Meaning of Bookkeeping
Bookkeeping is an activity concerned with recording & classification of financial transactions related to business operations regularly in a systematic manner.
It covers procedural aspects of accounting works and embraces record-keeping function.
The main focus of bookkeeping is to record all the business-related transactions accurately in primary books of accounts (i.e. Journal or Subsidiary books such as Sales book, Purchase book, etc.) then posting these transactions into the ledger (i.e. classification of transactions) and preparation of trial balance.
The bookkeeper is mainly focused on recording and classification of all the business transaction and not on preparation of financial statements (i.e. Profit & Loss account, Balance sheet, cash flow statement). The activity of the preparation of financial statements is mostly performed by Accountants.
What are the Objectives of Bookkeeping?
Following are 3 Objectives of Bookkeeping:
- Identification of business transactions
- Complete Recording of Business transactions
- Determine the financial effects on business
Now let’s understand each one of this in detail:-
Identification of business transactions
This is the basic objective of bookkeeping. The process of bookkeeping will help to identify only transactions related to business representing financial character and all other transactions that are not related to business or are not financial will be ignored by the bookkeeper.
Complete Recording of business transactions
This is the main objective as bookkeeping is concerned with the recording of all the identified business transactions completely and systematically. These recorded transactions can also be used for future references.
Determine the financial effects on Business
Trail balance prepared by bookkeeper will be used in the preparation of financial statements. With the help of financial statements, users will be able to understand the overall effects of all the recorded transactions on business.
Types of Bookkeeping System
There are 2 main types of bookkeeping systems (i.e. Single entry system & Double entry system). These systems are widely used by accountants and bookkeepers to maintain records of financial transactions.
Single Entry system
The single entry system is commonly used by small business owners or startups having a less complicated and low volume of transactions. As name single entry system itself indicates it requires recording of only one entry for each transaction in books.
Under single entry system transactions are recorded in books only when either cash is received for sales made or cash is paid for expenses incurred. Transactions are not recorded on a due basis, Hence, this system is not suitable for businesses having accounts payables, accounts receivables, and many capital transactions.
The accountant will only maintain a cash sales account, cash expense account, and a bank book for recording transactions. After periodical intervals i.e. either monthly or semi-annually all transactions recorded in the bank book will be reconciled with the bank statements.
Double Entry system
The Double entry system of bookkeeping is useful for the larger organization having complex and huge transaction volumes. Business organizations having accounts payables, accounts receivables, and a high volume of capital transactions are also benefited from this system.
Under double entry system transactions are always recorded in terms of debit and credit. One account will be debited and the corresponding credit effect will be given in another account for the same amount. That means for each entry passed the sum of debits must always be equal with the sum of credits.
For example, if you had made sales on a credit basis. Customer’s account (Accounts receivable) will be debited and the corresponding credit effect will be given to the sales account (Revenue account) for the matching amount.
Unlike a single entry system, transactions are not recorded on a cash basis but on accrual basis i.e. transactions are recorded when an expense is incurred or revenue is earned irrespective of whether cash is received or paid at the time of transaction. With the help of a double-entry system recording of transactions in books is standardized and helps in the detection of errors on a timely basis.
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