Bookkeeping: Definition, Importance & Benefits for Businesses

Bookkeeping involves the recording, on a regular basis, of a company’s financial transactionsFinancial Accounting TheoryFinancial Accounting Theory explains the why behind accounting - the reasons why transactions are reported in certain ways. This guide will. With proper bookkeeping, companies are able to track all information on its books to make key operating, investing, and financing decisions.

Bookkeepers are individuals who manage all financial data for companies. Without bookkeepers, companies would not be aware of their current financial position, as well as the transactions that occur within the company.

Accurate bookkeeping is also crucial to external users, which includes investors, financial institutions, or the government – people or organizations that need access to reliable information to make better investmentsInvesting: A Beginner's GuideCFI's Investing for Beginners guide will teach you the basics of investing and how to get started. Learn about different strategies and techniques for trading or lending decisions. Simply put, business entities rely on accurate and reliable bookkeeping for both internal and external users.

Importance of Bookkeeping

Proper bookkeeping gives companies a reliable measure of their performance. It also provides information to make general strategic decisions and a benchmark for its revenue and income goals. In short, once a business is up and running, spending extra time and money on maintaining proper records is critical.

Many small companies don’t actually hire full-time accountants to work for them because of the cost. Instead, small companies generally hire a bookkeeper or outsource the job to a professional firm. One important thing to note here is that many people who intend to start a new business sometimes overlook the importance of matters such as keeping records of every penny spent.

The Accrual vs Cash Basis of Accounting

In order to properly implement bookkeeping, companies need to first choose which basis of accounting they will follow. Companies can choose between two basic accounting methods: the cash basis of accounting or the accrual basis of accounting. The difference between these types of accounting is based on the timing for when the company actually records a sale (money inflow) or purchase (money outflow) in the books.

 Cash BasisAccrual BasisDefinitionRecord transaction only when cash is actually received or paidRecord transaction when it occurs, even if cash is not received or paidExample: You purchased 100 units of a product and will pay for it next month.No transaction recordedTransaction recorded through an accounts payable (liability) account

Additional Resources

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™Program Page - CBCAGet CFI's CBCA™ certification and become a Commercial Banking & Credit Analyst. Enroll and advance your career with our certification programs and courses. certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

• Financial Accounting Job TitlesJobsBrowse job descriptions: requirements and skills for job postings in investment banking, equity research, treasury, FP&A, corporate finance, accounting and other areas of finance. These job descriptions have been compiled by taking the most common lists of skills, requirement, education, experience and other
• Analysis of Financial StatementsAnalysis of Financial StatementsHow to perform Analysis of Financial Statements. This guide will teach you to perform financial statement analysis of the income statement,
• 3 Statement Model3 Statement ModelA 3 statement model links the income statement, balance sheet, and cash flow statement into one dynamically connected financial model. Examples, guide
• Source DocumentsSource DocumentsThe paper trail of a company's financial transactions are referred to in accounting as source documents. Whether checks are written to be