Any business’s performance is analyzed using its financial statements. The company’s financial statements help in ascertaining its performance. These financial statements are prepared by the accounting department.
Thus accounting involves identification of the transactions taking place in the business, recording them in the appropriate accounts, classifying them and then analyzing them to communicate the end results to the users of financial information.
Bookkeeping is a part of the accounting system. Bookkeeping can be defined as a subset of accounting. Bookkeeping involves identification of monetary transactions, recording them in the different books of accounts, posting in the different classified ledger accounts and creating a summary of the accounts i.e. trial balance. The analysis of the transactions is done in the accounting system. Thus, it can be stated that the bookkeeping for the basis of the accounting system. Or in another word, where bookkeeping ends, accounting starts. Accounting is a broader concept and needs vast knowledge. Once the bookkeeper is done with the compilation of transactions and records, the accounting expert performs the task of analysis and communicating the summary to the end users.
The process for Book Keeping can be understood as follows:
Identification of Monetary Transactions: The process of bookkeeping starts with identifying the monetary transactions in the business. In accounting, only the transactions to which a monetary value can be attached are recorded. Thus only Quantitative data is recorded and not the qualitative. Thus first of all the quantitative data is identified and then it is processed.
Recording of transactions: Recording of the transaction means maintaining proper record of the transactions. Once the items are identified with the monetary value, they are recorded in the appropriate book i.e. Journal. All the entries are posted in the journal. Other than the journal other books where the transactions are recorded at the initial stage are Cash Book, Sales Book and Cash Book.
Classification: It means classifying the transactions in their related accounts. The transactions relating to one account shall be classified under one head only and it should be ensured that all the related transactions are recorded. No transaction should be omitted. Afterwards, the casting of the transaction is done.
Summarization: Once the transactions are classified into specified accounts, the casting or addition of the amounts is done and a trial balance is created in which the casted amounts of every account are recorded. A trial balance ensured that the accounts are maintained correctly if the Debit side total of the trial balance matches with the credit side of the trial balance.
There are two types of book keeping systems depending on the records maintained by them:
1. Single Entry System: Single Entry System is also known as the incomplete record system. In single entry system, only single aspect of the transaction is recorded as compared to two aspects in Double Entry System. Thus it has incomplete information as to the records. This system of accounting is generally followed by the small business units who don’t have a large amount of transactions. The transactions in this kind of system are generally low and of recurring nature. The accountants try to find the missing info and make financial statements out of it. The general accounts prepared in this kind of system are Cash Book, Revenue and Expense Account and Statement of Affairs. These accounts help in ascertaining and understanding the information.
2. Double Entry System: This is the generally accepted format for recording financial information. Both aspects of the transaction are recorded in this system i.e. Debit and Credit. It shows the dual aspect and dual effect of transactions on accounts. This method is more reliable and efficient in nature. This is a universally accepted method because of its compatibility. This provides complete information and gives a true picture of the company’s position. This can be used by any kind of firm or company. But this in this method a large number of accounts and books are to be maintained which makes it more expensive than the Single Entry System.
1. Cash Book: Cashbook is the most important and basic book of any enterprise. It contains all the information about cash transactions i.e. from where did the enterprise receive cash, where was it spent, how much was spent, what is the current balance. The cash book shoes the immediate liquidity of the enterprise. It records all the cash sales, cash purchases, cash incomes and cash expenses.
2. Sales Book: Sales Book keeps a record of the sales taking place in the business. It records all the credit and cash sales that take place in the business. This helps in cross-checking the sales account at later stages for cross verification that no duplicity has taken place while recording transactions.
3. Petty Cash Book: In a business, there are several petty and miscellaneous expenses. If these small expenses were to be accounted in the primary cash book, it would have become a mess. This is why a separate petty cash book is maintained where such transactions are recorded. Such a petty cash book is maintained on imprest system.
4. Purchase Book: The purchased book keeps a record of all the credit and cash purchases made by the business. This helps in cross-checking the purchase account at later stages for cross verification that the amounts so entered are correct.
5. Sales Return Book: This book records the sold goods which have been returned by the customers. They have to be verified with proper credit notes.
6. Purchase Return Book: These are the goods purchased from the supplier which have been returned back to the supplier on account of defects or if the products don’t match the description.
1. Evidence in the Court: The bookkeeping records can be used as evidence in the court in case of any discrepancy. In case the company sues anyone or the company is being sued, it can use the books for seeking justice. Bookkeeping records are a strong tool and are accepted as evidence in the court.
2. Proper records: The bookkeeping records help in maintaining proper and complete records of transactions taking place in the business. It helps in maintaining the order of transactions, expenses and revenues in the business. This ensures the authenticity of the business and mitigating any error in the business. Even as per law, every business is supposed to prepare proper records.
3. Financial Comparison: A proper record of transactions helps the business to compare its financial information with the previous year’s information or with other enterprises. Thus, bookkeeping lays down the basis for this comparison.
4. Tax Computation: Computing taxes is one of the most complex tasks. But maintaining a proper bookkeeping record helps in easy tax computation at the end of the period.
5. Budget Monitoring: Planning and controlling is an essential part of the business. The business needs to make plans time to time and check its effective implementation in the business. The bookkeeping records help in ascertaining if the budget is being followed or it is exceeding the budget. Accordingly, proper actions are taken to correct the situation.
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