Bookkeeping is an organized method of recording and maintaining a company’s financial transactions so that the company can maintain a sound financial management system. Bookkeeping and accounting seem to be the same, but have distinct features. In bookkeeping, the accountant focuses on maintaining records in journals and ledgers, whereas in accounting, the accountant analyzes, adjusts, and prepares financial reports. Due to modern accounting software, these traditional methods are blurred, which affects individuals with minimal bookkeeping or accounting training. Under this section of bookkeeping, we will understand the process of financial recording, to gain knowledge in managing the financial data, and improve the financial management values in current and future company roles.

What is Bookkeeping?

Bookkeeping is the process of keeping records of the financial transactions of a company on a regular basis in an organized accounting system. It is an essential factor of any bookkeeping and accounting process. With proper updated transaction records, any company can generate precise financial reports that support calculating the annual business performance of that company. Maintaining records also helps with tax audits.

Importance –

• Precise financial recording is crucial because business entities depend on it for both internal and external users, such as investors, financial institutions, or government bodies, as they are institutions that require reliable data to make better investment or lending decisions.
  
• With proper maintenance of financial records, companies are able to measure their performance by tracking accurate information from their books.
• It provides accurate information that is helpful in making strategic financial decisions and sets a standard for tracking revenue and income goals.

In short, when a business is set and running smoothly, it is crucial to maintain records. Whereas many small-scale companies don’t have a full-time accountant to keep a record of financial transactions because of cost, so they hire a bookkeeper or outsource the task to a professional firm. This ensures proper bookkeeping and accounting without requiring full-time staff.

What Do You Mean by Accounting?

Bookkeeping and Accounting both seem alike, but accounting is the process of keeping records and categorizing the company’s financial transactions, then outlining, analyzing, and documenting these activities. The final data is presented in the form of a balance sheet, revenue, and cash flow statement.

A financial accountant also forecasts and presents their report to the business leaders so they can: 

• Audit human resources and payroll
• Track inventory status
• Explore new business opportunities
• Improve financial performance
• Monitor cash flow
• Analyze business financial performance

Key Insights –

• Accounting includes a wide range of financial activities, such as maintaining financial records to measure the financial health of a company, revenue forecasting, managing taxes, and ensuring regulatory compliance.
• Business mostly uses three main types of accounting: financial, managerial, and cost accounting.
• US public corporations use a standard set of accounting rules and guidelines known as GAAP (Generally Accepted Accounting Principles).
• Use of proper bookkeeping and accounting methods ensures accuracy in financial reporting.

What is the Process of Accounting?

The accounting process cycle has eight steps to ensure the precision and compliance of financial reports. This is a standard process that all types of businesses follow. The length of the process depends on how often the business chooses to analyze its performance during the financial year.

Step 1 – Identifying Transactions

At the first stage, all the transactions must be recorded, whether it’s a sale, a refund, a debt payoff, a stock order, or a question of assets. It includes the detailed information of every transaction, such as date, cash inflow, and cash outflow. For the business using a POS (Point of Sale) system, sales transactions are recorded automatically.

Step 2 – Entering Transactions

After the transactions are recorded, they need to be entered in a journal entry. Journal is the current record of all business financial transactions, including dates of every transaction, the amount of money involved in each transaction, and the accounts involved in each transaction.

The timing of recording depends on the type of transaction. In cash accounting, transactions are recorded when cash is received or paid. In accrual accounting, the transactions are recorded when the revenue is earned and expenses are incurred, independent of cash flow.

While recording the transactions, it is essential to keep all the monetary values in chronological order. In case you are using double-entry accounting, mention two entries each time. For every transaction, both credit and debit must be mentioned. So that the credits balance debits and the overall total remains the same.

Step 3 – Entering Transaction into General Ledger

When the transaction is recorded in a journal entry, it needs to be entered in the general ledger. It is a traditional method of keeping the financial data of a business in a record system.

In the general ledger, all the accounting transactions are summarized and organized into subcategories: assets, liabilities, owners’ equity, revenues, and expenses. It helps to track bookkeeping and accounting data, i.e, the company’s owner equity, its spending, or how much it owes, more effectively.

Step 4 – Compiling a Trial Balance

When all the transactions are entered into the general ledger, the next step is to ensure that all the entries of credits and debits balance out. It is done by building the trial balance. A trial balance is a financial recording worksheet that lists the ledger balances in debit and credit account columns.

When the data is laid down in a financial record worksheet, it helps to match the credits to debits, and if they don’t match, this indicates there is an error. It is basically prepared at the end of the financial period, whether monthly, quarterly, or annually.

Step 5 – Reviewing the Worksheet

It is a phase when worksheets are reviewed to identify errors. If the debits and credits on the trial balance worksheet don’t match, the bookkeeper must identify the gaps and adjust them accordingly. Even a bookkeeper has to review repeatedly to find the missing transactions or the incorrect ones. This is a crucial step in both the bookkeeping and accounting processes.

Step 6 – Adjusting Accounts

If any mismatch or error is identified, an adjustment in the accounts is made. When a business uses accrual accounting, it needs to account for accruals, deferrals, and estimates, like an allowance for doubtful accounts.

In cash accounting, the transaction is recorded when it is made. Whereas, accruals are recorded when the payment is made after the goods or services are delivered. In this, the log date is the date when the service is provided, received, or earned. Deferrals are recorded when the payment is made before the goods or services are delivered.

Obviously, not all the goods and services are delivered in one day. Sometimes it may extend for over a week or months; in such cases, an adjusting journal entry is required. To keep track of whether it is accounted for correctly or not.

Step 7 – Preparing Financial Statements

After all the errors and gaps are identified and adjusted for the accounting period, the final steps include the preparation of financial statements. It should include the following templates:

Balance Sheet: In this, the record of the company’s assets, liabilities, and stakeholder equity is mentioned. It shows how much the company owns and owes, and the investment amount of stakeholders, with a time period.

Income Statement: It includes a company’s revenue, income, and expenses for a particular period. Through this, it is easy to calculate whether the company is in profit or loss.

Cashflow Statement: It indicates the movement of cash inflow and cash outflow of the business during the reporting period.

Step 8 – Closing the Books

After all the transactions are balanced and the preparation of financial statements is completed, it’s the last step to close the books. And it shows the company’s performance and its comparison with other accounting periods and competitors. On the next step of analysis, areas of improvement are identified and highlighted where the company has performed well. This last step ensures that the bookkeeping and accounting process is complete.

Importance of Accounting –

Accounting plays an important role in various business functions:

It supports the business to keep track of revenue, expenses, assets, liabilities, equity, cash inflow, and outflow. Also, to check whether the company has received the payments from customers and has paid its own due bills.

It provides businesses with clear insight that helps to plan the future strategy. For example, account managers can analyze accounts receivable to find out the delay in payment by the customers and adjust credit policies accordingly, or check the expenses report to find where the operational costs can be cut down to improve profitability.

Through accounting, the accountant may find investors and secure financing for the company. Lenders need proof that the business is profitable before they lend money to small or large enterprises. Investors also want to ensure that the company will give a potential return on their investments.

Also, accounting helps with tax and compliance. Presenting accurate financial reports is essential to the IRS for public companies. Whereas the public and private companies both are needed to show the quarterly tax estimates and yearly tax returns. If the tax reports are incorrect and subject to audit or fine from the government.

Difference Between Bookkeeping and Accounting –

Conclusion –

Bookkeeping is the backbone of every successful business; without it, it is impossible to develop strategies and make improvements in the major areas of an organization. The proper handling of bookkeeping and accounting ensures the company maintains accurate and up-to-date financial records. Effective maintenance of it allows the business to track its earnings and expenses, and overall profit and loss for the particular financial year. Hence, enables financial leaders to make strategic decisions while ensuring regulatory compliance. It plays a crucial role in audit and tax filing; without it, the company risks penalties or fines for disorganized records or delayed submissions. Hence, consistent and accurate maintenance of bookkeeping and accounting is essential for ensuring good financial health and long-term success of any organization.

Frequently Asked Questions (FAQs) –

1. Who are Bookkeepers?

Bookkeepers are professionals who are responsible for maintaining the books of accounts that include all the financial data. It is the responsibility of bookkeepers to properly manage the financial data of the company. The company gets a track record of all financial information on its books. With the help of this financial transactions record, the company can make all necessary strategic financial decisions on investing and operating.

Without the support of a bookkeeper, the company may not be able to understand its financial position.

2. What are the methods of bookkeeping?

The three methods of this system are the single-entry system and the double-entry system. The companies may choose any one type according to their use, or some companies use a combination of both.

1. Single Entry System

The single-entry system is a basic system to maintain a record of daily receipts or create weekly or daily statements of the company’s cash flow. In this system, the bookkeeper records one entry of every financial transaction. The entries are recorded on only one side of the transactions or activity. It maintains the records of purchases, sales, cash receipts, and payments. It is mainly used by small to medium-sized enterprises that have fewer transaction activities.

2. Double Entry System

The double-entry system involves the double-entry of each financial transaction. It balances the credit entries with the debit entries to ensure that the total transaction is correct. In this, for every credit entry, there must be a debit entry to cross-check the balance in the total transaction. It is non-cash-based, and the entry is made when the revenue is earned or a debit is incurred.

3. Cash-Based or Accrual-Based

In this method, we select whether to use cash-based or accrual-based bookkeeping. This decision depends on the company’s recognition of its income and expenses. 

In the cash-based bookkeeping method, you identify the receivable of cash into your company. Expenditure is identified when the cash is paid. In simple terms, when cash enters or exits the company’s account, it is identified in the books. In contrast, the buying or sales made on the credit side will not go into the book until the cash exchanges.

In the accrual method of bookkeeping, revenue is identified when the income is earned. Similarly, expenditure is identified when it occurs, generally in alignment with the corresponding revenue. The actual cash movement is not needed for recording a transaction. The credit-based sales and purchases are entered immediately.

Bookkeeping methods of single entry and double entry can be maintained either on the cash-based or accrual-based accounting methods. In general, the single-entry method serves as a basis of cash-based bookkeeping where each transaction is recorded once as either an inflow or an outflow of cash. Whereas the accrual basis accounting works more effectively with the double-entry system.

3. What are the five main accounts in bookkeeping?

In this, any financial transaction falls under these five basic categories of accounts.

• Assets: what the company owns, such as cash, accounts receivable, inventory, intellectual property, equipment, etc.
• Liabilities:  what the company has borrowed, such as loans, accounts payable, mortgages, current liabilities, etc.
• Equity: the owner’s shareholding or interest in the company, such as capital, retained earnings, and  owners’ withdrawals for personal use.
• Income: cash received after the sales of goods or services.
• Expenses: the cash paid for running the company, such as rent, salaries, utilities, supplies.

4. What is the main rule of bookkeeping?

The main rule of bookkeeping is as follows:

Each transaction must be entered correctly and accurately. As follows

• For each debit, there must be an entry of credit in the accounting, especially in double-entry bookkeeping.
• In simple terms, debit each expenditure and loss, and credit each income and gain.
• Debit whatever comes into the account and credit whatever goes out of the account.
• Each financial transaction needed to be documented with proof, such as receipts and invoices.
• Records must show the current financial position of the company.

5. What is a balance sheet in accounting?

A balance sheet is a financial statement of a company for a specific date or day. In simple terms, it reflects what the company owns, i.e, assets, what the company has borrowed, i.e, liabilities, and how much the company owner has in its stake, i.e, shareholding. 

The balance sheet is maintained by following the basic accounting equations:

Assets = Liabilities + Equity