Bookkeeping is essential for a business. It is the process of recording the everyday financial
transactions of a company in an organized way.
Thus, bookkeeping involves recording every sale, purchase, payments, or other financial
transactions of a business. It enables the company to assess its financials.
Bookkeeping is a part of the overall accounting process. As such, it is necessary for businesses of
Not only for businesses, but bookkeeping is also necessary for individuals and non-profit
Benefits of Bookkeeping
The primary benefit of bookkeeping is to get an accurate understanding of a business’s financial position. As it tracks every penny spent, it lets the business know about its incoming and outgoing money. Based on the information, it can make proper investment decisions, set financial targets or goals, etc.
Bookkeeping is also necessary for external users, such as investors, creditors, financial institutions, and the government. They need reliable data regarding a business’s financial status to make their investment decisions. The government uses the data to check for any fraudulent activities.
As it involves tracking every transaction that occurred in a day, it demands attention to detail. The person employed to handle bookkeeping is known as a bookkeeper.
Do not confuse a bookkeeper with an accountant. There is a thin distinction between the two. While the bookkeeper records day-to-day financial transactions, an accountant provides a financial statement of the business based on the data from bookkeeping.
Tasks of a Bookkeeper
The work of a bookkeeper is to record every financial transaction of business. As such, the bookkeeper has to track and record daily the following:
- Invoices or receipts – money received through sales
- Deposit slips – money deposited into bank accounts
- Loan payments
- Expenses – Payment to suppliers and other expenses
- Tax payments
The bookkeeper records all these transactions into the accounting books or an accounting system. Each transaction must be supported by a document such as a sales receipt, a seller invoice, bank payment slips, etc. The reports thus provide an audit trail of the transactions and keep the account records up-to-date.
All the financial transactions of a business are recorded in a general ledger. The bookkeeper enters the details of each financial transaction in this ledger.
In the ledger, financial transactions are divided into assets, liabilities, equities, revenues, and expenses.
Businesses employ double-entry bookkeeping in general ledger to detect errors in financial entries.
In the double-entry bookkeeping system, every financial transaction requires two entries. One is the debit entry, and the other is credit entry. In the account ledger, the entries are noted in two columns – debit entries on the left and credit entries on the right.
If there is any mismatch between the sum of debits and credits at account ledger, there is an error, and the trial balance gets affected.
A business must maintain error-free accounting records and credible financial statements. Bookkeeping will help achieve both by tracking and recording every financial transaction daily. Thus, bookkeeping is a business imperative.