What is Bookkeeping?
Bookkeeping or original books of entry is a component of accounting that interprets and analyzes the record of financial transactions to generate reports. It includes sales, earned revenue, payment of taxes, earned interest, payroll and other operational expenses, loans and investments. Business entities often display bookkeeping entries in forms called financial statements.
The financial statements focus on specific aspects of a company’s financial activities such as cash flow, assets or earned revenue and connected expenses.
The accounting period that a business entity chooses for its business becomes part of its bookkeeping system and is used to open and close the financial books. The accounting period affects all aspects of the company’s finances, including taxes and analysis of your financial history.
In most of the countries, the accounting period is the financial year which starts from 1st April and ends on 31st March of every year. In some countries like Middle East (UAE, Saudi, Bahrain etc) the calendar year is used as accounting period i.e. 1st January to 31st December.
Method of Bookkeeping
Business entities choose from two types of bookkeeping systems, although some entities use a combination of both.
The single-entry system of bookkeeping requires recording one entry for each financial activity or transaction. Single entry bookkeeping system is a basic system that a company might use to record daily receipts or generate a daily or weekly report of cash flow.
The double-entry system of bookkeeping requires double entry for each financial transaction. The double entry system provides checks and balances by recording corresponding credit entry for each debit entry. Double-entry system of bookkeeping is not cash-based. Transactions are entered when a debt is incurred or revenue is earned.
Method of accounts
The cash-based system of accounting records financial transactions when payment is made or received. This system recognizes revenue or income in the accounting period in which it is received and expenses in the period in which they are paid.
The accrual basis method, which is favoured under the generally accepted principals of accounting, record income in the accounting period in which it is earned and records expenses in the period incurred.
Posting entries and documentation
All Financial transactions undertaken by a business entity are posted in ledgers using the information from receipts and other documentation. Ledgers summarize the transactions recorded. Bookkeeping software usually includes customizable ledgers.
Most entities post financial transactions daily, while others post in batches or outsource the posting activity to accounting professionals. Posting entries on a regular basis helps in generating current financial statements or reports.
Financial transactions documentation is an important element of a company’s bookkeeping system. It requires maintaining files of receipts and other documents. The duration period for maintaining documentation records depends on your company policy and legal or tax requirements.
Influence of Bookkeeping on the chart of accounts
A business entity can create more comprehensive bookkeeping system when it includes accounts for each area of financial transactions. Financial accounts are grouped or categorized based on the nature of accounts or impact on the financial statements. This usually includes balance sheet accounts and income statement accounts.
Balance sheet accounts are assets, liabilities, and stockholder or owner equity. Income statement accounts are operating and non - operating revenues, expenses, gains and losses.