In this post, we discuss:
- What is Bookkeeping
- Double-Entry System
- Types of financial records
In the previous blog, we discussed the role and tasks of the bookkeeper. Amongst daily tasks, bookkeepers are required to record business transactions accurately and in a timely manner. The records must indicate our charges to clients, the costs from suppliers, the payments received from clients, and the amounts paid to clients.
Those can be summarized as follows: sales, purchases, receipts from customers, and payments to suppliers.
Nowadays, of course, with the use of online or desktop accounting software (like Xero), it is all hidden by a nice user interface, but the basis remains the same for all record-keeping. The records are entered into separate books: sales journal for sales to customers, purchase a journal for purchases, cash book, or cash journal for payments. Keeping books separately enables one to identify the total amounts per category as well as keep a well-prepared ledger. A ledger is a book of accounts, where information about all business transactions is kept to later form reports for annual submissions.
The way we enter transactions also remains old-fashioned: each transaction has two parties involved (at least), it is called double entry. For our business, selling goods on one side reduces the inventory quantity (decrease in inventory) and on other hand, we receive cash in exchange (increase in cash).
Do we need a special system to record transactions? No, it can be easily done in Excel, which we will learn later on. The most important is to track and match cash flows in and out of a business, so the reporting shows a true and fair view.
Types of Financial Transactions
Here are the typical types of financial transactions every bookkeeper works with.
Sale – an exchange of goods or services for cash or sale on credit from a customer (or client).
Purchase – buying goods or services from another company (a supplier) in exchange for cash or purchase on credit.
Payment – transfer of money to someone else, including paying for purchases or wages.
Receipts – getting money from someone else for goods or services sold.
Petty cash – a small fund of cash for insignificant business spending, like milk or cookies.
Payroll – payment of wages or salary to the employees and any related taxes.
These transactions are entered by bookkeeper in the accounting records of business known as the “books” (sales book or purchase book). The records are then used to prepare a set of accounts known as “final accounts” by accountant.
Cash vs Credit transactions
I have mentioned above that we may have transactions, either sale or purchase, in exchange for cash (immediate payment) or on credit. Credit transactions happen when the goods or services are delivered to the customer in exchange for future payment. Such conditions are agreed beforehand in the payment terms, which could say the business needs to pay within 14 or 30 days from the date of the invoice.
An invoice has information about items sold, date of sale, value of transaction, outstanding amount and payment terms. We will be looking into examples later in the Business documents, however, for now, it is important to understand that a sale or purchase on credit delays the receipt of cash. Thus, the outstanding amount will be “parked” under accounts receivable or accounts payable accounts until cash is received in full. Both accounts are just registers of all invoices.
If the customer does not pay after 30 days? The bookkeeper needs to keep a close eye and chase for this payment by writing an email and attaching their client statement showing the owed amount. In rare situations, when monies are not received, the business has a legal right to file a case at the court or if the amount is low, write it off from the business books.
By now, you should be able to identify the business transactions and difference between cash or credit sale and purchase.
What’s Next:
- What Bookkeepers Do. A Typical Day.
- Business Documents
Learn from the beginning: