Any business whether small or big needs bookkeeping to keep track of the progress of the business. In this document, you will learn what bookkeeping is all about. https://make-money-with-sam.com/bookkeeping-101-for-small-businesses/
1. Bookkeeping 101 For Small
April 2, 2020
What Is Bookkeeping?
Bookkeeping is the recording and classifying of accounting transactions of a business in the
The term bookkeeping came about because long ago all accounting transactions or data were
manually recorded in books. It is only recently that most accounting is now done electronically
We however still have many small businesses at least in other parts of the world that still
processing their accounting transactions manually.
As a small business you can either set up your business accounting system yourself or you can
hire someone to set it up for you.
Luckily for small businesses nowadays there are so many accounting computer programs that
are so userfriendly that most people can easily set them up by themselves.
I am thinking of computer programs such as Quickbooks, and Xero, etc. I have used Quickbooks
and I can testify that it is a very user-friendly accounting computer program.
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2. Having said that I should emphasize that to avoid errors you at least need some basic
accounting knowledge to set them up properly and also to enter the correct information. So my
advice would still be to employ a bookkeeper to work for you or study basic bookkeeping.
What is the di erence between
bookkeeping and accounting?
Bookkeeping is more about recording the basic pieces of information such as sales invoices,
purchase invoices, receipts, and payments. Whereas accounting is what accountants will do to
the information recorded by the bookkeepers.
Accountants will analyze, review and interpret a business’s nancial information. This results in
various reports that include but not limited to, income statement (pro t and loss statement),
balance sheets, and cash ow statements.
Why bother with bookkeeping?
There are a couple of reasons as to why you cannot run away from bookkeeping if you are a
You need to know how your business is performing. Whether it is making a pro t or loss
The banks will need your accounts to see if they should borrow you any money and how
The government is also interested in your books to be able to calculate your taxes.
Prospective buyers of your business may also want to see your books of accounts before
they make up their minds.
People who just want to invest in your business may also want to see your books too.
As you can see without bookkeeping you will not be able to provide the information that all
these parties need for their own purposes.
The Accounting Equation
To better understand bookkeeping you have to know that the basis of bookkeeping is what is
known as the accounting equation.
Below is the accounting equation in a business where the owner has supplied all the resources
of the business:
3. Capital = Assets
In this case, the capital represents all the resources supplied by the owner. This is equal to the
Assets, which are the resources in the business.
In reality, however, some of the assets will have been provided by other people. These are
known as liabilities. Liabilities represent the amounts owing to these people for these assets.
Therefore the full equation is:
Capital = Assets – Liabilities
As you can see both sides of the equation will equal. This is because we are looking at the same
thing from di erent perspectives. The capital is the owner’s investments in the business
whereas the other side represents the value owned by the owner.
This is best seen if you switch the assets and capital around like below:
Assets = Capital + Liabilities
Thus you can see here that the assets of the business are equal to the capital i.e. what the
owner or owners have contributed plus liabilities, i.e. what other third parties have contributed
to the business.
Therefore in bookkeeping and accounting, both sides of this formula will always agree.
Assets represent what the business owns such as buildings, goods, receivables, cash, etc.
Liabilities represent what the business owes to other parties such as amounts owed for goods
and services supplied to the business, loans, etc.
4. Capital is what the owners have put into the business, i.e. their investment into the business. As
the business makes pro ts any pro ts retained will be added to capital.
Among the reports that come out of a business, it is the balance sheet that is represented by
the accounting equation.
A balance represents a kind of a snapshot of the nancial position of the business at a
particular point in time.
The balance sheet will contain details of assets, liabilities, and capital. To come up with the
balance sheet the accountant uses the books of accounts prepared by the bookkeepers.
It is from the accounting equation that we now end up with the double-entry accounting
system. This states that every entry in the books of accounts requires a corresponding and
opposite entry to a di erent account.
These two sides for each entry are known as debit and credit. So every entry in the books of
accounts has to have a debit and a credit. It may a ect more than two accounts but the total
debits have to match credits.
This can be illustrated by looking at the transaction where the owner is paying capital of $5,000
into the bank.
That transaction will increase an asset i.e. bank and the other side increases capital. The double
entry is represented below:
Dr. Bank $5000
5. Cr. Capital $5000
Another example will be where the business buys goods for $100
In this case, the business is decreasing the asset of cash by $100 but increases asset of stock of
goods by the same amount of $100
Dr. Bank $100
Cr. Stock of goods $100
An income statement is a nancial report/statement that reports the revenue, and expenses of
the business over a speci c accounting period.
It is one of three important nancial reports. The other two are the balance sheet and cash ow
The income statement focuses on four key areas, i.e. revenue, gains, losses, and expenses.
Revenue consists of operating revenue and non-operating revenue.
Operating revenue represents the revenue obtained through the primary or core activities of
the business. Thus for a furniture company, its operating revenue would consist of the sales of
furniture. If it is a grocery store, its operating revenue would the revenue achieved through
sales of groceries to its customers.
Non-operating revenue is the revenue the business gets from non-core business activities.
These could include for a retailer bank interest earned for its savings account, rental income if
6. for instance, it is renting out some of its premises to others. In summary, it is income that you
earn form from activities that are not your main business.
Gains and losses are another form of non-core activities and result from the sale of assets other
than inventory. It is measured by comparing the sale proceeds versus the amount that you have
in your books of accounts.
An example would the sale of a company van. In this case, you will compare the sales proceeds
versus the value of the van in your books of accounts.
Thus if you sell the asset for less than the value in the books you have a loss and if you sell it for
more than its book value then it is a gain.
These are reported as non-operating or other income.
It should be pointed out at this point that the income statement does not show cash receipts i.e.
the money you receive or cash payments.
The Income Statement is concerned with recording revenue regardless of whether cash is
received or not.
Thus if you are a furniture business and a customer comes to buy a chair etc for say $100. You
will record this as a sales revenue of $100 and you will also record this $100 as a receipt in your
You can see here that the business has both a sale and revenue in this transaction. A receipt
because it has received cash and sale because it has sold a chair
If the sale is on credit you will still record it as $100 in sales revenue and also record it as $100
in accounts payables. When the customer pays the $100 later on this will just be posted to cash
7. book and accounts payables.
Revenue is recorded in the period in which the sales are made or services delivered regardless
of whether cash is received or not. It is recorded once as a sale.
Expenses are the costs incurred in running the business. These costs are recorded regardless
of whether you have actually paid or not.
Accounts are prepared under the accrual basis of accounting which states that transactions
should be recorded in the period in which they occur.
In the case of sales of goods or services, we record the sale once the goods are delivered or
For expenses, we record them once they are incurred regardless of whether they are paid or
The expenses are usually grouped into two, expenses from primary actives and expenses from
Expenses from primary activities are expenses incurred to earn the core operating revenue.
These include sales commissions, salaries, and wages, maintenance costs, etc.
Expenses from secondary activities are non-operating expenses. They include interest expense
as it is a nance cost of the business rather than the primary activity of buying/ producing and
At this point, you need to bear in mind that not all payments are considered expenses.
Payments such as loan repayments are not considered expenses.
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Thus if you pay $100,000 to reduce your bank loan, this payment is not considered an expense.
It just reduces your liability to the bank. Whereas the interest for the same loan is considered
Why do you need an income statement?
An income statement tracks the performance of a business. It focuses on the pro tability of the
Most people who go into business want to make pro ts. The income statement, therefore, helps
to show whether the business is making pro ts on not.
The success of most businesses is determined by whether they are making pro ts or not.
Further, the income statement also helps in determining the amount of tax to be charged ton
the pro ts of the business.
I should, however, point out at this point that for tax purposes they are a few adjustments that
need be made to come up with the taxable pro ts.
Below is a sample of an income statement.
bookkeeping income statement
This is a nutshell is what bookkeeping is all about. It is an indispensable part of any serious
business. It helps to measure the performance of the business by recording the nancial
transactions of the business.
Please share your experience on this topic in the comments section below.
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