Bookkeeping is the detailed recording of all financial transactions related to your business, including sales, purchases, receipts and individual payments, and is a key part of the accountancy process. It ensures that all financial records are accurate and provides the necessary information for accounts to be prepared, which makes it vital to the smooth-running of your company. Here, we answer a few questions about the process of bookkeeping and how you can ensure you stay on top of your financial obligations.
A bookkeeper is someone who prepares the accounts/does the bookkeeping for a particular company (or companies, if they work for a larger accountancy or bookkeeping services firm). Essentially, they’re responsible for ensuring that all financial records are up-to-date; they record transactions, cross-reference the information against bank statements and create reports, ultimately keeping track of all funds that go into and out of a business (“balancing the books”).
They may also be required to create and send invoices, and make sure invoices received are paid on time. Some may be involved in payroll, budgeting, tax filing and end of year reporting too, depending on the requirements of the company in question. The duties they’re ultimately responsible for could vary depending on the size of the company and their role within it, such as whether they’re the business owner who takes on basic bookkeeping duties while outsourcing more complex financial requirements, or someone specifically hired to perform the role.
Someone who’s chosen the role as a career will invariably have undertaken bookkeeping courses and/or associated training, with certifications often necessary for a more formal position. Conversely, someone who’s a “kitchen table bookkeeper” – perhaps the business owner, their partner or an employee who fulfils the role alongside their other obligations – may be self-taught, and will typically only be involved in the more basic tasks of data entry, reconciliation and filing the necessary paperwork for the accountants.
At the most basic of levels, bookkeeping works by having a system in place to accurately record and organise the financial transactions of a business, and ensure those transactions tally up; the bookkeeper inputs the information, checks its accuracy, and creates any reports necessary to meet the firms’ accountancy obligations.
For very small companies and sole traders, sometimes a simple spreadsheet is all that’s required, with the information being input manually each time. However, many bookkeepers turn to online tools to help the process run smoothly, such as cloud-based software or digital accountancy apps. This can take some of the legwork out of the bookkeeping process, and for a lot of business owners, such tools can be invaluable.
A key decision will be whether to use single or double entry bookkeeping, and this will again depend on both the size of the business and its individual requirements. Single entry bookkeeping is at the more basic end of the scale, and simply involves keeping a record of transactions with just one line devoted to each entry – i.e. recording it as a positive or negative amount. As such, it only calculates net income – it doesn’t track things like inventory and accounts payable, and it can’t be used to develop a balance sheet. Its simplicity means it’s really only suited to very small businesses without complex needs or a high volume of activities.
As such, most businesses use double entry bookkeeping, whereby two entries are made for each transaction – a debit is recorded in one, and a credit in another. This kind of system is therefore suitable for companies that want to keep a record of asset and liability accounts, or who want to efficiently calculate profit/loss and prepare financial statements directly from the books. As such, even small business bookkeeping will typically use this format.
The two terms are often thought of as being interchangeable, but they’re actually distinct parts of a linked process: bookkeeping is focused on the recording and organisation of a company’s financial data, while accounting is the interpretation and analysis of that data, and the presentation of it that follows to ensure it complies with HMRC requirements.
Fully-qualified accountants are often more concerned with the overall picture of the company’s finances, rather than the day-to-day transactions, which is where the detail-orientation of a bookkeeper comes in.
Given that bookkeeping is the first part of the accounting process and is essential to the whole operation, it’s often the case that the work of a bookkeeper and an accountant overlap. This is particularly so in smaller firms where one person may be hired to take on the whole accountancy process, and as such, accountants can do bookkeeping – but it depends on the complexity of your business’ financial operations as to whether you’ll want someone to perform both roles.
In a similar vein to the above, they can, but it will depend on your business as to whether this is the best way to go. In the case of small business bookkeeping whereby one person is responsible for recording the transactions, implementing payroll and reporting on the data, it may be a simple step up to complete the tax return – particularly if digital accountancy tools are used – but this will always depend on the complexity of your business’ finances.
If you’ve got digital accountancy or bookkeeping services on your side, you may not need to hire a bookkeeper – provided you’re comfortable with inputting the required information yourself, or delegating it to another employee. Managing your books needn’t be complex with the right tools at your disposal, and the bonus of relying on this kind of service is that everything will be standardised and easy to keep track of, though you may find you want a bookkeeper to input the information in the first place.
As with so many things in the world of small business ownership, it all comes down to your individual requirements, so it’s worth doing your research or speaking to business advisers to decide on the best course of action.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.