Bookkeeping & Its Definition, Types and Importance of Bookkeeping | What is Book Keeping and Its Uses

Controlling is the documentation method of all financial transactions conducted by a corporation. It is the bookkeepers' duty to register, identify and arrange all financial transactions made during the transaction. The accounting is different. The accountability process uses the books held by the librarian to prepare the reports and accounts at the end of the year.

Very small organisations may choose a simple bookkeeping system that documents every financial transaction in much the same way. Companies with more complicated financial transactions typically opt for dual-entry accounts.

What is bookkeeping?

Bookkeeping is the method of monitoring each financial transaction carried out by an organisation from the start-up to the end of the company. Each financial transaction is reported based on supporting records, depending on the type of accounting method used by the organisation. This could be a receipt, an invoice, a purchasing order or a financial record of some sort that indicates the transaction was carried out.

The transactions in bookkeeping can be entered manually in a journal or through a tablet programme like Microsoft Excel. Many companies now use specialised computer bookkeeping programmes to maintain books which display financial transactions. Book owners may record financial transactions by means of single or double-entry bookkeeping. The account list and how to use debits and credits in order to balance the accounts are to be comprehended by bookkeepers.

“The bookkeeping process should allow for communication of the financial results of the firm at the end of the year for income tax purposes and the preparation of financial statements by the firm's accountant”.

"What is Book Keeping and Its Uses"

What is the difference between bookkeeping and accounting?

Incorporation as a company is an essential but preliminary function for the actual accounting function. For each financial transaction, the bookkeeper gathers paperwork, registers the transactions in the accounting journal, splits each transaction into one or more debits and credits, and organizes transactions according to the company's account diagram.

All financial transactions are registered, but at the end of certain time periods, they must be summarized. Some businesses need reporting quarterly. Other smaller businesses may only need reports for tax preparation at the end of the year.

At the close of the required time, the financial information of the business company will be checked, evaluated, reviewed, interpreted and reports. The accountant frequently prepares financial statements for the year-end and the company's accounts. The annual statements prepared by the accountant shall comply with the Financial Accounting Standards Board (FASB) standards. These laws are known as GAAP (Accounting Standards Commonly Accepted).

(What is Book Keeping and Its Uses)

What do you want to develop your business bookkeeping?

When you set up your bookkeeping system, one of the first decisions you have to make is whether to use a financial accounting system or not. You may want to keep up with cash accounts if you run a small, independent company from home or even a big consulting practice from a one-man office.

You report the transaction when cash changes hands when you use cash accounting. You report transactions or sales immediately with accrual accounting, even though cash just changes hands later, often businesses start their business by using cash accounting and move on to accrual accounting as they expand.

You must use an accrual accounting scheme if you are to give your customers credit, or if you are to seek a loan from your suppliers.

You will have to consider whether to use one-stop or double-stop bookkeeping as a new business owner. Bookkeeping with a single entry means that the check register is very much managed. When you pay bills and deposit into your company account, you report transactions. It works only if your business with a small number of transactions is relatively small. 

You need to set up a double-entry accounting system if your business is larger and more complex. For each transaction, at least two entries are made. One debit is rendered to one account at least and one credit to another. This is the secret to accounting for double entries.

Companies must also develop their electronic accounting systems when developing bookkeeping for their companies. In order to keep up with their bookkeeping entries, most businesses use computer software. Small businesses like Microsoft Excel can use a simple spreadsheet. Larger companies are using more advanced software to monitor their business papers.

Finally, the organization must construct its account diagram. As the company expands and evolves, the account chart will change over time.

Important: The chart of accounts lists every account the business needs and should have. Each account has a number and a name. Subaccounts are also listed.

[What is Book Keeping and Its Uses]

Understanding assets, liabilities, and equity in balancing books

Effective accounting requires an understanding of the firm's basic accounts. These accounts and their sub-accounts are the company's list of accounts. Assets, liabilities and equity are the accounts that make up the balance sheet of the company.

Assets are what the company owns, such as its inventory and accounts receivable. Assets also include fixed assets that generally plant, equipment and land. If you look at the balance sheet format, you will see the asset accounts listed in the order of their liquidity. Asset accounts start with the cash account because the cash is completely liquid. There is an inventory, receivables, and fixed assets account after the cash account. These are tangible assets. You could touch them. Firms also have intangible assets, such as customer goodwill, which may be shown on the balance sheet.

Liabilities are what the company owes to its suppliers, bank and business loans, mortgages, and any other debt on the books. Accounts for liabilities on the balance sheet shall contain all existing and long-term liabilities. Current liabilities are usually accounts payable and accrued liabilities. Accounts payable are usually what the company owes to its suppliers, credit cards and bank loans. Accruals will consist of taxes owed, including sales tax due and federal, state, social security and Medicare tax on employees who are generally paid on a quarterly basis. Long-term liabilities have a maturity of more than one year and include items such as mortgage loans.

Equity is an investment made by the owner of the business and by any other investor in the firm. The equity accounts shall include all claims made by the owners against the company. An investment is made by the owner of the business and maybe the only investment in the firm. If the firm has taken over other investors, this is reflected here.

"What is Book Keeping and Its Uses"

You have to balance the accounts in accounting at the end of the year. The accountant must keep a careful track of these items and ensure that transactions dealing with assets, liabilities and equity are recorded correctly and in the correct place. There's a key formula you can use to make sure your books are always balanced. The formula is called the accounting equation:

Assets = Liability + Equity

The accounting equation means that everything the business owns (assets) is balanced against claims against the business (liability and equity). Liabilities are claims based on what you owe to vendors and lenders. The owners of the business are entitled to claims against the remaining assets (equity).

Income Statement and Accounting: Revenue, Expenses and Costs

The statement of revenue shall be drawn up using sales revenue and other sources, expenses and costs. In accounting, you must record each financial transaction in the accounting journal that falls into one of these three categories.

Important: The information from a company's balance sheet and income statement gives the accountant, at the end of the year, a full financial picture of the firm's bookkeeping transactions in the accounting journal.

Revenue is all the income that a company earns when it sells its products or services. Expenses, also known as the cost of goods sold, are all the money that a business spends on purchasing or making the goods or services it sells to its customers. The Purchases account on the account map records the items purchased.

Expenses are any money spent on operating a business that is not directly connected to a product or service sold.5 Examples of an expense account are Salaries and Wages or Selling and Administrative Expenses.

The accountant shall be responsible for determining the accounts under which the transactions are to be registered. For example, if a company sells cash to a customer and the business uses double-entry accounting, you will report the cash earned in the asset account called Cash and the transaction would be reported in the revenue account called Sales.

"What is Book Keeping and Its Uses"