What is Bookkeeping? Definition, Types and Implementations

Running a business can sometimes feel like juggling too many things at once, right? Tracking cash flow, managing transactions and records in bookkeeping, and keeping inventory organized can get overwhelming if not handled properly.

That’s why having a reliable accounting system is essential, as everything is recorded accurately, thus avoiding unnecessary problems. With the right accounting system, you can easily analyze your company’s performance, transactions, and growth.

If you’re not familiar with the basics of bookkeeping, this article is here to give you a thorough overview, while giving you a glimpse of a tool that can record your transaction accurately, and so much more than that. Read on to find out!

What is Bookkeeping?

Bookkeeping is the process of regularly recording and monitoring a business’s financial transactions. It helps businesses keep track of their financial activities and make important decisions about operations, investments, and funding.

Bookkeepers are responsible for managing a company’s financial records. Without them, businesses would struggle to understand their financial status or monitor their transactions effectively.

Common bookkeeping tasks include:

• Sending invoices to customers for sales.
• Recording and organizing customer payments.
• Verifying and managing supplier invoices.
• Paying suppliers for goods or services.
• Handling employee payroll.
• Preparing financial reports.

Nowadays, manual bookkeeping has largely been replaced by online tools and software, making the process more efficient and accurate.

Types of Bookkeeping

Bookkeepers use different methods for recording transactions, with single-entry and double-entry bookkeeping being the most common.

• Single-entry bookkeeping involves recording each transaction in a single row. This method is often used for tracking cash flow, taxable income, and tax-deductible expenses.
• Double-entry bookkeeping records each transaction in two entries, usually as a debit and a credit. This method typically applies accrual accounting to manage liabilities, equity, assets, expenses, and revenue.

Although single-entry bookkeeping is simpler, double-entry bookkeeping is more detailed and reduces the chances of errors.

What does a Bookkeeper Do?

A bookkeeper is a financial professional who records daily business transactions, such as sales, purchases, payroll, accounts receivable, accounts payable, and related activities. They maintain detailed records of the daily financial flow in and out of your business.

Unlike accountants, bookkeepers typically do not have formal accounting training. Their primary role is to document business transactions within an accounting system.

The responsibilities of a bookkeeper can differ based on the specific needs of the business. You might work for a large corporation, a small business, or as an independent freelancer. Some common tasks include:

• Recording transactions with accounting software, spreadsheets, or databases
• Organizing financial documents like cash flow statements, bank records, and loss statements
• Issuing invoices and processing customer payments
• Monitoring account debits and credits
• Reconciling financial statements
• Preparing balance sheets and income statements
• Ensuring accuracy in financial reports
• Managing payroll
• Filing tax returns for the business

Why is Bookkeeping Important?

Effective bookkeeping provides businesses with a dependable way to measure their performance. It supports strategic decision-making and helps set clear benchmarks for revenue and income goals. These are the reasons why businesses need to do proper bookkeeping:

1. Calculation of Taxes: Small business bookkeeping is essential to determine net profit, which is needed to calculate taxes. You can only calculate taxes accurately when you know your total income and expenses, which requires proper and up-to-date bookkeeping.
2. Measure Financial Position: Financial statements like the income statement, balance sheet, and cash flow statement show your business’s financial position. These statements can only be prepared accurately if all financial transactions are properly recorded and organized through bookkeeping.
3. Consideration of Tax Deductions: The Income Tax Department allows certain deductions, but keeping track of them is impossible without accurate bookkeeping. With proper bookkeeping, you can provide receipts and details to your accountant during tax filing to calculate eligible deductions.
4. Borrowings, Loans, and Advances: Maintaining proper books of accounts is mandatory for availing loans or attracting investments. Financial statements generated from these records help lenders and investors assess your business’s financial position before providing funds.
5. Tracking Errors: Organized bookkeeping helps track and correct errors in transactions as they occur. This eliminates the need to wait until the end of the year to reconcile accounts and identify mistakes.

However, many aspiring entrepreneurs overlook the importance of tracking every expense, which can lead to challenges down the road and causing all sorts of accounting problems.

Activities Involved in Bookkeeping

Bookkeepers handle various tasks as part of their bookkeeping services. These include recording financial transactions and maintaining balanced accounts. They also reconcile books of accounts with bank statements and other documents to ensure everything is accurate.

1. Financial Reports: Gumagawa rin sila ng mga financial reports tulad ng balance sheet, income statement, at cash flow statement.
2. Invoices and Payments: Bookkeepers prepare and send customer invoices while tracking payments to ensure timely receipts. They also check supplier invoices for errors and make sure they’re paid on time.
3. Payroll and Taxes: Sila rin ang nagca-calculate ng payroll at deductions gaya ng tax, leave, at retirement contributions.

Additionally, bookkeepers prepare various tax returns, such as sales tax and payroll tax returns. They may also assist with budgeting, forecasting, and creating annual reports.

Accrual vs. Cash Basis Bookkeeping

To properly implement bookkeeping, companies need to decide on the accounting method they will use. The two main options are the cash basis of accounting and the accrual basis of accounting. The key difference between these methods lies in when a company records sales (money inflow) or purchases (money outflow) in its books.

Difference Between Cash Basis and Accrual Basis

The accrual basis of accounting records revenues when earned and expenses when incurred, regardless of cash payment or receipt. This method matches expenses to the revenues they generate within the same period.

On the other hand, cash basis of accounting records income and expenses only when cash is received or paid for the transaction. This method is often used for small, daily transactions like receipts or minor operational expenses.

Here’s a simple table to illustrate the scenario of cash basis vs accrual basis accounting:

Implementation of Bookkeeping

Many companies in the Philippines have adopted bookkeeping or cost accounting in their operations. However, it’s important to note that each company has a unique accounting cycle. How is it applied across different types of businesses? Let’s explore some examples:

1. Service Companies

Service companies provide services to their clients, and their business activities are generally simple. Usually, ang proseso nito ay preparation ng service at pagtanggap ng bayad mula sa clients. As a result, financial reports for service companies focus on the cost of services provided to clients.

2. Manufacturing Companies

Manufacturing companies are involved in processing raw materials until the products are ready for sale to customers. Kaya, ang cost accounting ng manufacturing businesses ay naka-focus sa computation ng selling price ng products. Additionally, it aims to provide information about the production cost of each unit stored in the warehouse.

3. Trading Companies

Trading companies engage in buying and selling products to consumers. Unlike manufacturing companies, hindi nila pinoproduce ang sarili nilang goods pero nagdi-distribute lang ng products.

The distribution process can be either direct or indirect. For trading companies, the accounting cycle considers goods entering and exiting inventory. They must also account for elements such as cost of goods sold (COGS), inventory, discounts, markdowns, and other related accounts.

In dynamic industries like fashion, proper bookkeeping is critical to ensure every transaction, whether for purchases or sales, is accurately recorded.

How to Set Up Bookkeeping for Business

If you want to implement the bookkeeping process effectively in your business, follow these steps:

1. Open a Business Checking Account: Set up a business checking account to keep your funds organized and separate from personal finances.
2. Separate Personal and Business Expenses: Keep personal and business expenses separate to avoid confusion and unnecessary stress during tax filing.
3. Choose a Bookkeeping Method: Decide between single-entry and double-entry bookkeeping. Single-entry is suitable for new businesses as it records transactions once, while double-entry tracks both debits and credits for a more comprehensive approach, making it the preferred method.
4. Select an Accounting Method: Pick between cash and accrual accounting. Small businesses often start with the cash basis for simplicity, but accrual accounting is preferred for a clearer view of financial performance as it includes accounts receivable and payable.
5. Use Proper Tools to Categorize Transactions: Organize transactions into categories like assets, liabilities, revenue, expenses, and equity. You can use cloud-based software like HashMicro or spreadsheets to manage this effectively.
6. Regularly Categorize Transactions: Regularly categorize transactions to ensure accuracy, which simplifies tax deductions and financial reporting.
7. Store Financial Documents Digitally: Use tools to store receipts and records digitally, reducing the hassle of collecting documents during tax season.

This structured approach ensures efficient bookkeeping and keeps your business finances on track.

HashMicro Accounting Software as Your Solution for Bookkeeping

With HashMicro’s integrated accounting software, managing your business finances becomes effortless. Designed with advanced features and full automation, it helps you record transactions, generate reports, and stay tax-compliant with ease.

Here’s why HashMicro stands out:

• BIR CAS-Approved Integration: Fully integrated with the Bureau of Internal Revenue’s Certified Accounting System (CAS), making tax reporting smooth and compliant.
• Invoicing, Billing, Credit Note, and Debit Note Management: Lahat ng billing at invoices mo, isang system na lang! It ensures accuracy and streamlines your financial processes.
• Multicurrency Management: Easily record transactions in multiple currencies, making international deals hassle-free.
• Direct & Indirect Cash Flow Reports: Automatic cash flow reports let you monitor your finances in real time—alam mo agad kung may issues sa cash flow.
• Multi-Level Budget Management: Easily oversee and allocate budgets across divisions or projects to keep your finances on track.

Moreover, this software can integrate with various systems, such as sales, inventory, purchasing, HR, and a lot more. Thus, you only need to access one single system to get all your data, which saves time significantly.

Conclusion

Bookkeeping is the backbone of any business, ensuring accurate financial records and informed decision-making. It tracks transactions, prepares financial reports, and helps businesses understand their financial health and meet tax obligations.

With HashMicro’s accounting software, managing your finances becomes easier, faster, and more accurate than ever. Walang hassle ang pag-file ng taxes kasi BIR CAS-compliant na ang system. Bakit kailangan pa ng maraming system kung lahat ng kailangan mo ay nasa HashMicro na? From sales to inventory and budgeting, it seamlessly integrates all your operations.

Do you want to experience using this software to make your bookkeeping faster and more accurate? Try the free demo now!

FAQ on Bookkeeping

• What qualifications are needed to become a bookkeeper in the Philippines?

  To become a bookkeeper in the Philippines, you typically need a high school diploma or equivalent. Taking courses in accounting or bookkeeping or earning certifications like NC III in Bookkeeping from TESDA can improve your qualifications.

• How much does a bookkeeper charge per month in the Philippines?

  Bookkeeping fees in the Philippines vary, with freelance bookkeepers charging between PHP 5,000 to PHP 15,000 per month for basic services. Professional services from firms may cost more, depending on the complexity of the tasks and the business size.

• Can bookkeeping be done remotely?

  Yes, bookkeeping can be performed remotely. With advancements in technology and accounting software, bookkeepers can manage financial records and communicate with clients virtually, providing flexibility and efficiency.

• What are common bookkeeping mistakes to avoid?

  Common bookkeeping mistakes include failing to maintain proper organization, inaccurate data entry, not reconciling bank statements regularly, and neglecting to track expenses diligently. Implementing systematic processes and regular reviews can help avoid these errors.