To create a total balance for every account, all the debits and credits should be sum up together. If these numbers do not balance, it will be up to your bookkeeper to identify and remove the errors. Financial statements are essential for your business as you can not secure loans, sell your business, or plan expenses without them. So, to run your business smoothly, many employers require an ongoing cycle of tasks.
Recording entails noting the date, amount, and location of every transaction. Next, you’ll break down (or analyze) the purpose of each transaction. For How to Meet Your Bookkeeping Needs example, if a receipt is from Walmart, was it office supplies? But I also recognize that not every organization will hire someone for that role.
The 8-step accounting cycle: A beginner’s guide
They also allow businesses to determine whether they meet their budget goals and gain operational efficiencies. On the other hand, cash flow reports provide insight into how much cash has come into a business from sales and how much has gone out on expenses, investments, and more. Knowing this information helps create budget forecasts that enable companies to manage their finances more effectively. Accounts have to be balanced at the end of your accounting period.
The accuracy of your data entry will directly impact how well you can analyze your finances. Poorly validated entries could lead to inaccuracies in the financial statements. With today’s technology, there are more automated ways that businesses can quickly and efficiently record their transactions.
Step 2. Record the transactions
As bookkeeping can be time consuming and have a hugely damaging effect if done incorrectly, companies of all sizes tend to hire a professional bookkeeper to accurately keep track of all financial records. Bookkeeping differs from accounting as the accounting process uses the books kept by the bookkeeper to prepare the end of the year accounting statements and accounts. Finally, you need to post closing entries that transfer balances from your temporary accounts to your permanent accounts. You can then show these financial statements to your lenders, creditors and investors to give them an overview of your company’s financial situation at the end of the fiscal year. The result of posting adjusting entries should be an adjusted trial balance where the total credit balance and the total debit balance match. The total credit and debit balance should be equal—if they don’t match, there’s an error somewhere.
Let’s assume that you post $2,000 in personal expenses in the company accounting records. The expenses in the income statement won’t be accurate, and your business tax return will contain errors. One of the main duties of a bookkeeper is to keep track of the full accounting cycle from start to finish. The cycle repeats itself every fiscal year as long as a company remains in business. Entering transaction data is the next step in unlocking the power of bookkeeping. This data must correspond to the physical business records to maintain accuracy and ensure legal compliance.