A business rests on its financial structure. Success requires sound management of finances, expert analysis, and informed strategy. Most people know this process has something to do with the fields of bookkeeping and accounting, but tend to incorrectly use the two terms interchangeably. Bookkeeping is really one function of accounting, while accounting encompasses many functions involved in overseeing a business’s finances. We listed the fundamentals of bookkeeping for startups that will assist you to build a stronger foundation for your company.
Let’s begin by looking at what bookkeeping even means. Bookkeeping is the field within accounting that encompasses everything related to how you record and organize all information pertaining to your finances: that means every transaction, tax form, bank statement, etc. The bookkeeper’s work moves on to the accountant, who prepares reports and other types of analysis tailored to boost your business. Your brainchild depends on the management of your books, so it is essential to do them correctly. Accurate numbers will equip you with reliable financial records, enable you to file taxes without any speed bumps, analyze finances, and develop a winning strategy.
Introduction to Debits and Credits
There are two basic accounting terms that you should learn in order to become proficient in bookkeeping for startups: debit and credit. These terms frequently appear on bank records. Debit simply denotes the left-hand side of a journal or ledger, and credit denotes the right-hand side. Any preconceived association with these words, which are often mentioned in connection with credit cards and accounts, should be forgotten. When doing your books, you have to stick to a few essential principles about debits and credits on financial statements. In order for a double-entry bookkeeping system to remain in balance, the total of debits must be equal to the total of credits. Dividends, Expenses, and Assets should increase with debits and Liabilities, Equity, and Revenue should rise with credits.
Journal and Ledger Basics
Your business will require a precise and consistent picture of every transaction to achieve success in business. That’s why you will need a system to organize every receipt, bill, invoice, and payment. When tracking your business’s dealings, you will need a trusted sidekick: this is a financial statement called the journal, and it creates a chronological list of every financial event that your business encounters.
Journal entries include important information about transactions, including the date, the names of any accounts affected, and the amount moved to each account. Note that it is standard to address accounts that are debited before accounts that are credited. The sample financial statement below contains two journal entries: one for the purchase of furniture, and the other for rent and insurance.