Bookkeeping 101
What do bookkeepers do
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There are already many bookkeeping and accounting sites explaining the functions of bookkeeping. Even ChatGPT (or Google's Gemini) can do a decent job summarizing it.
Instead of repeating the information, I want to explain it on a high level, hopefully in simple words. So what bookkeepers really do??
A bookkeeper keeps the financial books of a business. It centers around generating / recording, storing, managing all the business financial transactions (in "books") and turning data into meaningful reports. I use 4 areas to capture all bookkeeping responsibilities.
Responsibilities of a bookkeeper
Recording the flow of money with the right buckets. Keep it clean, organized and accurate.
Managing the bookkeeping system: keep it updated, and verify (reconcile) books parodically.
Helping relevant day to day tasks (tracking bills, invoices, payroll, etc.)
Generating reports for financial health and decision making.
Area 1: Recording the flow of money with the right buckets, timely & accurately.
Money constantly flows in and out along with business activities (when you make a sale, purchase materials, pay for contractors or yourself, send an invoice, pay for a loan, etc.). A bookkeeper records each transaction with the correct buckets.
Generally there are 5 types of bucket:
revenue accounts (money made from sales… well, one of the main purposes of having businesses)
expense accounts (money spent for running the business)
asset accounts (useful and valuable things the business owns)
liability accounts (money a business owes)
equity accounts (remaining value after subtracting liabilities from assets)
Each type / category can have many sub-buckets. A business can easily have a set of >50 financial buckets or even hundreds depends on the business needs.
Area 2: Managing the bookkeeping system
Checks if the bucket system is setup correctly for the business. As business grows or evolves, the buckets may need to modified to match the business.
Verify the books are correct. You may have heard reconciliation. It simply matches the records in the books with all the bank statements. If it doesn’t match, troubleshooting and correction will be needed.
Area 3: Relevant day to day tasks & operations
Based on business needs, bookkeepers may also track the following activities since it will affect the books. But the level of involvement will vary based on the type of business.
Paying bills to vendors & sending invoices to the customers.
Payroll for employee and related taxes, as well as 1099 contractors.
Preparing information & assisting accountant for smooth tax filing.
Area 4: Generating financial reports periodically to help owner make sense of the financial data
In my option this is the fun part. Typically a set of reports are generated: income statement, cash flow, balance sheet.
The reports help to understand the financial health of the business. It can give you insights on things like:
Is my business making profits over a certain period? What are the top revenue generators?
Is the business running efficiently with reasonable cost? What are the top expenses?
Is my business at risk of running out of cash? How about debt level, and ability to repay it?
Did my previous key decisions make improvement for the business?
What is the profit by product and service or by business section? Do I have bad service that may erode the overall profit?
What is the grow potential?
Based on particular business needs, bookkeepers can also create custom reports for specific purposes (i.e. understand cost per project, profit by product / service, or by location, etc.). You can only improve what you track. Work with your bookkeep for your custom reporting.
Accounting vs bookkeeping
We have talked a lot bookkeeping, but what about accounting?
Accounting focuses on analyzing financial reports, making business strategy and filing tax. While bookkeeping centers around recording and upkeep of a business’s financial transactions and records.
But there is no clear cut boundary between the two, and some bookkeepers do wear CFO / controller hats. So yeah, as long as the business has good books, and uses them properly, who does what really depends on the business owner, accountant, and the bookkeeper.
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