Definition and Objectives of Bookkeeping and Accounting Systems

Accounting is defined as "the art of recording, classifying and summarizing in terms of money transactions and events of financial character and interpreting the results thereof." In simplest words, we can say:

(1) Accounting is an art

(2) of recording classifying and summarizing

(3) in terms of money

(4) transactions and events of financial nature and

(5) interpreting the results thereof

Accounting is an art of correctly recording the day to day business transactions: It is a science of keeping the business records in a regular and most systematic manner so as to know the business results with minimum trouble. Therefore, it is said to be a statistical procedure for the collection, classification and summarization of financial information.

Objectives of Accounting

The objectives of accounting are two-fold:

(1) To record permanently, all business transactions, and

(2) To show the effect of each transaction and also the combined effect of all such transactions for a given period so as to find out the profit the business has earned or loss incurred, and also to know the correct financial position on a particular date.

The necessity and importance of accounting can be understood by answering the following questions:

(1) How much we have earned this year ?

(2) How much was earned during the last year ?

(3) Is our business improving?

(4) How much cash do we have?

(5) How much money we owe?

(6) How much others owe to us ?

Accounting Systems

There are various systems of accounting for maintaining business records:

Cash system of accounting

This system records only cash receipts and payments on the assumption that there are no credit transactions. If at all there are any credit transactions, they are not at all recorded until the cash is actually paid or received. Receipts and payments account in case of clubs, societies, hospital, educational institutes, lawyers etc. is the best example of cash system.

Single Entry System

This system ignores the two fold aspect of each transaction as considered in double entry system. Under single entry system, merely personal aspects of transaction i.e. personal accounts are recorded. This method takes no note of the impersonal aspects of the transactions other than cash. It offers no check on the accuracy of the posting and no safeguard against fraud because it does not provide any check over the recording of cash transactions. Therefore, it is called as "imperfect accounting."

Double Entry System

The double entry system was first evolved by Luca Pacioliin, who was a Franciscan Monk of Italy. With the passage of time, the system has gone through lot of developmental stages. It is the only method fulfilling all the objectives of systematic accounting. It recognizes the two fold aspect of every business transaction.

These questions are of decisive importance for a trader and the answers can only be derived from up to-date financial records. Only the system of keeping the perfect records of all business transactions will help the proprietor to know the amount he has gained or lost.

The main objective of any business is to earn maximum possible profits with minimum expense. In view of this, a commercial organization always tries to expand its business, increase its sales and reduce operating expenses. The progress made in this regard, is always indicated only by the properly maintained financial records.

Meaning of Accounting

In the beginning, the main objective of accounting was to ascertain the result of the business activities (whether profit has been earned or loss has been suffered) during a year and to show the financial position of the business as on a particular date. Accounting has to meet the requirements of taxation authorities; investors, government regulations; management and owners. This has resulted in widening the scope of accounting and may be defined as follows:

"Accounting is the art of recording, classifying and summarizing, in a significant manner and in terms of money transactions and events which are in part at least, of a financial character and interpreting the result thereof."

Is Accounting a Science or an Art?

In simple words, science establishes relationship of cause and effect whereas the art is the application of knowledge comprising of some accepted theories, principles and rules. Since accounting docs not establish cause and effect relationship it only provides us with the procedure by which objectives of accounting can be achieved, therefore accounting is an art and not a science. Accounting is an art of recording financial transactions in a set of books; classifying in desired categories and summarizing the information for presentation in a suitable manner to the concerned persons for their benefit.

Scope of Accounting

The need of a system of accounting was felt by man early in the history of trade and commerce. The art of book-keeping is as old as the art of trading itself. This art of keeping records passed through many phases since its inception. With the development of commerce, it has attained a position of great importance. Indeed, it can be truly said that accounting has become the foundation on which the whole fabric of modem commerce rests.

Though there is no legal obligation on an ordinary trader to keep the records, every business house finds it essential and convenient to keep the systematic records so as to know where exactly it stands. Moreover, it is legally binding on some forms of business, such as joint stock companies, to prepare periodically, statements in proper forms showing the position of the business. A proper and satisfactory method of accounting is an essential part of any business house for the following reasons :

(1) If no records are kept, it will be difficult to find out accurate net profit. Under such circumstances, tax authorities may overestimate the profits and thus a trader will suffer for not having kept the business records.

(2) In absence of proper business records, the trader will find it difficult to submit the true position to the court in case he becomes insolvent.

(3) Keeping of proper records helps the trader in framing future business plans & policies.

(4) It will be difficult to ascertain and fix the price of business to be sold or disposed off, if no records are kept.

(5) Finally, in spite of the best memory it is beyond the capacity of a trader to remember all the business dealings with back references.

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Freelance Bookkeeping Rates - How to Charge For Your Bookkeeping Services

New to the bookkeeping business?

Then you are probably uncertain about how much to charge for your services. This is business advice for Bookkeepers and other consultants as well.

When I began my bookkeeping business in 1999, so was I. Here are some tips on what to charge.

One lesson I learned quickly is that EVERYBODY wants a deal and they think that you should give them one, but the minute you do, they will undervalue your services and consider it to be a permanent discount.

Don't make the mistake of charging too little - Use reward incentives and bonuses for new client referrals instead of lowering your price for any customer. Even once can be the "Kiss of Death" to your rate sheet.

Do not guess at how much to charge, either. When you begin you need to seek out other professionals in your field and simply ask them what the rates are that they are charging in that area. Ask them if there is a sliding scale and if so, what criteria they use to determine those variables.

Here is what I figure -

Small business clients would rather pay a flat fee than an hourly rate. Most bookkeepers charge an hourly rate, but will charge a flat fee based on the number of transactions that need to be entered, plus $5-10 (if they don't know the client in advance). You must also calculate these costs into your calculations - Workers Compensation, self-employment tax (10% for USA), and business insurance.

For a basic bank and credit card reconciliation, data entry and set of monthly financials you will work approximately 2.5 minutes per entry. Each data entry transaction counts as "2.5." So, if you have an average small business with 200 entries per month, you need to charge 2.5 minutes per entry minimum.

Experience tells me that some entries will take more time and some entries will take less time, but from start to finish all entries made will balance out to 2.5 minutes apiece. At the rate I charge that means that a monthly flat fee for this customer equals 2.5 times number of entries divided by 60 total minutes times hourly rate (2.5 x 200 / 60 x $45 = $360 per month flat fee).

Not all bookkeepers are willing to share their fee structure with others, so do not be afraid to ask several bookkeepers what they charge for a beginning point of reference. You will find that there are ranges of rates from $16-60 + per hour. Pick one of those rates that feels like it covers your costs and still holds you accountable as an expert in your field. If you charge $16 an hour then you really need to get more experience and/or education to be taken seriously. Bookkeeping Accreditation is one way to do that. Check with your local chapter of American Institute of Professional Bookkeepers for accreditation.

If your customer seems apprehensive about your fee then ask them if they would imagine a set of records presented to their accountant at the end of the year with no problems, and if that would be an equitable way to think of your fee. If they still hesitate then you are best advised to help them find someone else.

The benefits of hiring a bookkeeper also include the fact that a full-time employee and payroll costs are eliminated, computer hardware and software and extra office space and storage for bookkeeping purposes aren't necessary.

$25-45 is the average cost per hour for a good bookkeeper who knows the business. For higher hourly rates you are paying for a bookkeeper who works with an accountant. Those rates reflect the fact that they work with professionals who oversee their work and the higher rate is symbolic of the review by a tax professional of the records of a business before they go out the door to the IRS or CRA. It is worth the extra cost for a lot of clients. For others it is not and those people probably don't make the best clients for experienced bookkeepers.

When you are creating your invoices for your own customer billings, briefly rewrite the work you did for them (client) in the body of your invoice to them. There is really no need to add all the items on your list of the services you provided for them. You just want to include a 2-5 sentence outline for your client so that they understand what they are paying for.

TIP: If you have a large amount on your invoice to present to them then try to break it up into 2-3 separate invoices in the course of a month. Your clients may need you to do their work, but nobody appreciates a huge bill at the end of the month without any warning. Those situations lead to ill-will and short-term clients. Longevity is the key to owning and operating a reputable and long-standing bookkeeping business.

Invoice Descriptions Include:

"Bookkeeping services rendered for November, included but were not limited to, the following: Bank and credit card reconciliation and reports for October statements, cash receipts journal, cash disbursements journal, general journal entries (for those on an accrual method of accounting. General journal and accruals, trial balance, general ledger postings. If you performed payroll services then add "payroll preparation," "quarterly payroll tax returns," etc.

The big picture and a few details help your client understand why you bill the way you do. And why you are worth it!

If you performed additional services that you choose to leave as un-billed go ahead and add it to your invoice as a note on the bottom listing that service - For example: IRS phone calls for payroll issue 3 hours at no charge. ALWAYS say, "Thank you." NEVER ask a client to call with questions on your invoice.

Charge for telephone consultations and training sessions at reduced rates - Unless you want to be training your clients for free and that just takes away valuable time you can be spending getting other jobs and clients. Time is Money-Use yours wisely to grow your business. Do not nickel and dime clients - faxing and copies should not be billed out unless they exceed $20.00 in your time and costs.

Always invoice your clients regularly - the same time every single month. Create professional invoices even if it's on an Excel spreadsheet. Use the last day of the month as a guideline in billing dates.

Still looking for clients?

- Look through the want ads for people who are interested in hiring a 10-15 hour person a week. Generally these people are less interested in hiring an employee. Give them a call or send your business card and resume and cover letter explaining why your service is good for them - outline the benefits for them and request a phone call to discuss it.

- Join a local networking group. I found that Business Networking International (BNI) not only helped me professionally with public speaking, and self confidence, but they also gave me a steady and solid stream of references every single week that grew my business and kept me busy. The cost of membership paid for itself in only one week.

Good luck!

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