What is Bookkeeping and why is it important for UAE Businesses?

Bookkeeping is a process of recording and organizing all the business transactions that have occurred during operations, maintaining the businesses book of accounts. With the introduction of Corporate Tax in the UAE, all businesses need to maintain their book of accounts. Without it, you cannot determine if the business has surpassed any VAT or Corporate Tax thresholds. It is also not possible to calculate taxable income.  

Why is Bookkeeping Important from the business perspective? 

Bookkeeping is an integral part of accounting and mainly focuses on recording day to day transactions to maintain accurate records. Bookkeeping is important for several reasons: 

1. Bookkeeping is important to maintain proper records. 
2. Bookkeeping is important to determine how much money entered or exited the company. 
3. It also improves budgeting accuracy.
4. It also helps you prepare for tax filings. 
5. Bookkeeping is an initial step to creating any financial report. It is a crucial step in representing accurate and fair financial reports to stakeholders. 
6. It helps in setting and monitoring business goals. 
7. By bookkeeping, you can ensure compliance with government regulations. 

What is the difference between Bookkeeping and Accounting? 

Bookkeeping involves recording and organizing financial transactions, while accounting entails analysing this data and preparing financial statements. Bookkeeping focuses on day-to-day financial activities, while accounting takes a more analytical and strategic approach, interpreting financial information to make decisions. 

Components of the Bookkeeping Process: 

Chart of Accounts: 

A chart of accounts is a master list of all the different accounts used to track the money in a business. Each account keeps tabs on a specific part of the business, like what it owns, owes, earns, spends, or its overall financial value. These accounts are organized using a coding system to make them easy to find and understand. 

Journal Entries: 

Bookkeeping aims to give a clear and current view of a business’s financial situation. Journal entries are used to write down all the details of each transaction, like how much money moved in or out of different accounts. Then, these entries get added up and put into the business’s main financial record, called the general ledger. 

General Ledger: 

Think of the general ledger as a detailed list with numbers where a company writes down everything it does with its money. This list is crucial because it helps the company create three important financial reports that show how well it’s performing financially. 

In double-entry bookkeeping, every time the company records transactions in the ledger describing money going into one account, it also records the same transaction amount coming out of another account. It’s a balancing act to ensure everything adds up correctly. 

Balance Sheet: 

The balance sheet of a company shows a clear picture of its finances at one particular time. It keeps track of what the company owns (assets), what it owes (liabilities), and its overall value to its owners (equity). 

Income Statement: 

An income statement tells you how much money a business made, how much it spent, any extra income it earned, losses it experienced, and overall earnings for a certain time frame. Some companies call this statement either an earnings statement or profit and loss statement, often shortened to P&L. 

Cash Flow Statement: 

A cash flow statement shows the money, including cash and similar assets, coming into and going out of a business during a certain period. It’s a financial map that helps companies understand how easily they can access cash when needed. 

Bookkeeping is a part of the whole accounting cycle: 

The accounting cycle is a series of steps where a company identifies, analyses, and records its financial transactions. The accounting cycle covers a complete reporting period. So, keeping everything organized during this time is crucial for efficiency. The length of the accounting cycle can differ depending on reporting requirements. While many companies review their performance monthly, others may concentrate more on quarterly or yearly results. 

The accounting cycle is a basic, seven-step process for completing a company’s bookkeeping tasks. 

Step 1: Identifying Transactions: 

In the accounting cycle, the first step is identifying transactions. These transactions are the various activities or events that involve money or financial resources within a company. They can include things like sales, purchases, payments, receipts, loans, and investments. 

Properly recording transactions means making sure that all the details are captured, such as the date of the transaction, the amount of money involved, who the transaction was with, and what it was for. This information helps to create a clear and accurate financial picture of the company’s activities. So, the first step in the accounting cycle involves being diligent about spotting and documenting all these transactions. 

Step 2: Recording transactions in Journals: 

The second Step is the creation of a journal entry for each transaction. The decision between accrual and cash accounting determines when transactions are officially recorded. Accrual accounting aligns revenues with expenses, so both are recorded at the time of sale. On the other hand, cash accounting records transactions when cash is received or paid. Double-entry bookkeeping involves making two entries for each transaction to maintain detailed financial statements like the balance sheet, income statement, and cash flow statement. 

In double-entry accounting, every transaction has a debit and a credit that match each other, often used in business-to-business dealings. Single-entry accounting keeps track of your check book. It shows your balances but doesn’t require multiple entries. 

Step 3: Posting:  

After a transaction is written down as a journal entry, it goes into a specific account in the general ledger. The general ledger keeps track of all financial activities by account. This helps the bookkeeper keep an eye on each account’s financial situation. One important account in the general ledger is the cash account, which details how much cash the company has. 

Step 4: Unadjusted Trial Balance: 

This is the first step that takes place once the accounting period has ended and all transactions have been identified, recorded, and posted to the ledger. The purpose of this step is to make sure that the total debit side is equal to the total credit side, and if they are not equal it means a mistake was made while recording transactions. 

Step 5: Identifying Discrepancies and Adjusting them: 

A worksheet is made to check if debits and credits match up. If they don’t, adjustments are required to fix it. These adjustments are necessary for matching revenue and expenses in accrual accounting. They’re recorded as journal entries as needed. 

Step 6: Financial Statements: 

After finishing all adjustments, the company goes to the next step, where it prepares its financial statements. Usually, these include an income statement, balance sheet, and cash flow statement, which most companies have. 

Step 7: Closing the Books: 

In the seventh step, a company wraps up the accounting cycle by officially closing its books at the end of the specified date. These closing statements offer a summary for analysing the company’s performance during the period. 

Once closed, the accounting cycle begins anew with a fresh reporting period. This closing phase is a good opportunity to handle paperwork, prepare for the upcoming period, and review future events and tasks on the calendar.

Note: if you have any questions after reading this, please reach out to us.