Bookkeeping

Updated on April 25, 2024
Article byWallstreetmojo Team
Edited bySusmita Pathak
Reviewed byDheeraj Vaidya, CFA, FRM

Bookkeeping Meaning

Bookkeeping is the day-to-day documentation of a company’s financial transactions. These transactions include purchases, sales, receipts, and payments. The details are entered in chronological order. Crucial investments, business operations, and financial decisions are made based on performance analysis reflected in these records.

Bookkeeping Meaning

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Bookkeeping (wallstreetmojo.com)

There are two ways of bookkeeping, the single-entry systemSingle-entry SystemThe Single Entry System is an accounting approach under which every accounting transaction is recorded with only a single entry towards the results of the business enterprise, shown in the statement of income of the company.read more and the double-entry systemDouble-entry SystemDouble Entry Accounting System is an accounting approach which states that each & every business transaction is recorded in at least 2 accounts, i.e., a Debit & a Credit. Furthermore, the number of transactions entered as the debits must be equivalent to that of the credits. read more. The double-entry system is used more commonly. These records are important for analyzing performance.

Key Takeaways

  • Bookkeeping is the chronological recording of business sales, revenue, purchases, and expenses. This is done on an everyday basis. Entries are made into the company’s ledger.
  • Bookkeepers are responsible for entering accounting details. They prepare their firms’ relevant financial statements.
  • This documentation can be done via cash or accrual method; however, GAAP prefers that the companies prepare their financial statements on an accrual basis.
  • While bookkeeping is a part of accounting, the latter is a more extensive concept. It includes interpreting the accounts prepared by the bookkeepers to derive conclusions and facilitate crucial decision-making.

Bookkeeping Explained

Bookkeeping is an essential process that involves the systematic creation of a company’s accounts ledger. Accountants, managers, directors, and shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares.read more get vital insights from ledgers. Also, when it comes to external parties like banks, investors, and associates, bookkeeping records are a source of reliable and comprehensive information. Decisions related to lending and business association are also made based on these records. Most firms prefer the double-entry bookkeeping system to record an equivalent credit for every debitDebitDebit represents either an increase in a company’s expenses or a decline in its revenue. read more aspect.

Bookkeepers are individuals who execute the task of writing down a firm’s financial transactions daily. Bookkeepers’ responsibilities include creating bank reconciliation statementsReconciliation StatementsA reconciliation statement contains a list of differences between bank balance as per bank statement, books of accounts, debtor-creditor reconciliation, debt balance reconciliation, or any other reconciliation with a difference in the records of two separate legal entities, and it aims at nullifying the difference.read more, closing monthly ledger accounts, and preparing annual financial statements.

Even sole proprietary businesses and small firms such as local stores and dealers require bookkeeping for tracing expenses, revenue, sales, and purchases. Many small-scale enterprises nowadays use accounting software like “QuickBooks.” Small businesses prefer hiring bookkeepers over in-house accountants. That would be the cheaper option. Alternatively, they also outsource such activities to a professional accounting firm.

Accounting for Financial Analyst (16+ Hours Video Series)

–>> p.s. – Want to take your financial analysis to the next level? Consider our “Accounting for Financial Analyst” course, featuring in-depth case studies of McDonald’s and Colgate, and over 16 hours of video tutorials. Sharpen your skills and gain valuable insights to make smarter investment decisions.

How To Do?

Bookkeepers must know which form of accounting method to opt for to ensure accuracy and reliability in the results obtained. Hence, they primarily use the following approaches:

  1. Cash Basis: Cash BasisCash BasisCash Basis Accounting is an accounting method in which all the company's revenues are accounted for only when there is an actual cash receipt, and all the expenses are recognized when they are paid. Small companies and individuals generally follow this accounting method.read more  is a method whereby only the financial transactions facilitated through money exchange can appear in the books. It ignores outstanding expenses and owed income.
  2. Accrual Basis: Accrual BasisAccrual BasisAccrual Accounting is an accounting method that instantly records revenues & expenditures after a transaction occurs, irrespective of when the payment is received or made. read more is a more realistic approach for accounting. Therefore, it is mandated by GAAP. In the Accrual method, bookkeepers record the financial transactions immediately. Entries are made as soon as income or sales amount becomes due. Expenses or payments owed are also recorded instantaneously.

Types

It is important to understand the components or types of bookkeeping that play a vital role in the bookkeeping procedure:

Bookkeeping Meaning Types

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Bookkeeping (wallstreetmojo.com)

  1. Chart of Accounts: COACOAThe acronym COA stands for "Chart of Accounts." It is a list of accounts (revenue, expenditure, assets, liabilities, etc.) that a company generates in order to organize, record, and segregate all accounts that have been utilized for transaction purposes in its accounting system.read more is a detailed worksheet containing guidelines and a framework for what kind of expense should go to which general ledgerGeneral LedgerA general ledger is an accounting record that compiles every financial transaction of a firm to provide accurate entries for financial statements. The double-entry bookkeeping requires the balance sheet to ensure that the sum of its debit side is equal to the credit side total. A general ledger helps to achieve this goal by compiling journal entries and allowing accounting calculations. read more account. It helps bookkeepers pick the correct expense code while posting any journal entry.
  2. Journal: Journal entries primarily record the financial impact of any business transaction, where the debit equals credit aspect.
  3. Ledger:  A ledger is the primary book of accounts that shows the debit and credit transactions related to one account. This is for a particular period and is recorded in a summarized format. It also contains the opening and closing balances by evaluating all the debits and credits of an account. It facilitates the creation of a Trial BalanceTrial BalanceTrial Balance is the report of accounting in which ending balances of a different general ledger are presented into the debit/credit column as per their balances where debit amounts are listed on the debit column, and credit amounts are listed on the credit column. The total of both should be equal.read more.
  4. Cash Flow Statement: All the cash and cash equivalentCash And Cash EquivalentCash and Cash Equivalents are assets that are short-term and highly liquid investments that can be readily converted into cash and have a low risk of price fluctuation.  Cash and paper money, US Treasury bills, undeposited receipts, and Money Market funds are its examples. They are normally found as a line item on the top of the balance sheet asset. read more changes from financing, investing, and operating activities are summarized in a cash flow statement.
  5. Income Statement: This is commonly known as a Profit and Loss Account. The income statement puts forward the net profit or net lossNet LossNet loss or net operating loss refers to the excess of the expenses incurred over the income generated in a given accounting period. It is evaluated as the difference between revenues and expenses and recorded as a liability in the balance sheet.read more in a particular period.
  6. Balance Sheet: The balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more  is the statement that shows a summary of shareholders’ equity, assets, and liabilities. The balance sheet summarizes data for a particular financial year. Therefore, it resembles the organization’s financial position.

Examples

Let us consider the following examples to understand how bookkeeping in accounting works:

Example 1

Every transaction comprises a debit and credit value to create an equilibrium. Only then can an entry be validated. This is why the double-entry accounting methodAccounting MethodAccounting methods define the set of rules and procedure that an organization must adhere to while recording the business revenue and expenditure. Cash accounting and accrual accounting are the two significant accounting methods.read more is considered the best. In addition to that, bookkeepers should always stick to the following golden rules of accountingGolden Rules Of AccountingAccounting rules are guidelines to follow for registering daily transactions in the entity book through the double-entry system. Here, every transaction must have at least 2 accounts (same amount), with one being debited & the other being credited. read more:

Account TypeAny IncreaseAny Decrease
AssetsDebitCredit
LiabilitiesCreditDebit
IncomeCreditDebit
ExpensesDebitCredit
EquityCreditDebit

Example 2

Given below is the balance sheet of the PQR enterprises:

Balance Sheet

For March 31, 2020

Bookkeeping Balance Sheet

Following are the financial transactions for the financial year 2020-2021:

Additional information:

  • Closing stock $313000
  • Mr. B’s bad debts $39000

Bookkeepers prepared the following financial statements:

Journal Entries

For the year ending on March 31, 2021

Journal Entries

Balance Sheet
For the year ending on March 31, 2021

Bookkeeping

Note:

Accounts payable = 182000 + 51000 (MNC Ltd.) = $233000

Equity = 621000 + 93000 (Net Profit) = $714000

The business realized it had made a profit of $93000 but was losing money to Mr. B (one of the debtors), i.e., bad debtsBad DebtsBad Debts can be described as unforeseen loss incurred by a business organization on account of non-fulfillment of agreed terms and conditions on account of sale of goods or services or repayment of any loan or other obligation.read more of $39000. Therefore, the management decided not to provide goods on credit to Mr. B in the future.

The bookkeeping patterns of Amazon and Godaddy follow the accrual method of accounting. Therefore, their accounting periodsAccounting PeriodsAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance.read more coincide with the calendar year from the 1st of January to the 31st of December.  

Advantages

Some of the advantages of bookkeeping services are as follows:

Disadvantages

Bookkeeping also has some flaws, which one must know of. Some of these include:

Bookkeeping Vs Accounting

Though the terms refer to processes that lead to achieving the same objective, they differ widely in terms of how they are maintained and used. Some of the differences between bookkeeping and accounting are as follows:

CategoryBookkeepingAccounting
FoundationIt is the basic method of maintaining daily records.It is a complete process of recording, interpreting, and analyzing the performance of a company through its financial records.
SystemIt is part of the whole accounting process.It is a complete process of recording, interpreting, and analyzing performance of a company through its financial records.
ObjectiveProvide data for accounting.Prepare financial statements for performance analysis

Frequently Asked Questions (FAQs)

What is bookkeeping?

It is the method of documenting the daily financial transactions of an organization. Ledger entries are made in the order of their occurrence. Additionally, bookkeepers reconcile bank records and report employers’ financial information in an organized format.

What is the difference between accounting and bookkeeping?

Accounting is a broader phenomenon; bookkeeping is just a small part of the accounting system. Accounting comprises organizing, recording, classifying, summarizing, and reporting business transactions. In comparison, bookkeeping is limited to recording and organizing financial information.

What do you need to be a bookkeeper?

Bookkeepers need not be highly qualified; instead, individuals can start documenting immediately after passing high school. However, to gain specialization, bookkeepers can get a certification or diploma. Some go as far as an associate’s or bachelor’s degree in accounting to stand out. Additional certification does result in higher remuneration.

Recommended Articles

This article is a guide to Bookkeeping and its Meaning. We explain the differences with accounting, its examples, how to do it, types, and advantages. You can learn more about financing from the following articles –