Bookkeeping is a very important aspect of every business. Since most business owners are not accountants, they are usually worried about dabbling into this aspect without the right resources and guidance.
To support and create relief for business owners in this category, we have created this bookkeeping guide to ensure you are well-equipped and confident to begin the bookkeeping journey.
|TLDR: Bookkeeping is an important aspect for businesses that have growing accounting needs. For a blooming business, traditional bookkeeping is cheap and easier on handling accounts, but it will lead to inevitable human errors and take time to finish the process. While Xero is one of the most welcomed platform provided digital bookkeeping tools may come in place to help. By digital bookkeeping, user can handle their bookkeeping process more effectively.|
The topics to be covered in this guide includes:
What is Bookkeeping?
Bookkeeping can simply be defined as the process of recording the financial transactions of a business. The financial transaction of a business includes issuing sales invoices, recording suppliers’ invoices, reconciling salaries and payments to consultants.
The job of a bookkeeper lies in categorising, processing, and reconciling these financial transactions using the manual bookkeeping method or a cloud-based bookkeeping method.
Oftentimes, bookkeeping and accounting are usually confused to mean the same thing. Unfortunately, bookkeeping and accounting mean different things. While a bookkeeper’s role involves handling the daily financial activities, an accountant’s role involves the use of financial tools to summarize and analyse the data prepared by the bookkeeper.
In summary, the objective of preparing bookkeeping is to ensure that financial transactions are accurately documented to enable the accountant to make accurate analyses and interpretations for decision making.
Why is Bookkeeping Important?
1. Tax Reporting Requirement
Since businesses are required to notify the authorities on the total assessable profit, bookkeeping is the first step to achieving this. If bookkeeping is prepared properly, the tax reporting process is more seamless.
2. Internal Control
Routine bookkeeping ensures that all business transactions are recognized and documented immediately they occur. Internal fraud can easily be detected when suspicious transactions appear. Investigating these suspicious transactions takes less time with proper bookkeeping and internal control.
3. Cost Effective Fees for Audit
Waiting till the end of your financial year to prepare your company’s book is a very risky practice. The initial pricing offer from service providers may seem attractive, but unplanned additional costs will arise during the task. Asides from the errors associated with preparing bookkeeping at once, the time factor is an important aspect to consider. The Inland Revenue Department in Hong Kong has a tax filing deadline for all businesses. Waiting till the company’s year-end to prepare the bookkeeping limits the time available for the preparation of the annual accounting and audit report. Since the late submission of the company’s financial report is subject to penalties and prosecution, it puts your company in an unfavorable position.
4. Always be Investor Ready
For start-ups and small businesses, it is very important to prepare regular bookkeeping with the use of an accounting system that can generate financial and business reports instantly. By ensuring that bookkeeping is done regularly and accurately, the business is always ready to share its numbers with potential investors. This projects a good company image for the business and facilitates decision making.
5. Minimise Error
Bookkeeping ensures that financial information is kept in an orderly manner. This ensures that errors or missing documents are spotted easily and quickly. These days, paper filing is now being phased out and cloud storage systems are now in vogue. When documents are stored in a coherent pattern (i.e., by months, according to the chart of accounts, or according to the transaction date), errors can easily be detected as soon as they occur.
Documents Required for Bookkeeping
The documents required for bookkeeping may vary according to the industry, business nature and business activities.
Most Retail trading businesses are inclined towards cash operation, while service-based industries use a more cashless operation process with less physical activities. Regardless of the industry or business nature, most businesses require similar documents for bookkeeping. Some examples of these documents include bank statements, cash statements/registers, cheque stubs, invoices, receipts, payslips, and salary records.
For trading business natures, additional documents required for bookkeeping may include: a record of all the trade debtors and creditors, inventory and stocktake figures, sales and purchase records showing the prices and quantities of each item purchased and sold.
For service-based business nature, you may need to keep a record of all service contracts and agreements, payment record of all commissions paid, contractors, paid, additional proof to support contract negotiation, and service price determination process (for offshore companies).
In Hong Kong, business owners are mandated to keep all business records for at least 7 years after each financial year end. In a situation where the company ceases to operate before its 7th year anniversary, record keeping is still mandatory until the 7-year period expires.
Options for Preparing Bookkeeping
Traditional bookkeeping, also known as the manual bookkeeping option, involves the use of pen and paper to organize the financial transactions of a company. Journal registers, ledgers, cash registers, and other paper books of account can be used to document transactions by a professional bookkeeper.
This method of bookkeeping is cheaper and easier to maintain but requires accounting skills and experience for successful execution. Even though it is a cheaper alternative, the traditional bookkeeping method takes time and is prone to human error.
The digital bookkeeping option is an innovative way of preparing bookkeeping using accounting software. With the help of a computer, even a mobile phone, business owners can manage their accounts very easily.
With bookkeeping software, any computer literate can handle bookkeeping very easily. Accounting background and skills are not required. This bookkeeping option is easier, faster and eliminates human error.
Practical Steps to Bookkeeping
1. Choose your financial year-end date
A financial year is any annual period at the end of which a company’s accounts are closed. A financial year-end date signifies the completion of the 12-month accounting period for a company. Choosing a financial year-end as the first step to bookkeeping helps with accounting and tax planning. Once the year-end date is confirmed, the bookkeeper prioritizes better and quickens the bookkeeping and accounting process.
2. Separate business and personal expenses
Once the financial year-end and accounting period are confirmed, then it’s time to sort, file, and record financial transactions related to the business operation only. Personal expenses should not be considered in preparing bookkeeping for a business. Only business expenses that are used in the production of business income are deductible in Hong Kong.
3. Select a preferred bookkeeping tool
Choosing a bookkeeping tool depends on the resources available to the business. If the business is in a remote area with limited access to the internet, bookkeeping can be prepared manually with cashbook registers and ledgers. If the business has access to the internet, it’s best to use cloud-based accounting software for bookkeeping.
4. Prepare the Charts of Account
If you have chosen a cloud-based software like Xero, setting up the charts of accounts will be the next step. A chart of accounts is a list of all the financial accounts that make up the general ledger of a company. A chart of accounts Includes revenue account (sales, commission, service income), expenses account (Cost of goods sold, Advertising, Wages, etc.), Asset (bank account, cash account, plant, and machinery account, etc.), and liabilities (loan account).
The chart of accounts for a trading business will differ from that of a service-based business. This creates the need to set up the chart of accounts that works best with the business nature of the company.
5. Start Recording the financial transactions
Once the basic setup of your preferred accounting tool is done, then the process of bookkeeping can begin. All financial transactions related to the business must be recorded and reconciled to ensure the accuracy of financial statements.
6. Generate the financial statement
After the bookkeeping for a period is completed, the financial statement can be generated and analysed. The basic financial statements used by most businesses include the income statement, balance sheet, cash flow statement, and statement of equity. Your accountant can analyse these statements for business decision-making activities.
If the business does not have an in-house accountant, you can seek the services of a Certified Public Accounting.
Finding the Ideal Bookkeeping Tool for Your Business
The options for bookkeeping are widely split into manual and digital bookkeeping processes. The ideal bookkeeping tool will depend on the preferred option chosen.
If the business decides to go for a manual bookkeeping option, the tools required will be cash books, ledgers, and lots of paper and pencils. An excel spreadsheet is also a tool used in manual bookkeeping methods.
Using a manual bookkeeping method is time wasting. The staff in charge must spend time sorting through papers, using journal entries and ledgers to mark the transactions, and manually generating the financial statement. Manual bookkeeping method may be an option for businesses with limited access to electricity and the internet. For businesses with high transaction volumes, it is not advisable to opt for this bookkeeping method.
However, most businesses now manage bookkeeping using cloud-based accounting solutions. These solutions allow access to financial information from phones, tablets, or computers, if you have internet access. Its flexibility and efficiency are great selling points for most businesses. For businesses looking to go paperless, cloud bookkeeping tools are the best option.
Xero, being one of the best players in the industry, provides business owners with tools that make running their businesses easier. Xero offers simple and efficient ways of managing tedious business processes such as invoice management, payment collection, inventory, and payroll management.
For businesses with large volumes of transactions and frequent need for performance review, forecasting, budgeting, and generating financial statements, it is best to work with cloud accounting software to streamline bookkeeping tasks.
We hope that reading this guide has given you the basic information needed to get you started with bookkeeping for your business.
Whether you are handling the company’s bookkeeping internally or outsourcing it, it is advisable to work with a bookkeeping system that allows for two-way communication. One thing is to manage financial information accurately, another is to make informed decisions using the data available. Working with a bookkeeping system that allows business owners, get real time status of their operation, and automates manual tasks is very important.
FastLane Group is a licensed CPA firm and corporate service provider in Hong Kong. We help clients in establishing a business presence in Hong Kong and other jurisdictions. We utilize leading technology to facilitate service delivery to our clients.
FastLane Group is also a Certified Xero advisor and a Platinum Xero Partner. We can make your transition to cloud accounting seamless. We offer a range of services to enable you to get the most out of Xero.
Want to know more about Xero Cloud accounting software?
Get in touch with a trusted FastLane advisor to get a 30-minute free consultation.