Bookkeeping or account bookkeeping is a process that involves systematic organizing and recording of any financial transactions taking place in a company; so that it could be totally reliable while tracking information at any time later. The term 'accuracy' plays a notable role in bookkeeping. Proper account bookkeeping could assist you with tracking key operations, financial decisions, and good investments. Prior to this electronic era, account bookkeeping for any business was usually handwritten. A bookkeeper is someone who is employed by a company, whose job is to essentially record any payments (say, loan payments, payments to suppliers, etc.), monitor asset depreciation, and generation of financial reports. Since now we know what bookkeeping and accounting are, let us move on to the types of bookkeeping.
Types of Bookkeeping
There are two different types of bookkeeping.
Single-entry
Double-entry
Single entry bookkeeping is precisely done for small businesses that do not entail arduous transactions. Payment details are recorded accurately, and notes on bookkeeping and accountancy are made from time to time. Individuals' entries ought to settle down with bank account details. For penny accounts, or where transactions do not happen on a regular basis, the single entry system of recording is considered to be the best.
The double-entry bookkeeping process is way too tedious as it jots down account details of complex and big-budget companies. In this process of bookkeeping, there are endless debits and credits taking place so spontaneous recording might be indispensable. Therefore, for big companies where numerous entries are made per day, the double-entry system is the perfect fit.
What Does Single-Entry and Double Entry System Means?
Single-Entry System: As the name itself suggests, a single entry system means a single entry for all business transactions should be included in the accounting records. Generally speaking, a single accounting system works better for small businesses with less revenue. In addition to this under the single-entry bookkeeping system, one will not find records of assets and liabilities. But will find records of cash disbursements and cash receipts
Double-Entry System: Double-Entry Bookkeeping System is the quality method of record-keeping normally used by businesses, bookkeepers, and accountants. The plan of executing the double-entry bookkeeping system is more lengthy and complex than the single-entry bookkeeping system. It provides the concept of debit and credit which means that for every transaction there is something received and given up.
Introduction to Bookkeeping and Accounting
Bookkeeping and accounting are two extensive factors that are exceedingly required for any growing industry. Bookkeeping and accounting are often believed to be the same. However, both bookkeeping and accounting are concerned with the handling of financial data. Accounting is something much broader than bookkeeping. Bookkeeping is one of the phenomena mandatory in accounting. Otherwise stated, bookkeeping mainly concerns the preparatory part of the accounting process.
Accounting provides a whole lot of data that bookkeepers utilize for preparing income-tax statements, audits, financial statements, and cost studies. Furthermore, accountants prepare records based on that information. Simply put, an accountant has to be more skilled than a bookkeeper. Moreover, accounting is a more advanced and detailed form of bookkeeping.
Bookkeeping vs Accounting or the Difference between Bookkeeping and Accounting
To know how bookkeeping differs from accounting, let us now understand the main differences between the two. There are several differences between bookkeeping and accounting.
Account Bookkeeping often ensures that the financial documents are correctly and systematically recorded, whereas the task of accounting is more likely done to evaluate the financial well-being of any given organization. Accounting focuses more on the analytic side of the data.
Bookkeepers do not necessarily require any exceptional skills, but accountants are expected to have extensive skills since the data analysis and preparation of financial statements are not only complex but also tend to be extremely analytical.
The bookkeeping process may be of single entry or double entry, but in accounting, several processes, namely financial, social responsibility, inventory, are obliged. In the case of accounting, sufficient academic qualification is needed, whereas bookkeeping is all about the ability to understand financial subjects accurately.
The account bookkeeping process involves four simple steps that are as follows.
Analyzing financial transactions.
Writing the original entries.
Preparation of the ledger accounts.
Adjust the entries at the end of every accounting.
Bookkeeping is generally termed as a task of recording financial transactions and is a part of accounts in business and other organizations. This plays a vital role in keeping track of documents related to transactions, operations, and other events of a business. Transactions include purchases, sales, receipts, and payments by a person or an organization/corporation. The person in an organization who is employed to perform bookkeeping functions is usually called the bookkeeper (or bookkeeper). The bookkeeper brings the books to the trial balance stage, from which an accountant may prepare financial reports for the organization, such as the income statement and balance sheet.
Process of Accounting
The eight steps of the accounting process include the following points:
Identify Transactions
Record Transactions in a Journal
Posting
Unadjusted Trial Balance
Worksheet
Adjusting Journal Entries
Financial Statements
Closing the Books
Identification of financial transactions
Recording of transactions in the journal
Preparation of the ledger accounts
Preparation of the trial balance
Making a worksheet of the financial statements
Adjusting the entries
Verifying the financial statements
Advising on taxation matters
Closing of the books
Fun Facts
Just by looking into the word, it's crystal clear that bookkeeping holds one special characteristic in the English language, embodying back to back duplicating three sets of double letters combined concurrently. When you go back in time, individuals can easily pinpoint that bookkeepers have made a great deal of history. For instance, chewing gum was primarily fabricated by an accountant. Most of the women residing in the US are either accountants or bookkeepers. Surprisingly several superstars, including Mick Jagger, practiced being a bookkeeper but ended up becoming splendid artists Hence, bookkeeping and accounting have always been considered as important roles in society.
FAQs on Bookkeeping: Meaning and Basics Explained
1. What is the primary goal of bookkeeping?
The primary goal of bookkeeping is to systematically record all the financial transactions of a business in a chronological and logical manner. This creates an accurate and up-to-date financial history, which is essential for making sound business decisions and preparing financial statements.
2. What are the main systems used in bookkeeping?
The two main systems of bookkeeping are:
- Single-Entry System: A simple method that records income and expenses in a single column, much like a cashbook. It's suitable for very small businesses with straightforward transactions.
- Double-Entry System: A more robust method where every transaction affects at least two accounts, with a debit in one account and a credit in another. This system is the foundation of modern accounting as it provides a complete financial picture and helps ensure accuracy.
3. How is bookkeeping different from accounting?
While related, bookkeeping and accounting are distinct functions. Bookkeeping is the recording phase where daily financial transactions are identified and logged. Accounting is the analysis phase; it involves interpreting, classifying, summarising, and reporting the financial data collected by the bookkeeper to provide insights for decision-making. In short, bookkeeping provides the data, and accounting turns that data into meaningful information.
4. Why is accurate bookkeeping important for a business?
Accurate bookkeeping is crucial for several reasons. It helps a business:
- Track Financial Performance: See if the business is making a profit or a loss.
- Manage Cash Flow: Understand where money is coming from and where it is going.
- Make Informed Decisions: Provides reliable data for budgeting and planning.
- Meet Legal and Tax Obligations: Ensures correct tax filings and compliance with laws.
- Secure Loans: Lenders and investors require accurate financial records to assess a business's health.
5. What does a bookkeeper's daily work actually involve?
A bookkeeper is responsible for maintaining the day-to-day financial records of a business. Their tasks typically include recording sales and expenses, sending out invoices to customers, paying bills from suppliers, processing payroll for employees, and reconciling bank statements. They ensure all financial data is accurate and organised.
6. What are the typical stages in the bookkeeping cycle?
The bookkeeping cycle is a step-by-step process to record and analyse a company's financial activities. The key stages are:
- Identifying and analysing financial transactions.
- Recording transactions in a journal.
- Posting the journal entries to the respective accounts in the ledger.
- Preparing an unadjusted trial balance to check for errors.
- Making adjusting entries for items like accruals and depreciation.
- Preparing an adjusted trial balance.
- Creating the final financial statements like the Income Statement and Balance Sheet.
7. What is the 'double-entry' system, and why is it the standard for most businesses?
The double-entry system is a fundamental accounting principle stating that every financial transaction has an equal and opposite effect in at least two different accounts. It is based on the accounting equation: Assets = Liabilities + Equity. For every debit made to one account, an equal credit must be made to another. It is the standard because it provides a self-checking mechanism that significantly reduces errors and gives a complete, reliable picture of a company's financial position.
8. Can you provide a simple example of a bookkeeping transaction?
Certainly. Imagine a small business buys office supplies for ₹500 in cash. In a double-entry system, this transaction would be recorded as:
- A debit of ₹500 to the "Office Supplies" account (an increase in an asset).
- A credit of ₹500 to the "Cash" account (a decrease in an asset).
This keeps the accounting equation balanced and accurately reflects that the business exchanged one asset (cash) for another (supplies).
9. If a business uses accounting software, is a bookkeeper still necessary?
Yes, even with accounting software, a bookkeeper's role is still vital. While software can automate data entry and calculations, it cannot understand the context of a transaction or make judgements. A bookkeeper ensures that data is entered correctly, categorised properly, and reconciles accounts. They can also spot errors or potential issues that the software might miss, ensuring the financial data remains reliable and accurate for decision-making.
