What Is Bookkeeping? (+ How to Do It)

Michael Gigante
Michael Gigante  |  April 25, 2019

One of the most important aspects of running a business is keeping track of company finances.

Although businesses often believe they have the resources and cash to retain a positive cash flow, they may not have knowledge or understanding of how easy it can be to fall behind on your payments. This contributes to why 82 percent of all businesses fail due to poor or negative cash flow management.

With many businesses failing to see the financial pitfalls that are in front of them, it’s obvious that most companies do not understand how to accurately determine the health of their finances. Every business should take the time to ensure they are recording and analyzing each financial statement. This is where bookkeeping comes into play.


What is bookkeeping?

At its core, bookkeeping is all about keeping track of your business' finances. 

When businesses refer to strong bookkeeping practices, they mean a company’s ability to keep track of all financial transactions that occur.

Keeping track of all your business’ finances offers a variety of benefits: It helps with identifying financial problems as early as possible, it shows investors that your company is financially healthy, and it helps with managing cash flow.

Ultimately it is your bookkeeping practices that will also allow you to submit accurate tax reports and keep your company from getting audited.

Whether it’s through the use of accounting software or utilizing bookkeeping services, maintaining a consistent and accurate bookkeeping system is critical in understanding the state of your company’s finances.

TIP: Check out how bookkeeping services can take the pressure off of you!

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Bookkeeping basics

Before we delve into the different ways that you can perform bookkeeping, it’s important to understand some basic bookkeeping principles.

There are essentially two main systems that are consistently used: single-entry bookkeeping and double-entry bookkeeping.

1. Single-entry bookkeeping

requires that your business records a financial transaction only one time. This means that whenever your company makes or receives a payment, you input that expense in either the credit (receiving money) or debit (paying money) column. If you receive a payment you would enter that money into the credit column, and if you make a payment then you would put that into the debit column. The single-entry bookkeeping system is often utilized by small and new businesses. This is because these companies have a low level of transactions and do not need as much focus.

Single entry bookkeeping

2. Double-entry bookkeeping

requires that you input a financial transaction twice. This means that whenever your company makes or receives a payment you input that expense into both the credit and debit column. Accounting professionals use this system so no financial entry is ever unaccounted for. It ensures that every time you make a payment, you are subtracting that money from both your debit and credit account. If a double-entry bookkeeping system is done correctly, the total number in your bookkeeping entries should equal zero. This means that the total debit equals the total credit. This would mean that you accurately accounted for every payment you received and every payment that you gave. Although this system is more tedious and often requires the time of a dedicated bookkeeper, it ensures a higher level of accuracy for maintaining your company’s finances.

Double entry bookkeeping

It’s beneficial to have a better understanding of these basic principles as it will familiarize you with both manual bookkeeping and understanding what a bookkeeper does.

TIP: To understand how to easily implement a double-entry bookkeeping system, check out our article on how to use balance sheets.


How to do bookkeeping

As a business owner you have a couple of options when it comes to setting up a bookkeeping system. If you’re a small business with a few people it may prove to be easier and more cost-effective to do bookkeeping by yourself. This can be done manually by hand, or with accounting software. If you’re a big business that has to manage a larger set of finances, then it will prove worthwhile to utilize bookkeeping services or even an ERP software. Whether you are a large enterprise or a budding startup, we will outline your options and find the most effective way for you to manage your company’s finances.

Bookkeeping software

Bookkeeping and accounting software is becoming an increasingly popular option for small businesses to use. Research shows that only 14 percent of small businesses outsource their bookkeeping services, which means that most small businesses are opting to complete their bookkeeping in-house.

Bookkeeping software is an excellent solution for small businesses as most are unwilling to shell out money to pay for accounting staff. Bookkeeping software allows businesses to manage all of their finances digitally and input all of their daily transactions. It also allows businesses to record profits/losses, expenses and visualize their overall income.

The benefits of doing bookkeeping by yourself include saving on labor costs and taking ownership over your company’s finances. On the other hand, bookkeeping can prove tedious and can take some time to learn. As your company scales, it will be important to assess at what point it would be smart to switch the bookkeeping responsibilities over to a full time bookkeeper.

TIP: To understand the basics of accounting software, take a look at our article on what is accounting software.

Bookkeeping services

Although it will cost you more than the do-it-yourself method, the benefits of outsourcing your bookkeeping include freeing up time and a higher chance of accurate financial recording.

Below are a range of bookkeeping services that a business can take advantage of.

Virtual bookkeeping

Virtual bookkeeping is when an accountant provides bookkeeping services to a company or client from a remote location. Outsourcing accounting jobs has become increasingly popular in recent years as the trend proves to be more cost-effective and flexible for both employers and workers. This may be an appealing option for small businesses as they don’t have to provide the accountant with any insurance, benefits, or office supplies.

Virtual bookkeeping

Monthly bookkeeping services

Monthly bookkeeping services are your standard bookkeeping services. A monthly bookkeeping service is a collective service that includes monitoring of bank accounts, alerts for suspicious transactions, the management of company budgets and much more. The average price of outsourcing your bookkeeping ranges from $500–$2,500 a month depending on the number of transactions and complexity of the services required. Below is an example of how a company may choose to charge businesses based on what they need to be completed.

Monthly bookkeeping services

Hire an in-house bookkeeper

40 percent of small business owners say bookkeeping and taxes are the worst part of owning a business. How do you avoid this? Hire an in-house bookkeeper, which can be extremely advantageous for a company. Having a daily meeting with a bookkeeper allows you to visualize the state of your company’s finances and can influence the decisions you make on a day-to-day basis. This can help with setting sales goals, analyzing how many clients you have and identifying financial trends. Although it may prove costly, many business owners pay the cost since they understand how much value a bookkeeper can bring to a company.


Bookkeeping vs. accounting

With accounting and bookkeeping being closely related, many business owners often wonder what the difference between the two is.

While accounting handles interpreting, classifying and analyzing financial data, bookkeeping is more concerned with recording all financial transactions.

In this sense it is crucial to understand that an accountant can also act as an advisor who understands how to analyze financial data and make informed decisions based on that data. An accountant has a high level of expertise and is typically very well versed on making sense of complex financial data.

Bookkeepers on the other hand, are more limited in their expertise. Bookkeepers generally maintain the financial picture for companies and typically are not tasked with providing in-depth analysis of company finances.

Accounting versus bookkeeping

While some companies elect to have both an accountant and a bookkeeper, the reality is that an accountant generally possesses the skills to do both. Furthermore, since accounting software can automate most of a bookkeeper’s responsibilities, companies on a tighter budget often elect to hire just an accountant.

On the other hand, businesses that can afford to have both a bookkeeper and an accountant may have a competitive advantage. Having a bookkeeper who can maintain the day-to-day operations of a company’s finances leaves an accountant with more time to analyze operational costs. If you want to have both an accountant and a bookkeeper you can refer back to the bookkeeping options that were detailed in the section on bookkeeping services.

While you assess the needs of your own company, it’s important to understand that as your company scales, more bookkeeping will need to be done.


Every business should have a bookkeeping system

Bookkeeping is the compass that leads your company’s cash flow. Without it, businesses are lost and do not understand the financial health of their company.

Businesses that fail to keep track of their finances as their company scales are the same businesses that fail due to poor cash flow management. The most successful businesses utilize their bookkeeping as a tool to drive sales, marketing and set financial benchmarks. 

Ready to implement a bookkeeping software today? Check out our article on the best free accounting software, or look at reviews to discover what accounting software would work best for your business!

See the Highest-Rated Accounting Software →

Michael Gigante
Author

Michael Gigante

Mike is an associate research analyst focusing on CAD and PLM software. Since joining G2 in October 2018, Mike has grounded his work in the industrial and architectural design space by gaining market knowledge in building information modeling, computer-aided engineering and manufacturing, and product and machine design. Mike leverages his knowledge of the CAD market to accurately represent the space for buyers, build out new software categories on G2, and provide consumers with data-driven content and research. Mike is a Chicago native. In his spare time he enjoys going to improv shows, watching sports, and reading Wikipedia pages on virtually any subject.