Introduction
The bookkeeping system comprises of several books called Journal, Ledger, Cash book and Trial Balance. A bookkeeping system is similar to a maze where transactions are recorded, sorted and summarized. Businesses have been opting for bookkeeping systems for centuries and this system has evolved in complexity with time, to factor in the needs of modern day commerce. After a transaction has been put through the system, the details are available for analysis and manipulation in the form of reports. This article explains the process of bookkeeping and discusses its importance in the business world.
What is Bookkeeping System?
Bookkeeping is a type of financial bookkeeping system that involves compiling, cataloging, analyzing, interpreting and recording financial facts, data and information related to the balance sheet, income and expenditure of an organization. It’s primarily performed by bookkeepers or accountants in the accounts department, but it can also be done by the owners or managers of a business. Bookkeeping is generally used to produce financial statements or to monitor the financial position of a business entity. Bookkeeping involves recording each financial transaction made by a business, including sales, purchases, receipts, payments and any other business-related activities.
Types of Bookkeeping
Bookkeeping can be divided into two main categories: single-entry bookkeeping and double-entry bookkeeping. Single-entry bookkeeping focuses solely on recording business transactions, while double-entry bookkeeping requires the recording of all transactions, including the debits and credits. Basically, in double-entry bookkeeping, an equal amount of money is entered for each transaction, with one entry reflecting the credit amount and the other entry reflecting the debit amount. Double-entry bookkeeping is considered the more efficient form of bookkeeping and is often used by larger and more complex businesses.
How Does it Work?
Before discussing how bookkeeping works, it’s important to understand the principles of accounting. The foundation of double-entry bookkeeping is based on the three fundamental principles of accounting:
1. Accrual: transactions are recorded when they are earned, regardless of when the cash is actually received.
2. Consistency: the same accounting methods, conventions and principles are used throughout the during the whole period of business.
3. Materiality: transactions are only recorded if they are of a material size, i.e., capable of affecting a company’s financial statement.
Once all the transactions of a business have been recorded, these transactions can be organized in the form of reports. Reports such as income statement, balance sheet, cash flow statement and statement of financial position are generated to analyze the financial performance and position of the business. The reports are used to identify areas of financial strengths and weaknesses, as well as to spot potential opportunities and areas for improvement.
The Advantages Of Bookkeeping System
• A bookkeeping system records all financial activity as it occurs and helps to keep track of accounts receivable, accounts payable, and individual payments.
• It makes it easy to determine the net income or loss of the business.
• Bookkeeping systems produce accurate financial statements and reports.
• It helps to identify irregularities, fraudulent activities and discrepancies.
• Bookkeeping system helps to boost the productivity of a business by streamlining the process of collecting data and generating reports.
• It helps businesses to identify their financial position at any given time.
Conclusion
Bookkeeping is an essential part of running a successful business as it ensures accurate tracking and analysis of financial data. Understanding the principles of bookkeeping and its importance to the financial health of a business is critical for any business owner or manager. It’s also important to keep up to date with the latest changes in bookkeeping system and regulations. A bookkeeping system helps to streamline the process of gathering, recording and analyzing financial data, as well as providing businesses with an opportunity to identify problems, areas of improvement and potential opportunities.