This article describes the bookkeeping process, whether it is performed by bookkeepers, accountants, or small business owners. Bookkeeping and accounting include steps from recording transactions to preparing financial statements. The bookkeeping process is much more efficient when you use automated accounting software.
Bookkeeping and Accounting
Experienced bookkeepers can close the books, prepare financial statements, analyze them, and get ready for tax time. Accountants may supervise bookkeepers and prepare some of the more complex journal entries. Supervisory accountants would review the financial transactions, journal entries, and financial statements, including The Balance Sheet, Income Statement, and Statement of Cash Flows for accuracy. CPA firms may review or audit the financial statements, especially when required for obtaining financing or providing financial information to investors.
What Is The Difference Between An Accountant And A Bookkeeper?
Bookkeepers and accountants sometimes do the same work. But in general, a bookkeeper’s first task is to record transactions and keep you financially organized, while accountants provide consultation, analysis, and are more qualified to advise on tax matters.
Bookkeeper Role In Your Business
Normally, bookkeepers aren’t required to have any formal education. To be good in their job, bookkeepers need to be accurate, and knowledgeable about important financial topics. Often the bookkeeper’s work is overseen by an accountant or the business owner. So a bookkeeper can’t call themselves an accountant.
Accountant In Your Company
To qualify to call oneself an accountant, an individual must have a bachelor’s degree in accounting. For those that don’t have a specific degree in accounting, finance degrees are often considered an adequate substitute.
Accountants, unlike bookkeepers, are also eligible to acquire additional professional certifications. For example, accountants with sufficient experience and education can obtain the title of Certified Public Accountant (CPA), one of the most common types of accounting designations. To become a CPA, an accountant must pass the Uniform Certified Public Accountant exam and possess experience as a professional accountant.
Learn more about what is CPA here.
To get a better overview of UCPA exam, see this resource.
Back To Bookkeeping
So now as we understand who is a bookkeeper and who is an accountant, let's get back to our bookkeeping guide. What are the bookkeeper's responsibilities?
Closing Calendar
Create a standard detailed closing calendar that lists tasks, persons assigned, and deadlines. Regular monthly closes use the same steps. Some additional steps are added for the year-end close. Creating and distributing this closing calendar will ensure that the required steps are taken each month and will establish accountability.
Internal Controls
Part of bookkeeping and accounting is establishing proper internal controls to prevent fraud and improve the accuracy of the books. Internal controls can be implemented through a separation of duties between recording transactions and handling cash receipts and disbursements, including cash, checks, or disbursements made through online banking transactions.
For better internal control, someone who is not handling the cash is assigned to reconcile the bank account to the general ledger. Very small businesses may not have enough employees to establish good internal controls. If not enough bookkeeping or accounting staff members are available to provide the required separation of duties, the business owner should review cash receipts, vendor invoices, and disbursements, and reconcile the bank account.
The Accounting Period
The Income Statement includes transactions for the accounting period of an entire (twelve-month) year, whereas The Balance Sheet is a snapshot at the ending date of one or more periods presented in the financial statement.
For its accounting period, a business can either use a calendar year-end or choose a different fiscal year-end, such as a month with lower inventory balances or business activity. As an extra step for the company’s year-end, zero out The Income Statement accounts to a retained earnings account on The Balance Sheet. This zeroing step will result in the next year’s accounts only capturing that year’s activity in the accounting records and financial statements.
Interested in knowing much more about different financial statements, what do they mean and how do they work?
Read our What Are the Five Types of Financial Statements And How to Understand Them.
Comparable Financial Statements
Prepare financial statements on a monthly and yearly basis, showing comparable results for the same period in the prior year. Financial statements may also show results summarized by (three-month) quarters.
Record transactions with double-entry bookkeeping using balancing debits and credits. Use your chart of accounts with numbers and accounting descriptions to code these transactions.
Interested in knowing more about Chat of Accounts? Read our detailed guide here.
Accrual or Cash Basis Accounting
Accrual accounting, which is preferred for financial statements presented on a Generally Accepted Accounting Principles (GAAP) basis, is different than Cash Basis Accounting. In Accrual Basis Accounting Method, revenue is recorded when earned (such as the delivery of products or performance of services and contract obligations recognized over time) and expenses are recorded in the same accounting period as revenue under the matching principle. In The Cash Basis Accounting Method, the accounting transactions are recorded when cash is received.
Under Accrual Accounting, there must be a proper cut-off of transactions to record them in the accounting period to which they relate.
For example, you may look at shipping and receiving information and invoices for disbursements for a certain number of days after each month-end. Then record those transactions that relate to that month for which the financial statements are being prepared.
The Accrual Method of Accounting, as defined by the accountingcoach.com, “refers to adjustments that must be made before a company's financial statements are issued.”
Let's look at a few examples to put things into perspective.
Example 1
- Company A receives an invoice for rent from their landlord. Using the Accrual Method transaction becomes recorded when the bill is received.
- Company A receives a rental bill of $1,000 on June 20th,
- Company A pays the rental bill of $1,000 on August 12th,
- The accrual transaction is recorded on June 20th, and not August 12th, even if it was paid for in August.
Example 2
- Company A sends a bill to the client for website creation. Using the Accrual Method Accounting the transaction becomes recorded when the bill is sent out.
- Company A sends a bill to Client B of $600 on April 4th,
- Client B pays the bill of $600 on July 16th,
- The accrual transaction is recorded for April 4th, and not July 16th since Client B received the bill in April.
The same rule applies when paying taxes. When using the Accrual Method you pay taxes based on the accrual record, which is when the transaction took place, not when the transaction is settled.
Example 3
- Company A sends a bill to Client B for website creation. Using the Accrual Method Accounting the taxes are paid for the bill which is sent out, even if payment hasn’t been made.
- Company A sends a bill to Client B of $600 on April 4th,
- Client B pays the bill of $600 on July 16th,
- The taxes are paid for the bill sent on April 4th, despite the Client paying the bill on July 16th.
You record your accounting activities through journal entries. Set up automatic adjusting journal entries (and next month reversals) in the software system for recurring transactions such as allocating prepaid insurance to the month to which it belongs. If you receive all or partial payment before revenue is earned, record it as a debit to a Cash account and a credit to Deferred revenue (or Unearned Revenue) through a journal entry. Record a debit to Deferred Revenue or Unearned Revenue and a credit to Revenue as the revenue is earned under accrual accounting.
Deferred revenue, also known as unearned revenue, refers to advance payments a company receives for products or services that are to be delivered or performed in the future. The company that receives the prepayment records the amount as deferred revenue, a liability, on its balance sheet.
When setting up your accounting system (before tax time), consult your CPA firm for advice on using accrual or cash basis accounting for accounting and financial statement preparation. These accounting methods will produce different taxable amounts for the tax return.
Account and Bank Reconciliations For Increased Accuracy
Reconcile underlying balances monthly to the general ledger, including cash per bank account statement, accounts receivable ageing, prepaid assets, fixed assets, inventory, accounts payable ageing, etc. Reconcile your bank accounts monthly too. Accounting software has automated features to help you reconcile bank accounts to your cash accounts balance in the accounting system very efficiently.
Reconciliation is an accounting process that compares two sets of records to check that figures are correct and in agreement. Account reconciliation also confirms that accounts in the general ledger are consistent, accurate, and complete.
In other words, it is a process established in the Congressional Budget Act of 1974 by which Congress changes existing laws to conform tax and spending levels to the levels set in a budget resolution. Changes recommended by committees pursuant to a reconciliation instruction are incorporated into a reconciliation measure.
Learn more about what it means to reconcile your accounts here.
How Does Automated Accounting Software Change Bookkeeping?
Manual bookkeeping systems without accounting software require recording all transactions, then manually posting them to Journals and General Ledger. With accounting software, there is an automatic posting of transactions to detailed Journals and General Ledger. Financial statements are automatically created.
When you record sales transactions on credit, the accounts receivable detail is automatically recorded by the customer and invoice through the accounting software. The accounting system will automatically generate accounts receivable ageing report to help you understand collection status by the customer, invoice, and total for 0-30 days, 31-60 days, 61-90 days, and 91-120+ days outstanding classifications.
You can also search the accounting system by inquiry on a real-time basis to determine outstanding invoices and balances. Cash disbursements are automatically recorded in the accounts payable account and detailed accounts payable ageing reports. Detailed inventory and fixed assets records are used to prepare automatic reports. As stated earlier, standard adjusting journal entries and reversing entries at the beginning of the next month can be set up in an automated accounting system.
Summary
There is a subtle difference between an accountant and a bookkeeper, which is quite important to understand, should this be your job choice. An accountant is often required to have a bachelor's degree in the field of accounting or finance, whether to be a bookkeeper high school diploma will suffice. As an accountant you would be working alone, while for bookkeeping you will have a supervisor, either CPA or a small business owner, making sure books are well documented.
Among bookkeepers most important duties there are to understand key financial terms, differences in accounting methods and ability to file governmental documents, like tax returns. Among important terms to understand there definitely are:
- Accrual Accounting Method
- Cash Accounting Method
- Bank Reconciliation
- Accounting period vs fiscal year vs tax period
- Internal controls
- Calendar management, like inventory scheduling
- Financial statements
As a bookkeeper you will be required to know the difference of important financial statements:
- The Balance Sheet
- The Income Statement
- The Cash Flows Statement
- The Shareholder's Equity
- Footnotes (not an actual statement, yet critical part of accounting communication)
As a bookkeeper, you will be responsible for suggesting to a business owner improvements in efficiency in your field. And one of such great effectivity tool for accounting-done-well is accounting software. Its pick needed features, and pricing that will fit small business owner's need.
Still not sure what accounting software to choose? Check our back-to-back comparison of two major players in the field of cloud accounting, Quickbooks and ZarMoney.
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