory should be regularly reviewed against the current inventory on hand through manual counting.
- Fixed Assets (i.e., properties and equipment)
Liabilities are what the business owes. This includes short- and long-term debts: accounts payable and loans payable (current and non-current):
- Accounts Payable – This is what the business owes to its suppliers. Bookkeepers need to work diligently to pay suppliers on time or even earlier, which can qualify the business for a discount.
- Loans Payable – This account keeps track of the current and non-current loans the business incurred. These loans are usually when the company borrows money to buy property, equipment, or vehicles necessary to operate.
Liabilities are also part of the Balance Sheet.
Equity refers to the ownership of the business owners and investors in the company. In the Balance Sheet, the equity accounts cover all the claims they have over the company.
Equity includes the investment the business owner/s put in as well as the other investments the company made.
Owners’ equity monitors the amount the owners and investors put into their business.
4. Single-Entry Bookkeeping
The single-entry system is one of the two main types of bookkeeping. This works for sole proprietors and small business owners who deal with minimal and uncomplicated transactions.
In single-entry bookkeeping, you record earnings and expenses upon incurring them. The following documentation also comes with this type of bookkeeping:
- Cash Disbursements Journal – Where you record the expenses the business pays for
- Cash Sales Journal – Where you record the business’ revenues
- Bank Statements – The documentation you use to check transactions to avoid error in the journal entries
5. Double-Entry Bookkeeping
The double-entry system is the second type of bookkeeping. This works for any business size with complex transactions.
In this system, each transaction has at least two entries: debit and credit. Bookkeeping software, such as QuickBooks, uses the double-entry system.
6. Cash Basis of Accounting
If you’re doing simple bookkeeping for a small business or you’re operating a one-person business, applying the cash basis of accounting is ideal. Here, you record each transaction whenever cash changes hands.
Each business transaction passes through the Cash account. Bookkeepers use two kinds of journals to track the activity: the Cash Disbursements and Cash Receipts.
Cash covers both physical and electronic money (such as transferred funds). Some businesses start off by using the cash basis and as they grow, they shift to the accrual basis of accounting.
7. Accrual Basis of Accounting
Growing businesses that offer credit to customers or request credit from suppliers use the accrual basis of accounting. Here, sales and purchases are immediately recorded even if there’s no exchange of cash involved until a later time.
Bookkeepers apply the accrual basis of accounting when tracking the accounts receivable and accounts payable.
Bookkeeping Basics: How to Balance the Books
The first three basics of bookkeeping discussed above are what you’ll find in the Balance Sheet. To balance the books, you need to carefully monitor the assets, liabilities, and equity.
You also need to ensure that all transactions concerning these three are correctly recorded in the right journal or document.
Bookkeepers use a formula called the accounting equation to make sure the books always balance:
Assets = Liabilities + Equity
In this formula, you balance what the business owns (assets) against the business claims (liabilities and equity).
Liabilities cover all the payables or debts to creditors and suppliers — that is, the money owed to them. Equity covers the investment or capitalization that business owners put into the business.
8. Income Statement
Aside from the Balance Sheet, bookkeepers also create the Income Statement. This covers the revenue, costs, and expenses of the business.
Revenue refers to all the income that comes into the business after selling products and services. The sales account monitors all the income or revenue.
It’s critical to record sales in an accurate and timely manner as it helps business owners determine how well their business is doing.
Costs are also known as cost of goods sold (COGS). This refers to the money spent to purchase or manufacture the products or services the business sells.
Bookkeepers track the materials and goods purchased for the business in the purchases account. You use this to calculate the COGS, and you subtract it from sales to determine the company’s gross profit.
Expenses refer to the money used to run the business but aren’t related to products or services. For instance, one of the items under the expense account is salary or payroll expenses.
It’s important to keep payroll expenses accurate and updated to ensure the business meets legal requirements.
As with the Balance Sheet, bookkeepers are also responsible for tagging transactions under the right accounts in the Income Statement.
9. Retained Earnings
In the retained earnings account, bookkeepers monitor any profit the company makes that isn’t paid out to owners and investors.
Retained earnings accumulate, meaning they reflect the total amount of money retained since the company’s launch. If properly updated, it doesn’t take much time to manage this account.
Keeping the retained earnings account up-to-date is important for investors and lenders who need to track the company’s performance over time.
Knowing these nine bookkeeping basics is essential for any bookkeeper to perform their job well. They apply to almost any business type and size, which makes having these basic bookkeeping skills valuable.
To better understand these concepts and how to apply them, take bookkeeping courses that will allow you to practice them. Making an effort to hone these skills gives you more confidence in your bookkeeping career.
What other bookkeeping basics do you want to learn? Let us know in the comments section below!