What is Recordkeeping?
Recordkeeping is a primary stage in accounting which tells us how to keep a record of monetary business transactions with the objective keep permanent track of all the transaction, know the correct picture of assets-liabilities, profits and loss etc, keep control of the expenses with a view to minimizing the expenditure and to have important information for legal and tax purposes
Steps to Recordkeeping Method
- Identifying the transactions
- Recording in the journal
- Classifying the nature of the transaction
- Posting to ledgerPosting To LedgerLedger in Accounting, also called the Second Book of Entry, is a book that summarizes all the journal entries in the form of debits & credits to use for future reference & create financial statements.
- Balancing of accounts
- Preparing a financial statementFinancial StatementFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.
- Interpreting the financial statements
- Communicating it to stakeholders
ABC Limited is a sole proprietor firm, carrying out small shops 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 purposes, ABC limited will have to maintain daily cashbooks for maintaining the petty cashPetty CashPetty cash means the small amount that is allocated for the purpose of day to day operations. It is unreasonable to issue a check for such small expenses and for managing the same custodians are appointed by the company. and bank balances. At the end of the year, they have to prepare a Profit and Loss A/c and Balance sheet to verify the profitability during the year. It is one of the simplest ways of maintaining the records of the business transaction.
- Amazon.com is a multinational corporation having operations throughout the globe and giving employment to millions of people. Every day millions of transactions are carried out, and to maintain the interest of the 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 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 principlesGenerally Accepted Accounting PrinciplesGenerally accepted accounting principles (GAAP) are the minimum standards and uniform guidelines for the accounting and reporting. These standards prohibit firms from engaging in unethical business activities and enable for a more accurate comparison of financial reports to investors. 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 – It helps in maintaining the permanent record of all the transactions, 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 – It will give the profit earned during the given period based on ongoing business operations.
- Ascertainment of Financial Positions – It 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 need to be rectified in the future to ensure better operations in the future.
- Taxation – It is highly recommended and needed by tax authorities. 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 dependent on the financial records to undertake the planning of the business operationsBusiness OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation.. Moreover, they are also in need of continuous reporting by the middle level about the progress made in finance terms. The financials maintained by the organization governs all the strategic decisions
- Legal Requirements – There is a massive 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 tough for them to maintain the same
- Manual and Monotonous – It is a highly manual job. The same work is needed to be carried out as many times the 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 that make the accounting highly subjective. The viability of such assumptions needs to be verified before analyzing the financial statements
- Only Monetary Transactions can be Recorded – In Business, both: monetary and non-monetary aspects are essential. 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 that needs to be factored in 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.
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
Recordkeeping is the art of recording and disclosing financial transactions. It 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. 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.
This article has been a guide to What is Recordkeeping, and its Definition. Here we discuss the record-keeping method along with examples, advantages, and disadvantages. You can learn more about excel modeling from the following articles –