What actually is book-keeping?

Kirsty Young Advice and Tips

Oddly, what book-keeping (or bookkeeping, take your pick) actually is, isn’t as easy to explain as you’d think. If you ask most people about book-keeping, they will probably list various tasks they think book-keepers do, such as:

  • Organising paperwork
  • Entering data
  • Keeping receipts

However, true book-keeping for a small business is far more detailed.

 

The joy of double entry book-keeping

At the heart of good book-keeping is the creation of a set of ‘double entry’ records. Hence the phrase double-entry bookkeeping! This means for every transaction you enter, it appears in two different places in your financial records. (You may hear this referred to as the ‘debit and credit’ system).

Modern software such as Xero or QuickBooks will do double-entry for you behind the scenes. For example, if you made a bank payment to Vodafone for your mobile phone bill, entering it in your software system and categorising it as ‘telephone’ would:

1) Enter the transaction in the bank (as a payment out)

AND

2) Show the transaction in your ‘Profit & Loss Account’ as a telephone cost.

The software system has entered a ‘debit’ and a ‘credit’. In contrast, unless it is custom designed to do so, a spreadsheet will not do double-entry. It will just record income and expenses.

 

The danger of trusting the software; where most owners go wrong

The main issue our small business book-keepers and accountants see when reviewing a set of business records inside software, is that the balances the reports show are not accurate.

Whilst you can enter any transaction, you need to check each balance matches the real-life situation. For example, does your bank account statement match the balance in the software? If you don’t check your real figures, there will be a high chance the reports will not be correct.

This process of checking these balances is referred to as ‘reconciling’ the balances. This is where the true skill in book-keeping lies.

The goal is to know that every balance is correct. For example, if you print a report that shows who you owe money to on a certain date, that should reflect the reality of who you owe what to. It seems simple but it is all too easy to make a basic mistake or omission, that throws your figures out as a result. As the saying goes – GIGO – put garbage in, get garbage out.

To see how you can spot mistakes in your records, check out our blog where we go through 3 easy ways to check your book-keeping.

 

The power of good book-keeping

Having current, up to date and accurate book-keeping can truly transform your small business. With good records you can:

  • Know who owes you money
  • Know who you owe money to
  • Know where you are in terms of profit (or loss!)
  • See the overall position of the business
  • Use the data to make solid financial decisions

The top 2 points are absolutely the ones that will have most impact on you, as a business owner. We’ve worked with countless businesses over the years, helping to establish up to date, fully reconciled book-keeping records (in software) to help solve cashflow challenges. You would be amazed the amount of money we’ve ‘found’ for clients where they just didn’t know someone hadn’t paid them!

 

Need help with your book-keeping?

We’re here for you. If you don’t have a book-keeper, or are not sure how much book-keeping your current accountant does for you (or not), we’d love a chat about how we can help.