Bookkeeping is the process of recording and tracking a business’s financial transactions.
During the month, financial transactions are recorded in a journal, spreadsheet, or software.
These activities are then categorized.
- Revenues
- Types of expenses
- Cash deposits
- Loan payments
Common categories include:
Once categorization is complete, the bookkeeper can produce customized reports that can be presented to internal and external decision-makers. Bookkeeping aims to create these customized reports to summarize where money flows in and out of a business so that people can make the right decisions.
These summaries produce fundamental reports: the income statement and the balance sheet. The income statement reveals the business’s profit or loss. The balance sheet displays the business’s assets, liabilities, and equity. Equity is the difference between the value of a business’s assets and liabilities. In business, equity or book value is also known as net worth.
Businesses can go about the bookkeeping process as either single or double-entry accounting.
Single-entry is simpler in that all transactions are categorized as income or expense. Therefore, only an income statement is produced. Double-entry bookkeeping enters each transaction twice as a debit or a credit. In double-entry, both an income statement and a balance sheet are generated.
Of course, all this only works if a proper bookkeeping system is accurately implemented.