What is Recordkeeping?
Recordkeeping is a primary stage in accounting which tells us how to keep a record of monetary business transactions. It is to be noted that only those transactions related to business that can be expressed in terms of money can be recorded through recordkeeping.
The Purpose of Recordkeeping is as follows –
- To keep permanent track of all the transaction
- To know the correct picture of assets-liabilities, profits and loss etc of the business
- To keep control of the expenses with a view to minimizing the expenditure
- To have important information for legal and tax purposes
Steps to Recordkeeping Method
Recordkeeping includes
- Identifying the transactions
- Recording in the journal
- Classifying the nature of the transaction
- Posting to ledger
- Balancing of accounts
- Preparing a financial statement
- Interpreting the financial statements
- Communicating it to stakeholders
Record-Keeping Examples
Below are examples of record keeping.
Record keeping Example #1
ABC limited is sole proprietor firm, carrying out small shop in a market in Atlanta. He is trading in clothes and having main inflow and Outflow as follows:
- Inflows: Sale proceeds from Customer
- Outflows: Material Purchase from vendors and payment of related expenses
For recordkeeping purpose, ABC limited will have to maintain daily Cashbook for maintaining the petty cash and bank balances. At the end of the year, they have to prepare Profit and Loss A/c and Balance sheet to verify the profitability during the year.
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This is one of the simplest ways of maintaining the records of the business transaction.
Record keeping Example #2
- Amazon.com is multinational corporation having operations throughout the globe and giving employment to millions of people. Every day millions of transactions are carried out and in order to maintain the interest of Company and to ensure the proper compliance of statutes and to maintain the confidence of the stakeholders, continuous bookkeeping is to be carried out.
- Separate teams need to be placed to ensure that each and every monetary transaction that is carrying out by the business, should get recorded in the books without any deviation. Also, such kind of bookkeeping must ensure that transactions are recorded as per the locally applicable generally accepted accounting principles and also applicable other statutes.
This is one of the most complex examples of maintaining the records of the business.
Both examples have their own merits and demerits, but hold good in their ways.
Advantages of Recordkeeping
- Permanent and Reliable Record – Recordkeeping helps in maintaining the permanent record of all the transaction which will help in ensuring the reliability of data.
- Arithmetical Accuracy of the Accounts – Continuous recording of transactions will help in identifying any arithmetical inaccuracy that might have taken place. E.g., excess payment to suppliers or double payment of any transactions
- Net Result of Business Operations – Recordkeeping will give the profit earned during the given period based on ongoing business operations.
- Ascertainment of Financial Positions – Recordkeeping helps in identifying the financial position of the business.
- Calculation of Dues – All the outstanding liabilities and dues on a given point of time can be calculated based on the proper financial statements prepared.
- Control Over Assets and Borrowings – Better control over assets and borrowings can be undertaken, this will help in managing the funds and various positions of business.
- Identifying Dos and Don’ts – Financial statements help in finding things that went out bad and needs to be rectified in the future to ensure better operations in the future.
- Taxation – Recordkeeping is highly recommended and needed by tax authorities. In order to complete their assessments, business persons have to appropriately maintain the records which will help in determining the tax liability over them
- Management Decision Making – Management is highly depended on the financial records to undertake the planning of the business operations. Moreover, they are also in need of continuous reporting by middle level about the progress made in finance terms. All the strategic decisions are governed by the financials maintained by the organization
- Legal Requirements – There is a huge requirement of statutes, Local GAAPs, IFRSs etc to maintain the proper books of account, to ensure the transparency of the business.
Disadvantages of Recordkeeping
- Clerical – For large organizations, recordkeeping is a highly tedious and ongoing job. It becomes very difficult for them to maintain the same
- Manual and Monotonous – Recordkeeping is a highly manual job. Same work is needed to be carried out as many times transaction is undertaken. This makes it a highly monotonous job.
- Subjective needs to Check before Analysed – Various accounting aspects like depreciation, stock valuation etc requires assumptions which make the accounting highly subjective. The viability of such assumptions needs to be verified before analyzing the financial statements
Limitations of Recordkeeping
- Only Monetary Transactions can be Recorded – In Business, both: monetary and non-monetary aspects are important. However, in recordkeeping, only monetary transactions can be covered. Non-monetary virtues like trained staff cannot be recorded in the books of accounts.
- Effects of Price Level Changes are not Considered – Inflation is an ongoing requirement which needs to be factored while recording the assets, however, in accounting, inflation cannot be considered while recording the transactions.
- Historical based Accounting – All the assets are to be recorded as historical cost. This will not help in identifying the present worth of the asset in the market.
Important Points
Any changes in the method of recordkeeping can be allowed only if:
- Substance over form is to be considered
- For better disclosure requirements
- Needed by accounting standards
Conclusion
Thus, recordkeeping is an art of recording and disclosing financial transactions. Recordkeeping requires a bit of expertise and tactics that will not only help in maintaining the image of the organization but also help in obtaining funding and bidding the tenders of business. In order to prove the accuracy of the transactions, recordkeeping gives a big push and helps in maintaining an image as an ethical business organization in the market.
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