What is BookKeeping? Benefits, Principles and the Process
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What is Bookkeeping?
Bookkeeping is the art of recording and organising all business transactions that have occurred during the business. It is a fundamental part of accounting and primarily focuses on recording daily financial transactions such as sales earned revenue, tax payment, earned interest, payroll and other operational expenses, loans investments, etc.
Moreover, bookkeeping methods determine the accuracy of the business’s overall accounting process. Thus, bookkeeping ensures that the record of financial transactions is up-to-date and, more importantly, accurate.
What makes bookkeeping important for all business
While preparing a report, you may require a data source, and bookkeeping is a resource that helps you summarise financial statements or any other accounting report. Bookkeeping tracks and records all financial transactions and becomes the accounting starting point. All in all, you can’t do accounting without bookkeeping.
Thus, it becomes crucial for businesses of all sizes to have bookkeeping in place.
Bookkeeping is crucial as,
- It keeps track of receipts, payments, sales, purchases and records of every other transaction made by the business.
- It summarises the income, expenditure and other ledger records from time to time.
- It provides information to create financial reports that provide businesses with specific information about the business, such as its profits or net worth.
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Common Bookkeeping Tasks and Practical Examples
Bookkeeping clearly involves everything that needs to be tracked, recorded, and organised regarding all the financial transactions that have occurred in the business.
The person responsible for managing bookkeeping usually has to track all the transactions related to business. Here are some examples of bookkeeping tasks;
- Billing for goods sold or services provided to clients.
- Recording receipts from customers.
- Verifying and recording invoices from suppliers.
- Recording payments made to suppliers and many more.
Difference between Bookkeeping and Accounting
Here is the distinction between bookkeeping and accounting in a tabulated form.
| Feature | Bookkeeping | Accounting |
|---|---|---|
| Definition | The process of recording financial transactions systematically. | The process of summarising, analysing, interpreting, and reporting financial data. |
| Scope | Focuses on recording day-to-day financial transactions. | Involves preparing financial statements, analysing data, and making financial decisions. |
| Purpose | Maintains an accurate record of financial transactions. | Helps in decision-making, tax filing, and financial planning. |
| Tasks Involved | Recording sales, purchases, receipts, and payments. | Preparing financial statements, auditing, tax computation, and financial forecasting. |
| Skills Required | Basic knowledge of financial transactions and ledger maintenance. | Advanced knowledge of accounting principles, financial analysis, and regulations. |
| Financial Statements | Not responsible for preparing financial statements. | Prepares financial statements like the Profit & Loss, Balance Sheet, and Cash Flow Statement. |
| Decision-Making | Does not involve decision-making. | Supports management in strategic decision-making. |
| Regulatory Compliance | Limited involvement in regulatory compliance. | Ensures compliance with legal and tax regulations |
| Who Performs It? | Bookkeepers | Accountants |
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What is a Bookkeeping Period and Why It Matters
The accounting period is a period that a business chooses for its business to become part of its bookkeeping system and can be used to open and close the financial books. The accounting period impacts all aspects of the company’s finances, including taxes and analysis of your financial history.
In most countries, the accounting period starts on 1 April and ends on 31 March of every year. However, in some countries like the Middle East (UAE, Saudi Arabia, Bahrain, etc.), the calendar year is considered an accounting period, i.e., 1 January to 31 December.
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Types of Bookkeeping
There are two types of bookkeeping systems available to business entities, although some use a combination of both.
In the single-entry bookkeeping system, businesses record one entry for each financial activity or transaction. This basic system might be used by a company to record daily receipts or generate a daily or weekly report of cash flow.
The double-entry bookkeeping system requires a double entry for each financial transaction and provides checks and balances by recording the corresponding credit entry for each debit entry. It is not cash-based. Transactions are entered when a debt is incurred, or revenue is earned.
What are the methods of Bookkeeping?
The first method is a cash-based system of accounting that records financial transactions whenever a payment is made or received. This system recognises revenue or income in the accounting period in which it is received and expenses in the period in which they are paid.
The second method is accrual basis method, which is usually preferred under the generally accepted accounting principles, records income in the accounting period in which it is earned and expenses in the period incurred.
Principles of Bookkeeping
Bookkeeping principles are applied when all the transactions are recorded and organised systematically. The following are the bookkeeping principles.
- Entity Principle – A business is treated as a separate entity from its owner(s).
- Dual-Entry Principle – Every transaction has two sides, debit and credit, ensuring balanced accounts.
- Monetary Unit Principle – Only transactions measurable in monetary terms are recorded.
- Historical Cost Principle – Assets are recorded at their original purchase cost.
- Consistency Principle – The same accounting methods should be applied consistently over time.
- Conservatism Principle – Record expenses and liabilities as soon as possible, but revenue only when realised.
- Accrual Principle – Revenue and expenses are recorded when they occur, not when cash is exchanged.
- Going Concern Principle – Assumes the business will continue operating indefinitely.
- Materiality Principle – Only significant financial transactions should be recorded in detail.
- Full Disclosure Principle – All relevant financial information must be disclosed in reports.
How to record entries in Bookkeeping
Entries in bookkeeping are recorded using the traditional method of journal entry. In this method, the respective individual or accountant manually enters the account numbers and performs individual actions of debits and credits for every transaction. This approach is time-consuming and subject to error, so it is oftenly reserved for adjustments and special entries.
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The Process of Posting Entries and Maintaining Documentation in Bookkeeping
All financial transactions carried out by a business entity are posted in ledgers using information from receipts and other documentation. and ledgers summarize the transactions recorded. Most bookkeeping software automates posting transaction details to respective ledgers and reports.
Many entities post financial transactions on a daily basis, while others post in batches or outsource the posting activity to accounting professionals. Regularly posting entries allows businesses to generate on-time financial statements or reports.
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Documenting financial transactions is an essential element of a company’s bookkeeping system. It requires keeping files of receipts and other documents. The duration of the maintenance of documentation records depends on your company policy and legal or tax requirements.
How Bookkeeping Affects the Chart of Accounts and Financial Reporting
A business entity can have an exhaustive bookkeeping system comprising accounts for each area of financial transactions. Financial accounts are grouped or categorized based on their nature or impact on the financial statements. This usually involves balance sheet accounts and income statement accounts.
Balance sheet accounts comprise assets, liabilities, and stockholder or owner equity. Income statement accounts include operating and non-operating revenues, expenses, gains and losses.
I am a Chartered Accountant with more than five years of experience in the accounting field. My areas of expertise include GST, income tax, and audits. I am passionate about sharing knowledge through blogs and articles, as I believe that learning is a lifelong journey. My goal is to provide valuable insights and simplify financial matters for individuals and business owners alike.
Frequently Asked Questions
- What features does BUSY have for accounting and bookkeeping?With BUSY, you can easily and efficiently manage your accounting and bookkeeping tasks. Whether you need to enter vouchers, generate reports, or perform any other accounting operation, BUSY has the features and functionality to help you. BUSY is designed to simplify your accounting process and provide you with accurate and reliable results.
- How do I properly record debit and credit entries?To properly record debit and credit entries in BUSY, you need to understand the basic principles of double-entry bookkeeping. Debit entries are made on the left side of an account and represent increases in assets or expenses, while credit entries are made on the right side and represent increases in liabilities, equity, or revenue. When recording a transaction, you should ensure that the total debits equal the total credits to maintain balance. It is important to accurately classify the nature of the transaction and select the appropriate accounts for recording debit and credit entries.
- How do you link inventory records with accounts and bookkeeping?For Job Work charges in issue and receipt first enable option accounting for pure inventory voucher from Inventory Module. Apply charges at bill sundry in material issue and material received voucher. Enable accounting option in bill sundry too.
- What are the different types of TDS supported in the software? How do I distinguish between them for bookkeeping?As per government regulations, we have two types of TDS: salary-based and Non-salary, i.e., TDS on expenses. In Form 24Q, TDS is applied to salary income once it exceeds the threshold limit. On the other hand, non-salary-based TDS is applicable when the income exceeds the same threshold of 50 lakh. BUSY software includes various categories of TDS expenses.
- When should I use double entry, and when is single entry booking?The choice of using single-entry or double-entry bookkeeping depends on the type and size of your business and your accounting preferences. Here are some general guidelines to help you decide:
Single-entry bookkeeping is simple, involves one entry per transaction, and is suitable for small businesses with cash-based accounting. It is easy to set up and maintain, but it does not provide a complete picture of your financial position.
Double-entry bookkeeping is more complex and involves two entries per transaction. It is ideal for businesses with complex transactions and accrual-based accounting and provides a more accurate and balanced view of the business.
