Bookkeeping means recording the financial transactions and information concerning the business of a company regularly. It is a systematic recording of financial transactions in a company. It ensures that the records of each financial transaction are up-to-date, correct and comprehensive.
The bookkeepers are individuals or entities who maintain the books of account of a company. They manage all the financial data of a company. The companies can track all their financial transactions on their books with accurate bookkeeping. Bookkeeping helps companies to make important investing, operating and financing decisions.
Connection Between Bookkeeping and Accounting
Bookkeeping is a separate process from accounting, which occurs within the broader scope of accounting. The accounts are prepared from the information provided by bookkeeping. A strong relationship between these two functions is necessary to take the business to the next level.
Bookkeeping is a segment of the whole accounting system. Bookkeeping is the basis for accounting as it contains the proper records of all financial transactions whereas, accounting involves organising, summarising, classification and reporting financial transactions.
If the bookkeeping is correct, the accounting of a company will be proper. Thus, accounting is broader than bookkeeping and accounting of a company relies on a proper and accurate bookkeeping system.
Bookkeeping helps to interpret the accounting information for decision making by both the internal and external users. Bookkeeping is a subset of accounting and clerical in nature which involves the following:
- Recording financial transactions
- Posting credits and debits
- Producing invoices
- Maintaining and balancing current account and general ledgers
- Completing payroll
Objectives of Bookkeeping
The objectives of bookkeeping are as follows:
To record the transactions
The first objective of bookkeeping is to maintain accurate and complete records of all financial transactions in an orderly manner. It systematically records all transactions and ensures that all financial transactions recorded are reflected in the books of accounts. These transactions can be used for future references.
To show the correct position
Bookkeeping helps to ascertain the overall impact of all financial transactions of a company. It reflects the financial effect of all business transactions that have taken place in a financial year. It provides financial information to the shareholders and management of the company, thus helping them formulate future policies and plans.
To detect errors and frauds
Bookkeeping helps to identify the transactions and summarise them chronologically in a systematic manner. It ensures that the books of accounts are correct, up-to-date, chronological and complete. Thus, it helps to detect any errors or frauds in the business.
Types of Bookkeeping System
There are two types of bookkeeping systems. The business entities can choose any one of the types of bookkeeping system. Some entities use a combination of both types. The following are the two types of bookkeeping system:
Single-entry system of bookkeeping
The single-entry system of bookkeeping is a basic system to record daily receipts or generate a weekly or daily report of a company’s cash flow. In the single-entry system of bookkeeping, the bookkeeper records one entry for each financial transaction or activity.
The single-entry system of bookkeeping involves recording only one side of the transaction or activity. It maintains only the purchases, cash receipts and payments and sales. It is used mainly by small businesses, which have minimal transactions.
Double-entry system of bookkeeping
The double-entry system of bookkeeping records a double entry for each financial activity or transaction. The double entry system provides balances and checks as it records the corresponding credit entry for every debit entry. It is not cash-based, and the transactions are entered when revenue is earned, or debt is incurred.
The double-entry system of bookkeeping is based on the duality concept, i.e. every financial transaction affects two accounts. It means that every debit entry to an account has a corresponding credit entry in another account and vice versa. This system is universally adopted and is considered accurate for recording business/financial transactions.
Importance of Bookkeeping
Bookkeeping is necessary for all businesses, irrespective of the size, nature, business transactions, or any specific industry. Upon the commencement of a business, maintaining proper records is essential. The following points state the importance of bookkeeping:
Records the source of transactions
Bookkeeping acts as a source of all the financial transactions of a business since it records all the financial transactions from the source of the transaction, like receipts, invoices, payment notes, etc.
Bookkeeping keeps track of payments, receipts, purchases, sales and records every transaction made from and by the business. The financial statements or other accounting reports of a business are summarised from their books of accounts. Thus, all businesses irrespective of their size, need to have proper bookkeeping in place.
Helps in decision making
A correct and proper bookkeeping process provides companies with an accurate measure of their performance. It also provides information for making general strategic decisions and a benchmark for its income and revenue goals. Bookkeeping is a reliable source for companies to measure their financial performance.
One of the main reasons for bookkeeping is maintaining all financial records of a business that shows the financial position of every head or account of income and expenditure. The companies can obtain detailed information about each income or expense instantaneously through bookkeeping.
Gives information to prepare financial statements
Bookkeeping summarises the expenditures, income and other ledger records periodically. Since bookkeeping records and tracks all financial transactions, it becomes the starting point of accounting. If the bookkeeping of a company is not proper, the accounting of the company will not be accurate.
Bookkeeping provides information to prepare financial reports, which states the specific information about the business on how much profits it has made or the worth of the business at a specific point in time.
Legal requirement
The maintenance of financial statements and books of accounts is a legal requirement under many acts. In the case of banks or companies or insurance companies, the acts that regulate them require such firms to maintain and keep financial records. Thus, bookkeeping becomes necessary for such companies.
