bookkeeping

bookkeeping

[book-kee-ping]
bookkeeping, maintenance of systematic and convenient records of money transactions in order to show the condition of a business enterprise. The essential purpose of bookkeeping is to reveal the amounts and sources of the losses and profits for any given period. Proper bookkeeping should also reveal the nature and value of the assets and liabilities of a firm, as well as its net worth at the close of that period.

Bookkeeping records are kept in columnar form, using separate columns for the date of transaction, an explanation of the nature of the transaction, and its value. Other columns may be added. In general, two sets of columns are used, assets being placed in one set of columns and liabilities in the other set (a money value having been assigned to all assets and all liabilities of the business). Such an arrangement is called double entry. A balance sheet may be compiled at any time by totaling each column and subtracting the smaller total from the greater to give either a surplus or a deficit. The result is called the net worth, and it gives an indication of the financial state of a firm. A detailed balance for a period between two balance sheets is called a profit and loss statement.

The process of deciding whether to enter items into one set of columns or the other, i.e., into the debit side or the credit side, is called journalizing, since the analyzed items are placed in a journal, or daybook, soon after the transactions occur. Separate accounts of persons or sections are kept in a book called a ledger; the ledger is now often a computer file (created in "spreadsheet" software) rather than a physical book. The transfer of items from the journal to the ledger is called posting. In large businesses, the journal is broken into many sections, each concerning a separate function of the business, such as sales, purchases, accounts receivable, accounts payable, sales return, purchases return, and cash on hand. The journal also has sections for invoices, inventory, orders, cash, sales, bills, and checks.

Single-entry bookkeeping enters all debits and credits in a single set of columns in a journal and labels each entry Dr. (debit) or Cr. (credit). Thus in a single entry only one element of a transaction is entered. Single-entry bookkeeping fails to give detailed information as to the sources of gain or loss.

There are two main methods of accounting for money in a business. The cash method reports income in the year it is received and deducts expenses in the year they are paid. The accrual method reports income when it is earned and deducts expenses as they are incurred, regardless of whether the money has actually entered or left the business yet.

Any bookkeeping system must also account for all canceled checks, paid bills, duplicate deposit slips from banks, and other records of transactions. These records act as proof of the posted entries; they are usually organized chronologically or by type and are kept in filing cabinets. Bookkeeping machines, ranging from the simple adding machine to the computer, help in maintaining properly organized books. Computers revolutionized bookkeeping and accounting systems, both for entering ledger items and for such operations as year-end profit-and-loss calculations.

The Babylonians, Egyptians, Greeks, and Romans kept business records. Double entry seems to have been first developed by the people of N Italy during the great commercial expansion of the 14th and 15th cents. and has consequently been called the Italian method. The system then spread to the Netherlands, England, and elsewhere. Single entry developed later.

See also accounting; auditing.

Recording of the money values of business transactions. Bookkeeping provides the information from which accounts are prepared but is distinct from accounting. Bookkeeping offers information on both the current value, or equity, of an enterprise and on its change in value (due to profit or loss) over a given time period. Managers require such information to examine the results of operations and budget for the future; investors need it to make decisions about buying or selling securities; and credit grantors use it to determine whether to grant a loan. Financial records were kept in Babylon and in ancient Greece and Rome. The double-entry method of bookkeeping began with the development of the Italian commercial republics of the 15th century. The Industrial Revolution stimulated the spread of bookkeeping, and 20th-century taxation and government regulations made it a necessity. Two types of records continue to be used in bookkeeping—journals and ledgers. They can be recorded by hand or entered into a computer. The journal contains daily transactions (sales, purchases, etc.), while the ledger contains the record of individual accounts. Each month an income statement and a balance sheet are posted in the ledger.

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Bookkeeping (also book-keeping or book keeping) is the recording of all financial transactions undertaken by an individual or organization (including a corporation or legal person). Bookkeeping is "keeping records of what is bought, sold, owed, and owned; what money comes in, what goes out, and what is left." Bookkeeping is part of the accounting cycle, and bookkeepers' work is closely related to that of accountants.

Individual and family bookkeeping involves keeping track of income and expenses in a cash account record, checking account register, or savings account passbook. Individuals who borrow or lend money track how much they owe to others or are owed from others.

Methods

Bookkeeping may be performed using paper and a pen or pencil but the vast majority of organizations use computer software.

Single / Double-entry

Two common bookkeeping methods used by businesses and other organizations are the single-entry bookkeeping system and the double-entry bookkeeping system. Single-entry bookkeeping uses only income and expense accounts, recorded primarily in a Revenue and Expense Journal. Single-entry bookkeeping is adequate for many small businesses. Double-entry bookkeeping requires posting (recording) each transaction twice, using debits and credits.

Bookkeeper

A bookkeeper (or book-keeper), sometimes called an accounting clerk in the United States, is a person who records the day-to-day financial transactions of an organization. A bookkeeper is usually responsible for writing up the "daybooks." The daybooks consist of purchase, sales, receipts and payments. The bookkeeper is responsible for ensuring all transactions are recorded in the correct daybook, suppliers ledger, customer ledger and general ledger. The bookkeeper brings the books to the trial balance stage. An accountant may prepare the income statement and balance sheet using the trial balance and ledgers prepared by the bookkeeper.

Single account bookkeeping

Simple bookkeeping for individuals and families involves recording income, expenses and current balance in a cash record book or a checking account register.

Sample checking account register (United States, 2003)

¤AD-Automatic Deposit ¤AP-Automatic Payment ¤ATM-Teller Machine ¤DC-Debit Card
NUMBER
OR CODE
DATE TRANSACTION DESCRIPTION PAYMENT AMOUNT  /  FEE DEPOSIT AMOUNT BALANCE
balance forward 1331 85
AD 3/15 paycheck 1823 56 3155 41
AP 3/26 electricity 104 31 3051 10
704 3/26 car registration 58 50 2992 60
ATM 3/30 cash withdrawal 100 00 1.00 2891 60
DC 4/2 groceries 127 35 2764 25

Single-entry bookkeeping

The primary bookkeeping record in single-entry bookkeeping is the Revenue and Expense Journal, which is similar to a checking account register but allocates the income and expenses to various income and expense accounts. Separate account records are maintained for petty cash, accounts payable and receivable, and other relevant transactions such as inventory and travel expenses.

Sample revenue and expense journal for single-entry bookkeeping

No. Date Description Revenue Expense Sales Sales Tax Services Inventory Advert. Freight Office Suppl Misc
7/13 Balance forward 1,826.00 835.00 1,218.00 98.00 510.00 295.00 245.00 150.00 83.50 61.50
1041 7/13 Printer- Advert flyers 450.00 450.00
1042 7/13 Wholesaler - inventory 380.00 380.00
1043 7/16 office supplies 92.50 92.50
-- 7/17 bank deposit 1,232.00
- Taxable sales 400.00 32.00
- Out-of-state sales 165.00
- Resales 370.00
- Service sales 265.00
bank 7/19 bank charge 23.40 23.40
1044 7/19 petty cash 100.00 100.00
TOTALS 3058.00 1,880.90 2,153.00 130.00 775.00 675.00 695.00 150.00 176.00 184.90

Double-entry bookkeeping

Footing

Footing and Cross-footing are bookkeeping terms for summing a table of numbers by column and by row, respectively. In British English, the terms casting and cross-casting are used.

Computerised bookkeeping

Computerised bookkeeping removes many of the "books" that are used to record transactions and usually enforces double entry bookkeeping. Computer software increases the speed at which bookkeeping can be performed.

Online bookkeeping

Online bookkeeping allows source documents and data to reside in web-based applications which allow remote access for bookkeepers and accountants. Typically, a company scans its business documents and uploads them to a secure location or into an online bookkeeping application on a regular basis. This allows the bookkeeper to work remotely with these documents to update the books. Users of this technology include:

  • Mobile employees scanning and sending in their receipts and bills while on the road to get reimbursed more quickly.
  • Organizations with multiple offices centralizing their accounting department and having the documents sent to this location online.

Notes and references

External links

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