What is bookkeeping?
Bookkeeping refers to the process of recording, storing, and reporting financial transactions like sales, purchases, income, receipts, and payments by an individual or organization. It’s usually done on a day-to-day basis. It’s not the same thing as accounting, but it falls under the same umbrella (see bookkeeping language definitions below).
Why is it important?
Bookkeeping gives you a form of control over your business. It can help you identify any financial issues early, so you can fix them before they severely impact your business. It also helps keep the Canada Revenue Agency happy and means you’ll be ready for any potential future audits. Having to deal with the CRA can disrupt your business if you’re not well organized and prepared. Finally, knowing every aspect of your business means you can present yourself well to your stakeholders (e.g., your investors, shareholders, or any other interested party).
Some bookkeeping language:
Chart of Accounts (COA)
How do you cover the basics of bookkeeping?
Most bookkeeping these days is done using software, but you can set up two types of spreadsheets to record most of your business transactions:
- Sales journal
- Expenses journal
When you post a transaction to one of these journals, your debits (what you spend) must equal your credits (what you earn) – this is the double-entry method of bookkeeping. Take a look at this table to get a sense of what we mean:
Although this table doesn’t include actual numbers, you can see that where there’s an increase in one column, the other column will decrease, and vice versa. So, for example, if your revenue or earnings go up (credits), then your debits will decrease.
How do you track sales transactions?
When you invoice your clients or customers, make sure your invoices are numbered in sequence. Always issue an invoice for any sales you make, keeping a copy for yourself in a separate digital or physical folder for recording in your sales journal at a later time.
Sales invoices, whether electronic or paper, should always include:
- Your business number
- Date of invoice
- Invoice number
- Description of goods or services provided, including the date of provision, pre-tax sales amount, GST/HST amount, and total amount charged.
You need to then record all sales in your sales journal.
The most common sales accounts found in sales journals include:
- Product sales
- Service revenue
- Sales discounts
- Sales returns and allowances
How do you track expenses?
Because you’re likely to have both digital and physical receipts, make sure you keep an electronic folder as well as an expandable physical folder. Put all your paid receipts in these folders, categorized by expense type. It’s also a very good idea to keep a separate folder for all your unpaid bills, categorized by the month they’ll be due in.
What are common expense accounts found in expense journals?
Everyone has their own system when it comes to filing and keeping receipts, etc., so you need to find what works for you. It’s very important, though, to be well organized. Keep accurate, detailed records; know what’s going out and what’s coming in to your business; and make the data work for you.
DJ Rise Bookkeeping Activity
So that you can get a better sense of what sales and expenses journals look like and how they work, let’s help out DJ Rise!
DJ Rise has been a DJ for 10 years and did this as a hobby, playing at special events for friends and family. Beginning September 1st this year, she’s going to compile a few CDs with her original mixes and hopes to sell them to customers that have shown interest already, before she moves into digital sales. She’ll have to purchase the blank CDs and get labels printed on them. DJ Rise also hopes to earn revenue by charging a small fee for appearances at events such as birthdays, weddings, etc. She’ll have to rent a DJ mixer for each event.