Bookkeeping is the process of recording and categorizing the day-to-day transactions of your business. A bookkeeper "books" these transaction to an accounting ledger. Every month, the bookkeeper must reconcile each transaction. That is, he must make sure every transaction is accounted for by comparing everything in the accounting ledger to official documents like bank statements and credit card statements. An accountant then takes these accumulated transactions in the accounting ledger and produces financial statements. Financial statements are reports that generally show the health of a business.

Financial statements are reports that generally show the health of the business. Financial statements are produced every month, quarter, and year. There are 3 main financial reports: 1. Profit & Loss (P&L) Statement - how much income you're making, how much you're spending, and ultimately what is your profit over a certain period of time 2. Balance Sheet - the business's assets, liabilities, and equity at a certain point in time 3. Cash Flow Statement - how much cash is coming into your business versus how much cash is leaving the business over a certain period of time

Financial statements are critical for anyone trying to understanding your business. That "anyone" could be yourself, your business colleagues, the IRS, banks, and other investors or potential investors in your business. Perhaps the most immediate and obvious purpose of financial statements is that you need them (the P&L statement in particular) in order to accurately file your tax return (both federal and state) and pay taxes. If you ever want to get a business loan or take on additional investors, you will need to provide accurate financial statements.

For simple businesses, this statement is accurate. But for the vast majority of businesses, tracking cash by itself will not produce accurate financial reports. Let's say you play gigs at venues and allow up to 30 days for customers to provide payment. You could perform gigs for an entire month, rack up expenses for things like equipment and travel, and not receive any cash until the following month. If you produced financial reports for that month on a cash basis, you wouldn't have any revenue (because no cash came in) to report even though you performed a bunch of gigs. Cash basis accounting isn't permitted by Generally Accepted Accounting Principles (GAAP). And generally GAAP is needed for producing financial statements that are ultimately used for things like taxes and business loans.