Career Development

What Is Bookkeeping? (Definition and Examples)

August 20, 2021

Bookkeeping ensures that businesses are able to measure growth and profitability. To improve the effectiveness of its bookkeeping, a business might develop strategies to help streamline the bookkeeping process. In this article, we give a simple definition of bookkeeping, how the fundamentals work and examples of the tasks a bookkeeper might perform.

What is bookkeeping?

Bookkeeping refers to the daily tasks of recording and managing a business's financial information. Data like transactions, expense accrual and other financial information can be accounted for in the completion of bookkeeping tasks. Bookkeeping can be an essential function of running an organization, as it allows for tracking all financial information that is needed to make sound financing and operating decisions.

A bookkeeper is a professional who manages a business's financial transactions and recording. With an efficient bookkeeper, a business can ensure accurate and efficient recording and management of its financial assets and liabilities. This can aid in internal business decisions, like where to allocate a surplus of revenue, as well as external decisions, such as an investor's choice to fund the business's operations.

Read more: Your Guide to Careers in Finance

How does bookkeeping work?

In general, bookkeeping works by maintaining an accurate and current record of a company's financial records. However, before an organization can implement effective and proper bookkeeping strategies, it might consider several key things. For instance, one key factor in how bookkeeping works for an organization is determining the accounting method it will use. Several other ways bookkeeping works in a business can include the following key aspects.

Determining accounting method

Bookkeeping works with the accounting method a business chooses to use. For instance, a company might choose to use the accrual basis of accounting for recording every transaction as it occurs to keep a record of incoming and outflowing cash and credit. Similarly, the cash flow method of accounting could be used, in which case a bookkeeper would record only the transactions that exchanged cash. Once a business determines its accounting method, it can review its financial books in order to make goals that advance the growth of the business.

Monitoring progress towards goals

Effective bookkeeping also works by monitoring the financial progress towards revenue and profit goals. For instance, a bookkeeper can keep track of the number and frequency of sales as well as the profit margin for recorded accounting periods to better assess strategies a business can use to help it reach its income goals.

Managing financial records

Bookkeeping also works by managing all the financial records of a company. With proper accounting, bookkeeping allows businesses to keep accurate data regarding their overall financial health and status. This data can be important for seeking funding, investing and proving overall profitability.

Read more: 16 Accounting Jobs That Pay Well

Bookkeeping task examples

Bookkeeping can involve a wide variety of tasks that serve important functions in maintaining a business's financial records. From recording sales revenue to balancing accounts, bookkeeping can commonly include the following tasks.

  • Recording all financial transactions
  • Managing bank feeds
  • Reconciling company bank accounts
  • Managing payroll
  • Handling accounts receivable and accounts payable
  • Preparing financial reports and statements
  • Assisting with tax preparation
  • Using technology for streamlining tasks

Recording all financial transactions

Bookkeeping most typically involves recording all of a business's financial transactions. This can include sales, expenses and all cash flow relates to receivables and payables.

Managing bank feeds

In a virtual environment, bookkeeping software can be linked to a business's bank accounts to allow the bookkeeper to see transactions as they happen. This task can help the bookkeeper ensure that the business's financial records match what is going on with its bank accounts.

Reconciling company bank accounts

Bookkeepers will also reconcile company accounts to ensure that the financial information recorded in the accounting software they use matches the information recorded on the company's bank statements, credit statements and income statements.

Managing payroll

Bookkeeping can also encompass payroll management. A bookkeeper might be responsible for managing the tax, benefits and other deductions of employee wages to ensure the accuracy of payroll processing and documentation.

Handling accounts receivable and accounts payable

Bookkeepers may frequently handle a business's accounts receivable and accounts payable. While large organizations may have separate account clerks for each department, small- to mid-size business bookkeepers may be the professionals in charge of maintaining the business's incoming and outgoing credit transactions.

Preparing financial reports and statements

Bookkeepers may also be responsible for preparing financial statements and reports for specific accounting periods. For instance, a bookkeeper might organize and prepare a business's financial statement for the fiscal year that details the gross and net revenue the business has generated.

Assisting with tax preparation

Bookkeepers may also assist in the preparation and filing of a company's income taxes. Tax preparation could include organizing financial records for filing tax statements, entering data into tax preparation software and reporting revenue, expenses and other deductions.

Using technology for streamlining tasks

Bookkeepers might also perform tasks that use technology to streamline accounting tasks such as accounting programs or spreadsheet software. In order to stay current in a virtual environment, bookkeeping can typically require the application of technological skills along with the skills essential to accounting.

Related: 6 Essential Accounting Skills

Tips for effective bookkeeping

Bookkeeping is essentially related to accounting, and there are a variety of ways to make bookkeeping tasks more effective and less prone to error. When considering improving financial skills and implementing efficient bookkeeping methods, the following tips may prove beneficial.

  • Think about using bookkeeping software, both online and offline, to streamline bookkeeping tasks

  • Set up clearly defined processes, such as when to expect financial reports, what information will be included in those reports and how records will be managed

  • Consider using software programs designed to organize and manage more than one financial account to optimize project management and workflow

  • Use a document filing and management system to organize financial records and keep track of all transactions, accrued revenue and expenses and tax information

  • Consider bookkeeping software designed for expense documentation and payroll management to more accurately record this aspect of business operations

Ultimately, effective bookkeeping can mean the difference between a business accurately and efficiently organizing its financial information and making critical mismanagement errors. Bookkeepers can help businesses by ensuring the financial processes are clearly outlined and all financial operations are accounted for.

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