What Is Bookkeeping?

Whether you’re growing or starting a business, you’ll need to familiarize yourself with everything from management and human resources to marketing and accounting. While many business owners choose to outsource financial services, understanding the basics of bookkeeping can help you to make better strategic decisions.

If you don’t have a financial background, the idea of managing ledgers and tracking your expenses might seem intimidating. However, once you know what to look for and how to set up basic formulas (or find software in place that already uses them) you may be surprised by how quickly you learn it. This primer will help you to understand bookkeeping and why it’s a valuable skill for small business owners. 

Defining Bookkeeping

Bookkeeping is the process of tracking, storing, and analyzing financial data related to running a business. Simply put, it involves managing your financial books (accounting ledgers) accurately.

The concept of bookkeeping stems from the historical practice of business owners or accounting teams manually writing down each expense or translation to ensure it was accounted for properly. In modern bookkeeping, many of these numbers are auto-populated or entered into software tools that make tracking and analysis easier.  

What Records Would a Bookkeeper Track? 

Every business, no matter how small, has expenses and profits—the bookkeeper simply tracks all of these. As your business grows more complex and expands, you’ll have more records to track under different expense and profit categories. A few common numbers that bookkeepers track include:

• The cost of materials bought (often broken out by material and vendor)
• Outside vendor services (like marketing expenses)
• Operational costs and fees (including rent, business licenses, utility bills)
• Billing sent to clients and the status of payments
• The number of goods sold and at what prices

Any expense or source of income, no matter how inconsequential, gets recorded by the bookkeeper. This follows legal guidelines for accurate tax reporting while painting the most accurate picture of your business’s financial health. 

What Do Entrepreneurs Need to Know About Bookkeeping?

Oftentimes, the bookkeeping process isn’t as important to small business owners as is what they do with their books once they’re updated. Entrepreneurs can use their books to uncover financial data and trends that, in turn, can help them to make important strategic decisions.

For example, to increase a company’s profit margin, an entrepreneur might look at their expenses for materials and identify certain vendors that are particularly costly. If the company can switch vendors or use less costly materials, they can increase profits. They can also increase their product’s price to make the cost of materials worth it to the company and customers.   

As a small business owner, you need to be able to read bookkeeping reports and understand what they mean. Knowing how to identify anomalies in expenses or evaluate the health of your business can help you to move it in the right direction.  

_{Information provided on this blog is for educational purposes only, and is not intended to be business, legal, tax, or accounting advice. The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. While Lendio strives to keep its content up-to-date, it is only accurate as of the date posted. Offers or trends may expire, or may no longer be relevant.}