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What is Bookkeeping and why is it important?

Updated: Oct 26, 2023

Bookkeeping is one of the most essential tasks of any business.  It is the process of recording all of the financial transactions and events that occur in your business.  Purchases, payments, sales and receipts are recorded so that all of the money that flows in and out of your business is accounted for.

There are 3 primary reasons why bookkeeping is so important:

1.  This information is all necessary to prepare financial statements and to analyze the financial state of your business.  Without bookkeeping records, you won't be able to see how much money you are really making (or how much money you have lost).  You also won't be able to determine whether or not you are meeting your financial goals.

Bookkeeping allows you to see whether your earnings are enough to cover your expenses and gives you information that guides your financial decisions. Financial Statements help business owners to make "good" decisions.

2.  If you are interested in taking out a loan or some other form of bank financing, your bank will most likely require financial data from you that will prove to them your business is in good economic standing.  Banks will want to see copies of your financial statements, cash flow budgets, and other financial data.

3.  Proper bookkeeping is extremely important for preparing an annual tax return.  Without good bookkeeping practices, tax return work is more difficult and it is also more likely that discrepancies will occur on the tax return -- which then, in turn, can lead to an IRS audit.  

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