Bookkeeping is the task of recording business transactions either amounts, dates, or the sources of all business revenue, expense, and profit & loss transactions. It is not a big deal, you can easily handle it with this easy process: Cash Flow > Journal > Ledger > Profit and Loss > Balance Sheet and it’s done. Now, with the help of computerized booking, you can keep accurate financial records. All the accounts refer to assets, liabilities, expenses, income, and the equity you used that appears in a Chart of Accounts (COA). To explore more or looking for more information you can easily connect with a team of accountingguide.co.
Table of Content:
- Importance of Bookkeeping
- Why Bookkeeping matters
- Process of Bookkeeping
- Tasks involved in Bookkeeping
- What types of Entry systems are involved
- Understanding of Daybooks
- What is Petty cash books
- Charts of Accounts (COA)
- Understand about Ledgers
- What is a Balance Sheet?
- Abbreviations used in Bookkeeping
- Computerized Bookkeeping
- How to connect with a team?
Definition of Bookkeeping
“Bookkeeping is the organized documentation and arrangement of financial transactions within a company.
It involves the recording on a daily basis of the financial transactions and the information pertaining about business.” This ensures that the records of the individual financial transactions are reliable, up-to-date, and complete. Hence, accuracy is crucial to the operation.
In other words, it provides you the information related to accounts that are prepared or it is a distinct process that happens within the broader scope of accounting.
Importance of Bookkeeping
It is a fact that proper Bookkeeping can only give companies or businesses a reliable measure of their performance. It also offers information on general business decisions and a framework for its goals in terms of sales and profits. In short, once a company is up and running, it’s very important to spend extra time and resources on keeping good records.
Many small companies don’t necessarily employ full-time accountants because of the expense to work with them. Instead of that, they employ a bookkeeper or outsource the work to a professional company. One important thing to remember here is that many people who want to start a new company often forget the value of things like keeping track of every penny spent.
Why bookkeeping matters
It aims to track business financial transactions which ensure you can keep an up-to-date record of current incoming and outgoing numbers, amounts owed by both customers and the company, and more. It is truly important for tax, assets, loans, and investments so that you can keep a clear and accurate record of every single thing related to your business finance.
Process of Bookkeeping
The process of booking generally involves four basic steps:
- Analyzing and assigning financial transactions to different accounts.
- Write original journal entries crediting and debiting the accounts appropriated
- Posting Ledger account entries
- Adjust the entries at the end of each period of accounting.
Bookkeeping also rooted in two basic concepts:
- One is any debt that has to be created accurately
- Another is to balance all accounts. So, it is suggested you follow from the first.
The tasks involved in Bookkeeping
Bookkeeping means recording and tracking numbers in an organized way that is involved in the financial side of the business. It is important for companies, but it is also useful for individuals and non-profit organizations.
The persons responsible for a business’ bookkeeping which record all relevant transactions including, but not limited to,
- Expense payments to suppliers
- Loan payments
- Customer payments for invoices
- Monitoring asset depreciation
- Generating financial reports
What types of Entry systems are involved?
Basically, there are two methods to do entry include:
- Single-entry system: It is a method of bookkeeping that relies on a single-sided accounting entry in order to maintain financial information. It is also known as an incomplete or unscientific method for recording transactions.
The primary bookkeeping record is the cash book in single-entry bookkeeping which is similar to a checking account register except for all entries that are allocated among several categories of income and expense accounts.
- Double-entry system: It is a system in bookkeeping where every entry to an account needs a corresponding and opposite entry to a different account.
It has two equal and corresponding sides are known as debit and credit. A debit raises the total amount of money or financial interest in a normally debited account, such as an asset account or expense account, and a credit reduces the sum or interest.
On the other hand, it is credited that increase the value of the account, and debits that decrease it, for an account that is normally credited, such as a liability account or revenue account. In bookkeeping with double entries, a transaction usually involves at least two accounts, usually contains at least one debit and one credit, and always has equal total debits and total credits i.e.,
“Assets = Liabilities + Equity”
Understanding of Daybooks
It is a diary-like record which contains day-to-day transactions. It is also commonly known as the original entry book. The details of daybooks can be transcribed into journals that enable you to post to ledgers. There are some of the daybooks that include:
- Sales daybooks to record sales invoices
- Sales credits daybooks to record sales credit notes
- Purchases daybooks to record purchase invoices
- Purchases debit daybook to record purchase debit notes.
- Cash daybook, commonly known as the cash book, for recording all, received monies and all paid out monies. It can be divided into two daybooks: a daybook receipts documenting every received money-amount, and daybook payments recording every made payment.
- General Journal daybook to record journal entries.
What is Petty cash book?
Petty cash is a small sum of disposable funds in the form of cash used for spending where the hassle and expense of composing, signing, and then cashing the cheque will not allow any disbursement by cheque.
This type of cash book is generally used by the imprest system- It is a certain amount of money that is provided to the petty cashiers by the senior cashier. This money is used for small expenditures such as hospitality, casual postage, minor stationery, etc. The balance of a petty cash book is also called “Asset”.
A Journal entry is the act of keeping or making records of any transactions either it is economic or non-economic. It is recorded in the general journal daybook and it is a record of financial transactions before their values are accounted as debits and credits in the general ledger. A company can maintain a single journal for different transactions and keep several journals based on the same activity like sales, revenue, cash receipts, etc.
Chart of accounts
It is a list of accounts generated by an entity to identify each class of products that spend or earn money or its equivalent. It is used to coordinate the finances of the company and to segregate expenditure, sales, assets, and liabilities to provide a clearer understanding of the financial health of the organization to the interested parties.
Types of accounts involved in Bookkeeping
- Asset accounts: It represents the different types of economic resources that are owned or controlled by an entity like cash in hand, real estate, and cash in the bank, inventory, goodwill, prepaid expenses, and accounts receivable.
- Equity accounts: It represents the entity’s remaining equity. Equity funds include common stock, capital paid in, and earnings retained.
- Liability accounts: It represents the different types of economic obligations of an entity like accounts payable, bonds payable, bank loans, and accrued expenses.
- Revenue or income accounts: It represents the profits of the company and rising examples include sales, service revenues, and interest income
- Contra-accounts: It is an account of negative balances that offset other balance sheet accounts like accumulated depreciation, bad debts allowance.
- Expense accounts: It represents an investment for the product. Common types are electricity, rent, depreciation, interest, and insurance.
Understand about Ledgers
It is a principal book or computer file for documenting and calculating economic transactions calculated by account form in terms of a monetary unit of account. According to all types of accounts, ledger is made. It is created with debits and credits in different columns and the starting monetary balance as well as the ending of the monetary balance for each account.
What is a Balance Sheet?
A balance sheet or financial statement is a statement of the financial balance of an individual or organization, whether it is a sole proprietorship, a business partnership, a corporation, a private limited company, or some other institution such as a government or a non-profit organization.
Abbreviations used in Bookkeeping
The abbreviation that is basically used while maintaining bookkeeping or we can say the abbreviation that is normally used in Bookkeeping:
- A/C- Account
- Acc- Account
- A/P- Account payable
- A/R- Accounts receivable
- AMT – Alternative minimum tax
- b/d- Brought down
- b/f – Brought forward
- B/S- Balance sheet
- c/d- Carried down
- c/f – Carried forward
- CPO – Cash Paid Out
- CP – Cash Payment
- CST – Central sale tax
- Cr – Credit side of a ledger. “Cr” stands for “Credit register”
- Dr – Debit side of a ledger. “Dr” stands for “Debit register”
- Dep – Depreciation
- Depr – Depreciation
- EAT – Earnings after tax
- EBDTA – Earnings before depreciation, amortisation, and taxes
- EBITDA – Earnings before interest, depreciation, amortisation, and taxes
- EBT – Earnings before tax
- G/L – General ledger; (or N/L – nominal ledger)
- GST – Goods and services tax
- PL – Profit and loss; (or I/S – income statement)
- PP&E – Property, plant, and equipment
- PAT – Profit after tax
- PBT – Profit before tax
- P/R – Payroll
- TDS – Tax deducted at source
- TB – Trial Balance
- VAT – Value added tax
You can easily maintain records of the financial transactions of a business entity by making use of computer or accounting software instead of doing paperwork. It also minimizes errors while documenting the various activities and a business entity can also initiate or complete their activities over an accounting period.
How to connect with a team?
We conclude the article here with the hope that this technical article would be very helpful for you. This article contains all relevant information related to bookkeeping and how it is beneficial in terms of handling the financial transactions of your business.
If you need more information or looking for advice related to bookkeeping you can easily connect with bookkeeping technical support toll-free helpdesk number. As the team is available all round the clock you can freely contact them by dialing a number, dropping an email at [email protected] to get instant help. You can also do a live chat with dedicated experts.