Now that you understand the need for bookkeeping and how it relates to accounting, let’s talk about the different accounts bookkeepers keep.
“Each and every account has its purpose in bookkeeping, but all accounts certainly aren’t created equal,” says Epstein. “For most companies, some accounts are more essential than others.”
To gain a solid understanding of your financial situation, it’s important to understand the different accounts that your bookkeeper will use. This will enable you to make better decisions and increase the efficiency of the business.
Below is a quick summary of eight vital bookkeeping accounts, as outlined by Epstein in Bookkeeping for Dummies.
All business transactions should pass through the cash account. In fact, this is so important, bookkeepers will often use two journals to track the activity (Cash Receipts and Cash Disbursements).
All cash coming in or going out must be recorded properly in the cash account.
Ah, sales — everyone’s favorite account.
This account is where you keep track of all incoming revenue from sales of your products or services.
Epstein notes that, “Recording sales in a timely and accurate manner is a critical job because otherwise, you can’t know how much revenue has been collected every day.”
3. Accounts Receivable
This is the account you use to track all money due from customers.
“Keeping Accounts Receivable up-to-date is critical to be sure that you send timely and accurate bills to customers,” writes Epstein.
It’s especially important if you sell products or services on credit.
To avoid cash flow problems, it’s imperative to know when you can expect to receive money owed to you. Plus, you don’t want to forget to collect money you’re owed!
If you don’t know how much stock you have, you’re in big trouble, my friend.
So you must account for and track your inventory meticulously.
“Your bookkeeper contributes to this process by keeping accurate inventory records in an Inventory account,” writes Epstein. “The numbers you have in your books are periodically tested by doing physical counts of the inventory on hand.”
5. Accounts Payable
This account tracks the bills you need to pay.
Epstein notes that you “want to make sure you pay bills on time,” as not doing so will likely land you in hot water.
“Suppliers often penalize late-paying companies by cutting them off or putting them on cash-only accounts. On the flip side, if you pay your bills early, you may be able to get discounts and save money with suppliers.”
6. Office Expenses
“These expenses tend to creep up if they aren’t carefully monitored in the Office Expenses account,” says Epstein.
As Benjamin Franklin said, “Beware of little expenses. A small leak will sink a great ship.”
Depending on the type of business you run, this may also include office utility bills and rent, travel expenses, and entertainment expenses.
7. Payroll Expenses
Staff wages are often a business’ largest expense. Plus, employees won’t take kindly to being paid late or less than they’re owed.
“Accurate maintenance of this account is essential because it ensures that all governmental reports are filed and payroll taxes are paid,” according to Epstein. “And if you don’t take care of these responsibilities to the government, you’ll find yourself in some serious hot water.”
8. Retained Earnings
Use this account to track profits reinvested into the business.
“This account is cumulative, which means it shows a running total of earnings that have been retained since the company opened its doors,” notes Epstein.
The account is especially important to investors and lenders who need to track how the company is performing.
Other Bookkeeping Accounts Used
There are many other accounts that bookkeepers use, depending on the individual needs of the business. They include: