General Accounting and Book Keeping
Bookkeeping is the activity of systematic recording, classification, and summarization of financial transactions. Bookkeeping aims to achieve accuracy in financial records to keep correct records of income, expenses.
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Get Support AnytimeWhat is Bookkeeping in Accounting?
Bookkeeping in accounting refers to the systematic recording, classification, and summary process, of financial transactions to maintain specific financial files for a company or a person. It is a question of documenting each transaction, including sales, purchases, receipts, and payments, in a coherent and organized manner. Bookkeeping thus ensures that data capture is current and hence always ready for both financial reporting and budgetary and strategic planning purposes.
The key activities include maintaining the journal and ledger, reconciling bank statements, accounts payable and receivable, and the preparation of a balance sheet and income statement. Good bookkeeping further assists in cash flow management, initiates control over expenditure, and facilitates compliance with tax obligations. Bookkeeping will also support decision-making by ensuring full visibility of the financial status and operational effectiveness. Overall, bookkeeping itself is crucial to make financial management accurate and forms the basis upon which more complex accounting tasks are built.
Types of Bookkeeping in Accounting Systems
| Feature/Type | Single-Entry Bookkeeping | Double-Entry Bookkeeping | Manual Bookkeeping | Computerized Bookkeeping |
| Definition | Records each transaction once as income or expense. | Records each transaction in at least two accounts (debit and credit). | Transactions are recorded by hand in physical books. | Uses accounting software to record and manage transactions. |
| Complexity | Simple | Complex | Varies from simple to complex | Varies from simple to complex |
| Primary Users | Small businesses, sole proprietors | Businesses of all sizes, more complex setups | Small businesses, individuals | Businesses of all sizes, individuals |
| Transactions Recorded | Once (either as income or expense) | Twice (debit and credit) | Once, by hand | Twice (debit and credit) |
| Accuracy | Less accurate, higher risk of errors | More accurate, errors offset by balancing | Can be prone to human error | Highly accurate, error reduction through automation |
| Financial Overview | Limited, less detailed | Comprehensive, detailed | Limited to the complexity of manual entry | Comprehensive, detailed, with advanced features |
| Time Consumption | Low, quick entries | Higher, due to complexity | High, manual entry is time-consuming | Low to moderate, depending on software and setup |
| Error Detection | Less sophisticated | Advanced through balanced accounts | Depends on manual review | Automated checks and reconciliations |
| Reporting | Basic financial reports | Detailed reports and statements | Basic, depends on manual effort | Advanced, customizable reports |
| Reconciliation | Less systematic | Systematic, due to the balanced equation | Manual, time-consuming | Automated, efficient |
| Cost | Low, minimal cost for records | Varies, and may require professional expertise | Low to moderate, depending on the difficulty | Moderate to high, cost of software and potential subscriptions |
| Scalability | Limited | Highly scalable | Limited, less practical for large businesses | Highly scalable, suitable for growing businesses |
| Software Examples | N/A | N/A | N/A | QuickBooks, Xero, Sage, FreshBooks |
| Integration | Limited | Possible, with accounting software | Limited to manual entry and tracking | High, with other business tools and systems |
Principles of Bookkeeping in Accounting
The basic principle of bookkeeping in accounting is the monotonous recording of the financial transactions of the business. The bookkeeping principles promise that all financial transactions are inclusive and updated and provide the required information for the preparation of accounts. The following are the principles of bookkeeping:
Revenue Principle: The revenue principle gives the timing when the bookkeeper can recognize a transaction as revenue on the books of account. According to the principle, a transaction is recorded as revenue earned about the business upon point of sale.
The revenue principle states that the revenue occurs at such a time when the business/buyer takes legal possession of the item/goods sold or the time when the service is performed. It implies that revenue occurs for business when the goods are received, or the services are performed irrespective of the time of payment for the transaction to the seller. This concept is also known as the revenue recognition principle.
Expense Principle: The expense principle states the timing of recording of a transaction as an expense in the books of account. Any expense of the business occurs at the time it accepts goods or services from another entity/seller. It simply means that the expenses arise on the receipt, relation, or performance of services, no matter when the bills or payments are made for the transaction.
Matching Principle: This is the principle that when the bookkeeper is recording revenues, all the expenditures related to such a recording should also be recorded in the same period. Thus, the stock is charged to the cost of the goods sold in the same period that the revenue from the sale of the inventory items is recorded.
Cost Principle: It states that the historical cost of an item should be used in the books of accounts and not the resell cost. For example - If a business owns property or vehicle, these assets should be recorded at their historical costs and not the current fair market value of the property.
Objectivity Principle: The objective principle indicates that only the verifiable factual data in the books of accounts must be used and not the subjective measurement of values. Even when the subjective data appears better than the verifiable data, only the verifiable data must always be used.
Benefits of Bookkeeping in Accounting
- Accurate Financial Recordkeeping: Bookkeeping ensures that the financial transactions are correctly recorded. It helps in keeping the financial statements and reports correct and, simultaneously, facilitates a proper understanding of the financial position of the business through those financial statements and reports.
- Tax Obedience: Proper bookkeeping regularly helps any business to obey the policy and laws of taxation by maintaining records in order. It facilitates the preparation of tax returns and helps avoid penalties or audits.
- Improved financial management: Through bookkeeping, cash flows are noticed through records of expenses, revenues, and other financial activities that take place, hence enabling a business to make sensible financial decisions that improve its budget.
- Better Decision-Making: With reliable, timely financial data, businesses will analyze performance and trends and make strategic decisions based on trustworthy information.
- Easier Financial Reporting: Preparation of balance sheets, income statements, and cash flow statements for internal management and external parties becomes much easier with conventional accounting.
- Fraud Detection: It helps to easily observe discrepancies and different types of abnormalities that may indicate fraud practices or financial mismanagement.
- Smoother Audits: Properly kept books of accounts ensure ease during financial audits since all required information can be compiled and is present, hence reducing stress and possible hitches during the audit process.
- Informed Business Planning: Accurately kept financial records allow one to foresee and plan on a realistic basis regarding future conditions and performance of the business.
Documents required for bookkeeping
Comprehensive list of documents required:
| Category | Documents Required | Description |
| Financial Statements | Balance Sheet | Assets, liabilities, and equity are shown. |
| Income Statement (Profit & Loss Statement) | Revenue, expenses, and profit or loss are listed. | |
| Cash Flow Statement | Details cash inflow and outflow. | |
| Transaction Records | Invoices | Issued to customers, received from vendors. |
| Receipts | Proof of the payments made or received. | |
| Bank Statements | Reconciling the transactions and verification of balances. | |
| Credit Card Statements | Tracking business credit cards transactions. | |
| Purchase Orders | Documenting orders for goods or services. | |
| Sales Receipts | Proof of sales transaction. | |
| Payroll Records | Payroll Reports | Details of employee wages, hours worked, and deductions. |
| Tax Forms | W-2s, 1099s, and other tax documents for employees and contractors. | |
| Timesheets | Records of hours worked by employees. | |
| Tax Documents | Tax Returns | Federal, state, and local tax returns. |
| Supporting Tax Documentation | Records that substantiate deductions and credits taken. | |
| Expense Reports | Expense Claims | Records of business use of a car or other vehicle. |
| Travel and Entertainment Receipts | Records of business use of an airplane. | |
| Contracts and Agreements | Leases | Records of business travel and entertainment expenses. |
| Service Contracts | Rental agreements for office space or equipment. | |
| Loan Agreements | Vender/contractor agreements. | |
| Bank and Credit Card Reconciliations | Reconciliation Statements | Documentation for loans or lines of credit made to or from the business. |
| Asset Records | Depreciation Schedules | Verify records agree with bank statements and credit card statements. |
| Asset Purchase Invoices | Fixed asset purchase records to compute depreciation. | |
| Financial Policies and Procedures | Accounting Policies | Equipment, machinery and/or vehicle purchase records. |
| Internal Controls | Accounting policies and procedures regarding financial transaction recording and reporting. | |
| Miscellaneous | Correspondence | Asset control policies and procedures. |
| Insurance Policies | Correspondence with clients, vendors, and financial institutions. | |
| Electronic Records | Digital Backups | Business insurance-related documents. |
| Accounting Software Data | Soft copies of hard documents. |
Procedure of Bookkeeping in Accounting
- Source Document Collection: First, gather source documents, which include but are not limited to invoices, receipts, and bank statements, required to support the financial transaction with evidence of its accuracy in accounting.
- Transaction Analysis: After gathering these documents, they are analysed to identify the accounts that would be affected and the nature of each transaction, whether it is a debit or credit; hence, the financial effect is rightly identified.
- Recording of Entries: The details obtained from the transaction analysis are written in the accounting records, which means writing down the data on journals and ledgers either manually or on a computer. Of course, recording should be accurately done to keep financial records up to date.
- Posting to General Ledger: The entries recorded in the journals are then posted to the general ledger. The general ledger contains all transactions of accounts, which shows the overall picture of an account.
- Preparing the Trial Balance: After this step, a trial balance is prepared to make the total debits equal to the total credits. This helps to review any discrepancies or errors in the recording process further so that the books are balanced.
- Adjusting Entries: Accrued revenues, deferred expenses, and all that need correction are adjusted. These adjustments allow the financial records to show the accurate financial position of an entity concerned.
- Preparation of Financial Statements: The financial statements are prepared with the assistance of a modified trial balance. These statements reflect a representation of the company's financial health, its performance, and the capability with which it can meet its short-term obligations.
- Review and Audit: Financial statements are reviewed and audited to check their accuracy and completeness. This review can be done internally by the company's staff or by independent auditors to ensure that a company follows accounting rules and regulations.
Why Corpseed?
Corpseed makes the work of accounting and bookkeeping very easy; it automates the tasks, maintains a record accurately, showing updated reports. Our tools, as they save time and effort, support preparation of tax and compliance with rules.
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Frequently Asked Questions
Quick answers to common questions about this service.
Why is accounting important to companies?
Accounting assures that all the financial transactions are accurate, hence this is important in the financial statement, tax preparation, and decisions.
What is a double-entry bookkeeping?
Double-entry bookkeeping is a system wherein every transaction is recorded in at least two accounts. One is speed and the other one is balance which provides an accounting equation
What is cash accounting?
Income only when cash is received and expenses only when funding is paid out. This is simple but may not reflect the true financial status.
How often should the financial statements be prepared?
Financial statements are prepared monthly, quarterly, and annually depending on the needs of the business concerned and also regulatory requirements
What is the chart of account?
A chart of accounts refers to the listing of all those accounts that are part of the accounting system and through which the financial transactions of a business are classified into assets, liabilities, equity, revenues, and expenses.
What is a general ledger?
The general ledger reflects the summary of all the transactions of the company that have taken place from its commencement date to the current date. It maintains a record of all the accounts along with their current balances.
What is the role of a bookkeeper?
A bookkeeper needs to record transactions in a ledger, reconcile all the accounts, make payrolls, make different financial reports, and check if their financial records are current as well as accurate.
What is a bank reconciliation?
Bank reconciliation is a system through which a company coordinates its books with the bank statement so that discrepancies can be accounted for.
What is the meaning of accounts payable and accounts receivable?
- Accounts Payable: Those credit amounts one owes to various suppliers or vendors due to goods delivered and services rendered
- Accounts Receivable: Those amounts owed to one's company by customers due to goods delivered and services rendered.
In what way does cash basis accounting differ from accrual basis accounting?
- Cash Basis Accounting: recognizes income or expenses only when cash is actually received or paid.
- Accrual Basis Accounting: it records the income and expenses when earned and incurred respectively, without considering if the cash has changed hands.
How is accounting different from auditing?
While accounting relates to the proper recording and summarizing of financial transactions, auditing process mainly comprises the independent examination of the truthfulness of financial statements regarding their compliance with accounting standards.
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