What Is Bookkeeping?
Bookkeeping involves tracking and recording the daily financial transactions of a business. Businesses then use those records to prepare financial statements, file tax returns and gain the insight needed to make informed financial decisions.
Bookkeeping definition: 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, then summarizes it into reports that show the business’s assets, liabilities, revenues and expenses.
Bookkeeping is essential for businesses of all sizes, as it allows them to prepare accurate financial statements and file tax returns. Using the reports generated by a bookkeeper, business owners and leaders can apply for business loans or grants and make more informed business decisions.
There are two methods typically used to keep a company’s books: cash basis accounting and accrual accounting.
| Cash | Accrual | |
|---|---|---|
| Definition | Recognizes income and expenses when money changes hands. | Recognizes revenue when earned and expenses when incurred, regardless of when cash changes hands. |
| Example | A business sends an invoice for work completed on Dec. 20, 2022, and receives payment on Jan. 15, 2023. The bookkeeper recognizes the revenue in 2023, since that’s when they received the money. | A business sends an invoice for work completed on Dec. 20, 2022, and receives payment on Jan. 15, 2023. The bookkeeper recognizes the revenue in 2022, as that’s when the business earned it. |
| Best for | Small businesses that don’t carry inventory or have significant payables or receivables. | Businesses that issue Generally Accepted Accounting Principles (GAAP) financial statements, carry inventory and have significant payables and receivables. |
Bookkeeping vs. accounting: What is the difference?
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, accountants typically have, at a minimum, a bachelor’s degree in accounting. They may also pursue certifications to expand their skill set and demonstrate their expertise.
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 income from sales of products or services 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 and making quarterly estimated tax payments.
- Update financial reports: Most modern accounting software allows bookkeepers to generate essential financial statements, including balance sheets, 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 see if they match. If there are discrepancies, they make adjustments and prepare reconciliations to account for those discrepancies.
- Invoicing: Some bookkeepers create invoices and send them to customers.
Learn more about accounting best practices.
Bookkeeping key terms
Check out these basic bookkeeping definitions, so you can start speaking the language of business.
- 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; 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.
Frequently asked questions
What are common bookkeeping tasks?
Bookkeepers reconcile all balance sheet accounts to ensure that amounts included in each account are valid, and that all revenues and expenses are accounted for.
Other common duties include:
- Categorizing expenses
- Recording bill payments
- Reconciling bank and credit card statements
- Applying payments to outstanding invoices
- Summarizing financial information reports
- Tracking accounts receivable and accounts payable
- Managing inventory
What is an example of bookkeeping?
One example of a task a bookkeeper might perform is categorizing expenses. Most modern accounting software connects to a business bank account and automatically pulls transactions from the bank account into the software; however, the software doesn’t always know how to categorize those transactions.
A bookkeeper will review the transactions pulled from the bank feed and classify expenses, such as fees paid to independent contractors, advertising and marketing expenses, utilities and office supplies, among others. They’ll also attach receipts or other support to each transaction to ensure that the business has the right documentation in place if it’s ever audited by the IRS or a state tax authority.
What is the best bookkeeping software?
Choosing the best bookkeeping software for a small business isn’t one-size-fits-all, since each company has unique needs.
That said, QuickBooks Online regularly receives high marks in rankings of the best accounting software for small business due to its ease of use, wide variety of features and support for hundreds of add-ons and integrations with other applications. Other good options include Wave, Xero, FreshBooks and Zoho Books.
How do I know if I should do my own bookkeeping or not?
Many small business owners start out doing their own bookkeeping because they don’t want the added expense of hiring a professional while they’re trying to get the business off the ground. However, most business owners aren’t skilled at bookkeeping and don’t have the time to do it well.
If you find yourself strapped for time, paying late fees or penalties because you can’t stay on top of your business finances or falling behind on your books, it’s probably time to outsource the job to a bookkeeper.
You don’t have to hire a full-time bookkeeper for your business if cost is a concern. Many bookkeepers work on a part-time or freelance basis. You can also look into bookkeeping services that offer flat-rate monthly pricing.