Bookkeeping is the day-to-day recording of business events – financial transactions and other information related to the business. Transactions include purchases, sales, receipts, and payments. The most important aspect of bookkeeping is to keep an accurate account of all records and keep them up to date. Accuracy is the most vital part of the bookkeeping process.
Bookkeeping is made to provide the preliminary information needed to create accounting statements. Each transaction must be recorded in the books, and any and all changes must be updated on a continuous basis.
There are two main standard methods of bookkeeping:
- the single-entry and
- the double-entry
The Single-entry bookkeeping
A single-entry bookkeeping system or single-entry accounting system is a method of bookkeeping relying on a one sided accounting entry to maintain financial information.
Single-entry bookkeeping is characterized by the fact that only one entry is made for each transaction, just like in your check register. In one column, entries are recorded as a positive or negative amount.
A single-entry accounting system is not self-balancing. Mathematical errors in the account totals are thus common. It’s also known as incomplete or unscientific method for recording transactions.
The Double-entry bookkeeping
Double–entry bookkeeping, in accounting, is a system of bookkeeping so named because every entry to an account requires a corresponding and opposite entry to a different account. The double–entry has two equal and corresponding sides known as debit and credit. The left-hand side is debit and right-hand side is credit.
A double-entry accounting system is self-balancing and more accurate.
Account of records
Double-entry bookkeeping follows to make accurate account of record:
- General Ledger – the Book where we can find Accounts:
- Assets: Things the business has bought and owns (or part-owns), inventory, money owed to the business as accounts receivable (ST A/R), and cash i.e. on bank account.
- Liabilities: Amounts the business owes in unpaid bills (ST A/P), taxes, payrolls/wages, or loans.
- Equity: Money placed by the owner or shareholders.
- Income: Invoices issued (later money received – cash inflow)
- Expenses: Invoices received (later money spent – cash outflow)
Basic principle or balances concludes:
- Assets = Equity + Profit & Loss (P/L) + Liabilities
- Profit & Loss (P/L) = Income + Expense
There are many financial statements but two main ones – the:
- Balance sheet lists the things your business owns and their value, plus the amounts your business owes.
- Profit and loss (P&L) totals the income and expenses for a set period of time and demonstrates how the business is trading.
- Cash Flow Statement real insight to your business – real money view.
Chart of accounts
Accounts are the basis of all transactional coding and double-entry bookkeeping. They help categorise types of assets, liabilities, income and expenses. They’re also called general ledger code
Bookkeeping is an indispensable subset of accounting. Bookkeeping refers to the process of accumulating, organizing, storing, and accessing the financial information base of an entity, which is needed for two basic purposes:
- Facilitating the day-to-day operations of the entity
- Preparing financial statements, tax returns, and internal reports to managers