Bookkeeping 101: Bookkeeping Basics

Welcome to the 1st of my Bookkeeping 101 posts. These posts will cover the basics of bookkeeping and accounting, which will include definitions of financial terms (such as capital, asset, liability, etc.), an explanation of double entry bookkeeping and other insights into accounting principles. In this post I will share some basic accounting knowledge and explain why it is necessary to keep financial accounts...

What is an Accountant?

An accountant usually refers to the person who will calculate the overall annual profitability of an entity (business, charity, company, etc.) and the amount of governmental tax that is owed. Sometimes an accountant is referred to as a 'Tax Accountant' or 'Year-End Accountant'. The majority of entities will use an accountant for profitability and tax calculations, usually an in-depth understanding of accounting techniques, accounting principles and current tax law is needed to make these calculations accurately.

What is a Bookkeeper?

A bookkeeper usually refers to the individual that keeps the financial records (accounts or books) of an entity. This involves recording the day-to-day financial transactions of a business, such as, recording the entities payments and receipts from bank statements, raising sales invoices, recording purchase invoices and making records for any cash payments and receipts. Some bookkeepers also help calculate VAT.

What is the Difference between a Business and Company?

In most countries, a business refers to an entity that trades as a sole trader - a person that has exclusive ownership of a business, all the profits are his/hers and he/she is liable for all business debts. A company usually refers to an entity that trades as a limited company - a company that is owned by share holders and directors. Individuals are only liable for the amount of debt equivalent to their investment. There are also other entities such as partnerships, limited partnerships and charities.

What do you Need to keep Accounts?

  • Without well-kept and accurate accounts, it is not possible to calculate the profitability of an entity... You won't know how much money you are making!

  • Up to date accounts help business owners and company directors make financial decisions about the entity. To plan for future performance you need to know current and past performance. Accounts can provide owners with details on current and past sales, stock and profitability, monies owed to the entity, monies owed by the entity, bank balances, cash flow and other crucial financial information.

  • By law, it is likely that the entity will have to declare profitability and pay tax. This cannot be done without well kept and accurate accounts.

  • Bank managers and investors will need to review business or company accounts before providing a loan or investment

Next Lesson: Bookkeeping 101 - Financial Terms