Bookkeeping is the systematic process of recording and documenting all financial transactions conducted by a business. Its purpose is to ensure accurate, timely, and comprehensive records of every financial activity. By maintaining proper books of accounts, a company fulfills its mandatory compliance obligations and establishes a reliable basis for preparing financial statements and reports.
Key points about bookkeeping:
- Systematic process: Bookkeeping involves the organized and methodical recording of financial transactions, ensuring that all relevant information is captured.
- Comprehensive record-keeping: Every financial activity, including purchases, expenses, and sales, must be recorded to provide a complete picture of the company’s financial transactions.
- Compliance obligations: Bookkeeping fulfills the legal requirements for financial reporting and tax compliance, ensuring that the company meets its regulatory obligations.
- Basis for financial statements: The information recorded in the books of accounts serves as the foundation for preparing financial statements, such as the balance sheet, income statement, and cash flow statement.
- Performance assessment: Accurate bookkeeping provides insights into a company’s financial performance, enabling management to evaluate its profitability, liquidity, and overall financial health.
- Informed decision-making: The information derived from bookkeeping helps business owners and managers make informed decisions, set financial goals, and develop strategies for growth.
- Manual or software-based: Bookkeeping can be carried out manually using journals or spreadsheets, or through accounting software like Tally, QuickBooks, or Xero.
Overall, bookkeeping is crucial for maintaining financial transparency, compliance, and informed decision-making within a business. It provides a clear record of financial transactions and facilitates the generation of financial reports and analysis that support strategic planning and management.
Advantages of Bookkeeping:
- Facilitates Planning: Comprehensive bookkeeping records enable easier planning and forecasting, providing insights into opportunities, profit and loss, and supporting informed decision-making.
- Detailed Recording: Bookkeeping ensures meticulous and up-to-date recording of all financial transactions, facilitating the preparation of accurate and complete financial statements.
- Compliance with Legal Requirements: Bookkeeping is mandatory in many jurisdictions, helping businesses remain compliant with legal obligations and avoid potential legal issues.
- Streamlines Financial Analysis: Detailed bookkeeping records reduce the time and effort required for financial analysis, enabling quicker generation of financial statements and reports.
- Enables Decision Making: Accurate bookkeeping provides a reliable basis for making informed business decisions by assessing the financial health of the company.
- Facilitates Tax Compliance: Proper bookkeeping ensures accurate recording of income, expenses, and other financial details, simplifying tax compliance and reporting.
- Supports Financial Control: Bookkeeping helps establish effective financial control mechanisms, allowing businesses to track income, expenses, and identify areas for improved financial management.
- Enhances Financial Transparency: Transparent and well-maintained books of accounts promote financial transparency, instilling confidence in stakeholders and supporting informed decision-making.
- Simplifies Audit Process: Properly documented and organized books of accounts simplify the audit process, saving time and effort for both the business and auditors.
- Provides Historical Reference: Bookkeeping creates a historical record of financial transactions, offering a valuable reference for future analysis, comparisons, and decision-making.
In summary, bookkeeping provides numerous advantages, including financial planning, compliance, streamlined analysis, informed decision-making, transparency, simplified audits, and historical reference for businesses.
The checklist/requirements for bookkeeping typically include:
- Monthly bank statements: Obtain and review the bank statements for each month, which provide a record of all financial transactions conducted through the business bank accounts.
- Sales invoices: Collect and organize all sales invoices issued by the business to its customers. These invoices document the sales made and serve as proof of revenue generated.
- Purchase invoices: Gather and maintain all purchase invoices received from suppliers and vendors. These invoices detail the expenses incurred by the business for purchasing goods or services.
- Expense vouchers and supporting documents: Keep track of expense vouchers, receipts, and other relevant details for business expenses. This includes items such as utility bills, office rent, travel expenses, and any other expenditure incurred by the business.
By ensuring the availability and accuracy of these documents, businesses can maintain comprehensive records of their financial transactions, which are essential for proper bookkeeping and generating accurate financial statements.
The process of bookkeeping involves the following steps:
- Analyzing financial transactions and classification: Examine and categorize the financial transactions according to their nature (e.g., sales, purchases, expenses). This step helps in identifying the appropriate accounts to record the transactions.
- Recording original journal entries: Create accurate and complete journal entries that reflect the dual-entry accounting system. Each entry should include a debit and a credit, properly allocating the amounts to the corresponding accounts.
- Posting entries to ledger accounts: Transfer the information from the journal entries to the respective ledger accounts. This step involves updating the account balances, considering the debits and credits associated with each transaction.
- Adjusting and closing entries at the end of the accounting period: Make necessary adjustments to the accounts to ensure accuracy and adherence to accounting principles. This may involve recording accruals, deferrals, depreciation, or other adjustments. Additionally, closing entries are made to transfer the temporary account balances (such as revenues and expenses) to the permanent equity accounts.
By following this systematic process, businesses can maintain organized and reliable financial records, enabling accurate reporting and analysis of their financial position and performance.
Key Deliverables:
- Books of Account: The primary deliverable of bookkeeping is the accurate and comprehensive maintenance of books of account, which includes recording all financial transactions of the business.
- Reconciliation Working Files: Bookkeeping involves the preparation of reconciliation working files, which help ensure that the recorded transactions match with supporting documents and external statements, such as bank statements or vendor invoices.
- Management Information System (MIS) Reports: Bookkeeping generates MIS reports that provide valuable financial information and analysis to management, enabling them to monitor the financial performance of the business and make informed decisions.
- Financial Statements: Bookkeeping serves as the foundation for the preparation of financial statements, such as the balance sheet, income statement, and cash flow statement. These statements present a clear picture of the financial position and performance of the business.
- Trial Balance: A trial balance is a key deliverable in bookkeeping, representing a list of all accounts and their balances at a specific point in time. It ensures that debits and credits are in balance and serves as an important step in the preparation of financial statements.
- General Ledger: The general ledger is a central component of bookkeeping, containing all accounts and transactions recorded chronologically. It provides a comprehensive overview of the financial activity of the business.
- Journals and Ledgers: Bookkeeping includes maintaining various journals, such as the cash book, purchase journal, sales journal, and general journal. These journals record specific types of transactions and are used to update the corresponding ledgers.
- Bank Reconciliation Statements: Bookkeeping involves the preparation of bank reconciliation statements, which compare the company’s recorded transactions with bank statements, ensuring accuracy and identifying any discrepancies.
- Financial Analysis Reports: Bookkeeping may also include the preparation of financial analysis reports that provide insights into the financial performance, profitability, liquidity, and other key aspects of the business.
- Compliance Documents: Bookkeeping generates compliance-related documents, such as tax returns, GST returns, and other statutory filings, ensuring adherence to legal and regulatory requirements.
These key deliverables of bookkeeping ensure accurate record-keeping, financial reporting, compliance, and provide valuable information for management decision-making.
What do you want to know?
A general ledger account is a record which is used to sort, store and summarize a company’s transactions.
Accounts payable is a current liability account in which a company records the money, it owes to suppliers or vendors for goods or services that it received on credit basis.
Account’s receivable is a current asset account in which a company records the money, it has a right to collect from customers who received goods or services on credit basis.
Petty cash fund is a small amount of money available for paying small expenses without writing a cheque.
For small companies it is expensive to hire full time bookkeeper who maintains all the financial records of the company. So small business can outsource this work, where professional bookkeepers maintain the books of records at a low cost. BN Advisories can help you with this.
This is the best option for small businesses to cut down on operational costs without compromising on quality and data privacy. You do not have to worry about frequent software updates or technical issues happening from time to time.
For Start-ups outsourcing is always better, as the founders do not need to worry about the compliances and company. BN Advisories can take care of it with full responsibility and the founders can focus on the business growth.
Yes, A CA is required to verify the entries done in the book of accounts. However, the entries can be performed by the bookkeeper.
When goods supplied are returned to the supplier due to goods (or services) not being up to the mark a credit note is issued. When extra goods being issued to the merchant a debit note is issued by the supplier.
Accrued income is representing revenue that has not yet invoiced. Prepaid income is advance payment received from the buyer.
Bank Reconciliation Statement is a statement which records differences between the bank statement and general ledger.