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Bookkeeping involves systematically recording daily transactions, playing a crucial role in collecting the financial data necessary for effective business management.
Key aspects of bookkeeping include:
Documenting financial transactions
Entering debits and credits
Generating invoices
Preparing financial statements (such as the balance sheet, cash flow statement, and income statement)
Managing and reconciling subsidiaries, general ledgers, and historical accounts
Conducting payroll processes
One of the primary elements of bookkeeping is maintaining a general ledger. This ledger serves as a foundational document where a bookkeeper records sales and expense amounts, known as posting. The frequency of ledger posting increases with the volume of sales transactions. A general ledger can be created using specialized software, a computer spreadsheet, or even a lined sheet of paper (although the latter is not recommended!).
The complexity of a bookkeeping system typically correlates with the business size and transaction volume handled on a daily, weekly, and monthly basis. All business sales and purchases must be documented in the ledger, with certain items requiring supporting documentation. The IRS specifies the business transactions necessitating supporting documents on their official website.
The transactions that you record in your bookkeeping are also the foundation of your accounting. Accounting practices require the pulling and analysis of financial data—in other words, everything that’s recorded in your ledger, among other financial transactions like loan disbursements or payments.
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