Bookkeeping Basics for Beginners

Are you aware that 8 out of 10 businesses close because they struggle with managing their finances? Proper bookkeeping could help avoid that. Welcome to our video on:

Understanding Bookkeeping:

Bookkeeping might sound like a mundane task that involves lots of numbers and paperwork. Think of bookkeeping as the backbone of a business’s financial health. It’s all about keeping track of every penny that comes in and goes out of your business.

This record-keeping is important because it helps you see how your business is doing money-wise. Without it, making smart decisions for your business’s future would be like trying to hit a target in the dark.

What is the Role of Bookkeeping?

Bookkeeping goes beyond just jotting down numbers in a ledger. It’s about recording your business’s financial activities in a way that helps you understand where your money is coming from and where it’s going.

This includes everything from the sales you make to the bills you pay. By keeping an eye on this information, you can make informed choices, like where to cut costs or when to invest more in certain parts of your business.

What is the difference between Bookkeeping and  Accounting? 

Now, you might wonder how bookkeeping is different from accounting. They’re closely related, but they’re not the same thing. Here’s how they differ:

Bookkeeping is about the daily record-keeping of your business’s transactions. It’s the first step in the financial process, making sure that every financial move your business makes is recorded accurately.

Accounting takes the information from bookkeeping and goes a step further. Accountants analyze this data, make sense of it, and use it to prepare financial reports. These reports can tell you more about your business’s financial health and help you plan for the future.

How can you make the Bookkeeping Process Simple? 

Step number 1: Gather Source Documents:

Before you can track your business’s money movements, you need to collect all the pieces of the puzzle. These pieces include invoices (what you bill your customers), receipts (proof of what you’ve bought), and bank statements (records of transactions through your bank).

Think of these documents as the building blocks of your bookkeeping system. They are important because they provide solid proof of your business’s financial activities. Keeping these documents in order helps you stay organized and makes the next steps smoother.

Step number 2: Categorize Transactions:

Once you have all your documents, it’s time to sort them into different buckets. These aren’t just any buckets, though. In bookkeeping, we call them accounts, and they’re split into five main types: assets (things you own), liabilities (things you owe), equity (your stake in the business), revenue (money you make), and expenses (money you spend).

By sorting each transaction into these categories, you turn a pile of documents into an organized record. This step is like organizing a messy room so you can find what you need when you need it.

Step number 3: Reconcile Transactions:

You take the transactions you’ve recorded and match them up with your bank statements to make sure everything adds up. This is a vital step because it catches mistakes or things you might have missed.

Step 4: Prepare Financial Statements:

Now that you’ve collected, categorized, and matched all your financial data, it’s time to put together the big picture. Financial statements, like balance sheets, income statements, and cash flow statements, are reports that show you how your business is doing financially.

What’s the next step? It’s about running those monthly, quarterly, or annual reports and then  analyzing them

Think of financial statements as your business’s report card. They tell you how well your business is doing. Here’s a quick guide on what to look for in each type of statement:

• What is a Balance Sheet?  This is like a snapshot of your business’s financial standing at a particular moment. It shows what your business owns (assets), what it owes (liabilities), and your stake in the business (equity). If your assets are much higher than your liabilities, that’s a good sign. It means your business is in a strong position.
• What is an Income Statement? This statement shows how much money your business made and spent over a certain period, usually a month or a year. By looking at the difference between your income (revenue) and what you spent (expenses), you can see if you made a profit or took a loss. A consistent profit indicates a healthy business.
• What is a Cash Flow Statement? This tells you about the cash that’s coming in and going out of your business. Even if your business is profitable, it needs enough cash to pay its bills on time. A positive cash flow means your business has more money coming in than going out, which is crucial for day-to-day operations.

Here are some actionable Insights:

Example:

Let’s say a small café owner reviews their financial statements and notices that their income from coffee sales is high, but their pastry sales are not doing well. By looking deeper into their expenses, they see that pastry costs are high due to wastage or spillage, perhaps

The café owner decided to reduce pastry offerings and focus more on coffee and specialty drinks, which have higher profit margins. This decision, based on their financial statements, helps improve the café’s overall profitability.

Here are some  Practical Bookkeeping Tips:

We generally recommend you use a cloud-based accounting software such as Quickbooks Online. Now even though Quickbooks says that bookkeeping is something that they have made DIY for you, most often, it’s been seen that the rules that the software creates by default are incorrect. This can lead to inaccurate categorization of transactions Plus Quickbooks does not do a very good job with calculating depreciation on assets as well, especially real estate. 

Do a Regular Review of your accounts

Checking how your business is doing money-wise shouldn’t be just an end-of-year thing. It’s more like a regular health check-up. Peek at your financial statements every month to see what’s going on. This is like keeping an eye on the scoreboard during a game; it tells you if you’re winning or need to up your game. Staying on top of these numbers helps you make smart moves all year round.

Now onto Decision Making, 

The magic of bookkeeping is in using those numbers to make your business better. If you see something that’s not selling well, maybe it’s time to stop offering it. Or if you find out you spend too much on something, you can figure out how to spend less.

We’ve covered everything from understanding bookkeeping and its importance, navigating the bookkeeping process, and analyzing financial statements, to practical tips that can transform the way you manage your business finances.

If you found this guide helpful, don’t forget to like, subscribe, and share this video to help others unlock the power of effective bookkeeping. Got questions or tips of your own?

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Together, let’s make bookkeeping a breeze and pave the way for business success. See you in the next video!