Bookkeeping is the art of recording business transactions in a systematic manner. However, bookkeeping has been defined in a variety of ways by different authors. Some of the definitions are given below:
- Bookkeeping is an activity concerned with the recording of financial data related to the business operations in a significant and orderly manner.
- The part of accounting that is concerned with recording data is often known as bookkeeping. (Frank wood)
- Book-keeping refers to the daily operation of an accounting system that is recording and classifying routine transactions. (Meigs & Meigs)
So, in simplified words “Bookkeeping” is an art of recording the business transactions in a prescribed manner in the books of accounts.
What is bookkeeping?
this is a very basic and very important question and deserves a very basic but important answer. “The process of correctly recording in books of account cash, credit and other transactions”.
What are books of account?
The primary book of account is called the ledger, so called because all transactions, after first being recorded in subsidiary books, are afterwards grouped or summarized in accounts in the ledger.
Why should goods are services be bought or sold on ‘credit’?
Almost all business dealings are conducted on a credit basis to avoid the inconvenience and danger of carrying large amounts of cash. The supplier of goods or services is usually content to accept payment at some further date. The main exception us the real trade for a private individual.
Why it is necessary to record these transactions?
Even in the smallest business the proprietor or manager will want to have accurate and up to date information about how much has been brought and sold, how much money has been received for sales, how much has paid away for purchases, etc. Private individuals often find it convenient to have the same information for their cash receipts and payments. You can imagine that with a very large business, chaos would quickly result without this information.
So bookkeeping really involves analyzing in some way or another these various transactions?
You could say it involves recording these transactions so as to permit analysis in a systematic fashion, in a way that can be applied to all businesses of whatever kind, and that is intelligible not only now but at any future time.
Do you mean by this the “double entry bookkeeping system”?
The term ‘books of account’ has a distinctly old-fashioned sound. It perhaps makes you think of a Charles Dickens novel set in early Victorian England, with rows of clerks perched on high stools writing in large books. Bookkeeping today is likely to be done with the aid of a computer rather than with handwritten books, and this is a virtual certainty in a business of any significance. Nevertheless, modern bookkeepers are doing exactly the same as the clerks in the Dickens novel, though they are doing it much more quickly and perhaps more accurately – though Victorian clerks achieved very high standards. (Whether or not they are any happier is a question for another book!)
The importance of bookkeeping
All businesses, without exception, need to keep accurate and readily accessible records of their financial transactions. Many organizations other businesses also need to do it, and some individuals too. As a child i had a neighbour who died at the age of 75 leaving records that accounted for every penny of his income and expenditures since his 21st birthday. Surprisingly he was a charming, generous man and in no way a miser. Perhaps you too have a personal bookkeeping system to record your own financial affairs, though I would not recommend taking it to these extreme lengths.
The benefits of business dependable financial records are probably self-evident. They include:
- The law requires all companies and many other organizations to prepare accounts that conform with certain criteria. This can only be done if the basic, supporting financial records are in place.
- The tax authorities require it. If you do not believe me, try telling Her Majesty’s Revenue and Customs that you cannot do a VAT return because you have not kept proper records.
- It is necessary to manage the bank account, cash and borrowing. Otherwise cheques night bounce or unproductive surplus build up.
- Intelligently used, the records should warn of impending financial difficulties or even insolvency.
- Intelligently used, the records should provide the basis for efficiency savings and profitable business decisions.
- Without proper bookkeeping, the owners would not know the worth of the business.
- It is, in many instances, essential in order to comply with money laundering regulations.