All About Bookkeeping
Bookkeeping is defined as the process of keeping the financial records of a business. Bookkeeping plays an important role in the accounting process. It includes gathering and organizing all financial documents of a business. These documents can be receipts, payments, payroll, or any other transaction that a business may encounter. There are two standard accounting systems used in bookkeeping – single-entry and double-entry. While these two systems are the most common, any process of recording financial transactions is considered a form of bookkeeping.
The professional who performs the bookkeeping duties is known as a bookkeeper. A bookkeeper records and classifies daily transactions. This means they take all sales and purchases and categorize them as credits or debits then enters them in the corresponding daybook and eventually into the general ledger. Once all the data is recorded and organized, it will eventually go off to the accountant. The accountant will create financial reports, like the income statement and balance sheet, from the bookkeeper’s data.
Bookkeeping goes back all the way to when the barter system was used. People would record their transactions on slabs of clay. In the past, the book in which daily transactions were recorded was called a “waste book”. It was known as this because after the daily transactions were moved to the corresponding daybooks and the general ledger, the waste book was then thrown out.
The main objective in bookkeeping is to keep track of the impacts that each financial transaction has on your overall financial status. There is the manual accounting system, which consists of using physical registers and ledgers for keeping financial records, and there is the computerized accounting system, which utilizes accounting software. A computerized, or electronic, accounting system skips over any delays that a manual system would include, as the transactions are documented immediately.
In businesses today, some type of documentation is created when a transaction takes place, such as a receipt, an invoice, a deposit slip or even a check. A bookkeeper’s job is to take all of these documents and input them into journals (or daybooks) containing multiple columns. Two journals a bookkeeper may utilize are a sales journal for credits and a cash payments journal. Commonly, in these journals, there are columns which represent each account a person or business holds. If the bookkeeper is employing a single-entry system, each transaction would only be entered one time. This is very similar to how you would keep track of your personal finances in your checkbook.
Every period, a specific amount of time (usually one month), each column is added up to determine a total in which you would then create a summary. If you were utilizing a double-entry system, those totals would now be moved over to their corresponding ledger. For example, if you had a summary of sales receipts for your company, in a double-entry system you would then record a debit into each customer’s account and a credit into the inventory account. This method allows the user to always be able to balance their accounts, every debit should have an equal credit and vice versa.
This balancing procedure is a partial check known as unadjusted trial balance. This is basically a table with three columns. Column one would list all accounts that are carrying a balance. Column two would consist of the amount of each account that has a debit balance. Column three would hold all account amounts that have a credit balance. When totaling column two and column three, they should always be equal. If they do not equal, then you know there is an error in the data somewhere and it must be found and corrected. This is because with the double-entry style, every debit should have an equal credit amount recorded with it and every credit should have an equal debit amount recorded simultaneously.
After the columns are equal and all accounts are balanced, the accountant would move into creating the adjusted trial balance. The adjusted trial balance is exactly what it sounds like, the accountant makes adjustments on the unadjusted trial balance. Some of these adjustments may include changing the amount of inventory listed on an account after a physical count shows a discrepancy, or if there has been depreciation that needs to be recorded. Since this is a double-entry system, every change the accountant makes will have an equal (but opposite) entry to keep everything balanced. Once the adjusted trial balance is completed, this data is used to create the financial statements for the period. Some examples of these financial statements include the balance sheet, the income statement, the cash flow statement, and the statement of changes in equity.
Common Terms and Their Definitions
The Single-Entry System is an accounting/bookkeeping method that involves entering a transaction only one time into, primarily, a cash book. This is because the single-entry system is used mainly for tracking cash payments and receipts, rather than assets and liabilities.
The Double-Entry System is an accounting/bookkeeping method that involves having two entries for every transaction into at least two different accounts. These entries must be equal and opposite of one another.
Electronic Bookkeeping is when software is used rather than handwritten paper books. You can still use either the single-entry or double-entry systems when utilizing computerized databases.
Daybooks are where the daily transactions are first recorded and are in chronological order. The information from the daybook is then transfer to journals, to eventually end up being posted to the ledgers. Some examples of day books are the sales daybooks, the purchases daybooks, and the cash daybook.
Journals are the next stop after daybooks. Journals only show the transaction amount. They also are in chronological order and recorded as credits and debits. A business may have one journal or use many journals to keep everything separated by category (cash, sales, purchases) for easier organization.
Ledgers get their information from the journals and are the permanent, formal records of your transactions. The information that is entered into the ledgers show the starting and ending account balance before and after each transaction. The ledger also totals each account, which is what is used to create the balance sheet and income statement.