Wed May 10, 2023 | Alan Lefkowitz | Bookkeeping Services

What Are the Four Steps of the Bookkeeping Process?

Name: CFO Strategies LLC
Telephone: (855) 732-7861

Are you looking to unlock the power of bookkeeping? If so, you’ve come to the right place! Today, we highlight the four steps of the bookkeeping process and show you how to manage your finances successfully. With a little guidance from experienced professionals and your commitment, you can ensure your books are in order and you never miss a deadline. So let’s jump in and go over each step of the bookkeeping process!

Recording Business Transactions

Recording business transactions is the most critical and foundational part of bookkeeping. Without properly recording transactions, a business can’t maintain accurate financial records. It must be recorded whenever money enters or exits a business, whether via cash, check, debit card, credit card, invoice, inventory sale, etc. When entering financial data into the books, you must always note the transaction date and record it in the correct account.

The accuracy of your data entry will directly impact how well you can analyze your finances. Poorly validated entries could lead to inaccuracies in the financial statements. With today’s technology, there are more automated ways that businesses can quickly and efficiently record their transactions. Using the software, business owners can accurately log their data with detailed descriptions of each monetary activity. This gives them an up-to-date view of their business performance and trends in financial activities over time.

Entering transaction data

Entering transaction data is the next step in unlocking the power of bookkeeping. After recording business transactions, this stage involves entering pertinent information—such as invoice numbers, issue and payment amounts, tax implications, and more—into the financial software to track a company’s financial accounts. This data must correspond to the physical business records to maintain accuracy and ensure legal compliance.

After entering transaction data with accuracy and efficiency, it’s time to move on to the next stage: balancing the ledgers.

Balancing the Ledger

Once you’ve entered all the necessary data into the ledger, the next step is to balance it. Balancing the ledger is key to ensuring the books are accurate and reflect the company’s financial picture. This can be done by adding up the debits and credits for each account and ensuring they match. Any discrepancies should be investigated and rectified if need be.

Balancing your ledger also helps streamline your business processes regarding budgeting, forecasting, auditing, and more. Without verifying your numbers are correct each month, there is no way to forecast properly, so you won’t be able to anticipate any potential upcoming issues before they arise. It, therefore, becomes much easier with proactive measures, such as reconciling accounts regularly and ensuring accuracy with every transaction, rather than trying to backtrack after something has gone wrong.

Fortunately, tools available today make balancing your ledgers much simpler and quicker than ever! With cloud-based software solutions such as QuickBooks, Sage, or Xero, you can automatically pull reports on your accounts, taking much of the guesswork out of reconciliation. Once these items have been balanced, verify account balances by checking against the actual bank statements and other external documents to ensure accuracy. Having this process in check gives you peace of mind when submitting year-end statements or sharing information with auditors or investors.

According to a survey by Chron, 34% of small businesses using bookkeeping reported an increase in profits after just one year.
Research published in 2020 in the International Journal of Business and Finance Research states that 80% of business owners believe bookkeeping processes are necessary for financial management.
According to Hubdoc’s survey, 65% of small businesses responded that they would invest more time into their bookkeeping if it were easier and faster.

Verifying account balances

Once the ledger has been balanced, the next step in the bookkeeping process is verifying account balances. During the verification process, discrepancies can be identified and rectified more easily. It is recommended that a financial professional conduct this step to ensure accuracy.

Verification also helps identify excess or insufficient funds that could be used elsewhere. For instance, if a business has an extra $30k of unallocated funds, management should decide what to do with them—invest them, pay off debt, or use them as working capital. Answers to questions like these emerge when verifying accounts, providing businesses with greater insight into how they function financially.

After balancing the ledger and verifying account balances, you must prepare financial statements to understand your overall financial picture. Financial statements reveal how well a company is doing by summarizing its transactions into digestible chunks, such as cash flow and profit and loss statements.

Preparing Financial Statements

With your account balances now confirmed, it’s time to move on to preparing financial statements. Financial statements are vital for understanding a company’s health and providing insight into important trends and changes.

Having established a solid foundation of financial veracity through proper reconciliations and the preparation of financial statements, we move forward to generating income statements and cash flow reports, providing even deeper insights into your business’s performance.

Generating Income Statements and Cashflow Reports

Income statement reports can help businesses identify where their operating revenues and profits are coming from, compare expense tiers and allocations, and learn patterns in their spending. They also allow businesses to determine whether they meet their budget goals and gain operational efficiencies. On the other hand, cash flow reports provide insight into how much cash has come into a business from sales and how much has gone out on expenses, investments, and more. Knowing this information helps create budget forecasts that enable companies to manage their finances more effectively.

Auditing and Verification Process

Auditing and verifying financial statements is a vital part of the bookkeeping process. It includes the examination by a third party of the accuracy of financial documents and records. This is to ensure that books are accurate, valid, and up-to-date. By having an independent, impartial professional verify them, you can trust the results of your bookkeeping process.

After going through the process of generating income statements and cash flow reports and auditing and verifying them, it is equally important to thoroughly review journal entries and other data within the books for further accuracy. For these steps to truly unlock the power of bookkeeping, one must ensure that all journal entries in every single record have been carefully examined from every angle before being included in any kind of report or filing statement. This meticulous act helps minimize potential discrepancies throughout all documents associated with the accounting system.

Reviewing Journal Entries and Other Data

Once the auditing and verification process is complete, reviewing any journal entries or other data in the post-editing phase is time. This stage of the bookkeeping process allows you to ensure accuracy and identify any mistakes that need to be corrected. It’s an important step, as accurate data is essential to producing an accurate financial picture of your business.

Determining what needs to be reviewed during this stage can be difficult for business owners. Some suggest that you review all journal entries and other data, while others believe only certain specific transactions should be examined.

On the other hand, those who support the idea of reviewing only specified records suggest far too many entries are being created each month to examine everything in detail.

Do you need expert bookkeeping services and want to understand the four steps of the bookkeeping process? Look no further than CFO Strategies, your trusted partner in financial management. Our experienced team specializes in bookkeeping and can provide you with the comprehensive support you need.

Contact us today at (855) 732-7861 to schedule a consultation with our knowledgeable professionals. During the consultation, we will explain the four essential steps of the bookkeeping process, including recording financial transactions, classifying them into appropriate categories, summarizing the information, and preparing financial statements. Our team will tailor our services to meet your specific needs, ensuring accurate and organized financial records.