Most small businesses are founded by people with a passion for the product or service they provide. Driven to make their start-up the best it can be, some overlook the fundamental value of a solid bookkeeping system.

Bookkeeping Underpins Small Business

For many, the prospect of keeping financial records can seem intimidating and even a distraction from the work that brings in customers. And while bookkeeping software can provide the tools for managing business books, a professional bookkeeper, whether hired or contracted as a service, can relieve the business owner from the time and effort needed to produce financial records. Professional services such as Bookkeeping Denver are an example.

Window Into Financial Health

Any small business must make a profit if it is to stay in business. Identifying financial strengths, reducing expense drags, identifying threats and external requirements such as taxes are why small businesses need a reliable bookkeeping system. The small business consultants at Business.org note that bookkeeping is related to accounting as a financial management process with accounting providing a big-picture analysis of the data that bookkeeping pulls together.

Value By the Book

An understanding of the types of accounts to be tracked is essential. Of the five types of business accounts, including assets, liabilities, revenue or income, expenses and equity, the latter designates the value of the business to the owner after liabilities are subtracted from assets. And, whether it is data on a computer or numbers on a page, company books are kept in a general ledger.

To ensure a ledger can provide reliable information, every transaction must be recorded correctly in the right account. Under a double-entry accounting system, debits and credits are recorded separately which helps quickly identify issues that threaten profits.

Matching Sides

For a bookkeeper to “close the books,” debits and credits for a period are posted to an account and balanced. If one side of the account does not match the other, the journal entries are reviewed for errors, corrected and the account is re-balanced. Only then can the accounts be closed and a financial report prepared.

Financial Pulse

The best way to take the pulse of a company’s financial health is a review of its financial reports. Most commonly, financial reports include a balance sheet summarizing assets, liabilities and equity for a period. A financial report should also include a profit and loss (P&L) statement and a cash flow statement, which is similar to a P&L only without non-cash items such as asset depreciation.