Bookkeeping is essentially the backbone of every business, whether your business is set up in Pennsylvania or any other state in the U.S. Having an understanding of some basic principles is necessary for every small business owner, manager, or freelancer so that one can make better decisions and make sure there is financial stability. If it is overwhelming for you, it is suggested that you let a CPA in Scranton, Pennsylvania, handle bookkeeping for you. Now, let us take a look at some basic principles of bookkeeping.
- Double-entry system
Every financial account has at least two accounts. One is debit, and the other is credit. Debit is considered as the increase in expenses or assets, whereas credit is regarded as a reduction in assets or an increase in equity or liabilities. A double-entry system is necessary to make sure that the accounting equation stays balanced throughout.
- Chart of accounts
A chart of accounts is essentially a categorized list consisting of all the accounts that are under use by a business to record its financial transactions. It generally has revenue, assets, equity, liabilities, and expense accounts. When you rationally organize the accounts, it makes it simpler and easier to track and analyze the financial data.
- Recording transactions
Recording your transactions immediately and accurately is necessary to maintain authentic financial records. Every transaction should be backed by documentation like receipts, invoices, and bank statements. To keep track of your transactions in a systematic manner, bookkeepers use ledgers and journals.
- Accrual vs. Cash Accounting
Either accrual or cash accounting methods can be used for bookkeeping. In cash accounting, your transactions are recorded when the cash is paid or received. In accrual accounting, transactions are recorded simultaneously with their occurrence, irrespective of when money is being exchanged. Having a better understanding of the two methods is quite important to assess the financial performance of your company accurately.
- Bank reconciliation
Regular bank reconciliation is needed to make sure that the financial records of the company are in sync with records registered in the bank. The process involves comparing the bank statement with the company’s accounting records so that one can identify discrepancies and sort them out. Bank reconciliation allows you to prevent fraud, detect any errors, and help to make sure that your financial statements are accurately maintained.
Role of CPAs in bookkeeping
Principles that are stated so far are merely a handful of all the basic ones. There is much more to it, and it gets pretty complex at times. CPAs can play a vital role in making sure that everything remains in compliance with the accounting standards, requirements of financial reporting, and tax law obligations. CPAs have expertise in strategic planning, economic analysis, and audit preparation, assisting businesses to keep precise records and make well-informed decisions.
