What we do
What does a bookkeeper do?
The accounting cycle
Organizing and categorizing financial transactions within the proper accounts is the bread and butter of a bookkeeper and it sounds simple enough, right? Well, it can be a little more complicated and require a more specialized understanding to do it right. A process called the Accounting Cycle can help us understand that there is a bit more involved here. Let’s take a look at it.
- Recording the Transactions – The cycle starts with properly recording the transactions in what’s called a transaction journal. This is organized chronologically as the transactions occur. These are categorized using the double-entry method of accounting.
- Posting to Ledger – After the transactions are recorded in the journal, they need to be organized by account to understand how each one affects the account balances. It’s a good idea to identify which account the transactions are coded to in the previous step.
- Unadjusted Trial Balance – Generating the trial balance is essentially the process of fleshing out any errors that may be in the books (entry errors, transversal errors, omission, etc.)
- Adjusting Entries – Certain accounts within a business will need to be adjusted on a monthly basis, depending on the type of business. In other words, money will need to be swapped between certain accounts to properly represent what is going on in the business. Some examples include prepaid expenses, asset depreciation, and current debt.
- Adjusted Trial Balance – This is basically the same as step 3, but includes the adjusting entries.
- Financial Statements – After all the previous steps are complete, statements such as the balance sheet, income statement (sometimes call profit and loss statement), and the statement of cash flows can be created. We’ll talk more about these statements below under the “Financial Statements” section.
- Closing Entries – This is the final step in the accounting cycle. Making closing entries is the process of moving money from temporary accounts into permanent accounts. Now the process starts over again. The associated time frame can be monthly (highly recommended), quarterly, yearly, etc.
common pitfalls
Improper Categorization
Because the Accounting Cycle starts with categorizing transactions, any kind of errors will propagate through the entire process. These errors can artificially inflate/deflate the account balances which can lead to overstating/understating revenue, profit, and expenses. Without accurate numerical data, a business cannot properly understand what must be done for stability and growth. In addition, potential errors will complicate your relationship with the IRS and create headaches for you during tax season.
Things can get a little messy
Many businesses will dump all the receipts and financial records on their CPA at the end of the year to ensure tax compliance. While this can be common, it is not the best way to manage your business records. Having to go through a year’s worth of information can potentially lead to errors, which can negatively affect your business. In addition, only looking at those numbers once a year is hardly taking advantage of the valuable information that can keep your business successful and growing.
Account Reconciliation
Bank accounts vs virtual accounts
There are many different types of accounts tied to business transactions. Some are directly connected to actual money in a bank or financial institution and others are used for tracking purposes in accounting software. Let’s try to better understand the purpose and differences between them. Let’s call the tracking accounts “virtual accounts” and the accounts that actually have money in them “bank accounts”.
Bank or financial institution accounts are essentially a central storage for your money, designed to protect your cash from theft, fire, or any other loss or destruction. In this modern world, the funds can be accessed around the globe rather than requiring you to carry cash on your person. Examples of bank accounts are checking, savings, money market, or certificate of deposit accounts. Although credit card accounts are not technically considered bank accounts, their use involves monetary exchange, so for our purposes, we will consider them as bank accounts.
Virtual accounts do not involve any type of monetary exchange. They do not contain physical cash, but are used to classify how actual money was spent in a business. Examples of virtual accounts include expenses, fixed assets, equity, revenue, or liabilities. Why don’t we look at an example to help identify the function of these accounts. Let’s say you purchased a $10 stapler, with a debit card tied to your business checking account. Your virtual expense account will go up by $10 while your actual checking account will go down by $10. The $10 balance in your expense account (virtual account), represents money spent on required office supplies, but no actual money was moved into that account. When it comes time for filing your taxes, the IRS will see that you exchanged money for the stapler and in turn, will lower your business’s taxable income.
Reconciliation
The process of reconciliation is ensuring that the money going in and out of your business bank accounts, matches what is recorded in the transaction journal (click here for more info on the transaction journal). Any errors, committed either by you or the bank, are more detectable and can be easily mitigated. Let’s go back to the stapler example. You purchase a stapler for $10 with your business checking account and you record it in your transaction journal on May 3rd. On May 31st, your bank releases your checking account statement that says you spent $10.70 on May 3rd. Wait a minute. Your transaction journal does not match. Something is wrong. After looking at the receipt, you determine that you forgot to record the amount of tax in the transaction journal when you purchased the stapler. With tax, it cost you $10.70. You appropriately modify the transaction journal and the crisis is averted. This is a very simple example, but can you imagine sifting through hundreds of transactions from several accounts for these types of errors? It’s a very time consuming process. Would you like to spend your time reconciling, or would you prefer to have a professional bookkeeper do it?
Financial Statements
what is a financial statement
Consider your physical health for a moment. Every time you see a doctor or visit a medical clinic, an assessment is made on your health based on the symptoms and any other information you provide. You are given a diagnosis, and in some cases a prognosis, treated accordingly with medication, or advised on the actions you should take to become well again. Often, the doctor can also help you understand how to prevent or hinder your ailment from returning.
Financial Statements can be considered the health records of your business. They encapsulate information that can be used to assess whether action is needed on behalf of the growth and success of a business. They can also function as warning signs or symptoms of an unhealthy business. Additionally, they are essential for determining tax compliance and liability. Let’s take a look at some very important statements.
key financial statements
Balance sheet
The term “balance” as it pertains to the Balance Sheet can take on a couple different meanings. First, the balance of an account is exactly how much money is contained therein or can refer to the amount of money owed on a credit card or loan. The balance sheet lists all asset, liability, and equity accounts in a business and their respective balances. These important numbers give an overall picture of the financial standing of a business (i.e. assets – what I own; liabilities – what I owe; equity – what is leftover).
Second, the balance sheet is a representation of what’s known as the Accounting Equation. Try and recall your understanding of a math equation from your study of algebra. It has two sides (one on the left side of the equal sign and one on the right). By very definition, one side has to equal the other or it is not a true equation. We can also think of this as balance. The total value of a business’s assets will equal the total value of its liabilities plus it’s equity. If they are not equal, an erroneous entry has been made in the transaction journal and should be corrected. Therefore the balance sheet can also serve as an error detector.
Third, the balance sheet comes in handy when it’s time to file your business taxes. It can help determine your tax liability and aide in planning for the future of your business.
Income Statement
The Income Statement, sometimes known as the profit and loss statement, sounds pretty self-explanatory. It examines how much a business received for its products or services vs how much was spent keeping it running smoothly. These two types of transactions are classified in revenue accounts and expense accounts respectively. The general idea is for the revenue account balances to be higher than the expense account balances, during a specific period of time, thus indicating profit for the business. This is a very simple, high-level way of looking at the income statement – bring more money in than you spend.
Though the income statement is very straightforward, it can also be examined in much more detail to provide valuable insight into increasing your margins. Additionally, a deeper dive can help you find answers as to why a particular time frame was more/less profitable than others, but it doesn’t have to be overly complicated. The good news is that if you have ever made a budget or scrutinized your personal finances for money saving opportunities, you already have a good understanding of how an income statement can help you make better decisions for your business.
Statement of Cash Flows
The Statement of Cash Flows answers four important questions pertaining to a specific period of time. Where did my cash come from and where did it go? How much cash did I start with and how much cash do I have now? There are three main sources of cash flow in a business. Let’s use a retail store as an example to illustrate these three sources.
The first source is the operating activities of the business. This is money flowing in and out of the business from its primary function much like a retail store purchases and sells products or inventory. The second source is the investing activities. A retail store that receives large shipments of products might not be very efficient without a forklift to move and organize the inventory. The purchase of a forklift would be considered an investing activity, that is, acquiring an asset that generates value to the business. The third source is the financing activities. Raising funds from loans or contributions from owners are considered financing activities.
Following the trail of cash increase and decrease using the statement of cash flows will lead to actionable data. This information can significantly increase your understanding of the health of your business and what decisions to make to keep it healthy.
Tax Services Referral
Need some help?
At this time, we are unable to offer tax preparation services, but we hope to be able to provide this important service in the future. That said, we partner with wonderful tax professionals who can take care of you and your business. If you currently do not have a tax professional that can assist you with your needs, let us refer you to someone who can help. We personally vet the individuals whom we refer to make sure that they are able to support you as best as possible.
Want to know more about us?
Getting in touch with the right people can be a challenge. Knowing the people behind the business is just as important as its function. If you would like to get to know us a little better, please click “Get To Know Us” link.