Bookkeeping

What is Bookkeeping?

Bookkeeping is a process of recording and organizing all the business transactions that have occurred in the course of the business. Bookkeeping is an integral part of accounting and largely focuses on recording day-to-day financial transaction of the business.

All the financial transactions such as sales earned revenue, payment of taxes, earned interest, payroll and other operational expenses, loans investments etc. are recorded in books of accounts.

The way the bookkeeping is managed determines the accuracy of the overall accounting process that is been followed by the business. Thus, bookkeeping ensures that the record of financial transactions are up-to-date and more importantly, accurate.

What Does Bookkeeping Mean?

Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business. Transactions include purchases, sales, receipts and payments by an individual person or an organization/corporation. There are several standard methods of bookkeeping, including the single-entry and double-entry bookkeeping systems. While these may be viewed as “real” bookkeeping, any process for recording financial transactions is a bookkeeping process.

Bookkeeping is the work of a bookkeeper (or book-keeper), who records the day-to-day financial transactions of a business. They usually write the daybooks (which contain records of sales, purchases, receipts, and payments), and document each financial transaction, whether cash or credit, into the correct daybook—that is, petty cash book, suppliers ledger, customer ledger, etc.—and the general ledger. Thereafter, an accountant can create financial reports from the information recorded by the bookkeeper.

Bookkeeping refers mainly to the record-keeping aspects of financial accounting, and involves preparing source documents for all transactions, operations, and other events of a business.

The bookkeeper brings the books to the trial balance stage: an accountant may prepare the income statement and balance sheet using the trial balance and ledgers prepared by the bookkeeper.

Bookkeeping is constructed to provide the preliminary information needed to create accounting statements. Each transaction must be recorded in the books, and any and all changes must be updated on a continuous basis.

Examples of Bookkeeping Tasks

Typical financial transactions and tasks that are involved in bookkeeping include:

  • Billing for goods sold or services provided to clients
  • Recording receipts from customers
  • Verifying and recording invoices received from suppliers
  • Paying suppliers
  • Processing employees’ pay and the related governmental reports
  • Monitoring individual accounts receivable
  • Recording depreciation and other adjusting entries
  • Providing financial reports

Importance of Bookkeeping

Proper bookkeeping gives companies a reliable measure of their performance. It also provides information to make general strategic decisions and a benchmark for its revenue and income goals. In short, once a business is up and running, spending extra time and money on maintaining proper records is critical.

Many small companies don’t actually hire full-time accountants to work for them because of the cost. Instead, small companies generally hire a bookkeeper or outsource the job to a professional firm. One important thing to note here is that many people who intend to start a new business sometimes overlook the importance of matters such as keeping records of every penny spent.

Double-entry Bookkeeping

The double entry system of bookkeeping is based on the fact that every transaction has two parts, which therefore affects two ledger accounts.

Every transaction involves a debit entry in one account and a credit entry in another account. This serves as a kind of error-detection system: if, at any point, the sum of debits does not equal the corresponding sum of credits, then an error has occurred.

Principles of Bookkeeping

To ensure the all the transactions are recorded and organized systematically, bookkeeping principles are applied. The following are the bookkeeping principle:

  • Revenue principle
  • Expense principle
  • Matching principle
  • Cost principle
  • Objectivity principle

Abbreviations used in bookkeeping

  • A/c – Account
  • Acc – Account
  • A/R – Accounts receivable
  • A/P – Accounts payable
  • B/S – Balance sheet
  • c/d – Carried down
  • b/d – Brought down
  • c/f – Carried forward
  • b/f – Brought forward
  • Dr – Debit side of a ledger. “Dr” stands for “Debit register”
  • Cr – Credit side of a ledger. “Cr” stands for “Credit register”
  • G/L – General ledger; (or N/L – nominal ledger)
  • PL – Profit and loss; (or I/S – income statement)
  • P/R – Payroll
  • PP&E – Property, plant and equipment
  • TB – Trial Balance
  • GST – Goods and services tax
  • SGST- State goods & service tax
  • CGST- Central goods & service tax
  • IGST- integrated goods & service tax
  • VAT – Value added tax
  • CST – Central sale tax
  • TDS – Tax deducted at source
  • AMT – Alternate minimum tax
  • EBITDA – Earnings before interest, taxes, depreciation and amortisation
  • EBDTA – Earnings before depreciation, taxes and amortisation
  • EBT – Earnings before tax
  • EAT – Earnings after tax
  • PAT – Profit after tax
  • PBT – Profit before tax
  • Depr – Depreciation
  • Dep – Depreciation
  • CPO – Cash paid out
  • CP – Cash Payment

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