Learn About Bookkeeping: Definition, Types & Importance

When data is collected, it is put in a report. Similarly, bookkeeping is the source of all financial statements where business transactions are recorded for a business. Accounting is the process of collecting the data and getting it into the report formats. The important financial statements are the Profit and Loss Statement, the Balance Sheet and the Trial Balance. Thus, it is safe to say that bookkeeping means the beginning of the accounting process for recording transactions. It consists of the financial statements such as the summary of the bookkeeping records and transactions over some fixed period like a quarter, a year or half a year.

What is bookkeeping?

• Most people are unaware of what is bookkeeping in accounting. Bookkeeping is an organising and recording process of all business transactions that have taken place in running a business. Bookkeeping is hence, an important part of accounting. 
• True bookkeeping means the financial recording of all day-to-day transactions occurring in any business over a specific period. All financial transactions like revenue from sales, taxes paid, interest earned, operational expenses, wages and salary paid, loans taken, investments made, and more are all recorded in the different account books.

Why is Bookkeeping essential in a business?

It is known that ‘No bookkeeping is the equivalent of no accounting’. 

The recording accuracy of bookkeeping determines the true and accurate financial position of an organisation. The complete accounting process is used to prepare and report important financial statements like the Balance sheet of an enterprise. Thus, before one expands, takes a loan, or reports a company’s financial statements, it is important that the bookkeeping is up-to-date, accurate, and captures all financial transactions.

That is why both big, small and all businesses in between use, maintain and have accountants and bookkeeping. The importance of bookkeeping practices is summarised below.

• Book keeping and accounting means to record and track an organisation’s payments, receipts, purchases, sales, etc. and records all monetary transactions made during the business’s operations. 
• Bookkeeping is used to summarise and report the expenditure, income from various heads and the other ledger records after a specific time or periodically. 
• Bookkeeping provides the data to create the crucial financial reports that provide specific information about how the business is faring, whether it is making profits, how these profits accrue, the net worth of a company, etc.

Bookkeeping task examples

Let us now look into the various bookkeeping tasks required to organise, record and track all the monetary transactions occurring in the organisation. The person responsible is also called the accountant and is tasked with managing bookkeeping, recording them rightly and accurately, providing and tracking all money-related transactions occurring in the enterprise. The below-mentioned tasks are typical examples of bookkeeping:

• Issuing and recording the customer payments and receipts.
• Issuing accurate bills for the services and goods provided or sold to its clients.
• Recording the supplier’s payments made.
• Recording and verifying the supplier’s invoices.

Also Read: Profit and Loss Account & Statement

Accounting Period in Bookkeeping

While bookkeeping is an ongoing process, accounting is typically an annual affair. But, the accounting period chosen is an integral part of a business and is reflected in its bookkeeping system. Most firms begin their accounting books on the 1^st of April and close their books on the 31^st of March of the following year. This is called the accounting year and the financial year for banks, accounting systems in India, tax systems and more. However, countries like Bahrain, UAE, Saudi Arabia, among others, use the 1^st of January as the start of the accounting year and finish their accounting year on the 31^st of December.

Bookkeeping Types

There are two popular bookkeeping systems, such as:

• The single entry system
• The double-entry system

Business entities are free to choose the kind of bookkeeping system they wish to follow. Some businesses use a combination of both types of accounting systems in bookkeeping. 

Let us look into the two types of systems used:

• The single-entry system requires that a single entry record represent each transaction in the books of accounts. Hence, the name single-entry bookkeeping system is where each money transaction or financial activity has only one record entry. This system is very basic. For example, a company uses daily receipts to record monetary transactions and then generate a weekly and daily record of them for its bookkeeping. 
• The double-entry bookkeeping system requires that the transaction has a double entry for each money transaction. This kind of accounting and bookkeeping system provides better accuracy, and you can check or balance out the entries by using the double-entry system for accuracy. Since it is a double-entry system, every debit will also have an equivalent credit entry. However, it is not cash-based, and the system does not affect the entity’s financial position. Its transactions are recorded  whenever revenue is earned, or debt is incurred. 

Accruals Bookkeeping Method

Also called the accrual system, the cash-based accounting system records monetary transactions whenever a payment is received or made. The system recognises income or revenue that had taken place in the accounting period by looking at the income records of when it was received, and the expenses record when it was paid. Accounting principles favour it because it accurately records the accounting period’s revenues and expenses in its books. 

Bookkeeping Principles

Book-keeping principles are applied to financial transactions so that they are organised and recorded systematically and chronologically. The application of the below-mentioned principles in bookkeeping and accounting ensures that accountants can always take these values as true values since record-keeping needs to be standardised.

The bookkeeping principles that are applied are mentioned below. 

• Expense principle: This principle states that an expense is said to occur and must be recorded whenever the business receives services or goods from a supplier.
• Revenue principle: This means that the revenue is recorded at a point of sale in the accounting books.
• Matching principle: This propounds that you record the related expenses when you record the revenue. Thus, if goods sold earn revenue, the inventory must show the goods sold simultaneously.
• Objectivity principle: This principle demands you use factual, verifiable data only and not data that is subjective. 
• Cost principle: This principle states that you always use the historical price and not the resale price in accounting.

Recording bookkeeping entries

Making entries in bookkeeping helps record money transactions. However, the method is obsolete in making journal entries today. Technology has brought in a range of accounting software that automates the process. Previously,  accountants had to manually enter all transactions, account numbers, individual credits or debits each time a transaction occurred. This process is time-consuming, and human errors can creep in at any time. Currently, bookkeeping entries are manually entered only when special entries or adjustment entries need to be made. Most businesses that can afford it use bookkeeping software like Tally ERP9 or Tally Prime. Smaller entities can also use automated bookkeeping software like the Legaltree software to track and record their bookkeeping from their smartphones.

Posting documentation and entries

In an accounting system, the bookkeeping definition means that all financial transactions of an enterprise get posted in the relevant ledgers. These ledgers use the data from invoices, receipts, bills and other forms of documentation. Thus, the ledgers record and summarise the money transactions. Unlike the manual entry system of posting, documenting and recording each transaction by an accountant as it occurs, modern-day accounting software automatically posts the daily transactions into the various record forms, ledgers and so on. Hence they are more accurate and avoid human errors from creeping in.

Most businesses prefer the daily posting of financial transactions. Yet others may prefer a batch posting system weekly or monthly. Still, others outsource their recording and posting activity to professional accountants. The most important reason for doing such posting activity daily is that the business records are more accurate. The reports or financial statements can be easily culled whenever required and are also more accurate.

Documentation of financial transactions is a crucial element in every business’s book-keeping and accounting activity for maintaining vouchers, files, receipts for Goods and Services Tax (GST) and taxation purposes. For convenience, many businesses use the 1^st April to 31^st March as the accounting year for the sake of convenience. The accounting period typically depends on the policy of the company, its requirements for taxation etc. Note that the GST taxation rules mandate that you follow the accounting mentioned above system as an accounting year. It further mandates that the technology used in accounting software be GST compliant.

Bookkeeping effect on account charts

• Bookkeeping aids in maintaining what is called the books of original entry and is the art of financial transactions recording. It captures all transactions that are monetary in nature, including the transfer of money and receiving the money’s worth as goods or services in these books of original records.
• Bookkeeping focuses on classifying and recording the concerned financial data of business operations chronologically and systematically. On the other hand, accounting is a broad subject of which book-keeping is an integral part. It is a more complex operation that focuses not on recording but understanding the bookkeeping records to interpret, analyse and draw up the financial statements and status of the business obtained from the book-keeping records or account books.
• The most comprehensive way of bookkeeping is to create comprehensive records for each type and area of financial transactions. The accounts can then be grouped and categorised under broader heads required in a financial statement. Thus, the better the accounting system and bookkeeping, the more accurate the financial statements and financial reports will be.

The typical financial statements required and maintained by all businesses are:

• Trial Balance which explains the exact position of the assets versus liabilities status.
• Balance Sheet, which reveals the capital, equity, liabilities, assets, stock holdings etc.
• Profit and Loss Account reveals the revenues both non-operating and operating, losses, gains, expenses etc.

Also Read: All You Need To Know About Cash Deposit Slip

Conclusion

In the article, we discussed how to define bookkeeping and why bookkeeping and accounting are essential to every business, small or big. The actual financial statements used to evaluate the business’s financial health are the financial statements used as data for the bookkeeping records. Hence, the necessity to have an accurate system for maintaining a steady growth of business. Did you know that Legal Tree is an excellent automatic way of bookkeeping for all businesses such as Micro, Small and Medium Enterprises (MSMEs)? Try out its features on your smartphone and get your financial statements in an instant.