A Guide to Basic Bookkeeping for New Business Owners
Bookkeeping can be tedious, however, having good financial records by being consistent with accounting helps company owners form the basis of a good business. It gives you a full picture of your financial situation so that you’ll be able to make informed decisions for your business, rather than one built on guesswork. Additionally, having well-organised finances can help to attract investors as they’ll have more confidence to fund your company.
In this article we break it down so that you can get started with a fundamental understanding of what bookkeeping involves.
Bookkeeping Basics
Bookkeeping is the process of recording all the financial transactions made by your business. The procedure involves recording, categorising and organising every single financial transaction made during your business operations.
Why do I need to do bookkeeping?
Having enough funds is important to your business, and doing bookkeeping the right way is key to managing your finances and subsequently promoting your company’s growth and success.
What’s the difference between bookkeeping and accounting?
Bookkeeping and accounting are not quite the same procedure. In a nutshell, the bookkeeper is responsible for recording the day-to-day work to be passed over to the accountant, who can concentrate on your business’s strategic financial operations. Without the bookkeeper, the accountants will not be able to do their job.
Benefits of Bookkeeping
We can’t emphasise enough on the importance of bookkeeping. This function is crucial to the growth of your business, and here are the 5 benefits of bookkeeping:
1. Monitor your cash flow
Maintaining daily records will allow you to easily keep track of your business’s financial condition. Implement a routine and stick to it so you can jot down accurate records every day to minimise mistakes when it comes to filing tax returns.
2. Allows you to concentrate on your business strategy
With a better understanding of your cash flow, you can also form better business strategies with greater confidence since you know where the money is flowing in and out of. You can then set realistic budgets that won’t cause a constraint on other aspects of your business.
3. Reduce costs
As a business owner, one of your key objectives would be to keep expenses low. In the beginning, most small businesses would choose to do their bookkeeping. You may also choose to do so and outsource the more complicated accounting matters, which is typically significantly less than hiring a full-time bookkeeper. Once you’re done with the books, you can then pass this on to your accountant and enable them to concentrate on your business's financial health.
Alternatively, you may also wish to outsource your bookkeeping and accounting to East river for a flat fee that covers your bookkeeping, financial statements, management reports, and tax filing.
4. Allows you quick access to important figures
Perhaps you’re thinking of a new venture, and require some financial information halfway through the month. Doing your books gives you quick access to the vital figures, so you can easily crunch numbers without having to await your accountant’s response.
5. Helps with business analysis
Ultimately, bookkeeping produces financial statements to help with your business analysis. With this information, you can then determine which business line is feasible. Subsequently, you can focus on your business's strength and improve on other weaknesses.
What is Involved in Bookkeeping?
Bookkeeping might sound like an intimidating process but fret not. Follow these 4 practical steps to have a better grasp of bookkeeping:
1. Record financial transactions with double-entry bookkeeping
Double-entry bookkeeping is the process of recording every transaction in at least two places and reflects how that exchange took place and the eventual results. It might sound like a bore, but it's important to paint a comprehensive picture of where your money is flowing out of and allows you to avoid making mistakes.
Stephanie runs her restaurant and spends $500 on purchasing the freshest ingredients. When looking at her cash balance, it would seem as if she has lost $500, when in fact, the ingredients offer a value. To look at this more accurately, the $500 should also be added to her inventory, since it will be used to serve as dishes to customers. In the double-entry system, Stephanie made two entries:
- Cash account = -$500
- Inventory = +$500
2. Set up a chart of accounts
A chart of accounts refers to a full list of the categories used by your business to classify and differentiate financial assets, liabilities, equity, income and more. What this means is that you'll have to track each transaction that affects other aspects of your business, and adjust its balance accordingly.
Referring to the above examples, Stephanie added $500 to her inventory account to reflect the inclusion of her ingredients. Stephanie should constantly update that account and adjust the balance whenever she buys or uses the supply, so this gives her a better idea of how much she has on hand.
Other than cash and inventory, you may also wish to keep track of the following:
- Equity
This is the amount of money you invest in the company as the owner, inclusive of the profits accumulated.
- Accounts Payable
This is the account you can use to keep track of the money you owe to third parties, including your suppliers, the banks or governments.
Stephanie has found the perfect location for her restaurant and takes out a mortgage. This is written in a contract to inform the bank that Stephanie will repay this mortgage over 12 months in instalments. This sum will be her accounts payable.
- Accounts Receivable
This is the account for you to keep track of the money that you should receive from third parties. Similar to Accounts Payable, this can be your customers, the banks or governments.
Stephanie received a delivery order made by her customer and subsequently billed her customer for this. As Stephanie awaits her customer to pay this amount, this transaction is recorded as an account receivable.
- Costs of Goods Sold
As the term implies, this is a straightforward one where you record the amount you spend on your products or services that you intend to sell - Expenses
This refers to the sum you spend to run your business, in aspects that are not directly related to your sale of goods or services.
Balance the Books
Balancing the books requires you to subtract the liabilities from assets, revealing a number that may not be equal to your equity.
Assets = Liabilities + Equity
When you upkeep a meticulous bookkeeping system, you can quickly understand your business's financial health.
Continuing from the previous example, here’s a simplified illustration of the concept:
Stephanie purchased $500 worth of ingredients. Following which, she uses these ingredients to prepare meals for her customers, earning her $1,000 profit. Stephanie then proceeds to record 3 new entries:
- Cash account = +$1,000
- Inventory = -$500 (since the goods have been sold)
- Retained earnings = Cash account + inventory = $500
With these entries that she made, she created an imbalance in the books since she added $1,000 to the cash account and deducted $500 from her inventory account. The current imbalance is $500 in retained earnings. She will then have to balance the books. With her retained earnings increasing by $500, she has to make a corresponding entry to balance the other side of the equation. She adds the $500 to her equity category to restore the balance.
Prepare Financial Statements
Financial statements include the income statement, balance sheet and cash flow statement. This information will come from the above examples.
In summary,
Balance sheet: equity + liabilities on one side; assets on the other side
Income statement: Revenue - (expenses + costs of goods sold) = net profit or loss
To get a full picture of your company’s financial statements, you can draw the information from the different accounts. The balance sheet shows you the balance of different accounts at the year-end date, while the Income Statement shows the total amount of Income and Expense items during the reporting period. Depending on the scale of your business, you may not require such formal statements so frequently.
Bookkeeping Tips for Small Businesses
When you first get started after opening your company in Hong Kong, bookkeeping can be an overwhelming process. You don’t have to do everything by yourself!
Stay on top of your small-business bookkeeping with East river, we put together paperwork, check numbers, and file annual returns on time. When you need advice, just message our experienced Chartered Accountants via our app any time of the day and they will be able to answer you quickly.