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The Importance of Bookkeeping for Businesses

The importance of bookkeeping for businesses

Bookkeeping refers to the activity of systemically recording and organising the financial affairs of a business. The purpose of the bookkeeping process is to maintain up-to-date and correct records of a company’s financial transactions in order to ensure they are all legitimate and accounted for. As each transaction must be recorded, total accuracy is required and companies will often have set structures called ‘quality controls’ in place to eliminate the chance of mistakes.

The process dates back to 1494 when such records were kept and maintained in handwritten books, hence the name ‘bookkeeping’. However, over the years, gradual technological advances have facilitated the move from ‘balancing the books’ on paper to the computer-based systems which we see today.

While many people think that bookkeeping and accountancy are the same practices, they are in fact two separate processes. Bookkeeping occurs as a function within the broader scope of accountancy by providing information from which accounts or accounting statements are made. However, as the practices are distinct from each other, you wouldn’t necessarily need to be an accountant to manage your own books.

There are different methods involved in maintaining the day-to-day financial records of an organisation. While single-entry bookkeeping is the simplest method, double-entry bookkeeping is the more sophisticated and, therefore, more common form. This system treats each transaction as two separate parts, placing credit entry in one column and debit entry in another column. This way, any discrepancies will be highlighted in the system if the sum of the debits is not exactly equal to the sum of the credits.   

Crucially, keeping track of a company’s transactions, whether they be sales, purchases, receipts or payments, provides information to produce important documents, some of which include:
  • Financial statements
  • Cash flow budgets
  • Sales tax and VAT management
  • Accounts receivable and payable
  • Income tax records
Some of these documents are also important as they are required government agencies, such as HMRC (Her Majesty’s Revenue & Customs), and other bodies which will formally file them.

Importance of bookkeeping:

Bookkeeping is a critical function of every business, no matter what the size. Effective financial management is key to any company’s overall success. Bookkeeping aids a business internally, through providing a financial snapshot of money coming in and out on a daily, weekly and monthly basis. Externally, the process is also extremely useful for potential investors to be able to see, first-hand, the exponential growth of a company. Some of the main benefits of bookkeeping are broken down below:

- Demonstrates how successful a business is to its owner: bookkeeping helps professionals evaluate whether their venture is profitable or not. By having an overall picture of your cash flow, you will be able to see if the business is making a profit or losing money. By analysing whether your company stands financially, you will be able to assess which areas to invest money into and where to hold back.

- See what strategies are working: the financial statements that are produced from bookkeeping provide companies with useful insights into what strategies have generated profits over a certain period of time. These successful methods can then, in turn, be used to make more effective business decisions when planning for the future.

- Tax return: a more pressing reason for bookkeeping is these records are used to calculate how much tax you owe to the government. Failure to pay tax is punishable by law. Additionally, having all the documents together in an organised manner will also save you time and stress when filing your tax return.

- Providing an overall picture to investors: when a company continues to grow exponentially over a certain period of time, external agents may become interested in investing in that company. The information provided by financial records makes it easier to provide infographics such as graphs and charts, to showcase the business’ progress to potential investors.

Overall, from a small trading firm to multinational corporations, bookkeeping is a vital component of every business. Ensuring that a company has organised and well-maintained financial reports will save a company a lot of stress and time and ultimately determine its success.

As shown, the practice of bookkeeping is crucial within the business world, meaning that graduates with these skills are highly sought after. If you are interested in pursuing a course in this area, IBAT College, Dublin offers a Diploma in Bookkeeping and Payroll.
Importance of Bookkeeping - Office

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