What is Bookkeeping?

Bookkeepers are tasked with recording business transactions and putting them into categories to produce meaningful financial reports.

Business is all about cash flows. Money comes in from sales and goes out as expenses. Ideally, there is more money coming in than going out, but it is not always easy to tell. In addition to sales, money can come into a business in the form of investments, loans, or prepayments, and money is often spent on assets with long-term value such as property and equipment.

At any one time, there might be bills due, money owed, payments coming in and payments going out. Keeping track of these transactions can quickly overwhelm business owners and outstrip the limits of even the most advanced Excel user.

Accountants are specialized in making sense of these transactions, and bookkeeping is a core accounting function. Bookkeepers are tasked with recording business transactions and putting them into categories so that they can be easily understood. The “categories” that bookkeepers use come from the Chart of Accounts. This chart lists all of the ways that a business receives and spends money. There are usually accounts for banks and credit cards, income, expenses, and equity, or the money the owner has added or earned in the business. As money goes in and out of the business, the bookkeeper will categorize these transactions as income, expenses, and equity using the Chart of Accounts.

Why is it important to categorize transactions?

Your bank account tells you how much money you have made, right?

Not exactly.

Before you get paid for your last job, you might start spending money on the next one. Maybe you have had a lot of sales this month, but you will not receive payment for them until next year. And where is all the money from your last big payment?

Categorizing business transactions gives you a clear idea of where your money came from and went over a certain time period. If you categorize them correctly, you can create an Income Statement or Profit and Loss report, which will show you exactly how much money you made or lost during the time period you select. Knowing how much profit you have is crucial to understanding the overall health of the business. If you do not keep track of your transactions, you could easily end up losing money without even realizing it.

So while bookkeeping begins as an organizational task of putting income and expenses into different boxes, it ultimately produces information that is necessary for running a business. Just as a pilot relies on key metrics such as altitude to make decisions in flight, business owners rely on the crucial information that bookkeepers provide to keep their companies on course.