Bookkeeping - What is bookkeeping?
Bookkeeping is the systematic recording and organising of financial transactions in a company
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Bookkeeping is the recording, on a day-to-day basis, of the financial transactions and information pertaining to a business. It ensures that records of the individual financial transactions are correct, up-to-date and comprehensive. Accuracy is therefore vital to the process.
Bookkeeping provides the information from which accounts are prepared. It’s a distinct process, that occurs within the broader scope of accounting.
Each transaction, whether it pertains to a purchase or a sale, must be recorded. There are usually set structures in place for bookkeeping that are called ‘quality controls’, which help ensure timely and accurate records.
Essentially, bookkeeping means recording and tracking the numbers involved in the financial side of the business in an organised way. It’s essential for businesses but is also useful for individuals and non-profit organisations.
The person(s) responsible for bookkeeping for a business would record all transactions that are related, including but not limited to:
Expense payments to suppliers
Customer payments for invoices
Monitoring asset depreciation
Generating financial reports
The terms bookkeeping and accounting are often used interchangeably, however, accounting is the overall practice of managing finances of a business or individual, while bookkeeping refers more specifically to the tasks and practices involved in recording the financial activities.
Why bookkeeping matters
While it may seem obvious, detailed, thorough bookkeeping is crucial for businesses of all sizes. Seemingly straightforward, bookkeeping quickly becomes more complex with the introduction of tax, assets, loans, and investments.
Tracking the financial activities of a business is the truest purpose of bookkeeping, meaning it allows you to keep an up-to-date record of the current incoming and outgoing amounts, amounts owed by customers and by the business, and more.
Bookkeeping has a long history as an integral part of accounting. Traditionally, it involves ledgers, charts of accounts, and a tedious double-entry system.
Here we'll cover how the main activities are recorded in traditional bookkeeping practices, which are still used to this day.
In principle, transactions must be recorded daily in the books or the accounting system.
For each transaction, there must be a document that describes the business transaction. This could include a sales invoice, sales receipt, supplier invoice, supplier payment, bank payments and journals.
These accompanying documents provide the audit trail for each transaction and are an important part of maintaining accurate records in the event of an audit.
The double entry system of bookkeeping is based on the fact that every transaction has two parts, which therefore affects two ledger accounts.
Every transaction involves a debit entry in one account and a credit entry in another account. This serves as a kind of error-detection system: if at any point, the sum of debits does not equal the corresponding sum of credits, then an error has occurred.
Bookkeeping options today
It seems there’s no industry that advances in technology have not affected. Bookkeeping is no exception. Bookkeeping used to involve multiple ledgers, then multiple Exel files...essentially an inordinate amount of paper or computer files. Storage quickly becomes an issue and organisation can be a challenge.
Technological advances facilitated a move to a computer-based system, with software available to purchase and download to a desktop. Even then, these programs could be costly and slow.
Continued development has led to what is available today: 100% online applications, backed up in the cloud, with unlimited storage. This means no downloads and buggy updates, no concern over losing documents due to computer crashes or viruses, and no problems with storage space online or off.
New options have also been opened by the boom of Android and iPhone mobile apps, allowing you to manage your accounting even on the go.
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