Bookkeeping 101: Keep your company’s finances in order

Good bookkeeping is critical for a successful business. Best practices to reduce the risk of errors.

10-minute read

A bookkeeper is the gatekeeper of your company’s financial information. Their job is to record your company’s day-to-day financial transactions accurately, consistently and on a timely basis.

They are also typically tasked with a variety of other key responsibilities, including drawing up invoices, paying employees and balancing books.

A good bookkeeper is essential for ensuring you have the right financial information for making sound business decisions and ensuring your finances operate smoothly.

What is bookkeeping?

Bookkeeping is the act of recording every business transaction in a financial record-keeping system, such as accounting software or a spreadsheet. The transactions bookkeepers record include:

  • sales and other income
  • expenses and other payments
  • asset purchases
  • loan and lease payments
  • investments

Record keeping is done in accordance with broadly accepted accounting standards (see more on those below).

What do bookkeepers do?

A bookkeeper’s core responsibility is to record business transactions. But they are often tasked with a wide range of additional responsibilities, such as:

  • preparing financial documents, including:
    • interim financial statements
    • accounts receivable and payable reports
  • preparing invoices and collecting payments
  • managing payroll
  • managing/preparing equipment and vehicle records
  • processing expenses
  • managing back-up files
  • setting up and maintaining customer and vendor records
  • preparing recurring transactions (e.g., depreciation, loan disbursements)
  • preparing remittances for taxes, the workplace safety board and employee benefits
  • doing monthly reconciliations of accounts payable and receivable, and bank and credit card accounts

At the heart of bookkeeping is accurate, reliable and timely recording of financial data.

What are the basics of bookkeeping?

Bookkeeping should be done according to established standards for recording transactions. These are set by the Accounting Standards Board in accordance with generally accepted accounting principles (GAAP).

Canadian private businesses can use one of two accounting standards:

Bookkeeping best practices

At the heart of bookkeeping is accurate, reliable and timely recording of financial data. This should be done according to the following principles:

  • Accuracy—The correct data must be recorded. It should be based on verified, precise figures, not on guesses or estimates.
  • Reliability—Data must be recorded in the proper place. For example, a direct cost should be allocated under cost of goods sold—not under selling, general and administrative expenses. Also, you need to record a debit and credit for every transaction (also known as double-sided entry).
  • Timeliness—Data should be recorded promptly; otherwise, details can be forgotten. Recording it when it’s fresh helps ensure accuracy.
  • Consistency—Rules on data entry are important to ensure that data is always recorded in the same manner.
  • Simplicity—Data entry should be done through a simple process. For example, a record should be entered only once. Multiple entries of the same information increase the risk of error.

Because of the importance of their role, it’s helpful to have an accountant or controller supervise a bookkeeper.

What skills does a bookkeeper need?

A bookkeeper doesn’t require formal training or a certification. Businesses hiring a bookkeeper usually seek someone with:

  • a two-year diploma in a related field, such as an accounting or payroll designation
  • prior bookkeeping experience
  • computer and organizational skills

Because of the importance of their role, it’s helpful to have an accountant or controller supervise a bookkeeper. That person can offer feedback on keeping and presenting records and ensure the bookkeeper’s work complies with accounting standards, tax requirements and management reporting needs.

For example, bookkeepers often make small mistakes or omissions when preparing interim financial statements. These then require analysis and adjustments by an accountant during the preparation of year-end financial statements.

What’s the difference between accounting and bookkeeping?

Bookkeeping—the recording of day-to-day financial transactions—is one part of the larger activity of accounting.

Accounting also involves:

  • ensuring that financial transactions are accurately and reliably recorded in accordance with accounting standards, tax requirements and management reporting needs
  • leading the preparation of cash flow plans, financial projections and annual budgets
  • summarizing and analyzing a company’s transactions and providing key performance information by way of monthly management reports and financial dashboards
  • helping business executives and owners understand their company’s finances and make business decisions
  • preparing financial documents for external parties, such as bankers, investors and buyers
  • advising on safeguards to reduce financial risks

An accountant has formal training and certification requirements, while a bookkeeper does not.

Is it hard to be a bookkeeper?

Bookkeeping can be relatively easy to learn. Affordable accounting systems are available that offer automated, easy-to-learn tools for recording financial transactions in accordance with accounting standards and other requirements.

Some businesses, however, record transactions on spreadsheets instead of an accounting system. It can be more difficult to properly record and manage financial information on spreadsheets. Spreadsheet formulas can be difficult to learn and there is a higher risk of record-keeping errors. The result may be an inaccurate picture of the company’s financial performance, incorrect tax filings and even unsound business decisions.

Our business advisors go into more detail on this subject in the BDC blog, Stop using spreadsheets to manage your business.

What is the double-entry system?

Double-entry bookkeeping is the process of recording two elements—a debit and a credit—for every financial transaction.

The two elements typically consist of:

  • What was purchased or sold
  • How money was exchanged in return for the item that was purchased or sold

For each transaction there is a debit and a credit. When assets are increased, they are considered debits. When liabilities or equity is increased, these are considered credits. Note that the credit and debit must be equal and thus balance each other out.

For example, if a business buys a computer and pays with cash, recording the transaction involves making two entries:

  • Debit―The purchase amount is added to fixed assets and any sales tax paid for the asset would be added to a sales tax receivable account.
  • Credit―The full amount of the purchase (inclusive of sales tax) would be recorded as a reduction in “cash.”

Where a business has issued an invoice to a customer for services rendered and the customer is allowed 30 days to pay for this service, the sales transaction would likely involve the following entries:

  • Debit―The full amount of the sale (inclusive of sales tax) would be recorded as an addition to accounts receivable.
  • Credit―The sale amount is added to revenues and any sales tax applied to the invoice would be added to a sales tax payable account. (Note: Revenues ultimately represent an addition to equity and are therefore considered credits. Expenses that are offset to revenues (and are therefore a negative equity) would therefore be classified as debits.

Accounting software uses automated double-entry bookkeeping that automatically determines both sides of each entry based on the type of transaction being recorded. As a result, the bookkeeper doesn’t have to worry about remembering what to debit or credit. Businesses relying on spreadsheets to record financial transactions must make sure to enter two entries for every transaction.

What is the single-entry system?

Single-entry bookkeeping involves recording only a single entry for each transaction. In the example of the computer purchase above, the transaction would be recorded once—as a fixed asset purchase. The records wouldn’t show how the purchase was paid for (i.e., with cash).

Single-entry bookkeeping can be used by very small businesses with few assets or liabilities and that primarily deal in cash. But it isn’t generally advisable as it doesn’t record sufficient information and can’t be used to generate financial statements.

What is a ledger?

A ledger is a digital or manual record of all financial transactions of the business with details that can be later used to generate financial statements. The ledger typically includes:

  • all debits and credits for a period
  • categorization of transactions, those categories being:
    • revenue
    • expenses
    • cash
    • accounts receivable and payable
    • inventory

What is a daybook?

A daybook is a journal in which financial transactions are manually recorded as they take place. The information is then transferred to a ledger and can be used to create financial statements.

Daybooks are used only in manual bookkeeping and have been largely replaced by accounting software and spreadsheets.

Next step

Discover ways to manage cash flow in your business by downloading the free BDC guide, Taking Control of Your Cash Flow.