Before we jump into establishing a bookkeeping system, it’s helpful to understand exactly what bookkeeping is, and how it differs from accounting. Bookkeeping is the day-to-day process of recording transactions, categorizing them, and reconciling bank statements.
Accounting is a high level process that looks at business progress and makes sense of the data compiled by the bookkeeper by building financial statements.
As a new business owner, you’ll need to determine which bookkeeping method to use:When your business is big enough you can opt to hire an in-house bookkeeper and/or accountant.
With so many options out there, you’re sure to find a bookkeeping solution that will suit your needs.
Business owners need to determine whether they’ll use the cash or accrual method of accounting. Let’s take a look at the difference between the two methods here:
Cash Method: Revenues and expenses are recognized at the time they are actually received or paid.
Accrual Method: Revenues and expenses are recognized when the transaction occurs (even if the cash isn’t in or out of the bank yet) and requires tracking receivables and payables.
Technically you are required to use the accrual method; but to simplify things, you can use the cash method throughout the year and then make a single adjusting entry at year end to account for outstanding receivables and payables for tax purposes.
