Businesses undertake various activities, and many of the transactions have financial linkages that need proper recording and necessitate the use of some accounting system of which bookkeeping is a part, explains Brian C Jensen. Since the goal of any business is to generate revenue for recovering the cost of maintaining the business establishment and operations and earn profits, it is critical to record each financial transaction by using an appropriate bookkeeping system. Bookkeeping provides the foundation for sound financial management by allowing business owners have complete control over the flow of money to and from the business.
Good bookkeeping allows full traceability of the transactions so business owners know where the money comes from, the expenses, and how much profit they can earn. The accounting system rests on the foundation of bookkeeping that supplies the primary transaction data about finances.
Here are some basic transactions that you will typically find in any accounting system.
Brian C Jensen explains Income transactions
Income is the incoming money to businesses earned by selling some products or services to customers or clients. Soon upon a sale, accountants raise an invoice for that transaction that reflects in the general ledger either by entering it manually or by entering it into the accounting software that directs the entry to the right place. The recorded income is not instant earning but only expected to happen after some time and is known as ‘accounts receivables. On receiving the customer or client payment, the system generates another entry or posted manually in the general ledger that offsets the earlier entry.
Businesses spend money to buy materials and labor necessary for producing the goods or providing. The services and in accounting jargon, known as expenses. Expenses are for various types like direct expenses related to creating products, overhead costs for operating businesses. That includes rent, utilities, loan repayments for capital goods or assets, and other similar expenses, clarifies Brian C Jensen. All such activities trigger accounting transactions.
Profit or loss
Working out a profit or loss of a company is easy by finding out the difference between income and expenses. If the result is positive, then it means profit, and a negative figure represents a loss. Therefore, every business tries to minimize expenses and increase its income to increase the profit margin. When the opposite happens, the company incurs losses. Maintaining proper accounting systems is essential to closely monitor each financial transaction. And understand where the money comes and where it goes so that business owners can reduce losses and increase profits.
Capturing all financial transactions correctly and recording them sequentially is critical for companies. To use that data for accounting to generate reports that help take business decisions more effectively. In addition, proper bookkeeping facilitates filing tax returns on time and in a flawless manner. As businesses can report all transactions to the IRS in a transparent manner that helps avoid tax audits. Most bookkeeping systems follow the double-entry system of debits and credits.