What is a Bookkeeper?

Many small business owners may be unsure of what a bookkeeper is and what sort of data bookkeepers can provide that they couldn’t obtain easily on their own.

Scouring bank statements, credit cards and separating expenses and receipts by category is a meticulous and tedious endeavor for most business owners. This is one of the many aspects bookkeepers take care of leaving you worry free.

A bookkeeper keeps track of your finances by establishing a record of daily financial transactions. Bookkeepers compile your expenses, payments, and sales into an easy to digest format for you, potential lenders, and accountants. They help secure loans and prepare your accountant for tax time.

Simply put, bookkeepers handle the little things so you can focus on the big picture. There are countless transactions that occur daily, not all of them are easily traceable. Bookkeepers are adept at handling the nooks and crannies of your business, especially the costs that would otherwise be exhausting to keep up with.

Bookkeeping: An Overview

Bookkeepers provide detailed information on various categories of spending to assist small business owners in identifying ways to improve spending. To understand what exactly a bookkeeper does, we’ve included a general overview of the terms you will see and then we continue to go in depth on these terms throughout this article.

Journal Entries

These are the day to day transactions that are recorded in raw form.

• General Journal: A complete record of all business transactions.  It documents every journal entry including the date of transaction, which accounts are debited or credited, the amount, and a description of the transaction. This is the primary journal regardless of the size of business.
• Specialized Journal: This journal contains information specific to one area of the business such as sales or purchases. The specialized journal is commonly used in big business to help sort transactions of a specific type.  Summary totals are then transferred to the general journal.  

General Ledger

Also known as a nominal ledger, this consists of the five main accounts used in bookkeeping. The information from the journal entries is used to make up the general ledger. An accountant then uses this ledger to pinpoint any errors and fix them if needed.

The five accounts are:

• Assets: These are the resources acquired by a company through transactions. Assets include things like inventory and cash.
• Liabilities: This is the money owed by a company, either on a short term or long term basis. Liabilities include things like rent, accounts payable, and loans.
• Owner or Shareholder Equity: This is the money earned by a company. Sole proprietorships reflect owner equity and corporations reflect shareholder equity.
• Income: This is the money received from the sale of goods or services. This differs from equity because income includes all money received, not just profits.
• Expenses: This is the money spent on things like inventory and wages. Expenses can be long term or short term.

The most common collection of information is displayed in three statements, which we’ll discuss below.

The Balance Sheet

The function of a balance sheet is broken down into a simple equation that balances the liabilities, equities, and assets of your company. This is also known as the fundamental financial statement which encompasses these three accounts:

• Assets: Your resources, cash, property, land, inventory to sell for future benefit.
• Liabilities: Money owed, loans, owed accounts, mortgages, rent, and expenses.
• Equity: is the total of assets minus liabilities, this is also known as the shareholders equity for larger companies and owners equity for small businesses.

The balance sheet is a key piece of information in your portfolio.

Income Statement

The income statement shows your net income which is your revenue minus expenses. This is a general, easy to understand equation that shows the difference of money spent and money gained.

• Revenue: also referred to as the “top line” includes all assets acquired through business transactions.
• Expenses: This includes all business costs including fixed and non-fixed expenses such as payroll, inventory, rent, mortgage, and advertising.

Simply put, the income statement is a summary of where your business is, financially, at the moment.

The Statement of Cash Flows

This statement highlights cash in and cash out to determine the efficiency of inbound money to cover expenses. The Statement of Cash Flows can be separated into three categories:

• Operating Activities: Includes the production and selling of goods or services and all standard business activities.
• Investing Activities: Includes long term investment items such as equipment and property. These items will generally be cash flow negative but provide long term benefit.
• Financing Activities: Includes loans that need to be paid back to companies and dividends paid to investors.

Cash flow in your financing activities determines the amount of credit that companies are willing to extend to your business.

What Does a Bookkeeper Do?

The responsibilities of a bookkeeper involve various day to day financial tracking through journals to then be posted on the corresponding accounts. Handling all these various receipts and reports on your own as a small business owner can easily consume the bulk of your time.

This includes collecting information such as:

• Cash receipts
• Bills of lading/ shipping invoices
• Purchase invoices
• Commercial Letters
• Expense reports
• Income tax assessment

Bookkeepers can head to the bank for you. While paying someone to do tasks that involve running around seems like something anyone can do, it might be beneficial for your bookkeeper to establish a relationship with the bank. This may save time and help with a smooth transition of information. Bookkeepers are not as expensive as accountants and often handle general tasks.

If you decide to hire a part time bookkeeper, you can decide where their time is best allocated. You may have a history dealing with certain aspects of your business and choose to continue to focus on those tasks while hiring extra help to tackle the tough jobs, so you can focus on your strengths while a bookkeeper reinforces the weak spots.

Payroll processing can be a time consuming and costly endeavor. This is why many businesses choose to outsource their payroll to a bookkeeping or payroll processing company. These companies will have a much lower rate than an in house CPA and will simplify and automate the payroll process.

What are the Two Types of Bookkeeping?

Single entry bookkeeping and double entry bookkeeping are the two major types of bookkeeping. Single entry bookkeeping is used by smaller businesses to keep a simplified log of income and expense. Double entry bookkeeping is the most common bookkeeping process and ensures precise financial recording of multiple accounts.

• Double entry bookkeeping uses both manual and automatic processes. Bookkeeping software will help offset the workload of a traditional bookkeeper and could save you money in the long run. However, the software must of course be purchased and some services require a subscription which adds consistent long term cost.
  
• Single entry bookkeeping is primarily a manual recording process and can be done easily on an excel spreadsheet or in a notebook. There are programs that help automate this process, but this is generally the choice of business owners who don’t need to keep track of many inflows and outflows of cash.

Some businesses owners may opt to use bookkeeping software like Quickbooks and later have the information logged by an accountant. This is important for optimizing bookkeeping because the human element helps translate the dense amount of information obtained by computers. This information is used to help small business owners make better decisions with their money.

Double Entry Bookkeeping

Double entry bookkeeping made its first traceable appearance in the mercantile period of Europe in the sixteenth century. It is considered the birth of capitalism and its methods have been fine-tuned over the last five hundred years. The premise remains the same, each side balances out, making this method a way of easily detecting errors and ensuring accuracy.

The double entry system uses accounts (assets, liabilities, and equities) by balancing out the debits (inbound money) and credits (outbound money). This is displayed in the equation, assets = liabilities + equities. Debits appear on the left side of a T account and credits appear on the right, this arrangement provides a visual aid when balancing your debits and credits.

It is important that debits and credits balance out, if the sum of the liabilities and equities do not match the assets that means there is an error that needs to be resolved. There is no circumstance where this equation does not balance.

Debits do not necessarily signify an increase however, and credits are not always a sign of decrease. If a company spends cash, it is reflected as a decrease in debits on the right and an increase in credits on the left. The two amounts are the same on both sides and are considered balanced out.

What is Single Entry Bookkeeping?

Single entry bookkeeping eliminates the use of debits and credits and focuses solely on expense and income accounts. This is a simplified version of accounting primarily used by new businesses to get their feet wet in the bookkeeping process. Businesses with low volume and small operations may choose to use single entry bookkeeping.

This process is reflected in the form of a cash book. Cash books contain information directly related to inbound and outbound cash flow and is documented on a spreadsheet. This is a manual process that is a good choice for those who don’t want to spend the extra cash on automatic software.

Single entry bookkeeping use a simplified system of recording and generally includes:

• Date of transaction
• Description of items/services
• Reference number or invoice
• Transaction Value reflected by income or expense
• Running total of transactions or balance

It is important to note that single entry bookkeeping is known as an “incomplete”  financial recording system because it does not balance like a double entry system. This leaves financial records susceptible to error and fraud. Large companies are required to follow certain guidelines that require the use of double entry bookkeeping.

What Can’t a Bookkeeper Do?

A bookkeeper cannot represent you or your business to the IRS. Representation must come from a trained tax professional or CPA. Untrained tax professionals and bookkeepers are not qualified to deal directly with the IRS. However, they can still prepare the books to be submitted by a CPA.

While bookkeepers do help quantify a large set of data, bookkeepers are not qualified financial strategists. Financial strategy encompasses a large subset of financial elements not suitable for an untrained professional. For this you will require a CPA or CFP (Certified Financial Planner). You can plan financially using bookkeeper data, but CPA assistance is recommended.

Bookkeepers cannot audit your books or help with an IRS audit. Bookkeepers communicate with third-parties such as accountants who act as the responsible party during audit time. Bookkeepers cannot prepare formal audits, but they can help prepare end of the year reviews. The financial statement of review can be prepared by a bookkeeper

You don’t necessarily need a bookkeeper for your taxes, but you might want one. Besides finalizing tax preparation and submitting your taxes to the IRS, a bookkeeper can ready this information for an accountant to submit. If part of your needs is saving money however, a bookkeeper will save you money by keeping up to date books at a low rate.

Can a Bookkeeper Help Get a Small Business Loan?

Yes, while a bookkeeper is not required to get a loan, a bookkeeper will be able to reflect accurate financial tracking to the lender. Not only will this help improve your chances of getting a loan in the first place, you can rest easy knowing you’ll get the maximum loan possible.

A Bookkeeper can assess your businesses by exploring the Five C’s of Credit as it pertains to your business.

The Five C’s of Credit

Character

This aspect focuses on your credit integrity as monitored by the three major credit bureaus. They will include credit reports for up to 7-10 years, so be sure to factor in any outstanding financial balances. Your credit history will be the determining factor in assessing the risk of taking your business on for loan. Bookkeepers do not directly affect credit in this manner.

Capacity

Capacity is assessed by examining your debt to income ratio. Most lenders will require at least a 35% debt to income ratio, this ensures borrowers will have enough funds to make loan payments. Lenders calculate your debt to income ratio by examining monthly payments and earnings. If your debt to income ratio is too high, lenders may be prohibited from loaning to you.

Capital

Capital consists of money you are able to put down up front to cover the loan cost. With a higher down payment you can reduce the amount of money you have to pay over time. A substantial down payment also increases the likelihood of approval from the lender.

A bookkeeper can help you determine your maximum down payment as it pertains to your current financial status.

Collateral

Collateral provides security for banks when processing loan applications. If you have high value collateral the bank will feel more comfortable extending a loan to your business. Providing collateral is an easy way to reduce interest rates. A collateral backed loan will help you negotiate better terms with your lender and can reduce the overall cost of the loan.

Conditions

This includes the terms of the loan such as interest rate, loan size, and term length. Condition also refers to the current state of the economy and whether it’s a good time to extend a loan to a certain business. If you are in a low risk industry with high reward this will also help your ability to acquire a loan.

The Different Types of Lenders

Lenders want to know whether you’ve already established a good line of credit or not, your previous loan acquisitions and payments will play a factor into this. There are three main types of lenders available, and they are:

• Banks: SBA (Small Business Administration) Loans provided by banks are anywhere from $500 to $5.5 Million. They tend to average at $500,000.
• Online Lenders: Loans from online lenders range in the $1000 to $5 Million area.
• Microlenders: Loans are less than $50,000.

The best option will depend on your current financial status, business volume, and overall credit.

Borrowing From Banks

Borrowing from a bank is the most common way to get a loan in today’s small business market. If you have your books in order and you have a good line of credit, banks will offer the most competitive rate and should be the choice of small businesses looking to expand. A bookkeeper will help you get all the information you need to apply for such a loan.

• Banks will be a slower lending process so if you need the money fast, you might want to consider an online lender or microlender.
• Banks generally have the lowest APR financing rates, good credit will help you get the lowest one.

Online Lenders

Online Lenders will be your choice to get a fast loan. If you’re worried about certain subpar financial aspects of your business, online lenders have one of the highest approval rates as well. A bookkeeper can help you get a better rate by keeping all your records in order to provide to the potential lender.

Online lenders are known for their ability to get cash in business owners hands quickly, if you need cash now choose this option. With rates ranging from 6%-99% APR, online lenders will be costly over time, so make sure your business can handle the volume of loans you have to pay back.

Microlenders

Microlenders are primarily used by start-up companies and small businesses who are not quite off the ground yet. A bookkeeper can help with this aspect because microlenders are non-profit companies who require an extensive look at your financial information and overall business potential.

• Microlenders offer loans to those who have limited financial and business history, many choose to go to a microlender if they are denied a loan from the bank.
• The APR on loans from microlenders are higher than bank loans, and should be something that new business owners consider if they get denied by the bank.

Obtaining a microloan can be a good move for startup costs or for those without much financial history, but they are often the downfall of many businesses who thought they could generate enough revenue and failed. Make sure your business is sound before obtaining loans of any sort.

How Does Bookkeeping Differ From Accounting?

Bookkeepers collect inbound and outbound financial data while an accountant interprets it. This distinction is important because while bookkeepers can obtain this data for you, they require no formal education to do this. Accountants must become educated and certified on important tax laws and should be your go to professional during tax season.

Bookkeepers are an important asset because they are able to do a wide range of clerical and financial tracking at a much lower cost. An accountant is still needed to summarize all the data retrieved by the bookkeeper and prepare the reports for management teams. Accountants analyze the data and provide detailed information to outline financial statements.

Bookkeepers and accountants generally work hand in hand, and in some cases accountants oversee bookkeeper processes. This is not always the case, bookkeepers can be hired as standalone consultants and the information they collect can then be analyzed and interpreted by a separate accounting firm.

As technology advances, many of the processes of accounting are transitioning into functions of a bookkeeper. Over time it is predicted that most of the bookkeeping data will be obtained primarily through software rendering bookkeepers obsolete. For now, bookkeepers remain a necessary and cost effective way to track financial data for small and big business alike.

When Should You Hire a Bookkeeper?

In the early stages of small business development many owners will opt to do most of their own bookkeeping. As your business grows however, the amount of data that must be tracked grows along with it. If you find yourself unable to keep up with normal business operations and are spending three or more days a week handling what a bookkeeper does, it might be time.

• If you already have an accountant and are spending a lot of extra time on the phone with them and paying them for it, you might want to consider hiring a bookkeeper to offset some of that workload. It will not only keep your accountant from handling some of the more menial tasks, it will save you on cost.
  
• If you are experiencing a rise in sales and your profits aren’t rising along with it, a bookkeeper might help. Bookkeepers will be able to pinpoint areas of cost you can optimize or eliminate. If you allow your financial data to back up for months on end it will be difficult to make meaningful business decisions.
  
• If you have a growing number of employees it might be time to get a bookkeeper. Bookkeepers can help with payroll processing and reduce the overall amount of paperwork you will have to handle with a growing business.
  

The sooner you hire a bookkeeper, the sooner you can reap the benefits and continue to grow your business in other areas.

The History of Bookkeeping

The business of accounting has been around for thousands of years dating back to the Mesopotamian era, so the methods that they use to process financial data are optimized for business small and large, simple and complex. The scope of information they are able to condense into a palatable format is achieved through methods that have stood the test of time.

Modern bookkeeping, namely the double entry method is credited to italian mathematician Frater Luca Pacioli who published the work “Everything About Arithmetic, Geometry, and Proportion” on November 10, 1494. Over the next few hundred years this would become the foundation of bookkeeping which included the use of journal entries and ledgers.

Various religious texts including The Bible and Quran also contain mention of primitive methods of bookkeeping and accounting. The thirteenth century marked the dawn of currency and merchants began using debits and credits to track finances. This helped provide a compounding resource of financial information to facilitate the growth of business.

As time goes on, bookkeepers are still utilized but it is projected that they will eventually have to get formal education to continue practice bookkeeping. This is because the legalities of keeping the books are becoming more strict, and a certified tax professional or CPA is required to handle the technical aspects of finance.

Summary

Bookkeepers are a valuable asset to any company and they provide low cost financial tracking for businesses of all shapes and sizes. Bookkeepers do not replace the advantages of an accountant but they can help offset some of the workload at a reduced cost. Bookkeepers are essential to business and can work with or without an accountant to take care of your financial records. Hire a bookkeeper to help your business grow to the next level.