What is Bookkeeping?
Bookkeeping refers to the formal recording of financial transactions. Bookkeeping will document a slew of transactions, including sales, income, purchases, payments and receipts processed by an individual or business entity. Bookkeeping is typically performed by a professional bookkeeper or accountant; however, the act of bookkeeping is always held separate from accounting.
Accounting is performed by a licensed accountant; this professional creates reports based on the recorded financial transactions offered by the bookkeeper. The accountant then files these reports/documents with the appropriate government agencies. Accounting practices are mandated to ensure that the individual or business entity complies with tax and business law.
In general, there are two common methods of bookkeeping: single-entry bookkeeping systems and double-entry bookkeeping systems.
Single-Entry Bookkeeping Systems:
A single-entry bookkeeping system is a distinct method of bookkeeping that relies on a one-sided accounting style to maintain an entity’s financial information. The majority of entities will record transactions based on the double-entry method; however, a number of small businesses will utilize the single-entry system to record only the “bare essentials.” In these cases, only records of cash, taxes accounts payable and accounts receivable will be recorded and maintained. Other records, including information regarding inventory, assets, revenues, expenses and other elements will not be kept in a single-entry system—this information will be stored in memorandum form. As a result, this system is typically ruled inadequate except where the operation is exceedingly simple and the attached volume is scarce.
Double-Entry Bookkeeping Systems:
The double-entry bookkeeping system is a set of guidelines for recording financial information where every transaction changes at least two attached nominal ledger accounts. In the American double-entry bookkeeping approach, transactions are recorded based on the following equation: Assets=liability + capital. This accounting equation reveals the equality between the entity’s debits and credits. For the purpose of this equation, all the entity’s accounts are classified into the following categories: assets, income/revenue, liabilities, capital gains/losses or expenses.
Under this system, an increase or decrease in one account will reflect an equal fluctuation in another account. There may be equal effects in both accounts depending on which accounts are altered or there may be equal decreases to the attached accounts. The following rules in respect to the categories of accounts will be observed:
1. Asset Accounts: Credit decreases in assets and debit increases in assets
2. Capital Accounts: debit decreases in capital and credit increases in capital
3. Liability Accounts: Credit increases liabilities and debit decreases liabilities
4. Revenues/Income Accounts: credit increases income and gains and debit will decrease income and gains
5. Expenses or Losses Accounts: Debit will increase expenses and losses while credit will decreases in expenses and losses.
In general, the bookkeeping process will refer to recording the effects of financial transactions into accounts. In the course of business, documents are produced each time a transaction is finalized. For example, sales and purchases will be attached with invoices and receipts. Because of this paper trail, bookkeeping will involve the affirmation—via recording—these details of these source documents into highly-organized journals. After a month or so, the columns in these journals are totaled to give a summary for a particular period.