Bookkeeping is essential for a business to run smoothly. Whether it’s recording transactions, receivables management, or monitoring customer credit and employee wages, bookkeeping is required to both understand your current financial situation and obligations, and prepare for growth down the line.
Below, we discuss the fundamentals of bookkeeping, from assets, liabilities and equity, to revenue, costs and expenses.
An asset is anything your company owns that has value, and there are several types. There are current assets which include cash, bank balances, investments, inventory, stock, debtors and any prepaid expenses. Next there are fixed assets which by nature are fixed, for example vehicles, land, buildings, furniture, plant etc. Finally, there are intangible assets – these include goodwill, patents, trademarks and others. These all fall under the umbrella of assets, and are recorded on your balance sheet with their dollar value. Any items bought on credit or with accompanying debt still count as assets, though the amount owed on the asset is listed as a liability.
Liabilities are everything the company owes to other businesses or individuals. Current liabilities cover any debts owed by the business that will be payable in that current year, including bills, wages, supplier debts, or short-term loans. Long term liabilities are for liabilities which won’t be paid in that year, for example a bank loan.
Finally, equity – also called owners’ equity – is any debt owed by the business to the owners. This can be in the form of any savings or money initially invested into company, or any business profits left at the end of each financial cycle. Revenues and expenses are recorded under equity as they relate to the financial earnings of the business over time.
Your revenue lists the amounts earned from the company’s main services or products. This could be retail sales of merchandise, venue operation, or fees earned through consulting. The balance of your business revenue will be cleared each financial year and moved to your business capital.
Your costs refer to the dollar amount required to buy and manufacture merchandise or provide services to customers through the business. Expenses, on the other hand, refer to all other costs not specifically related to the products or services of the business. One example of an expense is employee wages, where the business occurs a cost in order to generate further revenue down the line.
Together, these two key groups denote the amount of money owed to suppliers that the business is expected to pay (accounts payable), and the money expected from clients and customers (accounts receivable). While a lack of bookkeeping and accounting can turn the end-of-year tax time into a headache, great bookkeeping will allow you to forecast earnings, refine business processes, and ensure steady cash flow.
While these are the most basic aspects of bookkeeping, it’s easy for a small or medium-sized business to struggle with their bookkeeping and accounting in the first few years. Our services at 3rd Arm Admin include payment processing, reconciliation of banks accounts, credit control, monthly reporting and much more, and can provide the services of a costly, in-house bookkeeper or accountant at a fraction of the cost.
At 3rd Arm Admin, we provide expert bookkeeping services that will help your business grow. With well-organised financial records and an easy-to-use invoice system, you’ll be able to create better financial strategies, reduce financial stress, and make more out of your business.