When your average Jane or Joe hears the term bookkeeping, they may only imagine a bespectacled accountant scribbling complex mathematical formulas amid piles of bills, receipts, and checks. But it’s actually easy to understand what bookkeeping is all about.
Bookkeeping is simply the process of recording financial transactions for a business.
Bookkeeping is a subfield of accounting, which deals with the processing and interpretation of all types of financial information. Bookkeeping is the ongoing recording of a business’ daily transactions and does not deal with auditing, taxes, or other types of accounting. However, the reports bookkeepers generate are the foundation for all other accounting activities, and help accountants and managers do their jobs.
Every business needs bookkeeping.
It’s one of the few services that no company can go without. Bookkeepers issue bills to customers, record receipts from clients, verify invoices from suppliers, monitor accounts, process employee pay, create financial reports, rectify accounting errors, and complete many other important tasks that keep a business running smoothly.
There are two basic types of bookkeeping: single-entry and double-entry.
There is a basic division within the field between single-entry and double-entry bookkeeping systems. In single-entry systems, each transaction is recorded with one entry in a journal or log. Single-entry systems are sometimes adequate for small, simple businesses, but they have a number of limitations and disadvantages.
In double-entry systems, each financial event is recorded using two corresponding entries called a debit and a credit. For each transaction (or other financial event), you debit one account and credit another account. Each debit always equals the corresponding credit. You choose which accounts to credit/debit according to the accounting equation, which states that Equity = Assets – Liabilities, but don’t worry about the details of how this works for now. If you follow this rule and enter your debits/credits properly, the sum of debits for all accounts will always equal the corresponding sum of credits for all accounts. If not, then you know something has gone wrong. This allows for easy error-checking, and that’s the main reason double-entry systems are far more popular.
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The Importance of Bookkeeping
No business can survive without proper bookkeeping. Thanks to bookkeeping, companies keep their finances in check. Bookkeeping enables individuals and companies to complete various tasks:
- accurately plan budgets for future income;
- aid with tax preparations;
- maintain organized records;
- aid with meeting government and state regulations;
- plan and distribute resources (i.e., money);
- reflect data accurately.
It’s a must for companies and organizations to keep their records. However, even individuals can benefit from keeping their books properly and knowing how much money they have and spend.
