What is bookkeeping & how to automate it?
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As a new business owner, you quickly understand there is much more to running the business than your product or service. Leveling up your skills, managing customer and vendor relationships, and – perhaps most critically – keeping exact records of your transactions. This is where bookkeeping comes in.
Numbers scare some people.
Maybe you’re one of them. You may think, “I’ll be all right if I keep a rough idea of my sales and expenses in my head. Until I get started, I can afford to hire someone to care for that kind of thing.”
This could be a dangerous error. Worst case – your business may not survive a financial audit at tax time without the proper records. Best case, you could end up with an expensive tangle to sort out when you hire the right bookkeeping help. Either way, you’re better off keeping detailed records from day one.
Now you may need to know: what is bookkeeping? How do I keep proper records? What are financial statements, and how do I get them? In this article, we will walk through answers to all these questions and more, so you can begin your business bookkeeping journey with confidence.
What is bookkeeping?
Bookkeeping is the process of keeping financial records for your business. A single-person small business can get away with keeping written financial records in a notebook but large businesses need detailed entries.
At its simplest, it has to make sense to the person doing the recordkeeping. If your business is larger than just one person (sole proprietor), your bookkeeping should be in a standard format that is understandable to everyone involved: the owner, the bookkeeper or accountant, and any outside professionals such as loan officers or tax officials.
The standard format for bookkeeping is the double-entry accounting system. Your bookkeeping system records each transaction amount in two different places. Each transaction has two parts:
- A part that is recorded in the general journal: the log of all transactions over all accounts;
- The record for each separate account is a part recorded in the ledger. The ledger has different sections for each expense, customer account, and income source.
The double-entry accounting system is a built-in cross-checking system that reduces human error. The income and outgo are both recorded to show the cash flow overall and how the transaction affected individual parts of your business.
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Bookkeeping vs. Accounting
So, what is the difference between bookkeeping and accounting?
If you have considered hiring either of these professionals for your business, you may think that an accountant is just an expensive bookkeeper. Nothing could be further from the truth. Bookkeepers and accountants serve vital roles to business owners and CFOs – they serve different parts of the business's financial lifecycle.
The bookkeeper handles the day-to-day financial recording for the business. Every day, the bookkeeper is busy handling transaction entries, invoicing customers and dealing with late accounts, reconciling accounts, keeping up with payables, and overseeing payroll. She closes out the accounts at the end of the month and balances the books. Bookkeeping is the hands-on part of the financial care of the business.
Once the bookkeeper’s work is done, the accountant’s work begins. She takes the information from the month or the year and creates the financial statements. If necessary, she may audit the financial statements and discuss them with the owner. The financial statements will also play a key role in income tax preparation for the business – another job for the accountant. The right accountant can also assist with tax planning throughout the year to minimize overall tax liability. The accountant’s job is higher-level financial analysis compared with the bookkeeper’s work.
Financial ratios, outlying amounts, and other key markers of a business’s success or failure are what the accountant looks for. She can discuss this information with the business owner or chief financial officer so the executives can have the information they need to make strategic decisions for the future of the business.
A business can choose what level of financial help they need from an accountant or bookkeeper. Small businesses may decide not to hire bookkeeping help and DIY their day-to-day accounting. They may only employ an accountant for a few hours a year during tax season.
Larger businesses may not be able to get away with this low level of outside help. They may have an entire in-house accounting department for the daily work and outside accounting help for tax season. To decide what level of financial help is right for your business, assess your business’ budget, industry, growth rate, and overall needs.
What are the two types of bookkeeping?
The two types of bookkeeping are single-entry accounting and double-entry accounting.
Single-entry accounting is as simple as a list of figures in a notebook or Excel spreadsheet. Add money in, subtract money out. If you are just getting started, this can be a great option to get you going. It’s a copy of your bank statement for your business and can be reconciled to your bank statement at the end of the month for accuracy.
However, once your business is started, you will outgrow this accounting method fairly quickly. It will not be efficient for outside professionals, such as tax preparers or investors, to see how your business is doing. Your income may appear to vary wildly from one month to another; if you had a particularly large expense, such as an insurance payment at the beginning of the year, you will not be able to recognize that that expense “should” be spread over the entire year as the insurance policy covers the whole year. Once your business starts to take off, it is time to switch to the double-entry accounting system.
The double-entry accounting system records transactions to show which parts of the business are affected by each transaction. The basis of the double-entry accounting system is the accounting equation, which states :
Assets = Liabilities + Equity
This means that for every transaction, both parts of the double entry must keep the accounting equation in balance.
If an asset account goes up, either a liability or an equity account (or both) must also go up. If a liability goes down, then either asset must also go down, or equity must go up to remain balanced. Each transaction is recorded in a way that shows exactly which piece of the company is affected by that specific transaction. At the end of the year, the balance sheet shows how the accounting equation is carried through to the company’s financial statements.
Double-entry accounting is usually entered into an accounting software system such as Quickbooks or Xero & the entire process can be automated using accounting automation software like Nanonets. This can be done manually or automatically by connecting the company’s bank account to the software.
What is the easiest way to do bookkeeping?
The easiest way to do bookkeeping is the way that is right for your business. A single-entry accounting system may be the easiest if your company is very small. However, the ease of recording your income and expenses in a single Excel spreadsheet may be outweighed by the inconveniences of not having proper accounting records for bankers, investors, or tax preparers.
If your business is growing quickly, it will be easiest in the long run to have a bookkeeping system that can grow with you. A double-entry accounting system may take a bit more effort to set up, but it will serve you from the very beginning of your company to however large you grow.
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What is the most common method of bookkeeping?
The double-entry method of bookkeeping is the most common method worldwide. No one has yet come up with a system that is as intuitive and error-free as the double-entry accounting system.
Setting Up Bookkeeping for Business
In order to set up bookkeeping for your business, you will have to decide what method you will use for your accounting. Maybe you will use cloud-based accounting software like Nanonets & QuickBooks or maybe all you need is an Excel template.
Whatever method you choose, you will have to think carefully about all expenses and income sources you have for your business. If you need to, you can switch to another accounting system down the road after business expansion, but it is best to choose a system that can grow with you.
- Do you have multiple bank accounts or credit cards for your business that will have to be accounted for?
- How many income sources do you have?
- Multiple product lines?
- Other income such as real estate or investment income?
- How many vendors do you pay every month?
- What sort of expenses do you have? Each different expense will need to be assigned a numbered category.
How to do Bookkeeping?
Whether you choose accounting software or a simple method such as Excel, you will begin. Most accounting software is intuitive to use and guides the user through entering transactions, and the internet is full of beginner Excel tutorials.
You must be meticulously accurate when entering transactions – some errors will be caught by the software or when you reconcile the books at the end of the month, but others are more insidious.
How do I start bookkeeping for beginners?
First, choose a bookkeeping method that suits your business needs.
Second, organize your business records so you can enter them into your Excel template or accounting software without missing any transactions. Bank statements can help with this.
If you have back records that need to be entered from past months, you can request old account statements from your bank. This should give you a fairly accurate record of what business your company did in the last few months.
Third, set up a regular schedule to ensure you do not fall behind on your bookkeeping. Very small businesses may only have to do bookkeeping once a week. Larger businesses will have to do it every day and may require a dedicated in-house bookkeeping staff to handle the workload.
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Understanding Balancing the Books
At the end of the accounting period, usually at the end of the month, you will need to “balance the books”. This means going through your bookkeeping records and ensuring that both sides of the accounting equation match. There are a few things that have to be done at the end of the period to ensure that your accounting is accurate.
Bank statement reconciliation
After the end of the month, you will receive a bank statement from your bank. You must go through your business’ cash record in the ledger to ensure that the transactions on your ledger match what your bank statement records. If there are differences, such as a check that you sent out that has not yet cleared the bank, you must find out why.
The trial balance is another check that ensures that every transaction is recorded in two places. You must add up all of the debit balances and all of the credit balances for all your accounts. They should equal each other.
If they do not, you must find out why. It could be that a number was entered incorrectly, a transaction was sloppily recorded, or some other reason. Accounting software often has built-in error protection to prevent this sort of error from occurring in the first place.
Closing journal entries
There are certain accounts that have to be “closed” at the end of every month, and their balances moved to other permanent ledger accounts. All expense accounts are closed at the end of the month so that their balances can be moved to the equity portion of the books. This action moves the income and expense accounts, reflected on the income statement, to the asset and equity accounts, reflected on the balance sheet.
Financial Statements and Bookkeeping
Finally, once you have completed your daily, weekly, and monthly accounting tasks, you are ready to put this information into your yearly financial statements.
All your income and expense accounts are compiled into an income statement. The income statement shows your total sales, your total expenses, and your final income or loss. After you compile your income statement, the final income or loss is moved into the equity portion of your balance sheet accounts.
All your asset, liability, and equity accounts are compiled into the balance sheet. The balance sheet shows how each dollar of your assets is balanced by either debt or owner’s equity. Both the income statement and the balance sheet are critical pieces of information about your business's short- and long-term health and profitability.
Nanonets for Bookkeeping automation
Nanonets is an AI-based accounting automation software with in-built OCR software that can handle all aspects of bookkeeping, accounting and financial automation. Nanonets can be used to automate:
- Reconciliation processes - payment reconciliation, bank, account and credit card reconciliation
- Invoice processing - Invoice matching, uploading, data extraction and payment
- Payment - Send ACH and wire transfers directly from the platform
- Accounts Payable & Recievable processes
- Data entry processes
- ERP data sync
- Audit trial management
Here’s why you should consider Nanonets:
- Automate data extraction from documents - Use automated workflows to extract tables, text, barcodes or QR codes from documents in seconds.
- Approval automation - Get approvals from relevant stakeholders with approvalworkflows.
- Be audit ready - Maintain a log of all your actions with Nanonets.
- Customer focussed team - You’ll get 24x7 support, a talented training team, and a dedicated customer success manager.
Read more Accounting Articles:
- What is accounts payable process?
- How to automate Reconciliation processes with Reconciliation Software?
- What is Accounts Reconciliation, and how to automate it?
- What is an Expense Report & Why do you need one?
- Everything You Need to Know About an Audit Trail
- Credit Card Reconciliation: What It is and How to Do It?
- The Ultimate Guide to Accounts Receivable
- What is bookkeeping & how to automate it?
- What is Payroll Accounting & How to automate it?
Automate Accounting with free accounting templates
- Automate approvals with no-code approval workflow template
- Keep your books updated with Bank Account Reconciliation template
- Simplify Expense Management with Expense Report Template
- Try Nanonets Purchase Order Template
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