What is bookkeeping?

    • It records and organizes all the business transactions that have been collected in the due course of the business. Bookkeeping is a fundamental part of accounting and mainly focuses on recording transactions.
    • All the transactions related to finance, such as sales, revenue, taxes, earned interest, payroll, operational expenses, loans, and investments, etc., are produced in books of accounts.
    • The methodology used in bookkeeping for managing discovers the accuracy of the overall accounting process accordingly done by the business. Thus, bookkeeping assures that the record of financial transactions is up-to-date and, more significantly, accurate.
    • In preparing a detailed report, the company needs a source of data; bookkeeping is an origin that gets precise into the financial statements or any other accounting report that we witness. With bookkeeping companies can track and record all the financial transactions, it becomes the starting phase of accounting.
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Company with no bookkeeping = Company with no accounting 

Thus, it becomes necessary for businesses, whether small or big, to have bookkeeping, as it helps to keep track of receipts, payments and also provide information to create financial reports which tells us specific information about the business as how much profits the business has made or how much profits the business has made or how much the business is worth at a specific point of time.

 

Bookkeeping meaning:

 

BOOKKEEPING relates to a dynamic term, which includes almost the core of accounting. It refers to the recording of the financial transactions which take place day to day in an organization. The transactions include various sales, purchases, receipts, payments, etc.

 

There are several bookkeeping methods, but the methods used widely are single-entry and double-entry systems. It is also the art of correctly recording the monetary aspect of business transactions systematically.

 

Many of our readers, including some of them who are not familiar with these terms, often get confused between the two.

 

Bookkeeping ‘and accounting

 

Let me help them differentiate!!

 

Bookkeeping is essentially concerned with recording financial transactions, whereas accounting goes a step further; it includes the recording of transactions and summarising these transactions, and analyzing and interpreting their effect on the working of the business.

 

Bookkeeping provides the preliminary or initial record, Accounting processes this record. Bookkeeping is a part and an essential part of accounting.

 

The underlying purpose of accounting is to supply meaningful information about the business's financial activities. To get this information about the financial activities of a business. To get this information, there must be a systematic record of business transactions, a function performed by bookkeeping.

 

A bookkeeper records transactions. His work is more or less of a routine type and clerical. An accountant's work goes beyond that of a bookkeeper. He is a specialist in the field, and his job is to provide vital information to management in its pursuit of the profit motive and future program.

 

However, there are no hard and fast rules to determine where bookkeepers' work ends and the accountant's begins. In a small concern, the proprietor may record all the business transactions from the beginning to the end and prepare whatever statements are needed. Or he may employ a bookkeeper who does all the job of recording and analyzing business transactions. 

 

After knowing the appropriate differences, let us know the objectives of bookkeeping.

 

Bookkeeping Objectives:

 

Recording the transactions – Bookkeeping maintains an explicit and complete recording of all the financial transactions. It has detailed records of all transactions and makes sure that all the recorded transactions are replicated in the books (accounts). The recorded transactions can then be usable for the upcoming references.

 

To measure the appropriate position – Bookkeeping helps determine the complete footprints of all financial transactions of a company. It imprints the financial causes of all the business records or transactions that take place in a year (financial year). It anticipates financial information to the equity shareholders and management of the organization, thus giving aid to them to formulate policies and plans.

 

Detecting inaccuracy and fraud- Bookkeeping aids to recognize all the transactions summarising them accordingly in a systematized manner. Helping organizations to determine the mistakes in the business.

 

To classify and balance the ledger accounts- To classify the accounts as an expense, income, asset, liability and balance the ledger accounts as well. 

 

Hey readers! Aren't you in the thought of the importance of bookkeeping! If yes, then let's move ahead and look at the significance.

 

Significance of bookkeeping.

 

Bookkeeping is the basic requirement for every kind of business and organization regardless of the nature of its size. When the business starts, maintaining proper records is necessary.

 

Recording of the transactions and their sources- Bookkeeping acts as the database that gets recorded of the financial transactions from the transaction like receipts, purchases, sales, and records every transaction made from and by the company. Statements and financial reports in an organization are abstracted from books of accounts. Lastly, regardless of their structure or nature, businesses require systematic bookkeeping.

 

Helpful for making decisions - An appropriate bookkeeping system helps companies with an exact evaluation of their presentation. It supplies information for designing common strategic conclusions and a touchstone for its income and profit earning goals. Bookkeeping is a dependable statistics or database for companies to map their commercial performance. The important reason for bookkeeping is gathering and keeping all financial records of a business that shows the financial position of every heading of all income and expenditure. Then the companies can obtain detailed and structured information about each receipt or expense instantly through bookkeeping.

 

Gives data or statistics for preparing financial statements- The main importance of bookkeeping is to abstract the expenditures, receipts, and mentioned ledger records recurrently. Since bookkeeping records and imprints, all the financial transactions become the initiating point of accounting. Unless the bookkeeping of an organisation or company is not maintained properly, the company's accounting records will not be maintained with accuracy.

 

Bookkeeping produces data for preparing financial reports that state the specific statistics of the business on the profits earned or net-worth of the business at a specified point in time.

 

Examples of bookkeeping.

 

With the above precision of bookkeeping, it's clear that it includes all that is necessitated to follow, track or record, and organize all the financial transactions that have appeared in the business.

The person is liable for the management of bookkeeping, usually with the responsibility of taking into consideration or tracking all the transactions related to the organization or business.

 

EXAMPLES:

 

  • Billing of goods sold provided to customers.
  • Recording of receipts from clients.
  • Verifying invoices from the suppliers.
  • Recording of payment made to sellers.

 

Received money from sales- 

 

Hence, the entry is made in a tabular form.

 

For Example:

 

DATE      PARTICULARS DEBIT CREDIT REF.
1-07-2020 BANK A/C     DR. 100.00    
1-07-2020 TO SALES A/C    100.00  
1-07-2020 (BEING MR. SMITH PAYMENT CASH INVOICE 1)      



Let's have a glance at the period taken into consideration of bookkeeping.

 

The accounting session that an organization selects for its business becomes an integral part of its bookkeeping techniques and is used to open and shut the finance books. The accounting tenure affects the entire aspects of the company’s financial books, with the taxes and analysis of their financial chronicles.

 

The followed accounting period is the financial year which starts from 1st April and ends on 31st March of every year. 

 

After all these oceans of knowledge on bookkeeping, let us collect the corals and pearls by diving deeper; let's go!

 

Types of bookkeeping.

 

Business or organization selects from 2 types of bookkeeping systems;

The single-entry system of bookkeeping requires recording one entry for each financial transaction.

 

The single-entry bookkeeping system is a basic system used to record everyday receipts or produce a daily or weekly cash flow report.

 

The double-entry system stands in need of a double entry for each financial transaction. It brings forth the income and balances by recording and correlating credit entries for each debit entry. The double-entry system is not based on cash. Transactions are entered when a debt is incurring, or revenue is earned.



Methodologies of bookkeeping.

 

The liquid (cash) system of accounting records the financial transactions when payment occurs (made or received). The system recognizes income or expenditure in the accounting period in which it is received and expenses in the period in which they are paid.

 

Accrual basis method, favoring under the generally accepted principles of accounting, recording income in the accounting period in which it is earned and records expenses in the time-period they incurred.

 

Facing trouble understanding what the accrual basis method is? Here I define it for you!

 

Accrual basis method- Very often, when services are involved, the expense and sometimes the revenue should be allocated over two periods. However, the whole of the expense was for the period concerned. When this happens, the liability to the supplier must be recorded in the subsequent period. Still, the charge is treated as accrual and added to the total expense in the period under review. Subsequent adjustments are made in the recording medium to ensure that the expense is not accounted for twice while the payment is made to the supplier in the subsequent period.

 

When we look into some more methods of bookkeeping, we have:

 

Manual bookkeeping- It is the conventional method of bookkeeping that involves manually writing the transactions in the books of accounts. It is mainly used by small businessmen having minimum transactions, as it is cheaper and easier to maintain.

 

Computerized bookkeeping- With the introduction of computers, nowadays all the bookkeeping work is carried out through computers or laptops. It is an emerging method of keeping a record of financial transactions wherein accounting/bookkeeping software packages are used by businesses.

 

This method of bookkeeping is performed by a bookkeeper, who keeps track of all the financial data and organizes them systematically.

 

Principles of bookkeeping

 

To ensure that all the transactions are being recorded and classified systematically, bookkeeping principles are implied. 

 

The principles which are followed by bookkeeping:

 

  • The Revenue Principle
  • The Expense Principle
  • The Matching Principle
  • The Cost Principle
  • The Objectivity Principle

 

After looking at the theoretical aspect, let us focus on the practical areas of bookkeeping.

Methods of recording entries in bookkeeping?

 

 The transactions in bookkeeping are recorded in the antique method of a journal entry.

Here, the respective individual or accountant manually enters the account numbers and performs individual action of debits and credits for each transaction. This method is time-consuming and subject to error and so is usually reserved for adjustments and special entries.

 

It is important to record all the business transactions in the books of accounts. Once the financial accounts and the bookkeeping system of a business are in place, the bookkeeper will start to record the transactions.

 

The debit and credit transactions of a business must be recorded under the correct accounts. If the transactions are not recorded under the correct accounts, there will be a mismatch in the account balances, leading to the non-closure of books.

 

A trial balance can be done from time to time by adding the debit column and credit column separately and comparing these two additions. The current state of financial affairs of a business can be known by comparing the additional total of the two columns.

 

If the total of the credits is greater or more than the debits, then the business is making a profit, but if the total of the debits is greater than the credits, then the business is losing money.



When we look at the overall summary or concluding areas of this writing, it is observed that bookkeeping, being different from accounting, is the very integral part of accounting, which reveals their interdependency.

 

Hence, bookkeeping is the art of permanently recording the monetary aspect of business transactions systematically in different books of account, which helps maintain and balance all the sales, incomes, and receipts of the organization, offering various usable entry methods, which helps a business. Numerous principles followed in bookkeeping are designed in such a manner that perfectly coincides with the various business types that prevail.