Many new business owners are daunted by the idea of bookkeeping and accounting; most have not been trained to any degree in either field. Obviously, for the professional bookkeeper or accountant, both are fairly simple.
Bookkeeping is the practice or profession of recording the accounts and transactions of a business, whereas accounting provides information about the financial position of an organization which communicates an understanding of the financial operation.
Bookkeeping and accounting share two basic methods of tracking your income and expenses, both of which improve your chances of making a profit by gathering the financial information necessary to file your various tax returns.
The IRS requires that certain businesses use a specific method of crediting their accounts: the cash method or the accrual method; but, it does not require that the records be kept in any particular way just as long as the records accurately reflect the income and expenses of the business. Depending on the size of your business and amount of sales, you can create your own ledgers and reports or rely on accounting software.
Steps to keeping your books:
- Keep receipts or other acceptable records of every payment and every expenditure.
- Summarize your income and expenditure records on some periodic basis – daily, weekly, or monthly.
- Use your summaries to create financial reports that will tell you specific information about your business, such as how much monthly profit you are making or how much your business is worth.
Whether you are processing your accounting by hand on ledger sheets or using accounting software, these principles are the same.