{"id":3318,"date":"2022-08-09T15:31:38","date_gmt":"2022-08-09T20:31:38","guid":{"rendered":"https:\/\/www.northone.com\/blog\/?p=3318"},"modified":"2023-05-16T15:11:33","modified_gmt":"2023-05-16T20:11:33","slug":"what-is-bookkeeping","status":"publish","type":"post","link":"https:\/\/www.northone.com\/blog\/accounting\/bookkeeping\/what-is-bookkeeping","title":{"rendered":"What is Bookkeeping? Definition and Why It&#8217;s Important"},"content":{"rendered":"\n<p>Maintaining your small business\u2019 books is just about the most important part of being a business owner. Without good bookkeeping, it\u2019s nearly impossible to gauge the financial health of your company, <a href=\"https:\/\/www.northone.com\/blog\/accounting\/manage-business-cash-flow\">understand your cash flows<\/a>, or plan for the future. Simple bookkeeping goes a long way toward illuminating the financial picture of your business.<\/p>\n\n\n\n<p>Unfortunately, bookkeeping is something many small businesses struggle with. They\u2019re not entirely sure how to set up their books or manage them on a regular basis. The good news is, you don\u2019t need to be a Certified Public Accountant (CPA) to keep good books. All you need is a crash course in bookkeeping 101 and the right software on your side.&nbsp;<\/p>\n\n\n\n<p>Let\u2019s dive into bookkeeping basics: what you need to know to keep your business\u2019 books in good order\u2014and how to get the most of well-accounted finances. Consider this your crash course in bookkeeping.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_bookkeeping\"><\/span><strong>What is bookkeeping?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Bookkeeping is the proper recording and organization of a business\u2019 financial transactions. It records every instance where money flows into or out of the business and why. The term \u201cbookkeeping\u201d actually stems from the original practice of writing debit and credit transactions in a ledger to account for a business\u2019 financial health. Bookkeeping happens on a daily basis. Today, most bookkeeping happens digitally, through software like QuickBooks or Xero.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Bookkeeping_vs_accounting\"><\/span><strong>Bookkeeping vs. accounting<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Many people use \u201cbookkeeping\u201d and \u201caccounting\u201d interchangeably; however, these terms are different. Where bookkeeping involves the physical recording of transactions in the company\u2019s ledger, accounting is the practice of assessing the books to <a href=\"https:\/\/www.northone.com\/blog\/accounting\/how-to-make-sure-your-business-stays-financially-healthy\">understand and advise on the financial health of the business<\/a>.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Why_is_bookkeeping_important\"><\/span><strong>Why is bookkeeping important?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Bookkeeping is a critical part of small business ownership and management. Without routine bookkeeping, there\u2019s virtually no way for a business to <a href=\"https:\/\/www.northone.com\/blog\/accounting\/operating-cash-flow-ratio\">monitor and manage cash flow ratios<\/a>. This hinders accounting efforts, which makes it more difficult for businesses to plan for the future. Here\u2019s a brief look at the benefits of good bookkeeping:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Cash flow insights.<\/strong> Keeping accurate records of every transaction allows business owners to see, at a glance, if they\u2019re bringing in more money than they\u2019re paying out. Bookkeeping also makes it easy to see where money is coming from and going to, when, and how often.&nbsp;<\/li>\n\n\n\n<li><strong>Simplified tax preparation.<\/strong> When tax season rolls around, businesses rely on their books to report revenues and file taxes accordingly. Without accurate, up-to-date books, tax season can quickly become a mess and you risk under- or over-paying state and federal tax authorities.&nbsp;<\/li>\n\n\n\n<li><strong>Auditing transparency.<\/strong> Auditing is a healthy practice for any business. Without current, accurate financial data, it can be difficult for businesses to audit their finances\u2014or comply with an IRS audit. Simple bookkeeping provides the records needed to verify income and expenditures during an audit.&nbsp;<\/li>\n\n\n\n<li><strong>More accurate accounting.<\/strong> The function of bookkeeping is to provide financial data that informs better accounting insights. Up-to-date books allow a business to take stock of its financial health, plan for the future, make informed financial decisions, and more\u2014all with confidence.&nbsp;<\/li>\n<\/ul>\n\n\n\n<p>The bottom line is that bookkeeping provides an organized look at a business\u2019 finances, which makes it easier to answer key accounting questions. What kind of margins do you have? Is your cash flow healthy? What will you owe in taxes? Can you afford an upcoming expansion? Bookkeeping provides the crucial financial data necessary to answer these questions and more.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Common_types_of_bookkeeping_accounts\"><\/span><strong>Common types of bookkeeping accounts<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The framework for bookkeeping is built on the idea of various accounts, meant to organize the business\u2019 financial transactions. Typically, these accounts break down into the following:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Cash<\/strong>, which includes Cash Receipts and Cash Disbursements to track cash flow activity.<\/li>\n\n\n\n<li><strong>Sales<\/strong>, to track all incoming revenue from point-of-sale purchase of products or services.&nbsp;<\/li>\n\n\n\n<li><strong>Inventory<\/strong>, which includes the value of unsold products you currently possess.&nbsp;<\/li>\n\n\n\n<li><strong>Purchases<\/strong>, to track raw materials or finished goods purchased for your business.&nbsp;<\/li>\n\n\n\n<li><strong>Accounts Receivable,<\/strong> to track <a href=\"https:\/\/www.northone.com\/blog\/accounting\/bookkeeping\/how-to-collect-payments-from-your-customers\">invoiced funds due from customers or clients<\/a>.<\/li>\n\n\n\n<li><strong>Accounts Payable<\/strong>, to track upcoming bills and payments your business owes.&nbsp;<\/li>\n\n\n\n<li><strong>Loans Payable<\/strong>, to track upcoming payments owed against assets on your books.<\/li>\n\n\n\n<li><strong>Payroll Expenses<\/strong>, which tracks salaries, benefits, and taxes attributable to employees.&nbsp;<\/li>\n\n\n\n<li><strong>Owners\u2019 Equity<\/strong>, which is the amount of money or equity owed to an owner.&nbsp;<\/li>\n\n\n\n<li><strong>Retained Earnings<\/strong>, to track profits that are reinvested in the company for growth.&nbsp;<\/li>\n<\/ul>\n\n\n\n<p>There are other types of accounts to consider as well, depending on the nature of your business. These can include <strong>Rental Income\/Expense, Supplies, Utilities, Equipment,<\/strong> and more.&nbsp;<\/p>\n\n\n\n<p>Each of these accounts is further classified based on <a href=\"https:\/\/www.patriotsoftware.com\/blog\/accounting\/types-of-accounts-subaccounts-accounting\/\">the type of transaction it represents<\/a>: <strong>Assets, Expenses, Liabilities, Equity,<\/strong> or <strong>Revenue. <\/strong>As businesses explore how to do bookkeeping, they\u2019ll begin to identify which accounts represent each of these categories and how it affects the financial picture that bookkeeping paints.&nbsp;&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Debits_vs_credits_and_single-entry_vs_double-entry\"><\/span><strong>Debits vs. credits and single-entry vs. double-entry&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Bookkeeping is a lot more organized than entering incoming and ongoing monetary transactions in the right account. To understand the framework that keeps it all organized, we need to look at two basic bookkeeping concepts: debits vs. credits and single-entry vs. double-entry.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Debits_vs_credits\"><\/span><strong>Debits vs. credits<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Debits and credits are the two types of transactions that make up bookkeeping. Debits represent incoming money; credits represent outgoing funds. If you get money, such as through a sale, you\u2019ll record a debit. When you record an outgoing transaction, such as a bill payment, you\u2019re recording a credit. In bookkeeping, every transaction is either a debit or a credit.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Single-entry_vs_double-entry\"><\/span><strong>Single-entry vs. double-entry<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>In single-entry bookkeeping, every transaction has just one entry; in double-entry bookkeeping, every transaction has both a debit and a credit. Single-entry bookkeeping is tied to cash basis accounting, which is best-suited for very small businesses. Double-entry bookkeeping is part of accrual accounting, which is used by most businesses.<\/p>\n\n\n\n<p>Almost every small business will use double-entry accounting to record a debit and a credit for every transaction. For example, if you sell a product, the bookkeeping entry might look something like this:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Credit<\/strong> <strong>the<\/strong> <strong>inventory account<\/strong> to remove the value of the sold item from inventory.<\/li>\n\n\n\n<li><strong>Debit<\/strong> <strong>the<\/strong> <strong>cash account<\/strong> in the amount received from the sale of the product.&nbsp;<\/li>\n<\/ul>\n\n\n\n<p>Double-entry bookkeeping is part of <a href=\"https:\/\/www.accounting.com\/resources\/gaap\/\">Generally Accepted Accounting Principles (GAAP)<\/a> because it creates an automatic audit record in a company\u2019s books. The debit must always match the credit. As businesses get familiar with their books and the double-entry method, recording debits and credits will become second-nature. And, conveniently, most major bookkeeping software will automatically record the offsetting entry for you\u2014all you need to do is specify the account!<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_to_set_up_bookkeeping_for_your_small_business\"><\/span><strong>How to set up bookkeeping for your small business<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Now that you understand the basics of what bookkeeping is, why it\u2019s important, and generally how it works, there\u2019s only one thing left to do: set up bookkeeping for your small business. The question is: how?<\/p>\n\n\n\n<p>The process of establishing a reliable bookkeeping system and best practices is simpler than you might think, largely thanks to today\u2019s modern bookkeeping software. Here\u2019s a step-by-step guide to setting up bookkeeping basics for your small business.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Step_1_Choose_your_software\"><\/span><strong>Step 1: Choose your software<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>There are tons of bookkeeping platforms to consider, but it\u2019s best to start with some of the biggest and most reputable. Look at the pricing, features, functions, integrations, and other nuances of software like QuickBooks, Xero, FreshBooks, Wave, and others. Your choice of software will determine how you manage your books, so be sure to get familiar with the UI!<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Step_2_Set_up_the_general_ledger\"><\/span><strong>Step 2: Set up the general ledger<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The general ledger is where every transaction gets recorded, even before it\u2019s categorized into an account. Any bookkeeping software you choose will automatically create a general ledger for you. Get familiar with the ledger and comfortable categorizing transactions as they\u2019re recorded. Even better: learn to tap into the software\u2019s automations or AI features to quickly categorize general ledger transactions.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Step_3_Create_necessary_accounts\"><\/span><strong>Step 3: Create necessary accounts<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Remember all those accounts listed above? Make sure you\u2019re creating the appropriate ones for your business and attributing debit and credit transactions to them accordingly. Remember to consider the five basic types of accounts: <strong>Assets, Expenses, Liabilities, Equity,<\/strong> and <strong>Revenue. <\/strong>You can always add accounts as your scope of operations grows, but it\u2019s best to identify the essential accounts right from the get-go.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Step_4_Start_recording_transactions\"><\/span><strong>Step 4: Start recording transactions<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>With your software all set up, you can start transacting. Remember to record every single transaction, down to the penny\u2014and attribute debits and credits to the right accounts. Be sure to follow the double-entry bookkeeping standard. Here, it\u2019s a good idea to explore the integrations of your bookkeeping software to automatically import transactions wherever possible. The more you can automate, the less chance there is of user error.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Step_5_Establish_a_reconciliation_schedule\"><\/span><strong>Step 5: Establish a reconciliation schedule<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Also called \u201cbalancing the books,\u201d reconciliation is the practice of <a href=\"https:\/\/www.thebalance.com\/what-is-account-reconciliation-1293657\">tallying credits and debits to make sure they add up<\/a>. If they\u2019re equal, the books are balanced and everything is accurate. If they <em>don\u2019t<\/em> add up, you\u2019ll need to go back and figure out where the debits and credits don\u2019t match up. The good news is that most accounting software will do this for you\u2014all you need to do is review the reconciled figures.&nbsp;<\/p>\n\n\n\n<p>That\u2019s it! When it comes to your business\u2019 bookkeeping, software handles most of the heavy lifting for you. The most important thing to be mindful of in practicing good bookkeeping is to be consistent and thorough in recording and categorizing transactions. It\u2019s all about staying organized.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"The_importance_of_bookkeeping_cannot_be_understated\"><\/span><strong>The importance of bookkeeping cannot be understated<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>No matter how big your business is or what type of business volume you do on a regular basis, there\u2019s no understating the importance of bookkeeping. You need a clear financial picture of your business\u2019 performance and its cash flows to make good decisions about how to grow and prosper. Bookkeeping provides the data accountants need to advise you when the time comes to make key business decisions. It quite literally pays to do it right.&nbsp;<\/p>\n\n\n\n<p>Get your small business\u2019 bookkeeping off on the right foot with banking tools that make transacting simpler than ever to manage. Let North One help you <a href=\"https:\/\/www.northone.com\/customers\">open a business bank account<\/a> that\u2019s easily integrated into your bookkeeping software, so you always have the financial transparency needed to succeed.<\/p>\n\n\n\n<div class=\"wp-block-columns emailcapturecontainer has-background is-layout-flex wp-container-core-columns-is-layout-9d6595d7 wp-block-columns-is-layout-flex\" style=\"background-color:#edce81\">\n<div class=\"wp-block-column is-vertically-aligned-center is-layout-flow wp-block-column-is-layout-flow\" style=\"flex-basis:55%\"><\/div>\n\n\n\n<div class=\"wp-block-column is-vertically-aligned-center is-layout-flow wp-block-column-is-layout-flow\" style=\"flex-basis:45%\"><div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full\"><img decoding=\"async\" data-expand=\"1\" src=\"https:\/\/www.northone.com\/blog\/wp-content\/plugins\/media-ace\/includes\/lazy-load\/images\/blank.png\" data-src=\"https:\/\/www.northone.com\/blog\/wp-content\/uploads\/2021\/10\/N1-DeviceLockup.png\" alt=\"\" class=\"lazyload wp-image-3928\"\/><\/figure>\n<\/div><\/div>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"FAQs\"><\/span><strong>FAQs<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_exactly_does_a_bookkeeper_do\"><\/span><strong>What exactly does a bookkeeper do?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>A bookkeeper is the person in charge of <a href=\"https:\/\/www.northone.com\/blog\/accounting\/what-does-a-bookkeeper-actually-do\">entering a business\u2019 financial transactions<\/a> into bookkeeping software, then categorizing those transactions accordingly. Bookkeepers also have the responsibility of reconciling accounts, verifying receipts, preparing deposits, processing payroll, purchasing, monitoring accounts receivable, paying bills and much more.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_bookkeeping_and_example\"><\/span><strong>What is bookkeeping and example?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Bookkeeping involves entering and categorizing a business\u2019 financial transactions in an organized, accountable way. For instance, if you sell $1,000 worth of products to a customer, you would subtract (credit) $1,000 from your inventory account and add (debit) $1,000 to your cash account. This is an example of double-entry bookkeeping.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_are_the_two_kinds_of_bookkeeping\"><\/span><strong>What are the two kinds of bookkeeping?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Bookkeeping can either happen on a single-entry or double-entry basis. This tends to coincide with the <a href=\"https:\/\/www.northone.com\/blog\/accounting\/accrual-accounting-vs-cash-basis-accounting\">cash vs. accrual method of accounting<\/a>. Single-entry bookkeeping records one entry for transactions, whereas double-entry bookkeeping involves both a debit and a credit for each transaction. Double-entry accounting is the more popular method, because it creates accountability and transparency.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_difference_between_accounting_and_bookkeeping\"><\/span><strong>What is difference between accounting and bookkeeping?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Where bookkeeping deals with the physical entry and organization of a business\u2019 financial transactions, accounting is a broader discipline that focuses on using financial data to drive better decision-making. A bookkeeper would enter and categorize financial data so that an accountant can draw conclusions about the health and operation of the business from that data.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Maintaining your small business\u2019 books is just about the most important part of being a business owner. Without good bookkeeping, it\u2019s nearly impossible to gauge the financial health of your&#8230;<\/p>\n","protected":false},"author":4,"featured_media":3319,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[7],"tags":[],"class_list":["post-3318","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-bookkeeping"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.6 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>What is Bookkeeping? Definition and Why It&#039;s Important - North One<\/title>\n<meta name=\"description\" content=\"Learn everything you need to know about bookkeeping, the basics and how to bookkeep successfully for your small business.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.northone.com\/blog\/accounting\/bookkeeping\/what-is-bookkeeping\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"What is Bookkeeping? Definition and Why It&#039;s Important - North One\" \/>\n<meta property=\"og:description\" content=\"Learn everything you need to know about bookkeeping, the basics and how to bookkeep successfully for your small business.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.northone.com\/blog\/accounting\/bookkeeping\/what-is-bookkeeping\" \/>\n<meta property=\"og:site_name\" content=\"North One Blog\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/northonebanking\/\" \/>\n<meta property=\"article:published_time\" content=\"2022-08-09T20:31:38+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2023-05-16T20:11:33+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.northone.com\/blog\/wp-content\/uploads\/2022\/08\/Bookkeeping-101_-The-Basics-and-What-To-Know.jpeg\" \/>\n\t<meta property=\"og:image:width\" content=\"863\" \/>\n\t<meta property=\"og:image:height\" content=\"558\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Carter Grieve\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@NorthOneApp\" \/>\n<meta name=\"twitter:site\" content=\"@NorthOneApp\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Carter Grieve\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"9 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\\\/\\\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\\\/\\\/www.northone.com\\\/blog\\\/accounting\\\/bookkeeping\\\/what-is-bookkeeping#article\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/www.northone.com\\\/blog\\\/accounting\\\/bookkeeping\\\/what-is-bookkeeping\"},\"author\":{\"name\":\"Carter Grieve\",\"@id\":\"https:\\\/\\\/www.northone.com\\\/blog\\\/#\\\/schema\\\/person\\\/1d9ccac27f234254fafe34ebbeca437a\"},\"headline\":\"What is Bookkeeping? 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