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Bookkeeping: Definition, Importance, Types and Tasks



What is bookkeeping?

Bookkeeping is a process of recording and organizing all the business transactions that have occurred in the course of the business.  Bookkeeping is an integral part of accounting and largely focuses on recording day-to-day financial transaction of the business.

All the financial transactions such as sales earned revenue, payment of taxes, earned interest, payroll and other operational expenses, loans investments etc. are recorded in books of accounts.

The way the bookkeeping is managed determines the accuracy of the overall accounting process that is been followed by the business. Thus, bookkeeping ensures that the record of financial transactions are up-to-date and more importantly, accurate

Why Bookkeeping is important for all business?

Just like to prepare a report, you need a source of data, bookkeeping is a source that gets summarized into the financial statements or any other accounting report that you see. With bookkeeping tracks and records all the financial transactions, it becomes the starting point of accounting. No bookkeeping = No accounting.

Thus, it becomes important for businesses, small or big to have bookkeeping in place.

The following are the importance of bookkeeping:

  • Bookkeeping helps to keep track of receipts, payments. Sales, purchases and record of every other transaction made from the business.

  • It helps to summarize the income, expenditure and other ledger records periodically.

  • It provides information to create financial reports which tells us specific information about the business as how much profits the business has made or how much the business is worth at a specific point of time.

Tasks and examples of the bookkeeping system

With the definition of bookkeeping, it’s clear that the bookkeeping task involves all that is required to track, record and organize all the financial transaction that has occurred in the business.

The person is responsible for managing bookkeeping usually entrusted with the responsibility of tracking all the transaction related to business. The following are the bookkeeping tasks examples:

  • Billing for goods sold or services provided to clients.
  • Recording receipts from customers.
  • Verifying and recording invoices from suppliers.
  • Recording payment made to suppliers and so on…

 Are accounting and bookkeeping different? Read ‘Bookkeeping and Accounting’

Bookkeeping  period

The accounting period that a business entity chooses for its business becomes part of its bookkeeping system and is used to open and close the financial books. The accounting period affects all aspects of the company’s finances, including taxes and analysis of your financial history.

In most of the countries, the accounting period is the financial year which starts from 1st April and ends on 31st March of every year. In some countries like the Middle East (UAE, Saudi, Bahrain etc) the calendar year is used as an accounting period i.e. 1st January to 31st December.

Types of bookkeeping

Business entities choose from two types of bookkeeping systems, although some entities use a combination of both.

The single-entry system of bookkeeping requires recording one entry for each financial activity or transaction. The single-entry bookkeeping system is a basic system that a company might use to record daily receipts or generate a daily or weekly report of cash flow.

The double-entry system of bookkeeping requires a double entry for each financial transaction. The double entry system provides checks and balances by recording corresponding credit entry for each debit entry. The double-entry system of bookkeeping is not cash-based. Transactions are entered when a debt is incurred or revenue is earned.

Read 'Types and Methods of Bookkeeping System' to know more.

Method of bookkeeping

The cash-based system of accounting records financial transactions when payment is made or received. This system recognizes revenue or income in the accounting period in which it is received and expenses in the period in which they are paid.

The accrual basis method, which is favoured under the generally accepted principals of accounting, record income in the accounting period in which it is earned and records expenses in the period incurred.

Principles of bookkeeping

To ensure the all the transactions are recorded and organized systematically, bookkeeping principles are applied. The following are the bookkeeping principle

  • Revenue principle
  • Expense principle
  • Matching principle
  • Cost principle
  • Objectivity principle

Read 'Principles of Bookkeeping' to know more.

Posting entries and documentation

All Financial transactions undertaken by a business entity are posted in ledgers using the information from receipts and other documentation. Ledgers summarize the transactions recorded.  Most bookkeeping software automates the posting of transaction details to respective ledgers and reports.

Most entities post financial transactions daily, while others post in batches or outsource the posting activity to accounting professionals. Posting entries regularly helps in generating on-time financial statements or reports.

Financial transactions documentation is an important element of a company’s bookkeeping system. It requires maintaining files of receipts and other documents. The duration period for maintaining documentation records depends on your company policy and legal or tax requirements.

Influence of bookkeeping on the chart of accounts

A business entity can create more comprehensive bookkeeping system when it includes accounts for each area of financial transactions. Financial accounts are grouped or categorized based on the nature of accounts or impact on the financial statements. This usually includes balance sheet accounts and income statement accounts.

Balance sheet accounts are assets, liabilities, and stockholder or owner equity. Income statement accounts are operating and non - operating revenues, expenses, gains and losses.

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