Bookkeeping


Bookkeeping is the record of financial transactions that occur in business daily or any time so as to have a proper and accurate financial report.
Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business and other organizations. It involves preparing source documents for all transactions, operations, and other events of a business. Transactions include purchases, sales, receipts and payments by an individual person, organization or 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.
The person in an organisation who is employed to perform bookkeeping functions is usually called the bookkeeper. They usually write the daybooks, 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. The bookkeeper brings the books to the trial balance stage, from which an accountant may prepare financial reports for the organisation, such as the income statement and balance sheet.

History

The origin of book-keeping is lost in obscurity, but recent research indicates that methods of keeping accounts have existed from the remotest times of human life in cities. Babylonian records written with styli on small slabs of clay have been found dating to 2600 BC. Mesopotamian bookkeepers kept records on clay tablets that may date back as far as 7,000 years. Use of the modern double entry bookkeeping system was described by Luca Pacioli in 1494.
The term "waste book" was used in colonial America, referring to the documenting of daily transactions of receipts and expenditures. Records were made in chronological order, and for temporary use only. Daily records were then transferred to a [|daybook] or account ledger to balance the accounts and to create a permanent journal; then the waste book could be discarded, hence the name.

Process

The primary purpose of bookkeeping is to record the financial effects of transactions. An important difference between a manual and an electronic accounting system is the former's latency between the recording of a financial transaction and its posting in the relevant account. This delay, which is absent in electronic accounting systems due to nearly instantaneous posting to relevant accounts, is characteristic of manual systems, and gave rise to the primary books of accounts—cash book, purchase book, sales book, etc.—for immediately documenting a financial transaction.
In the normal course of business, a document is produced each time a transaction occurs. Sales and purchases usually have invoices or receipts. Historically, deposit slips were produced when lodgements were made to a bank account; and checks were written to pay money out of the account. Nowadays such transactions are mostly made electronically. Bookkeeping first involves recording the details of all of these source documents into multi-column journals. For example, all credit sales are recorded in the sales journal; all cash payments are recorded in the cash payments journal. Each column in a journal normally corresponds to an account. In the single entry system, each transaction is recorded only once. Most individuals who balance their check-book each month are using such a system, and most personal-finance software follows this approach.
After a certain period, typically a month, each column in each journal is totalled to give a summary for that period. Using the rules of double-entry, these journal summaries are then transferred to their respective accounts in the ledger, or account book. For example, the entries in the Sales Journal are taken and a debit entry is made in each customer's account, and a credit entry might be made in the account for "Sale of class 2 widgets". This process of transferring summaries or individual transactions to the ledger is called posting. Once the posting process is complete, accounts kept using the "T" format undergo balancing, which is simply a process to arrive at the balance of the account.
As a partial check that the posting process was done correctly, a working document called an unadjusted trial balance is created. In its simplest form, this is a three-column list. Column One contains the names of those accounts in the ledger which have a non-zero balance. If an account has a debit balance, the balance amount is copied into Column Two ; if an account has a credit balance, the amount is copied into Column Three. The debit column is then totalled, and then the credit column is totalled. The two totals must agree—which is not by chance—because under the double-entry rules, whenever there is a posting, the debits of the posting equal the credits of the posting. If the two totals do not agree, an error has been made, either in the journals or during the posting process. The error must be located and rectified, and the totals of the debit column and the credit column recalculated to check for agreement before any further processing can take place.
Once the accounts balance, the accountant makes a number of adjustments and changes the balance amounts of some of the accounts. These adjustments must still obey the double-entry rule: for example, the inventory account and asset account might be changed to bring them into line with the actual numbers counted during a stocktake. At the same time, the expense account associated with use of inventory is adjusted by an equal and opposite amount. Other adjustments such as posting depreciation and prepayments are also done at this time. This results in a listing called the adjusted trial balance. It is the accounts in this list, and their corresponding debit or credit balances, that are used to prepare the financial statements.
Finally financial statements are drawn from the trial balance, which may include:
  • the income statement, also known as the statement of financial results, profit and loss account, or P&L
  • the balance sheet, also known as the statement of financial position
  • the cash flow statement
  • the statement of changes in equity, also known as the ''statement of total recognised gains and losses''

    Single-entry system

The primary bookkeeping record in single-entry bookkeeping is the cash book, which is similar to a checking account register, except all entries are allocated among several categories of income and expense accounts. Separate account records are maintained for petty cash, accounts payable and accounts receivable, and other relevant transactions such as inventory and travel expenses. To save time and avoid the errors of manual calculations, single-entry bookkeeping can be done today with do-it-yourself bookkeeping software.

Double-entry system

A double-entry bookkeeping system is a set of rules for recording financial information in a financial accounting system in which every transaction or event changes at least two different ledger accounts.

Method

Cash Accounting

The Cash-Based System of Accounting is a simplified method of financial record-keeping that determines a company's profit based on the actual cash flow. The cash-based system of accounting records revenues when cash is received and expenses when cash is paid out, simplifying profit calculation for smaller entities by focusing purely on the actual movement of money. This method provides a clear view of current liquidity, but it does not necessarily reflect the true economic position.

Accrual Accounting

The accrual basis method, which is the required standard under Generally Accepted Accounting Principles, records income when it is earned and expenses when they are incurred, regardless of when the cash is actually exchanged, providing a more accurate picture of a company's financial performance. The accrual-basis system offers a more accurate view of a business's profitability and success by matching revenues and expenses in the correct period, which enhances forecasting accuracy, enables better strategic decisions on resource management and growth, and increases transparency and credibility for stakeholders.

Daybooks

A daybook is a descriptive and chronological record of day-to-day financial transactions; it is also called a book of original entry. The daybook's details must be transcribed formally into journals to enable posting to ledgers. Daybooks include:
  • Sales daybook, for recording sales invoices.
  • Sales credits daybook, for recording sales credit notes.
  • Purchases daybook, for recording purchase invoices.
  • Purchases debits daybook, for recording purchase debit notes.
  • Cash daybook, usually known as the cash book, for recording all monies received and all monies paid out. It may be split into two daybooks: a receipts daybook documenting every money-amount received, and a payments daybook recording every payment made.
  • General Journal daybook, for recording journal entries.
It is an important primary ledger, as the Generally Accepted Accounting Principles require the recording of every single business transaction. The fundamental principle of proper bookkeeping requires that every financial transaction must be recorded, maintaining a complete and verifiable audit trail. However, for retailers and businesses that conduct a high volume of small-value cash transactions, a practical exception to the requirement for single-entry recording of each individual sale is universally applied across major jurisdictions. It is generally recognized that itemizing every single cash sale across the counter is commercially impractical and disproportionate to the size of the transaction. Instead of itemized recording, the daily revenue is determined summarily based on secure point-of-sale systems or cash register totals. This daily summarized figure must be rigorously documented to satisfy the regulatory requirements of bodies such as the IRS, HMRC, and CRA
All business transactions must be recorded in a timely and organized manner in the primary books of entry. With the exception of cash transaction, the timely recording of transactions does not require daily entry. Nonetheless a temporal link must exist between the transactions and their accounting entry.