One way to appreciate bookkeeping, and accounting as a whole, is to learn the importance of it. Why are businesses going such lengths as outsourcing bookkeeping services Singapore? Here are two main reasons:
- To be able to monitor income and expenses in order to improve your chances of earning a profit.
- To collect and summarize financial information that is necessary for you in computing taxes and filing tax returns.
These two are crucial to your business right? Wish you would no longer argue why accounting is important.
But how does accounting exactly achieve these goals? It follows a certain process. Accounting for different types of transactions and companies can be complicated at times, but in general, it just involves three processes.
- Keeping source documents likes official receipts or invoices.
- Summarizing income and expense records on a periodic basis (which could be daily, monthly or annually)
- Summarizing financial reports that will be used by end users in making informed economic decisions.
Let’s discuss each in detail.
Step 1: Keeping your source documents
The first thing to do to have a smoothly flowing accounting system is to have a good way of keeping your source documents. These are the evidences you use in order to prove the existence of a financial transaction. These are also the basis of recording your transactions. Sample of source documents include official receipts, invoices, insurance contracts or billing statements.
Most keep their documents physically in safe vaults. For those that use cloud accounting, they capture the image of the document and store it in the cloud storage of their software. It reduces the risk of losing the document, and at the same time lengthens the life of it.
Step 2: Summarizing through ledgers
After recording the transactions, next thing to do is to summarize them by account title. Account titles will depend per business. The most used ones are Accounts Receivable, Accounts Payable, Cash, Inventories, Supplies, Sales, Rent Expense, etc. If the figures are summarized, it will be easier to check the balances of the accounts of the business.
Step 3: Producing the Financial Reports
Income statement is perhaps the most important to an owner. He will know how much his business earned or lost. The balance sheet is another important financial statement. It shows the amount of assets, liabilities and equity the business have. Other statements include Cash Flow Statements and Statement of Changes in Owner’s Equity.