Bookkeeping is financial record keeping—documenting how money moves through your business. Having accurate books is a requirement for completing your taxes, as well as for forecasting, modeling, budgeting, and other financial processes.
Concretely, bookkeeping is the ongoing work of collecting, categorizing, and adjusting transactions to maintain an accurate set of “books”, as well as the generation of financial reports derived from those books. “Closing the books”, which typically happens on a monthly cadence, looks like the following:
- Collect all transaction moving money into and out of your company. Transaction sources include your bank accounts, credit cards, payroll provider, credit card processor, and expense reporting system. Your assets, liabilities, equity, income, and expenses all generate transactions.
- Categorize these transactions into a set of meaningful buckets (“accounts”).
- Adjust transactions according to the principles of accrual-basis accounting. Depreciation and amortization of large assets, treatment of prepaid and accrued expenses, and treatment of unearned and accrued revenue are examples of common adjustments.
- Generate statements summarizing the company’s financial position. The profit and loss statement, balance sheet, and statement of cash flows are common financial statements.
Accurate categorization and accrual-basis adjustment of transactions matters for:
- Reporting your tax obligations correctly to the government
- Having an accurate view of how much money your company has and where it is making and spending money
As it turns out, doing all of this correctly requires understanding a lot of rules and doing a lot of meticulous work, which is why most companies leverage a bookkeeping firm that specializes in the rigorous application of accrual-basis accounting.
In addition to closing the books and providing monthly financial statements, a bookkeeping firm can help you:
- Structure your view into your company’s financials (the “chart of accounts” into which transactions are categorized) to be maximally useful
- Implement best practice workflows for corporate credit cards, payroll, expense reporting, and other business operations