Bookkeeping 101

Discover best practices for ensuring good bookkeeping

10-minute read

Good bookkeeping is critical to business success. It helps you prevent errors, comply with legal obligations and effectively analyze your performance.

What is bookkeeping?

Bookkeeping is the act of recording every business transaction in a financial record-keeping system, such as an accounting software or a spreadsheet. These transactions include:

sales and other income
expenses and other payments
asset purchases
loan payments
lease payments
investments

Bookkeeping relies on the accurate, reliable and timely recording of financial transactions.

How is bookkeeping done?

Bookkeeping must adhere to established standards for recording transactions. These are set by the Accounting Standards Board in accordance with generally accepted accounting principles (GAAP).

Canadian private businesses can use one of two accounting standards:

What are best practices in bookkeeping?

Bookkeeping relies on the accurate, reliable and timely recording of financial transactions. The following principles apply:

Accuracy – Record transactions accurately, including verified, precise figures, and not guesses or estimates.

Reliability – Record transactions in the proper place. For example, a direct cost, i.e. the manufacturing cost of a product, should be allocated under “cost of goods sold”, not under “general selling and administrative expenses.”

Timeliness – Record transactions promptly to ensure data accuracy and to avoid forgetting any details.

Consistency – Follow data entry rules to ensure that transactions are always recorded in the same manner.

Simplicity – Use a simple data-entry process. For example, a transaction should be entered only once. Multiple entries of the same information increase the risk of error.

What’s the difference between accounting and bookkeeping?

Accounting is a professional activity, the purpose of which is to record a business’s financial transactions in accordance with standards and requirements. This accounting information is then used to prepare financial projections and annual budgets.

The goal of accounting is therefore to provide accurate and reliable financial information to help management understand their company’s finances and make business decisions.

Bookkeeping is the recording of day-to-day financial transactions, and is one part of the larger activity of accounting. It is the responsibility of bookkeepers.

An accountant must have formal training and be a member of a professional order, while a bookkeeper does not.

Is bookkeeping difficult?

Bookkeeping can be relatively easy to learn. Several affordable accounting systems offer automated, easy-to-use tools. They also help the recording of financial transactions in accordance with accounting standards and other requirements.

Some businesses record their transactions on spreadsheets instead of using an accounting system. But this can make it more difficult to properly record and manage financial information. Spreadsheet formulas can be difficult to learn and there is a higher risk of record-keeping errors. The result may be an inaccurate picture of the company’s financial performance, incorrect tax filings and even unsound business decisions.

You can find more information on this topic in the BDC blog, Stop using spreadsheets to manage your business.

Bookkeepers

A bookkeeper’s job is to record your company’s day-to-day financial transactions accurately, consistently and on a timely basis. They are the gatekeeper of your company’s financial information.

Choose your bookkeeper well, so that you have the right financial information for making sound business decisions and ensuring that your finances operate smoothly.

What do bookkeepers do?

A bookkeeper’s core responsibility is to record business transactions. But they are often tasked with other responsibilities, such as:

preparing financial documents
preparing invoices and collecting payments
managing payroll
managing/preparing equipment and vehicle records
setting up and maintaining customer and vendor records
preparing recurring transactions
preparing remittances

What skills does a bookkeeper need?

A bookkeeper doesn’t require formal training or a certification. Businesses hiring a bookkeeper usually seek someone with:

a two-year diploma in a related field, such as accounting or payroll
prior bookkeeping experience
computer skills
organizational skills

Because of the importance of the bookkeeper’s role, an accountant or controller should supervise them. Given their experience, this person can offer feedback on keeping and presenting records, and can ensure that the bookkeeper’s work complies with accounting standards, tax requirements and management reporting needs.

Because of the importance of the bookkeeper’s role, it’s helpful to have an accountant or controller supervise them.

Bookkeeping tools

As a bookkeeper, you will record transactions in a ledger. You can use a double- or single-entry system.

What is the double-entry system?

Double-entry bookkeeping is the process of recording two elements—a debit and a credit—for every financial transaction.

The two elements typically consist of:

• What was purchased or sold
• How money was exchanged to do the transaction

For each transaction there is a debit and a credit. They must be equal and thus balance each other out.

When assets are increased, they are considered debits. When liabilities or equity is increased, these are considered credits.

For example, if a business buys a computer and pays with cash, recording the transaction involves making two entries:

1. Debit:

The purchase amount is added to the “fixed assets” account
Any sales tax paid would be added to a “sales tax receivable” account

2. Credit:

The full amount of the purchase, inclusive of sales tax, would be recorded as a reduction in “cash”

Accounting software uses automated double-entry bookkeeping. It automatically determines both sides of each entry based on the type of transaction being recorded. So, the bookkeeper doesn’t have to worry about remembering what to debit or credit.

However, businesses relying on spreadsheets to record financial transactions must make sure to enter two entries for every transaction.

What is the single-entry system?

Single-entry bookkeeping involves recording only a single entry for each transaction. In the example of the computer purchase above, the transaction would be recorded once—as a fixed asset purchase. The records wouldn’t show how the purchase was paid for (i.e., with cash in this case).

Single-entry bookkeeping can be used by very small businesses with few assets or liabilities, and that primarily deal in cash. But it isn’t generally advisable as it doesn’t record sufficient information and can’t be used to generate financial statements.

What is a ledger?

A ledger is a digital or manual record of all the financial transactions of a business with details that can be later used to generate financial statements. The ledger typically includes:

all debits and credits for a period
categorization of transactions:
- revenue
- expenses
- cash
- accounts receivable and payable
- inventory

Most businesses use accounting software and spreadsheets for bookkeeping.

But some companies still record financial transactions manually in a journal called a daybook. This information is then transferred to a ledger and can be used to create financial statements. Daybooks are used only in manual bookkeeping.

Next step

Discover ways to manage cash flow in your business by downloading the free BDC guide Taking Control of Your Cash Flow.