Bookkeeping can be defined as the activity or occupation of keeping records of the financial transactions of a business. Transactions include such as purchases, sales, receipts and payments by an organization/corporation or an individual person.
The prima-facie objective of bookkeeping is to keep a complete and exact record of all financial affairs in a systematic, orderly, logical manner.
Before we delve deeper, let’s understand the basics of bookkeeping such as types of bookkeeping, whether bookkeeping and accounting are the same, as well as the methods of bookkeeping.
Types of bookkeeping:
- Single entry system: A financial transaction is recorded once under a single-entry bookkeeping system. Therefore, there is no opposite account is created under this method of bookkeeping. Once a transaction is recognized, it is recorded on one side of business books. Mostly, methods of bookkeeping for small businesses involve a single-entry system.
- Double Entry System: Every financial transaction is recorded in two different accounts under the double-entry book-keeping system. The principle of double-entry system, each debit must have a similar amount of credit. hence, this accounting system is recognized worldwide. The double entry system permits the accounting equation to maintain an equal balance in asset and liability.
Assets = Liabilities + Equity
Are Bookkeeping and Accounting the same?
Account bookkeeping is the practice of recording business transactions in your ledger or software program that covers all the financial transactions since its inception in a systematic and appropriate manner.
Accounting is the practice of analyzing and interpreting the information in the ledgers. It is the process of measuring, processing and communicating your financial health of the business.
Methods of bookkeeping:
- Accrual method: It is the most preferred method because it provides a complete picture of the company’s assets, liabilities and stockholder’s equity at the end of the financial period or accounting period. Also, it provides a realistic position of a company’s revenues, expenses and net income for a specific time interval such as a month, quarter or year.
- Cash method: The transactions are only recorded when cash is spent or received. Mostly, a sale is recorded when the payment is received and an expense is recorded only.
In the accrual method, receivables are reported as assets when they are earned whereas, in the cash method, receivables are not reported as assets. Revenues are reported when they are earned in accrual, revenues are reported when cash is received in cash method of bookkeeping.
The debit and credit rule in double-entry book-keeping:
Debit Rule: an entry on the left side of an account
Credit Rule: an entry on the right side of an account
Types of Accounts:
When it comes to the types of accounts, primarily three are three types: Real, Personal and Nominal accounts. Further, personal accounts are classified into three subcategories: Artificial, Natural, and Representative.
The Golden Rules of Accounting is as follows:
- Debit the Receiver, Credit the giver.
- Debit what comes in, Credit what goes out.
- Debit the expense and loss of the business, Credit the income and gain of the business.
General Ledger Accounts:
The accounts that are used to sort and record transactions are called general ledger. A few classifications of the general ledger of a company.
- Assets (Cash, Accounts Receivable, Land & Equipment)
- Liabilities (Loans Payable, Accounts Payable & Bonds Payable)
- Stockholders’ equity (Common Stock & Retained Earnings)
- Operating revenues (Sales & Service Fees)
- Operating expenses (Salaries Expense, Rent Expense & Depreciation Expense)
- Non-operating revenues and gains (Investment Income & Gain on Disposal of Truck)
- Non-operating expenses and losses (Interest Expense & Loss on Disposal of Equipment)
Balance Sheet Accounts:
The first 3 classifications are:
- Stockholders’ (or Owner’s) equity
Income Statement Accounts:
The four remaining classifications of accounts are:
- Operating revenues
- Operating expenses
- Non-operating revenues and gains
- Non-operating expenses and losses
Maintenance of accurate books of accounts is one of the primary requirements of any business enterprise, no matter how small. With a good accounting system, the enterprise can manage the cash inflows and outflows, forecast revenues and pay bills, measure the values of the assets and the worth of the business and generate reports to have access to the capital/debt market.