What is Bookkeeping? And Why Is It So Important?

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Bookkeeping—the systematic recording and organization of a company’s financial transactions—plays an essential role in any business’ financial health. A clear understanding of your finances empowers business owners to make informed decisions and reduces the risk of mismanaging funds. Even so, it’s a tedious, complicated, and often dreaded task. If you’re not a trained bookkeeper, yet trying to manage your business’ books, there are quite a few bad bookkeeping habits that are easy to fall into. Without proper training, it’s challenging to navigate which accounting methods to use, how to manage cash flow, or even understand the key accounting metrics that can set your business up for success. That’s why so many businesses, especially small businesses, look to automated bookkeeping services (more on that soon).

In this post, we’re providing information on everything you need to know about bookkeeping, including:

So why is bookkeeping so important?

Bookkeeping, producing financial statements, managing cash flow, and tax compliance are inextricably linked, with accurate bookkeeping laying a solid foundation for the rest.

Bookkeeping provides key insights into the overall health of a business

Bookkeeping enables businesses to produce financial statements, which collect financial data and paint a clear picture of how your business is really doing. These statements help you manage cash flow, which is essentially how much cash is coming in and leaving your business at a given time. Cash flow projections are pivotal to the growth of a business, as they can entice potential investors and satiate existing ones. Understanding your business’s financial health eases making future plans involving hiring, expansion, and day-to-day operations. Financial statements, such as your balance sheet or income statement, give you the information you need to make decisions from an informed perspective rather than a taking a gamble.

Bookkeeping makes tax filing less complicated

When tax season rolls around and you must provide your accountant with the necessary documents for filing business taxes, having clean books substantially cuts down on the time it takes to prepare tax documents. Rather than rummaging through your business receipts, the accountant can focus on finding possible tax deductions, saving their time and your money.

Bookkeeping lessens the pain of an audit

Businesses always run the risk of one day being audited. While it’s not something to look forward to, it’s definitely worth preparing for. Having all your bookkeeping organized and in one place will make it easier to retrieve your business’s financial information and can help avoid penalties or late fees.

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What exactly does bookkeeping involve?

Okay, so bookkeeping is important. But what exactly does it entail? The elements of bookkeeping include:

Maintaining the general ledger

The general ledger, which is made up of sub-ledgers, records what your business has earned and spent. The information gathered in the general ledgers is used to create financial statements and file taxes.

Tracking income and expenses

Bookkeeping records income (i.e. any activities that generate revenue for a business), as well as expenses incurred by your business, including but not limited to rent, employee salaries, office supplies, and insurance. When recording activities that bring in revenue, bookkeepers also make note of details such as sales tax and the quantity and type of product sold.

Tracking income and expenses is easily one of the most important (and tedious) aspects of bookkeeping, as it’s the foundation that all other bookkeeping and accounting activities are built upon. Given the value or these recordings, plus the likelihood for human error, many businesses opt for automated bookkeeping software to reduce the amount of manual tracking needed.

Managing bank reconciliations

An unfortunate reality of bookkeeping is that there will be instances where your bank account doesn’t align with recorded transactions. In these instances, reconciliations, where you compare bank statements to bookkeeping records and not discrepancies, are necessary. Don’t worry too much if you’ve found yourself in this situation—it’s totally normal!

Staying on top of accounts receivable and payable

Accounts receivable includes money that your customers owe to you for services or products sold, whereas accounts payable includes money your business owes to vendors, suppliers, the government, etc.

Providing financial statements

As mentioned previously, bookkeeping includes providing financial statements, such as:

Single-entry vs. Double-entry Bookkeeping

When you’re first setting up your books, you’ll have to decide whether you want to use single-entry or double-entry accounting. This is a question that’s often intimidating for small business owners—especially those who may not have a ton of bookkeeping experience—looking to manage the books themselves.

The easiest way to differentiate single-entry and double-entry accounting

Single-entry bookkeeping involves tracking all business transactions (i.e. payroll, expenses, revenue) in one ledger. This is how most small businesses, especially freelancers, start, as it’s very easy to do.

Double-entry bookkeeping tracks every transaction as two entries, entering the amounts as “debits” and “credits,” which describes if funds are transferred to or from an account. This helps you see where your finances are coming from, as well as where they’re going. While double-entry accounting is more work, it provides a much more comprehensive view of your business’ financials.

An example of double-entry accounting

To help illustrate how entries are shown in two accounts, here are some simplified scenarios of common entries:

Entry 1 (What Happened?) Entry 2 (How Did It Happen?)
Acme corp received cash…
(Debit Cash)
…by taking out a bank loan.
(Credit Loan Payable)
Acme Corp spent cash…
(Credit Cash)
…on payday for employees.
(Debit Salaries & Wages)
Acme Corp sent an invoice to a customer…
(Debit Accounts Receivable)
…for services performed.
(Credit Revenue)

How to determine if your business should use double-entry accounting

The truth is, a vast majority of businesses need double-entry bookkeeping. The only instance in which this isn’t the case is if you’re a sole proprietor who doesn’t manage inventory, doesn’t have any debt, is comprised of only one employee (meaning it’s just you), and doesn’t have many accounts. Someone who fits into this description is likely a contractor or freelancer.

Most businesses, however, are more complex. In this instance, double-entry bookkeeping is strongly recommended, as it provides a more holistic, well-rounded view of your finances. This helps to create the financial statements required to grow your business. It also helps you make more informed decisions, as your finances will be much more transparent. Most investors and banks won’t take your business seriously if you don’t use double-entry bookkeeping.

Fortunately, there are online platforms and software that do this for you. Speak with a ScaleFactor expert to learn more about how to automate double-entry bookkeeping for your business.

Now That You Know What Bookkeeping Is, You Might Be Asking, “What Exactly Does A Bookkeeper Do?”

Bookkeepers are responsible for maintaining a business’s books, which track financial transactions. Most bookkeepers rely on cost-effective software to organize and manage details such as credits and debits, the chart of accounts, payroll, sales, and accounts payable procedures. The specific responsibilities of a bookkeeper will vary depending on the business size and type. Accountants typically oversee a bookkeeper’s work.

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What’s the difference between an accountant and a bookkeeper?

It’s common to confuse the role of a bookkeeper and that of an accountant. They both, after all, offer critical support for the financial health of a business and share similar goals. While both play essential roles, they focus on different details and processes. Bookkeepers are responsible for the initial stages in the financial cycle, involving record keeping, whereas accountants play a more subjective and analytical role, providing insights on the information compiled during bookkeeping.

Bookkeepers, for instance, deal with consistently recording daily transactions and organizing financial information. Accountants, on the other hand, use this information to easily discern a company’s financial standing. An accountant, who is usually a CPA (Certified Public Accountant), takes the information compiled by the bookkeeper to produce financial models and statements, analyzing the cost of operations and completing tax returns. Bookkeepers often don’t have current tax law knowledge or expertise to work with the IRS need be.

The main responsibilities of an accountant include:

  • Auditing financial documents
  • Analyzing cost of operations
  • Preparing financial statements
  • Completing income tax returns
  • Providing business executives with an understanding of the impact of financial decisions
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The main responsibilities of a bookkeeper include:

  • Maintaining the general ledger
  • Tracking income and expenses
  • Managing bank reconciliations
  • Tracking accounts receivable and payable
  • Providing financial statements
  • Completing payroll
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Managing Bookkeeping And Accounting For Your Business

Bookkeeping and accounting are vital but tedious tasks. Given the time-consuming nature of managing a business’ finances, many businesses (especially new and small businesses) outsource these bookkeeping services. However, there are business owners who choose to manage bookkeeping and accounting tasks in-house or even themselves.

Managing business finances in-house

If you have the time and desire to manage your business’ finances in-house, you certainly can. For some business owners, it makes more sense for them to do it themselves—they have the most intimate knowledge of their business. Those who own part-time businesses, especially, may not feel it’s worth it to pay someone else to perform bookkeeping and accounting tasks.

Before committing to managing your own business’ finances, however, be sure to compare the cost of a do-it-yourself accounting software (and your time) against the cost of outsourcing.

Another factor to consider is whether you, the business owner, actually have the expertise necessary to maintain financial health for your business. Navigating the tasks involved and making sense of them can be overwhelming. It’s easy to misunderstand the data you’re looking at without the experience or knowledge of a professional.

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When it’s time to outsource bookkeeping services

There are an abundance of reasons it might be time for you to outsource, whether it’s assistance with driving growth or if you’re just struggling to keep up with these tasks on your own.

Outsourced bookkeeping services come with a ton of benefits, like improving data security, increasing valuation, and saving time. Regardless of how in-tune you are with your business, financial guidance makes it significantly easier to discern the best next steps to meet your specific and unique goals.

If you own a new or small business, it doesn’t necessarily make sense to hire a full-time accountant, which will cost you. That doesn’t mean, however, you have to do it all on your own. Bookkeeping and accounting are challenging skill sets to learn, and it’s important that your business’ books and accounting are done right so you can make smart decisions and grow healthfully.

Leveraging an online bookkeeping and accounting software

Using a comprehensive software solution like ScaleFactor, that offers both bookkeeping and accounting and is backed by a support team of CPAs, ensures your business’ finances are handled correctly. It saves you time over a do-it-yourself solution and reduces the overhead cost of hiring a CPA. Rather than relying on multiple people or keeping data siloed in different places, ScaleFactor organizes all of your information in one place, while also providing useful insights and taking care of the day-to-day tasks of a bookkeeper or accountant.

Why so many businesses opt for automated bookkeeping

Bookkeeping is incredibly tedious, and poor bookkeeping can have dismal results. Leveraging automated bookkeeping is simply easier and less expensive than trying to do it yourself or adding another salary to your roster. Essentially, it negates the possibility of human error, saving businesses time and money. Online bookkeeping services that automatically categorize expenses and provide real-time financial data in a visual, easy-to-digest manner give accountants and business owners the tools they need for success. The last thing a business needs, especially a small and growing business, is blind spots in its financial health.

Learn more about how online bookkeeping can make your job easier here. Regardless of the size or focus of your business, online bookkeeping allows you to spend less time stressing about tracking your business’ finances and more time focusing on meeting your goals. Want to learn more about automated bookkeeping? Contact a ScaleFactor expert to schedule a demo today.

Reader Interactions


  1. Sarah says

    Nice post. It’s very informative and I’m sure a lot of people will find this information useful. Keep up with the great content!

  2. Callie Marie says

    I liked it when you pointed out that accurate bookkeeping is great when it comes time to file taxes because it makes it less complicated. If you haven’t been keeping up with the bookkeeping, I imagine it would be difficult to find all the expenses you can deduct and all the receipts you need. If you aren’t the type to keep track of all that, then hiring an accountant would be a smart idea.

  3. Sarah Packer says

    My husband and I are starting a business, so I wanted tips and advice on bookkeeping. I didn’t know tax season is a lot easier to manage when you’ve done good bookkeeping. I’ll have to keep that in mind and find a service that can take that stress off my husband and I, thanks to this post!

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