Bookkeeping
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Bookkeeping is the recording of financial transactions, and is part of the process of
accounting Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "languag ...
in
business Business is the practice of making one's living or making money by producing or Trade, buying and selling Product (business), products (such as goods and Service (economics), services). It is also "any activity or enterprise entered into for pr ...
and other organizations. It involves preparing source documents for all transactions, operations, and other events of a business. Transactions include purchases, sales, receipts and payments by an individual person or an organization/corporation. There are several standard methods of bookkeeping, including the single-entry and
double-entry Double-entry bookkeeping, also known as double-entry accounting, is a method of bookkeeping that relies on a two-sided accounting entry to maintain financial information. Every entry to an account requires a corresponding and opposite entry t ...
bookkeeping systems. While these may be viewed as "real" bookkeeping, any process for recording financial transactions is a bookkeeping process. The person in an organisation who is employed to perform bookkeeping functions is usually called the bookkeeper (or book-keeper). They usually write the '' daybooks'' (which contain records of sales, purchases, receipts, and payments), and document each financial transaction, whether cash or credit, into the correct daybook—that is, petty cash book, suppliers ledger, customer ledger, etc.—and the general ledger. Thereafter, an accountant can create
financial reports Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...
from the information recorded by the bookkeeper. The bookkeeper brings the books to the
trial balance A trial balance is a list of all the general ledger accounts (both revenue and capital) contained in the ledger of a business. This list will contain the name of each nominal ledger account and the value of that nominal ledger balance. Each nomi ...
stage, from which an accountant may prepare financial reports for the organisation, such as the
income statement An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''stateme ...
and
balance sheet In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...
.


History

The origin of book-keeping is lost in obscurity, but recent research indicates that methods of keeping accounts have existed from the remotest times of human life in cities. Babylonian records written with
styli A stylus (plural styli or styluses) is a writing utensil or a small tool for some other form of marking or shaping, for example, in pottery. It can also be a computer accessory that is used to assist in navigating or providing more precision w ...
on small slabs of clay have been found dating to 2600 BCE. Mesopotamian bookkeepers kept records on clay tablets that may date back as far as 7,000 years. Use of the modern double entry bookkeeping system was described by Luca Pacioli in 1494. The term "
waste book A waste book was one of the books traditionally used in bookkeeping. It comprised a daily diary of all transactions in chronological order. It differs from a daybook in that only a single waste book is kept, rather than a separate daybook for ...
" was used in colonial America, referring to the documenting of daily transactions of receipts and expenditures. Records were made in chronological order, and for temporary use only. Daily records were then transferred to a daybook or account ledger to balance the accounts and to create a permanent journal; then the waste book could be discarded, hence the name.


Process

The primary purpose of bookkeeping is to record the ''financial effects'' of transactions. An important difference between a manual and an electronic accounting system is the former's latency between the recording of a financial transaction and its posting in the relevant account. This delay, which is absent in electronic accounting systems due to nearly instantaneous posting to relevant accounts, is characteristic of manual systems, and gave rise to the primary books of accounts—cash book, purchase book, sales book, etc.—for immediately documenting a financial transaction. In the normal course of business, a document is produced each time a transaction occurs. Sales and purchases usually have
invoice An invoice, bill or tab is a commerce, commercial document issued by a sales, seller to a buyer relating to a sale transaction and indicating the product (business), products, quantities, and agreed-upon prices for products or Service (economic ...
s or
receipt A receipt (also known as a packing list, packing slip, packaging slip, (delivery) docket, shipping list, delivery list, bill of the parcel, manifest, or customer receipt) is a document acknowledging that a person has received money or propert ...
s. Deposit slips are produced when lodgements (deposits) are made to a
bank account A bank account is a financial account maintained by a bank or other financial institution in which the financial transactions between the bank and a customer are recorded. Each financial institution sets the terms and conditions for each type o ...
. Checks (spelled "cheques" in the UK and several other countries) are written to pay money out of the account. Bookkeeping first involves recording the details of all of these ''
source document A source document is a document in which data collected for a clinical trial is first recorded. This data is usually later entered in the case report form A case report form (or CRF) is a paper or electronic questionnaire specifically used in clin ...
s'' into multi-column ''journals'' (also known as ''books of first entry'' or ''daybooks''). For example, all credit sales are recorded in the sales journal; all cash payments are recorded in the cash payments journal. Each column in a journal normally corresponds to an account. In the single entry system, each transaction is recorded only once. Most individuals who balance their check-book each month are using such a system, and most personal-finance software follows this approach. After a certain period, typically a month, each column in each
journal A journal, from the Old French ''journal'' (meaning "daily"), may refer to: *Bullet journal, a method of personal organization *Diary, a record of what happened over the course of a day or other period *Daybook, also known as a general journal, a ...
is totalled to give a summary for that period. Using the rules of double-entry, these journal summaries are then transferred to their respective accounts in the
ledger A ledger is a book or collection of accounts in which account transactions are recorded. Each account has an opening or carry-forward balance, and would record each transaction as either a debit or credit in separate columns, and the ending or ...
, or ''account book''. For example, the entries in the Sales Journal are taken and a debit entry is made in each customer's account (showing that the customer now owes us money), and a credit entry might be made in the account for "Sale of class 2 widgets" (showing that this activity has generated revenue for us). This process of transferring summaries or individual transactions to the ledger is called ''posting''. Once the posting process is complete, accounts kept using the "T" format (debits on the left side of the "T" and credits on the right side) undergo ''balancing'', which is simply a process to Arrive at the balance of the account. As a partial check that the posting process was done correctly, a working document called an ''unadjusted trial balance'' is created. In its simplest form, this is a three-column list. Column One contains the names of those accounts in the
ledger A ledger is a book or collection of accounts in which account transactions are recorded. Each account has an opening or carry-forward balance, and would record each transaction as either a debit or credit in separate columns, and the ending or ...
which have a non-zero balance. If an account has a ''debit'' balance, the balance amount is copied into Column Two (the ''debit column''); if an account has a ''credit'' balance, the amount is copied into Column Three (the ''credit column''). The debit column is then totalled, and then the credit column is totalled. The two totals must agree—which is not by chance—because under the double-entry rules, whenever there is a posting, the debits of the posting equal the credits of the posting. If the two totals do not agree, an error has been made, either in the journals or during the posting process. The error must be located and rectified, and the totals of the debit column and the credit column recalculated to check for agreement before any further processing can take place. Once the accounts balance, the accountant makes a number of adjustments and changes the balance amounts of some of the accounts. These adjustments must still obey the double-entry rule: for example, the ''
inventory Inventory (American English) or stock (British English) refers to the goods and materials that a business holds for the ultimate goal of resale, production or utilisation. Inventory management is a discipline primarily about specifying the shap ...
'' account and asset account might be changed to bring them into line with the actual numbers counted during a stocktake. At the same time, the ''expense'' account associated with use of inventory is adjusted by an equal and opposite amount. Other adjustments such as posting
depreciation In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the a ...
and prepayments are also done at this time. This results in a listing called the ''adjusted trial balance''. It is the accounts in this list, and their corresponding debit or credit balances, that are used to prepare the financial statements. Finally
financial statement Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...
s are drawn from the trial balance, which may include: * the
income statement An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''stateme ...
, also known as the ''statement of financial results'', ''profit and loss account'', or ''P&L'' * the
balance sheet In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...
, also known as the ''statement of financial position'' * the
cash flow statement In financial accounting, a cash flow statement, also known as ''statement of cash flows'', is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to oper ...
* the statement of changes in equity, also known as the ''statement of total recognised gains and losses''


Single-entry system

The primary bookkeeping record in single-entry bookkeeping is the ''cash book'', which is similar to a checking account register (in UK: cheque account, current account), except all entries are allocated among several categories of income and expense accounts. Separate account records are maintained for petty cash,
accounts payable Accounts payable (AP) is money owed by a business to its suppliers shown as a liability on a company's balance sheet. It is distinct from notes payable liabilities, which are debts created by formal legal instrument documents. An accounts payable ...
and
accounts receivable Accounts receivable, abbreviated as AR or A/R, are legally enforceable claims for payment held by a business for goods supplied or services rendered that customers have ordered but not paid for. These are generally in the form of invoices raised b ...
, and other relevant transactions such as
inventory Inventory (American English) or stock (British English) refers to the goods and materials that a business holds for the ultimate goal of resale, production or utilisation. Inventory management is a discipline primarily about specifying the shap ...
and travel expenses. To save time and avoid the errors of manual calculations, single-entry bookkeeping can be done today with do-it-yourself bookkeeping software.


Double-entry system

A ''double-entry bookkeeping system'' is a set of rules for recording financial information in a
financial accounting Financial accounting is the field of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of financial statements available for public use. Stockholders, s ...
system in which every transaction or event changes at least two different nominal
ledger A ledger is a book or collection of accounts in which account transactions are recorded. Each account has an opening or carry-forward balance, and would record each transaction as either a debit or credit in separate columns, and the ending or ...
accounts.


Daybooks

A ''daybook'' is a descriptive and chronological (diary-like) record of day-to-day
financial transactions A financial transaction is an agreement, or communication, between a buyer and seller to exchange goods, services, or assets for payment. Any transaction involves a change in the status of the finances of two or more businesses or individuals. A ...
; it is also called a ''book of original entry''. The daybook's details must be transcribed formally into journals to enable posting to ledgers. Daybooks include: *Sales daybook, for recording sales invoices. *Sales credits daybook, for recording sales credit notes. *Purchases daybook, for recording purchase invoices. *Purchases debits daybook, for recording purchase debit notes. *Cash daybook, usually known as the cash book, for recording all monies received and all monies paid out. It may be split into two daybooks: a receipts daybook documenting every money-amount received, and a payments daybook recording every payment made. *General Journal daybook, for recording journal entries.


Petty cash book

A ''
petty cash Petty cash is a small amount of discretionary funds in the form of cash used for expenditures where it is not sensible to make any disbursement by cheque, because of the inconvenience and costs of writing, signing, and then cashing the cheque. ...
'' book is a record of small-value purchases before they are later transferred to the ledger and final accounts; it is maintained by a petty or junior cashier. This type of cash book usually uses the
imprest system The imprest system is a form of financial accounting. The most common is petty cash. The basic characteristic of an imprest system is that a fixed amount is reserved, which after a certain period of time or when circumstances require, because mo ...
: a certain amount of money is provided to the petty cashier by the senior cashier. This money is to cater for minor expenditures (hospitality, minor stationery, casual postage, and so on) and is reimbursed periodically on satisfactory explanation of how it was spent. The balance of petty cash book is
Asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value ...
.


Journals

'' Journals'' are recorded in the general journal daybook. A journal is a formal and chronological record of
financial transactions A financial transaction is an agreement, or communication, between a buyer and seller to exchange goods, services, or assets for payment. Any transaction involves a change in the status of the finances of two or more businesses or individuals. A ...
before their values are accounted for in the general ledger as
debits and credits Debits and credits in double-entry bookkeeping are entries made in account ledgers to record changes in value resulting from business transactions. A debit entry in an account represents a transfer of value ''to'' that account, and a credit en ...
. A company can maintain one journal for all transactions, or keep several journals based on similar activity (e.g., sales, cash receipts, revenue, etc.), making transactions easier to summarize and reference later. For every
debit Debits and credits in double-entry bookkeeping are entries made in account ledgers to record changes in value resulting from business transactions. A debit entry in an account represents a transfer of value ''to'' that account, and a credit en ...
journal entry recorded, there must be an equivalent
credit Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt) ...
journal entry to maintain a balanced accounting equation.


Ledgers

A ''
ledger A ledger is a book or collection of accounts in which account transactions are recorded. Each account has an opening or carry-forward balance, and would record each transaction as either a debit or credit in separate columns, and the ending or ...
'' is a record of accounts. The ledger is a permanent summary of all amounts entered in supporting Journals which list individual transactions by date. These accounts are recorded separately, showing their beginning/ending
balance Balance or balancing may refer to: Common meanings * Balance (ability) in biomechanics * Balance (accounting) * Balance or weighing scale * Balance as in equality or equilibrium Arts and entertainment Film * ''Balance'' (1983 film), a Bulgaria ...
. A journal lists
financial transactions A financial transaction is an agreement, or communication, between a buyer and seller to exchange goods, services, or assets for payment. Any transaction involves a change in the status of the finances of two or more businesses or individuals. A ...
in chronological order, without showing their balance but showing how much is going to be charged in each account. A ledger takes each financial transaction from the journal and records it into the corresponding account for every transaction listed. The ledger also sums up the total of every account, which is transferred into the
balance sheet In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...
and the
income statement An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''stateme ...
. There are three different kinds of ledgers that deal with book-keeping: *Sales ledger, which deals mostly with the accounts receivable account. This ledger consists of the records of the financial transactions made by customers to the business. *Purchase ledger is the record of the purchasing transactions a company does; it goes hand in hand with the Accounts Payable account.


Abbreviations used in bookkeeping

* A/c – Account * Acc – Account * A/R – Accounts receivable * A/P – Accounts payable * B/S – Balance sheet * c/d – Carried down * b/d – Brought down * c/f – Carried forward * b/f – Brought forward * Dr – Debit side of a ledger. "Dr" stands for "Debit register" * Cr – Credit side of a ledger. "Cr" stands for "Credit register" * G/L – General ledger; (or N/L – nominal ledger) * PL – Profit and loss; (or I/S – income statement) * P/L - Purchase Ledger (Accounts payable) * P/R - Payroll * PP&E – Property, plant and equipment * S/L - Sales Ledger (Accounts receivable) * TB – Trial Balance * GST – Goods and services tax * SGST- State goods & service tax * CGST- Central goods & service tax * IGST- integrated goods & service tax * VAT –
Value added tax A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of tax that is assessed incrementally. It is levied on the price of a product or service at each stage of production, distribution, or sale to the end ...
* CST – Central sale tax * TDS – Tax deducted at source * AMT – Alternate minimum tax * EBITDA – Earnings before interest, taxes, depreciation and amortisation * EBDTA – Earnings before depreciation, taxes and amortisation * EBT – Earnings before tax * EAT – Earnings after tax * PAT – Profit after tax * PBT – Profit before tax * Depr – Depreciation * Dep – Depreciation * CPO – Cash paid out * CP - Cash Payment * w.e.f. - with effect from * @ - at the rate of * L/F - ledger folio * J/F - Journal Folio * V.no.- voucher number * V/N - voucher number


Chart of accounts

A
chart of accounts A chart of accounts (COA) is a list of financial accounts set up, usually by an accountant, for an organization, and available for use by the bookkeeper for recording transactions in the organization's general ledger. Accounts may be added t ...
is a list of the accounts codes that can be identified with numeric, alphabetical, or alphanumeric codes allowing the account to be located in the general ledger. The equity section of the chart of accounts is based on the fact that the legal structure of the entity is of a particular legal type. Possibilities include ''sole trader'', ''partnership'', ''trust'', and ''company''.Marsden,Stephen (2008). Australian Master Bookkeepers Guide. Sydney: CCH


Computerized bookkeeping

Computerized bookkeeping removes many of the paper "books" that are used to record the financial transactions of a business entity; instead, relational databases are used today, but typically, these still enforce the norms of bookkeeping including the single-entry and
double-entry Double-entry bookkeeping, also known as double-entry accounting, is a method of bookkeeping that relies on a two-sided accounting entry to maintain financial information. Every entry to an account requires a corresponding and opposite entry t ...
bookkeeping systems.
Certified Public Accountant Certified Public Accountant (CPA) is the title of qualified accountants in numerous countries in the English-speaking world. It is generally equivalent to the title of chartered accountant in other English-speaking countries. In the United Sta ...
s (CPAs) supervise the internal controls for computerized bookkeeping systems, which serve to minimize errors in documenting the numerous activities a business entity may initiate or complete over an accounting period.


See also

*
Accounting Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "languag ...
*
Comparison of accounting software The following comparison of accounting software documents the various features and differences between different professional accounting software, personal and small enterprise software, medium-sized and large-sized enterprise software, and oth ...
* POS system: records sales and updates stock levels * Bookkeeping Associations * coordinate bookkeeper


References


External links


Guide to the Account Book from Italy 1515-1520
{{Authority control Accounting systems Accounting