What is Bookkeeping? Definition, Objectives, Types and Importance

What Is Bookkeeping?

Bookkeeping is the process of recording and summarizing financial transactions. It involves entering all financial transactions into a ledger, which is a book or computer system that tracks the financial activity of a business. Bookkeeping also includes preparing financial statements, such as the balance sheet and income statement.

Why Is Bookkeeping Important?

Bookkeeping is important for a number of reasons. First, it helps businesses to track their financial performance. By knowing how much money is coming in and going out, businesses can make informed decisions about their financial future. Second, bookkeeping can help businesses to comply with tax laws. The IRS requires businesses to keep accurate financial records, and bookkeeping can help businesses to do this. Third, Bookkeeping can help businesses to attract investors. Investors are more likely to invest in a business that has accurate financial records.

Benefits of Bookkeeping

• Helps you track your financial performance. Bookkeeping can help you to track your income and expenses, which can give you a better understanding of your financial health. This information can be helpful for making decisions about your business, such as how much to save, how much to invest, and how much to spend on marketing.
• Helps you comply with tax laws. The IRS requires businesses to keep accurate financial records. Bookkeeping can help you to do this, which can help you to avoid penalties and fines.
• Makes it easier to get funding. Lenders and investors are more likely to lend money to businesses that have accurate financial records. Bookkeeping can help you to create these records, which can make it easier to get the funding you need to grow your business.
• Helps you make better decisions. By tracking your financial performance, you can identify areas where you can improve your business. For example, you may find that you are spending too much money on marketing or that you are not charging enough for your products or services. Bookkeeping can help you to identify these issues so that you can take steps to address them.
• Helps you stay organized. Bookkeeping can help you to keep track of all of your financial transactions in one place. This can help you to avoid missing payments or overspending.
• Helps you generate reports. Bookkeeping can help you to generate financial reports, such as the balance sheet and income statement. These reports can be helpful for tax purposes, business planning, and decision-making.

If you are not sure how to start Bookkeeping, there are many resources available to help you. You can find books, articles, and online courses on the topic. You can also hire a bookkeeper to help you get started.

Here Are Some Additional Tips for Small Business Owners Who Are New to Bookkeeping:

• Choose a Bookkeeping system that is right for you. There are many different bookkeeping systems available, so it is important to choose one that is easy to use and that meets your specific needs.
• Get organized. Set up a filing system for your financial records and keep all of your receipts in one place.
• Enter your transactions regularly. The sooner you enter your transactions, the less likely you are to make mistakes.
• Reconcile your bank statements regularly. This will help you to ensure that your records are accurate.
• Back up your data regularly. This will protect you in case of data loss.

Bookkeeping can be a daunting task, but it is an important part of running a business. By following these tips, you can make the process easier and more efficient.

Methods of Bookkeeping

There are two main methods of bookkeeping:

• Single-Entry Bookkeeping
• Double-Entry Bookkeeping

1. Single-Entry Bookkeeping

Single-entry Bookkeeping is a simpler system that only records the total amount of money that is received and spent each day. It is often used by small businesses that do not have a lot of transactions or that do not need to keep very detailed records.

2. Double-Entry Bookkeeping

Double-entry Bookkeeping is a more complex system that records each financial transaction twice, once as a debit and once as a credit. This method of bookkeeping is considered to be more accurate and reliable than single-entry bookkeeping. It is often used by larger businesses and businesses that need to keep very detailed records.

Here is a table that summarizes the key differences between single-entry Bookkeeping and double-entry bookkeeping:

Here Are Some Additional Tips for Choosing a Bookkeeping Method:

• Consider the size and complexity of your business. If you have a small business with few transactions, single-entry Bookkeeping may be sufficient. If you have a larger business or need to keep very detailed records, double-entry bookkeeping is a better option.
• Consider your budget. Single-entry Bookkeeping is generally less expensive than double-entry bookkeeping.
• Consider your time commitment. Single-entry bookkeeping is generally less time-consuming than double-entry Bookkeeping.

Ultimately, the best Bookkeeping method for you will depend on the specific needs of your business.

Types of Bookkeeping

There are several types of Bookkeeping that bookkeepers perform. Two of the most common are single-entry bookkeeping and double-entry bookkeeping.

1. Single-entry Bookkeeping records all transactions in just one row. Typically, single-entry bookkeeping is suitable for keeping track of cash, taxable income, and tax-deductible expenses.
2. Double-entry Bookkeeping records all transactions twice, usually a debit and a credit entry. Typically, double-entry bookkeeping uses accrual accounting for liabilities, equities, assets, expenses, and revenue.

While single-entry bookkeeping is simpler, double-entry is more thorough and less likely to produce errors.

Bookkeeper vs. accountant: What’s the difference?

Both accountants and bookkeepers work to maintain accurate records of finances, and sometimes the terms are used interchangeably. Generally, bookkeepers focus on administrative tasks, such as completing payroll and recording incoming and outgoing finances. Accountants help businesses understand the bigger picture of their financial situation.

An accountant can certainly perform bookkeeping tasks, but the title generally involves other responsibilities as well. An accountant may interpret the financial records put together by a bookkeeper to assess a company’s financial health. They may also perform audits and prepare tax returns. Becoming an accountant usually requires more training and education than bookkeeping but can be a good next step in your financial career.

What Does a Bookkeeper Do?

The work of a bookkeeper may vary depending on the needs of the business. You may work at a large company, small business, or as a freelancer. Here are some other tasks you may handle as part of this job:

• Record transactions using accounting software, spreadsheets, and databases
• Collect and organize financial records, cash flow statements, bank documents, and loss statements
• Generate invoices and receive payments from customers
• Track debits and credits for various accounts
• Reconcile financial statements
• Create balance sheets and income statements
• Review reports for accuracy
• Complete payroll
• File business tax returns
   

Objectives of Bookkeeping

The principal objective of Bookkeeping is to keep an entire and precise record of all financial/monetary transactions in an effective and efficient way. This guarantees that all the financial impacts of these transactions are reflected properly in the books of accounts.

And the 2nd principle objective is to discover the general impact of every recorded transaction on the financial statement of the organization. In other words, Bookkeeping helps in determining the organization’s final accounts, to be specific the Profit and Loss Account and the Balance Sheet.

Need for Bookkeeping 

One of the primary explanations behind Bookkeeping is to show the income and expenditure of every single head/record of pay and consumption. Through bookkeeping, financial data about each income and expense could be ascertained promptly.

For instance, an organization makes deals in both cash and credit. Every one of these outward transactions will be recorded. At the point when a credit sale is made, the accounts of the creditors will be updated. So through proper Bookkeeping, the administration of the organization can figure out which creditors owe them how much cash by simply viewing the records/accounts.

Additionally, in many cases, it is mandatory to maintain books of accounts and financial statements. There are acts for companies, banks and financial institutions to maintain and keep financial records up to date. So for some organizations, Bookkeeping become compulsory.

Functions of Bookkeeping

There are a lot of functions of Bookkeeping. Some of the important functions of bookkeeping are:

• Financial transactions recording
• Debit and credits postings in the respective ledgers
• Generating and classifying source documents such as invoices
• Maintaining and updating the books of accounts

Bookkeeping vs. Accounting