- What is bookkeeping?
Bookkeeping is the first step towards financial accounting and reporting of a company. It is the process of recording all the business transactions of an entity occurring throughout the financial year. The main types of entries include sales, purchases, other income, operational expenses, investments, payroll, taxes and loans.
Once the transactions are recorded, they’re posted to ledgers and later systematically summarized into many different financial reports. The four main reports are:
- Income Statement – represents the net profit earned for any given time period.
- Balance Sheet – represents the assets, liabilities and capital owned at any time period.
- Cash flow Statement – represents the movement of cash during any time period
- Statement of Equity – represents movement in owner’s or shareholder’s equity
- Chart of Accounts:
A chart of accounts is the list of all accounting heads used to book entries in the general ledger. It is a tool offered by accounting software to analyze and aggregate the financial information for the annual financial reports. Each entity can customize its COA as per its requirements; however, it typically appears in order of the financial statements. First, balance sheet items are listed and are followed by income statement items in the following manner:
- Shareholder’s Equity
- Operating Revenues
- Non-operating revenues
- Operating expenses
- Non-operating expenses
- Types of Bookkeeping:
There are two types of bookkeeping systems; single-entry and double-entry.
A single-entry bookkeeping system involves booking of only one journal entry for each transaction. Only one aspect of the transaction is booked leading to incomplete records at the end of the year.
A double-entry bookkeeping system requires you to enter a double entry for each financial transaction. It shows both aspects of a transaction by following the debit credit system. For every debit, there is a credit and vice versa.
- Cash-basis Accounting vs. Accrual-basis Accounting:
There are two types of accounting methods used for financial reporting. As the name suggests, cash-basis of accounting revolves around booking journal entries only when a cash transaction occurs. It disregards the entire credit system. For example, it reports sale on cash-receipt basis only, and no credit sales are reported.
On the contrary, as per the prudent and matching concept of the generally Accepted Accounting Principles (GAAP), journal entries should be booked according to accrual-basis of accounting. Earned income should be booked regardless of it being received in cash, and accrued expenses should be reported regardless of it being paid.
- Keeping Records:
An essential part of bookkeeping is to document all the evidence of every transaction reported. All invoices, receipts, goods delivery notes, goods received notes, tax invoices and other relevant documents shall be maintained. Documentation is done to provide proof to the auditors about transactions that occurred throughout the year. It may also be requested by tax authorities to verify sales tax and income tax bills.
Professional bookkeeping is an integral and most basic function of financial accounting and reporting. It not only serves the purpose for preparation of financial statements but also helps in efficient management of money. Hence, success of a business lies in keeping track of cash flow and managing it accordingly.