• Bookkeeping

We often use the terms accounting and bookkeeping interchangeably. However, bookkeeping is actually just one part of the accounting process which deals with the recording of the transactions. So let us learn about book-keeping and its differences with accounting.

Bookkeeping is the activities concerned with the systematic recording and classification of financial data of an organization in an orderly manner. It is essentially a record-keeping function done to assist in the process of accounting . It is a key component in forming the financial statements of the organization at the end of the financial year.

Bookkeeping also concerns itself with the classification of financial transactions and events. Such classification of transactions is essential to maintain proper financial accounts. It also involves preparing source documents for the financial transactions and other business operations being carried out.

There are many methods of book-keeping. The most common ones are the double-entry system and the single-entry system. But even methods other than these, which involves the process of recording financial transactions in any manner are acceptable book-keeping systems or processes.

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Browse more Topics under Meaning And Scope Of Accounting

  • Meaning of Accounting
  • Objectives and Functions of Accounting
  • Sub-fields of Accounting
  • Limitations of Accounting
  • Functions of an Accountant

Objectives of Bookkeeping

The main objective of book-keeping is to keep a complete and accurate record of all the financial transactions in a systematic orderly, logical manner. This ensures that the financial effects of these transactions are reflected in the books of accounts .

Then the second main objective is to ascertain the overall effect of all recorded transactions on the final statement of the company. Book-keeping will eventually ascertain the final accounts of the company, namely the Profit and Loss Account and the Balance Sheet .

Need for Bookkeeping

One of the main reasons for bookkeeping is so records can be maintained to show the financial position of each and every head/account of income and expenditure. Through book-keeping, detailed information about each expense or income could be obtained instantaneously.

Say for example a company makes sales in both cash and credit. Each of these sale transactions will be recorded. When a credit sale is made, the creditor’s account will be recorded. So at any time, the management of the company can determine which creditors owe them how much money by just looking at the records/accounts.

Also, the maintenance of books of accounts and financial statements is a legal requirement in many cases. In the case of companies or banks or insurance companies, there are acts that require such firms to keep and maintain financial records. In such a case, book-keeping becomes mandatory.

Activities of Bookkeeping

Book-keeping comprises of a lot of functions and activities bundled together. Some such activities are

  • Recording all financial transactions
  • Posting debit and credits in the respective ledgers
  • Producing and organizing all source documents such as invoices
  • Payroll accounting and upkeep may also be clubbed in with book-keeping

Bookkeeping vs. Accounting

Solved question for you.

Q: Book-keeping is an analyzing function. True or False?

Ans : False. Book-keeping is actually a recording function. The analysis is done during accounting.

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Bookkeeping – Definition, Importance, Types & Methods

write an essay on the purpose of bookkeeping

What is bookkeeping and why is it important?

Bookkeeping is the process of recording your company’s financial transactions into organized accounts on a daily basis. It can also refer to the different recording techniques businesses can use. Bookkeeping is an essential part of your accounting process for a few reasons. When you keep transaction records updated, you can generate accurate financial reports that help measure business performance. Detailed records will also be handy in the event of a tax audit.

This guide will walk you through the different methods of bookkeeping, how entries are recorded, and the major financial statements involved.

Methods of bookkeeping

Before you begin bookkeeping, your business must decide what method you are going to follow. When choosing, consider the volume of daily transactions your business has and the amount of revenue you earn. If you are a small business, a complex bookkeeping method designed for enterprises may cause unnecessary complications. Conversely, less robust methods of bookkeeping will not suffice for large corporations.

With this in mind, let’s break these methods down so you can find the right one for your business.

Single-entry bookkeeping

Single-entry bookkeeping is a straightforward method where one entry is made for each transaction in your books. These transactions are usually maintained in a cash book to track incoming revenue and outgoing expenses. You do not need formal accounting training for the single-entry system. The single-entry method will suit small private companies and sole proprietorships that do not buy or sell on credit, own little to no physical assets, and hold small amounts of inventory.

Double-entry bookkeeping

Double-entry bookkeeping is more robust. It follows the principle that every transaction affects at least two accounts, and they are recorded as  debits and credits . For example, if you make a sale for $10, your cash account will be debited for $10 and your sales account will be credited by the same amount. In the double-entry system, the total credits must always equal the total debits. When this happens, your books are “balanced.”

Using the double-entry method for bookkeeping makes more sense if your business is large, public, or buys and sells on credit. Enterprises often choose the double-entry system because it leaves less room for error. In a way, it ‘double-checks’ your books because each transaction is recorded as two matching but offsetting accounts.

Cash-based or accrual-based

The next step is choosing between a  cash or accrual basis for your bookkeeping. This decision will depend on when your business recognizes its revenue and expenses.

In  cash-based, you recognize revenue when you receive cash into your business. Expenses are recognized when they are paid for. In other words, any time cash enters or exits your accounts, they are recognized in the books. This means that purchases or sales made on credit will not go into your books until the cash exchanges.

In the accrual method, revenue  is recognized when it is earned. Similarly, expenses are recorded when they are incurred, usually along with corresponding revenues. The actual cash does not have to enter or exit for the transaction to be recorded. You can mark your sales and purchases made on credit right away.

Both a cash and accrual basis can work with single- or double-entry bookkeeping . In general however, the single-entry method is the foundation for cash-based bookkeeping. Transactions are recorded as single entries which are either cash coming in or going out. The accrual basis works better with the double-entry system.

How to record entries in bookkeeping

Generating financial statements like balance sheets, income statements, and cash flow statements helps you understand where your business stands and gauge its performance. For these reports to portray your business accurately, you must have properly documented records of your transactions. Keeping these records as current as possible is also helpful when reconciling your accounts.

Recording transactions begins with source documents like purchase and sales orders, bills, invoices, and cash register tapes. Once you gather these documents, you can record the transactions using journals, ledgers, and the trial balance . If you are a very small company, you may only need a cash register. The information can then be consolidated and turned into financial statements.

C ash registers

A cash register is an electronic machine that is used to calculate and register transactions. Usually, cash registers are used to record cash flow in stores. The cashier collects the cash for a sale and returns a balance amount to the customer. Both the collected cash and balance returned are recorded in the register as single-entry cash accounts. Cash registers also store transaction receipts, so you can easily record them in your sales journal.

Cash registers are commonly found in businesses of all sizes. However, they aren’t usually the primary method of recording transactions because they use the single-entry, cash-based system of bookkeeping. This makes them convenient for very small businesses but too simplistic for enterprises.

The journal

The journal is called the book of original entry. It is the place where a business chronologically records its transactions for the first time. A journal can be either physical (in the form of a book or diary), or digital (stored as spreadsheets, or data in accounting software). It specifies the date of each transaction, the accounts credited or debited, and the amount involved. While the journal is not usually checked for balance at the end of the fiscal year, each journal entry affects the ledger. As we’ll learn, it is imperative that the ledger is balanced, so keeping an accurate journal is a good habit to keep. This form is useful for double-entry bookkeeping.

A ledger is a book or a compilation of accounts. It is also called the book of second entry. After you enter transactions in a journal, they are classified into separate accounts and then transferred into the ledger. These records are transcribed by accounts in the order: assets, liabilities, equity, income, and expenses. Like the journal, the ledger can also be physical or electronic spreadsheets.

A ledger contains a chart of accounts, which is a list of all the names and number of accounts in the ledger. The chart usually occurs in the same order of accounts as the transcribed records.

Unlike the journal, ledgers are investigated by auditors, so they must always be balanced at the end of the fiscal year. If the total debits are more than the total credits, it’s called a debit balance. If the total credits outweigh the total debits, there is a credit balance. The ledger is important in double-entry bookkeeping where each transaction changes at least two sub-ledger accounts.

Trial balance

The trial balance is produced from the compiled and summarized ledger entries. The trial balance is like a test to see if your books are balanced. It lists the accounts exactly in the following order: assets, liabilities, equity, income, and expenses with the ending account balance.

An accountant usually generates the trial balance to see where your business stands and how well your books are balanced. This can then be cross-checked against ledgers and journals. Imbalances between debits and credits are easy to spot on the trial balance. It is not always error-free, though. Any miscalculated or wrongly-transcribed journal entry in the ledger can cause an incorrect trial balance. It is best to look out for errors early, and correct them on the ledger instead of waiting for the trial balance at the end of the fiscal year.

Financial statements

The next, and probably the most important, step in bookkeeping is to generate financial statements. These statements are prepared by consolidating information from the entries you have recorded on a day-to-day basis. They provide insight into your company’s performance over time, revealing the areas you need to improve on. The three major financial reports that every business must know and understand are the cash flow statement, balance sheet, and income statement.

The cash flow statement

The cash flow statement is exactly what its name suggests. It is a financial report that tracks incoming and outgoing cash in your business. It allows you (and investors) to understand how well your company handles debt and expenses. By summarizing this data, you can see if you are making enough cash to run a sustainable, profitable business.

The balance sheet

The balance sheet  reports a business’ assets, liabilities, and shareholder’s equity at a given point in time. In simple words, it tells you what your business owns, owes, and the amount invested by shareholders. However, the balance sheet is only a snapshot of a business’ financial position for a particular date. It must be compared with balance sheets of other periods as well. The balance sheet allows you to understand the liquidity and financial structure of your business through  analytics like current ratio, asset turnover ratio, inventory turnover ratio, and debt-to-equity ratio.

The income statement

The income statement ,  also called the profit and loss statement, focuses on the revenue gained and expenses incurred by a business over time. There are two parts in a typical income statement. The upper half lists operating income while the lower half lists expenditures. The statement tracks these over a period, such as the last quarter of the fiscal year. It shows how the net revenue of your business is converted into net earnings which result in either profit or loss. The income statement does not focus on receipts or cash details.

Bank reconciliation

Bank reconciliation is the process of finding congruence between the transactions in your bank account and the transactions in your bookkeeping records. Reconciling your bank accounts is an imperative step in bookkeeping because, after everything else is logged, it is the last step to finding discrepancies in your books. Bank reconciliation helps you ensure that there is nothing amiss when it comes to your money.

Why is it mandatory?

Bank reconciliation is a must because it:

  • Provides the exact financial situation of your company
  • Tracks cash flow accurately
  • Helps detect fraud or bank errors

Stay on top of your bookkeeping

Proper bookkeeping drives your company to success. It is a foundational accounting process, and developing strategies to improve core areas of your business would be nearly impossible without it. Yet as important as bookkeeping is, implementing the wrong system for your company can cause challenges. Some companies can still use manual methods with physical diaries and paper journals. However, as technology gets more and more advanced, even smaller companies could get benefits from going digital. This is where a cloud bookkeeping solution like Zoho Books comes in. Zoho Books helps you keep accurate records of your business finances. It provides quicker and easier solutions for cash management, accounts payable/receivable, bank reconciliation, and generating financial statements. Further, its built-in automation takes care of mundane accounting tasks and helps you focus more on your business. Try our bookkeeping software for free and see how it can help your business maintain perfect bookkeeping records.

Related Posts

  • 'It's a match!': A simple guide on how to do bank reconciliation
  • Difference between single entry and double entry bookkeeping
  • What Are the Different Accounting Methods?
  • What is Journal & Ledger in Accounting and Bookkeeping?

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What Is Bookkeeping? Definition, Tasks, Terms to Know

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Table of Contents

The evolution of bookkeeping

What is a bookkeeper’s job, what is the difference between bookkeeping and accounting, common bookkeeping terms.

Bookkeeping is broadly defined as the recording of financial transactions for a business. It’s a key component of the accounting process and can be done as frequently as daily, weekly or monthly. Accurate bookkeeping is vital to filing tax returns and having the financial insights to make sound business decisions.

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Modern bookkeeping was formally established in the late 15th century when Italian mathematician and Franciscan monk Luca Pacioli described double-entry bookkeeping in his book, “Summary of Arithmetic, Geometry, Proportions and Proportionality.”

While the basics of accounting haven’t changed in over 500 years, the practice of bookkeeping has. Bookkeeping was once done manually using actual books called journals and ledgers. Because bookkeeping is based on double-entry accounting , each transaction affects two accounts — one gets debited and the other is credited. These debits and credits had to be manually recorded and balanced.

The advent of accounting software significantly lessened the tediousness of bookkeeping by handling debits and credits for you in the background. And technologies like optical character recognition (OCR) and bank feeds have come just short of fully automating the traditional bookkeeping process. Data entry can now happen as soon as you snap a photo of a receipt with your smartphone. And reconciliations happen almost in real time through daily bank feed maintenance, making the end-of-month closing process a snap. Now one bookkeeper can manage the bookkeeping for several businesses in fewer than eight hours a day.

» MORE: Bookkeeping 101: A crash course in small-business bookkeeping

Bookkeeping means different things to different people. Some bookkeepers focus solely on “write up” work, which basically consists of compiling the books quickly, usually for tax preparation purposes. Other bookkeepers provide “full-charge” services and can even serve as a financial controller for your company.

Full-charge bookkeeping tasks can be broken down into four broad categories.

1. Data entry

Data entry involves entering your business’s transactions into your bookkeeping system. As mentioned above, a lot of the data entry now happens automatically, either through OCR or bank feeds.

There's more to data entry than just putting the numbers into your software, though. Proper data entry includes:

Source document verification: This step usually gets skipped when doing your bookkeeping solely from bank feeds. Ideally, you want to make sure your data entry comes not from the bank feed, but from source documents like receipts or bills. This ensures that only valid business transactions are being entered into your books. Today’s bookkeeping software allows you to snap a photo of or scan in your source documents, and then OCR technology will extract the pertinent information and do much of the data entry for you. This means you can maintain source document verification while still taking advantage of the time-saving technology of your accounting software.

Accurate classification of transactions: Each entry into your bookkeeping system impacts at least two accounts in your business’s chart of accounts . Proper data entry — or data management if you rely on automation for your data entry — ensures that transactions are being posted to the correct accounts. Accurate classification of transactions enables you to produce financial management reports that can be used to make strategic business decisions.

Accurate identification of transactions: One downfall of some bookkeeping software is that the artificial intelligence behind it can make mistakes a human wouldn’t make while entering the data. The most common of these mistakes is assigning the wrong payee name to a transaction. You must make sure your transactions are being identified correctly. This is especially important for payments you make to vendors who will need a 1099 form at the end of the tax year.

2. Office management

Often, office management tasks like customer billing, paying vendors and payroll are considered to be bookkeeping tasks. Although accounts receivable, accounts payable and payroll do impact your books, some of these tasks can be managed by a person in your company other than your bookkeeper. Others, like payroll, can be outsourced to independent companies that specialize in the task.

If your bookkeeper bills your customers or pays your vendors and employees, make sure you have proper checks and balances in place to mitigate the possibility of fraud.

3. End-of-period closing

Your books should be closed at the end of each accounting period. End-of-period closing includes:

Reconciling all bank, credit card and loan accounts.

Reconciling accounts payable and accounts receivable.

Making any adjusting journal entries for prepaid revenue or expenses, depreciation or other unusual transactions.

Reviewing the financial statements for accuracy and completeness.

Locking the books so they can’t be changed after the end-of-period closing has been completed (optional, but highly recommended).

4. Internal management reports

Only an accountant licensed to do so can prepare certified financial statements for lenders, buyers and investors. However, your bookkeeper can generate internal management reports for your business.

There are three common reports your bookkeeper can prepare:

Your balance sheet is a snapshot of your assets, liabilities and equity as of a certain date.

Your income statement (also known as a profit and loss statement) details your business’s income and expenses for a period of time (a month, quarter, year, etc.). It shows whether your business has earned a profit or experienced a loss.

Your cash flow statement reconciles the income statement to the balance sheet and answers the question, “Where did the cash go?” for accrual-basis businesses.

Your bookkeeper might also prepare other auxiliary reports for your business, like accounts payable and accounts receivable aging reports . You can use these to make business decisions, but they should not be presented as audited, certified or official financial statements.

It’s important to note that not all lenders and investors require certified or audited financial statements. However, it’s still a good idea to ask an accountant to review your bookkeeper’s financial statements for accuracy and completeness prior to submitting them to a third party for consideration. And even if you’re not looking for funding, consider asking an accountant to review your financial statements at least once a year.

» MORE: Best online bookkeeping services

Bookkeeping is largely concerned with recordkeeping and data management. Bookkeepers make sure the information in the books is accurate and that the books are reconciled each month. In essence, they complete the first step in the accounting process.

Accountants, on the other hand, use the information provided by bookkeepers to summarize a business’s financial position and render financial advice to the business owner. Many accountants also prepare tax returns, independent audits and certified financial statements for lenders, potential buyers and investors.

Accountants typically have at least a bachelor’s degree in accounting, and many go on to become certified public accountants (CPAs) or certified management accountants (CMAs). Bookkeepers might also have degrees in accounting, but most have either technical certifications or on-the-job experience.

» MORE: Does your business need a bookkeeper or an accountant?

Bookkeeping has its own language, and bookkeepers and accountants sometimes forget business owners might not be fluent in it. Here are some common bookkeeping terms:

The accounting equation: The accounting equation is the key formula that keeps your books in balance. That equation is Assets = Liabilities + Equity. You can see the accounting equation in action in your business’s balance sheet.

Assets: What your business owns. Assets include cash, buildings, vehicles, patents and open invoices due from customers (accounts receivable), just to name a few.

Liabilities: What your business owes. Liabilities include credit card balances, amounts due to vendors (accounts payable), loan balances and tax liabilities that haven't yet been paid.

Equity: What is owed to the owner or shareholders of the business. Equity includes money paid in by the owner (contributions), money the owner has earned but not taken from the business (retained earnings) and other types of contributions like stock issued.

General ledger: The general ledger is where financial transactions are recorded and is made up of assets, liabilities, equity, income and expenses. These five types of accounts comprise the books for your business.

Chart of accounts: The list of categories you use to classify your business’s transactions. Think of the chart of accounts as a sort of filing system for your business’s transactions.

Debits and credits: Each bookkeeping transaction has two sides (remember, it’s called double-entry accounting). One side of the transaction is the debit side, and the other side is the credit side. Assets and expenses are increased by debits and reduced by credits. Income, equity and liabilities are increased by credits and reduced by debits.

Accrual basis and cash basis: Accrual-basis accounting recognizes income and expenses when they are incurred. Cash-basis accounting recognizes income when payment is received and expenses when payment is made. Check out NerdWallet’s accrual vs. cash basis accounting guide for more details.

Reconciliation: The process of verifying the balance of certain accounts (checking, credit cards, loans, etc.) against statements from an outside source, usually a bank.

Income: Money your business earns through sales.

Expenses: Money your business spends on operations and overhead.

Cost of goods: Money your business spends to produce income. Read NerdWallet’s cost of goods sold explainer to learn more.

Profit: What your business has earned after cost of goods and expenses are subtracted from income. Profit is not the same as cash on hand.

» MORE: NerdWallet’s top picks for accounting and bookkeeping apps

A version of this article was first published on Fundera, a subsidiary of NerdWallet.

On a similar note...

What Is Bookkeeping?

Table of contents.

write an essay on the purpose of bookkeeping

Whether you are an independent contractor or a multinational corporation, bookkeeping is important to you. It will help you establish a budget . With a budget, you are better equipped to plan for future expenses. It will also aid in tax preparation. These bookkeeping tips and best practices will help your business improve its financial recordkeeping.

What is bookkeeping?

Bookkeeping consists of creating and maintaining an organization’s financial records. It involves consistently recording a company’s financial transactions, as well as the archiving and secure storage of financial documentation. When bookkeeping is handled properly, the information is accurate, well organized and helpful so that business owners or shareholders can make key financial decisions involving the company.

Editor’s note: Looking for the right accounting software for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

Why is bookkeeping important for businesses?

Proper bookkeeping helps you maintain accurate financial records, which businesses are required by law to do for taxation purposes. Besides the legal requirement, good bookkeeping offers practical business benefits. Some of the reasons why good bookkeeping is essential to a successful business are:

  • Budgeting: When income and expenses are recorded , it is easier to review your financial resources and estimate cash flow.
  • Organization: Bookkeeping is an important tool for others  – the IRS, investors, accountants and lenders – who have an interest in your financial records. When your records are well organized, it is easier to locate and provide information when needed, it can be easier to file your taxes, and it can improve your chances of securing funding.
  • Analysis: Bookkeeping helps your company generate financial statements. These statements can be used as a tool to track cash flow and assist you in analyzing your company’s strengths and weaknesses.
  • Planning: Financial statements can also indicate initiatives that have or haven’t worked, which can help business owners and shareholders plan for the future.

[ Related Article: How and Why to Audit Your Company Bookkeeper ]

Bookkeeping vs. accounting

A bookkeeper ensures that all financial transactions are recorded and organized for financial reporting. Depending on the size of the company, quarterly reporting may be required. In some cases, this information is needed only at the end of the year for tax preparation.

An accountant takes a bookkeeper’s work , analyzes the data and prepares financial statements for the company.

Bookkeeping is an important tool for businesses. Organized financial records provide insight into how your business is performing and aids you in managing cash flow.

Single vs. double-entry bookkeeping

Single-entry bookkeeping is a good choice if your business is small and has a low volume of activity. It is similar to keeping a checkbook. You record one entry per transaction. You keep a two-column ledger: one for revenue and one for expenses.

A double-entry bookkeeping system has two columns, and each transaction is located in two accounts. You enter a debit in one account and a credit in another for each transaction. For example, if your company wants to pay off a creditor, the “cash” account is reduced by the amount you owe to the creditor. That is called a debit. The “creditor” account is then increased by the same amount. That is called a credit. This method is the best way to keep track of asset and liability accounts. The advantage of a double-entry accounting system is that it assures accuracy. For every debit, there is a corresponding and equal credit.

How to get started with bookkeeping

To get started with bookkeeping, the first step is to familiarize yourself with bookkeeping terms and phrases. (You can find a glossary of bookkeeping terms below.) In addition to reading this article (and others on Business News Daily), you can find resources online, including helpful blogs, webinars, and tutorials. There are also workshops you can attend.

The next step is to choose which accounting method (single entry or double entry) you want to use. Once you know that, then decide how you want to maintain your records. The following are the three most popular options:

  • Spreadsheets : This is a good option when your business is in the early stages. You can use programs like Excel or Google Sheets.
  • Accounting book: You can purchase hardbound accounting journals or ledger sheets, which provide an efficient way of tracking simple accounting records.
  • Bookkeeping software: You can use a cloud-hosted bookkeeping app or desktop software to help you record your company’s transactions.

When implementing a bookkeeping system in your business, familiarize yourself with bookkeeping terms and processes, choose which method you want to use for your business, and, finally, consider whether you will use a spreadsheet, paper records, or bookkeeping software.

Bookkeeping best practices

Keep these best practices in mind when implementing a bookkeeping system in your company:

  • Maintain accurate records. Good recordkeeping will aid in tax preparation and financial decision-making.
  • Use accounting software to track expenses . Using accounting software can help you save valuable time. Many applications connect with your business’s checking account so you don’t have to manually record entries.
  • Monitor everything. Keeping a close watch on your cash flow can help you avoid running out of funds and incurring expensive bank fees. Keep a record of all receipts – this is your proof of how you’ve spent funds throughout the year and can be invaluable if you’re audited.

Who should manage bookkeeping services?

There are several options to explore when deciding who should manage your bookkeeping. 

When your small business is just starting out, you might do your own bookkeeping. This option is a good choice if you are on a tight budget. You can find good resources online that can help you get started and provide tips to ensure you are doing it correctly. However, bookkeeping can be time-consuming, which is something to consider.

Third-party service

As your business grows, it may be time to hire a service to manage your books . Although this is an expense, your time is valuable, too. If you’re considering this route, check with other business owners for recommendations on the services they use.

Accounting software

Accounting software assists you with basic billing, invoicing and tax preparation. It can help manage your clients, reconcile your bank accounts and generate essential financial reports that can help your business grow.

Before you decide who should manage your bookkeeping, determine your needs first and if hiring a service is something you can afford.

Glossary of bookkeeping terms

Some common terms used in bookkeeping to be aware of include:

  • Account: A place where financial entries are recorded. You enter business credits and debits pertaining to the operation of your business.
  • Accounting : The process of organizing and entering financial data into a bookkeeping system for your business.
  • Accounts payable (A/P): These are funds owed by your business to other businesses or authorities. Money that you owe is also known as a liability.
  • Accounts receivable (A/R): This is money owed to your business by your customers or other entities. Money owed to you can also be called an asset.
  • Assets: This is any item of value owned by your business. It includes cash and accounts receivables, as well as any equipment or vehicles owned by your company.
  • Budget : A financial plan that estimates what you will earn during the year and what your earnings will be spent on. Once this plan is in place, you can then compare the actual figures to what was estimated.
  • Capital: This refers to cash or other assets a business owner has to start and run a business.
  • Credit: A credit is a bookkeeping entry that decreases assets and expenses and increases income and liability.
  • A creditor is a person or business to whom your company owes money.
  • Data is financial information entered in your bookkeeping system.
  • Debit: A debit is an entry in your bookkeeping system that increases assets and expenses and decreases income and liability.
  • A debtor is a person or company that owes your business money.
  • Deductible expense: A purchase that reduces the amount of income tax you owe the government because it reduces your profit.
  • Depreciation refers to a decrease invalue of the assets owned by your business over time due to wear and tear or the natural obsolescence of a physical asset. This can be claimed as a business expense and can reduce your income tax.
  • Double entry: A system of bookkeeping in which financial information is entered twice: once as a debit and once as a credit.
  • Equity: The net assets of your business minus your liabilities.
  • Expenses refer to purchases made by the business or costs the business incurs. This can reduce the amount of tax owed to the government.
  • Fiscal year: A financial year comprising 12 months. Your company’s fiscal year can follow the calendar year, or it can begin with any month. Income taxes are calculated at the end of those twelve months.
  • General ledger accounts: All financial transactions (debits and credits) are displayed in the ledger or main accounting record a company uses.
  • Gross profit: The business’s income minus the cost of sales is gross profit. If the costs of sales exceeds the income, this is known as gross loss.
  • Liability: Any debt owed by the company to other businesses or authorities. Liabilities can include loans or credit card balances.
  • Net profit: The amount of money a company has after expenses are subtracted from gross profit .
  • Opening balance: This is the amount of money a company carries forward on the first day of the month. This amount should match the ending balance of the previous month.
  • Payable is any bill that is due from your company. This is part of your accounts payable.
  • Petty cash: A small amount of cash that is kept on hand for small purchases, such as stamps, pens, etc. These purchases are typically not recorded the general ledger.
  • Profit refers to the difference between a company’s earnings and what it pays in expenses.
  • Receivable: These are funds that businesses owe you and should be included in your accounts receivable report.
  • Reconcile: A process in which you review your records against the bank statement to ensure they match. It is also a way to ensure all invoices owed to you have been paid.
  • Recurring: A transaction for a preset amount that occurs at a set time, i.e., weekly or monthly.
  • Remittance refers to payments that a company makes in relation to an invoice or bill.
  • Statement: A summary of financial information. Examples of common statements can be a profit and loss report or a bank statement, which lists all of the transactions that take place in a bank account for a set period of time.

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The Beginner's Guide to Bookkeeping

write an essay on the purpose of bookkeeping

What Is Bookkeeping?

  • Bookkeeping vs. Accounting
  • Bookkeeping for Business
  • Balancing the Books
  • The Income Statement

Image by Daniel Fishel © The Balance 2019

Bookkeeping is the process of recording all financial transactions made by a business. Bookkeepers are responsible for recording, classifying, and organizing every financial transaction that is made through the course of business operations. Bookkeeping differs from accounting. The accounting process uses the books kept by the bookkeeper to prepare the end of the year accounting statements and accounts.

Very small businesses may choose a simple bookkeeping system that records each financial transaction in much the same manner as a checkbook. Businesses that have more complex financial transactions usually choose to use the double-entry accounting process.

Bookkeeping is the process of keeping track of every financial transaction made by a business firm from the opening of the firm to the closing of the firm. Depending on the type of accounting system used by the business, each financial transaction is recorded based on supporting documentation. That documentation may be a receipt, an invoice, a purchase order, or some similar type of financial record showing that the transaction took place.

The bookkeeping transactions can be recorded by hand in a journal or using a spreadsheet program like Microsoft Excel. Most businesses now use specialized bookkeeping computer programs to keep books that show their financial transactions. Bookkeepers can use either single-entry or double-entry bookkeeping to record financial transactions. Bookkeepers have to understand the firm's chart of accounts and how to use debits and credits to balance the books.

The bookkeeping process should allow for communication of the financial results of the firm at the end of the year for income tax purposes and the preparation of financial statements by the firm's accountant.

How Does Bookkeeping Differ From Accounting?

Bookkeeping in a business firm is an important, but preliminary, function to the actual accounting function . A bookkeeper collects the documentation for each financial transaction, records the transactions in the accounting journal, classifies each transaction as one or more debits and one or more credits, and organizes the transactions according to the firm's chart of account.

The financial transactions are all recorded, but they have to be summarized at the end of specific time periods. Some firms require quarterly reports. Other smaller firms may require reports only at the end of the year in preparation for doing taxes.

At the end of the appropriate time period, the accountant takes over and analyzes, reviews, interprets and reports financial information for the business firm. The accountant also prepares year-end financial statements and the proper accounts for the firm. The year-end reports prepared by the accountant have to adhere to the standards established by the Financial Accounting Standards Board (FASB). These rules are called Generally Accepted Accounting Principles (GAAP).

What Do You Need to Set Up Bookkeeping for Your Business?

One of the first decisions you have to make when setting up your bookkeeping system is whether or not to use a cash or accrual accounting system . If you are operating a small, one-person business from home or even a larger consulting practice from a one-person office, you might want to stick with cash accounting.

If you use cash accounting, you record your transaction when cash changes hands. Using accrual accounting, you record purchases or sales immediately, even if the cash doesn't change hands until a later time, Sometimes firms start their business using cash accounting and switch to accrual accounting as they grow.

If you are going to offer your customers credit or if you are going to request credit from your suppliers, then you have to use an accrual accounting system.

You also have to decide, as a new business owner, if you are going to use single-entry or double-entry bookkeeping. Single-entry bookkeeping is much like keeping your check register. You record transactions as you pay bills and make deposits into your company account. It only works if your company is relatively small with a low volume of transactions.

If your company is larger and more complex, you need to set up a double-entry bookkeeping system. Two entries, at least, are made for each transaction. At least one debit is made to one account, and at least one credit is made to another account. That is the key to double-entry accounting .

Companies also have to set up their computerized accounting systems when they set up bookkeeping for their businesses. Most companies use computer software to keep track of their accounting journal with their bookkeeping entries. Very small firms may use a basic spreadsheet, like Microsoft Excel. Larger businesses adopt more sophisticated software to keep track of their accounting journals.

Lastly, the business must set up its chart of accounts. The chart of accounts may change over time as the business grows and changes.

The chart of accounts lists every account the business needs and should have. Each account has a number and a name. Subaccounts are also listed.

Understanding Assets, Liabilities, and Equity When Balancing the Books

Effective bookkeeping requires an understanding of the firm's basic accounts. These accounts and their sub-accounts make up the company's chart of accounts. Assets , liabilities , and equity make up the accounts that compose the company's balance sheet.

Assets are what the company owns such as its inventory and accounts receivables. Assets also include fixed assets which are generally the plant, equipment, and land. If you look you look at the format of a balance sheet , you will see the asset accounts listed in the order of their liquidity. Asset accounts start with the cash account since cash is perfectly liquid. After the cash account, there is the inventory, receivables, and fixed assets accounts. Those are tangible assets. You can touch them. Firms also have intangible assets such as customer goodwill that may be listed on the balance sheet.

Liabilities are what the company owes like what they owe to their suppliers, bank and business loans, mortgages, and any other debt on the books. The liability accounts on a balance sheet include both current and long-term liabilities. Current liabilities are usually accounts payable and accruals. Accounts payable are usually what the business owes to its suppliers, credit cards, and bank loans. Accruals will consist of taxes owed including sales tax owed and federal, state, social security, and Medicare tax on the employees which are generally paid quarterly. Long-term liabilities have a maturity of greater than one year and include items like mortgage loans.

Equity is the investment a business owner, and any other investors, have in the firm. The equity accounts include all the claims the owners have against the company. The business owner has an investment, and it may be the only investment in the firm. If the firm has taken on other investors, that is reflected here.

In bookkeeping, you have to balance your books at the end of the year. The bookkeeper has to keep careful track of these items and be sure the transactions that deal with assets, liabilities, and equity are recorded correctly and in the right place. There is a key formula you can use to make sure your books always balance. That formula is called the accounting equation:

Assets = Liabilities + Equity

The accounting equation means that everything the business owns (assets) is balanced against claims against the business (liabilities and equity). Liabilities are claims based on what you owe vendors and lenders. Owners of the business have claims against the remaining assets (equity).

Income Statement and Bookkeeping: Revenue, Expenses, and Costs

The  income statement is developed by using revenue from sales and other sources, expenses, and costs . In bookkeeping, you have to record each financial transaction in the accounting journal that falls into one of these three categories.

The information from a company's balance sheet and income statement gives the accountant, at the end of the year, a full financial picture of the firm's bookkeeping transactions in the accounting journal.

Revenue is all the income a business receives in selling its products or services. Costs, also known as the cost of goods sold, is all the money a business spends to buy or manufacture the goods or services it sells to its customers. The Purchases account on the chart of accounts tracks goods purchased.

Expenses are all the money that is spent to run the company that is not specifically related to a product or service sold. An example of an expense account is Salaries and Wages or Selling and Administrative expenses.

A bookkeeper is responsible for identifying the accounts in which transactions should be recorded. For example, if the business makes a cash sale to a customer and your business uses double-entry bookkeeping, you would record the cash received in the asset account called Cash and the sale would be recorded in the revenue account called Sales.

Key Takeaways

  • Bookkeeping is the process of keeping track of every financial transaction made by a business firm from the opening of the firm to the closing of the firm.
  • Accounting analyzes, reviews, interprets, and reports financial information for the business firm. The accountant also prepares year-end financial statements and the proper accounts for the firm.
  • In cash accounting, you record your transaction when cash changes hands. Using accrual accounting, you record purchases or sales immediately, even if the cash doesn't change hands until a later time,
  • Effective bookkeeping requires an understanding of the firm's basic accounts. These accounts and their sub-accounts make up the company's chart of accounts.
  • A business's six basic accounts are Assets, Liabilities, Equity, Revenue, Expenses, and Costs.

SCORE. " 10 Bookkeeping Basics You Can't Afford to Ignore ."

Bench Co. " Accounting 101: 8 Steps to Set Your Business Up for Success ," Page 8.

Bench Co. " Accounting 101: 8 Steps to Set Your Business Up For Success ," Pages 5-7.

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Why is accounting important.

Why is Accounting Important?

Accounting is important for small business owners as it helps the owners, managers, investors and other stakeholders in the business evaluate the financial performance of the business. Accounting provides vital information regarding cost and earnings, profit and loss , liabilities and assets for decision making, planning and controlling processes within a business.

The main objective of accounting is to record financial transactions in the books of accounts to identify, measure and communicate economic information. Moreover, tax reporting agencies require you to keep books at a minimum level that tracks income and expenditure.

What this article covers:

What Is the Purpose of Accounting?

Why is accounting useful for small business owners, why is an accountant important.

NOTE:   FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.

write an essay on the purpose of bookkeeping

Accounting is often referred to as “Language of Business”. It is a means of communicating financial information to different users for decision making.

The main objectives of accounting are:

RECORDING TRANSACTIONS

The primary role of accounting is to maintain a systematic, accurate and complete record of all financial transactions of a business. These records are the backbone of the accounting system . Business owners should be able to retrieve and review the transactions whenever required.

BUDGETING AND PLANNING

Business owners need to plan how they allocate their limited resources including labor, machinery, equipment and cash towards accomplishing the objectives of the business.

An important component of business management, budgeting and planning enable businesses to plan ahead by anticipating the needs and resources. This helps in the coordination of different segments of an organization.

DECISION MAKING

Accounting assists in a range of decision-making process and help owners in developing policies to increase the efficiency of business processes. Some examples of decisions based on accounting information include the price to be charged for products and services, the resources needed to make these products and services and financing and business opportunities

BUSINESS PERFORMANCE

Using the accounting reports , business owners can determine how well a business is performing. The financial reports are a reliable source of measuring the key performance indicators, so business owners can compare themselves against their past performance as well as against the competitors.

FINANCIAL POSITION

The financial statements generated at the end of the accounting cycle reflect the financial condition of a business at that time. It shows how much capital has been invested, how much funds the business has used, the profit and loss and the number of assets and liabilities of a business.

A common reason for small business failure is the mismanagement of cash. Accounting helps in determining the liquidity of a business which refers to the cash and other liquid resources at your disposal to pay off financial commitments. The information reduces the risk of bankruptcy through detection of bottlenecks.

Accounting helps business owners prepare historic financial records as well as financial projections which can be used while applying for a loan or securing investment for the business.

By placing various checks across the organization, accounting helps in avoiding losses caused by theft, fraud, errors, damage, obsolescence and mismanagement. The internal controls safeguard the business assets and avoid long-term losses.

LEGAL REQUIREMENTS

Law requires businesses to maintain an accurate financial record of their transactions and share the reports with the shareholders, tax authorities and regulators. The financial statements and information are also required for indirect and direct tax filing purposes.

Poor financial management is one of the primary reasons for small business failure especially in the first year of the business. Since small businesses have a limited budget and other resources, accounting plays a crucial role in providing information that helps businesses in its growth and development.

For small business owners, accounting is crucial due to the reasons below:

  • Keep a track of the cash flow . To prevent your business cash flow from running dry, you should implement policies for efficient record-keeping and a sound financial strategy.
  • To understand the concepts of fixed costs, variable costs and how to accurately cost your project, small business owners can rely on cost accounting . This way you don’t end up losing money on a project you thought would be a big earner
  • Accounting gives you a better grasp of the well-being of the business. You can do this by learning to read a balance sheet , income statement , and cash flow statement
  • Helps you detect and avoid frauds and theft by customers, employees and suppliers
  • When you understand the business finance and dealings, you are better equipped with facing audits
  • Bankers are more confident when dealing with business owners who have a handle on the business finances and actually understand financial implications

Whether you are a solopreneur or employ staff, the key to growing your small business is to review your financial statements regularly and establish a detailed budget that will allow you to discover operational inefficiencies.  Saving a little bit on several expenses can add up to big results over the long run.

write an essay on the purpose of bookkeeping

Accounting necessitates huge amounts of data collection and organization of information in a way that can easily be interpreted by the management. Business owners need to keep tabs on the operating costs, changing revenues and dividends to make strategic decisions.

As a small business owner , it might be tempting to manage the business finances yourself, but financial matters can be delicate and may require a trained professional to handle them correctly. Professional accountants assist business owners in making smart fiscal decisions while adhering to the compliance requirements.

Here are some of the key reasons to invest in an accountant for your small business:

  • Analyze the financial data and determine areas for improvement. This is crucial for the long-term health of the business
  • Prepare financial statements based on the Generally Accepted Accounting Principles (GAAP)
  • You will get customized advice based on your unique business needs
  • Using a third-party accountant ensures that you’ll receive unbiased information that is verifiable and objective
  • The accountant acts as a financial advisor and helps you with budgeting and monitoring cash flow on a steady basis. This will allow you to navigate any hurdles that occur in real time
  • It helps you during tax season as accountants can identify potential deductions and help avoid audits

Along with hiring an accountant, business owners are increasingly using online accounting software . The software syncs the accounting system with the banks and helps you understand your real-time cash position. It can also be used for viewing various accounting reports, creating expense claims and sending invoices on the go.

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Accounting in Business Essay

Accounting is referred to as “the language of business”. It is an art of recording, classifying and summarizing information about a business entity in relation to economic resources that are used in finding out the causes of success and failure in business. Due to its relevance in business it has been developed into two models; Management accounting, which deals with reporting financial information to the business stakeholders inside the organization to enhance taking managing and operating decisions; and financial accounting which provides useful information to potential and would-be stakeholders in the organization.

This has affected accounting as it has enabled easier provision of information to different groups of people through assortment of data to be handed to the financial accounting and management accounting (Sterling & Bentz, 54).

Accounting provides a body of rules and legislations that directs reporting of financial information referred to as “Generally Accepted Accounting Standards”. These accounting guidelines are adopted by many organizations and provide a standardized platform for businesses to present their financial information to the interested parties.

Jurisprudence application affects accounts and finance in accordance to the culture, religion, race and political background of the region. This is so as the laws govern the type of financial system regarding to spending, saving, investing, giving, property ownership and business marketing (Smith, Keith & Stephens, 78).

It is assumed in business, that a company cannot manage what it cannot measure. This is where an accounting system comes in handy. Without an accounting system a company cannot ascertain whether it is operating profitably or at a loss; it cannot budget cash flows in a given period; and also it cannot manage customer’s turnover or flow of inventory.

Accounting helps businesses to report accurately business transactions. In an accounting system, axiomatisation is used to show how propositions can fit in a deductive and logical system as they not only exist, but there are methods of creating them. This is through checking all measures and risk available and frequency of the object for easier description.

Accounting tends to facilitate intuitive thinking rather than of rational understanding as it is created with its purpose. This is so as accounting work is elusive, impetus, refractive at classification as they can be acknowledged in more than one way and has different interpretations. Accounting does not regulate as it is has no limits which govern it. This is so as it has no rules and regulations as what to account for or not to due to its diversity in the market of business (Power, 23).

Application of physics fundamentals has enabled development of current accounting technology, for example, accounting softwares and cloud computing. Most companies and institutions are implementing cloud accounting over the use of spreadsheets in accounting. This offers an easier method of maintaining financial records and also offers real time access to information (Kirkland & Howard, 89).

However the accounting field has been faced with numerous problems and challenges in attaining its objectives. Accounting has allowed fraudulent behaviors to go on at the expense of the involved parties. In current times a lot of accounting scandals have been witnessed as a result of loopholes in the accounting systems. More recently was the Madoff scandal which fleeced investors billions of dollars due to failure of legislations within the profession to address issues. Other scandals include Sunbeam, Qwest, Worldcom and Arthur Andersen frauds.

Accounting as a profession has been faced by the problem of malpractice by the accountants and lack of proper legislations to guide the professions. Accounting has primitives only on ungrounded standards as the techniques are not founded as it is extensive and thus requires wide research work.

Accounting is a complex subject and involves expertise and necessary infrastructure to maintain an effective accounting system. Many small and medium businesses do not maintain a proper accounting record due to the rigorous process and also it is expensive to acquire the necessary personnel and infrastructure (Ketz, 203; Yamey, 154).

Works Cited

Ketz, Edward. Accounting Ethics: Crisis in accounting ethics . New York: Routledge Publishers, 2006. Print.

Kirkland, Keith & Howard, Stuart. Simple and practical accounting with computers: a guide to the benefits of computerised accounts . London: Kogan Page, 1998. Print.

Sterling, Robert & Bentz, William. “Accounting in Perspective: Contributions to Accounting Thought by Other Disciplines ”. The Accounting Review , Vol. 46, No. 4. 1971. Print.

Power, Michael. Accounting and science: natural inquiry and commercial reason . London: Cambridge University Press, 1996. Print.

Smith, Jack, Keith, Robert & Stephens, William. Accounting principles . Sabine: McGraw-Hill, 1983 Yamey, Basil. Art & accounting . New York: Yale University Press, 1989. Print.

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IvyPanda. (2023, November 1). Accounting in Business. https://ivypanda.com/essays/accounting-in-business/

"Accounting in Business." IvyPanda , 1 Nov. 2023, ivypanda.com/essays/accounting-in-business/.

IvyPanda . (2023) 'Accounting in Business'. 1 November.

IvyPanda . 2023. "Accounting in Business." November 1, 2023. https://ivypanda.com/essays/accounting-in-business/.

1. IvyPanda . "Accounting in Business." November 1, 2023. https://ivypanda.com/essays/accounting-in-business/.

Bibliography

IvyPanda . "Accounting in Business." November 1, 2023. https://ivypanda.com/essays/accounting-in-business/.

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Home Accounting Bookkeeping: Definition, Importance, Types and Tasks

Bookkeeping: Definition, Importance, Types and Tasks

Tally Solutions | Updated on: February 14, 2023

--> published date: | updated on: --> <--, what is bookkeeping, why bookkeeping is important for all business, tasks and examples of the bookkeeping system.

  • Accounting period

Types of Bookkeeping

Method of bookkeeping, principles of bookkeeping.

  • How to record entries in bookkeeping

Posting entries and documentation

Influence of bookkeeping on the chart of accounts, frequently asked questions.

Bookkeeping is a process of recording and organizing all the business transactions that have occurred in the course of the business.  Bookkeeping is an integral part of accounting and largely focuses on recording day-to-day financial transaction of the business.

All the financial transactions such as sales earned revenue, payment of taxes, earned interest, payroll and other operational expenses, loans investments etc. are recorded in books of accounts.

The way the bookkeeping is managed determines the accuracy of the overall accounting process that is been followed by the business. Thus, bookkeeping ensures that the record of financial transactions are up-to-date and more importantly, accurate

Just like to prepare a report, you need a source of data, bookkeeping is a source that gets summarized into the financial statements or any other accounting report that you see. With bookkeeping tracks and records all the financial transactions, it becomes the starting point of accounting. No bookkeeping = No accounting.

Thus, it becomes important for businesses, small or big to have bookkeeping in place.

The following are the importance of bookkeeping:

  • Bookkeeping helps to keep track of receipts, payments. Sales, purchases and record of every other transaction made from the business.
  • It helps to summarize the income, expenditure and other ledger records periodically.
  • It provides information to create financial reports which tells us specific information about the business as how much profits the business has made or how much the business is worth at a specific point of time.

With the definition of bookkeeping, it’s clear that the bookkeeping task involves all that is required to track, record and organize all the financial transaction that has occurred in the business.

The person is responsible for managing bookkeeping usually entrusted with the responsibility of tracking all the transaction related to business. The following are the bookkeeping tasks examples:

  • Billing for goods sold or services provided to clients.
  • Recording receipts from customers.
  • Verifying and recording invoices from suppliers.
  • Recording payment made to suppliers and so on…

 Are accounting and bookkeeping different? Read ‘ Bookkeeping and Accounting’

Bookkeeping  period

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 the Middle East (UAE, Saudi, Bahrain etc) the calendar year is used as an accounting period i.e. 1st January to 31st December.

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. The 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 a double entry for each financial transaction. The double entry system provides checks and balances by recording corresponding credit entry for each debit entry. The double-entry system of bookkeeping is not cash-based. Transactions are entered when a debt is incurred or revenue is earned.

Read ' Types and Methods of Bookkeeping System' to know more.

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.

To ensure the all the transactions are recorded and organized systematically, bookkeeping principles are applied. The following are the bookkeeping principle

  • Revenue principle
  • Expense principle
  • Matching principle
  • Cost principle
  • Objectivity principle

Read ' Principles of Bookkeeping' to know more.

How to record entries in Bookkeeping

Entries in bookkeeping are recorded in the archaic method of journal entry . Here, the respective individual or accountant manually enters the account numbers and performs individual action of debits and credits for each transaction. This approach is time-consuming and subject to error, and so is usually reserved for adjustments and special entries.

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.  Most bookkeeping software  automates the posting of transaction details to respective ledgers and reports.

Most entities post financial transactions daily, while others post in batches or outsource the posting activity to accounting professionals. Posting entries regularly helps in generating on-time 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.

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.

What exactly does a bookkeeper do?

A bookkeeper is primarily responsible to record and track a company's financial transactions which include, purchases, sales and expenses. These transactions are first recorded as general ledger, which are later used while preparing a balance sheet.

What is the difference between Accounting and Bookkeeping?

Accounting is a broad subject. It calls for a greater understanding of records obtained from  bookkeeping  and an ability to analyze and interpret the information provided by bookkeeping records.

Bookkeeping is the recording phase while accounting is concerned with the summarizing phase of an  accounting system . Bookkeeping provides necessary data for accounting and accounting starts where bookkeeping ends.

Take a look at the difference between Bookkeeping and Accounting

Is it hard to be a Bookkeeper?

No. Bookkeeping is a rather simple and straight forward process which can be easily learnt while you're on-the-job. 

What are the 2 kinds of Bookkeeping?

The single-entry and double-entry bookkeeping systems are the two methods commonly used. While each has its own advantage and disadvantage, the business has to choose the one which is most suitable for their business.

More on types of Bookkeeping system

Read More on Bookkeeping

Bookkeeping Principles , Types of Bookkeeping System , Elements of Bookkeeping , Bookkeeping Vs. Accounting , Difference between Accountant & Bookkeeper , Basic Accounting Assumptions Basis Bookkeeping

Tally Solutions | Nov-28-2019

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Essay on Accounting: Meaning, Functions, Importance, Principles and Limitations

write an essay on the purpose of bookkeeping

Essay on Accounting :- 1. Introduction to Accounting 2. Meaning of Accounting 3. Functions 4. Importance 5. Systems 6. Principles 7. Concepts 8. Accounting Conventions 9. Limitations.

  • Essay on the Limitations of Accounting

Essay # 1. Introduction to Accounting:

Several thousand years ago when human beings first developed the need to accumulate information about economic resources such as land, livestock and other personal property, accounting got originated. It emerged as an information system formulated for accountability in the exchange of goods and services.

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With the invention of money there was an ease in the manner in which commodities and services were exchanged. Money became a unit of measurement. Throughout history accounting profession has continued to grow in response to the ‘financial information needs’ of individuals and societies.

Accounting is a function of economic and social development. It is the language of business. It records business transactions on a monetary basis in a set of books in a scientific manner. Cash plays a vital role in all types of business activities. One party pays it and the other party receives it. Even in non-cash transactions, cash has to be paid or received in future. Accounting provides information in a classified and a summarized form as financial statements.

It comprises Trading Account, Profit and Loss Account, and Balance Sheet. Account is that aspect of accountability that accounts for the purpose for which cash is paid or received. Trading Account and Profit and Loss Account are prepared to ascertain the profits earned or losses incurred for a particular period. The balance sheet shows the financial position of a business as at a particular point of time.

Accountants are the practitioners of accountancy. They are information specialists who collect, process and report economic information about specific financial events for business and non-business activities. Today, we observe several million individuals engaged in professional accounting activities and several billions dependent on such information. Thus, accounting has a wide scope in the spectrum of economic and social development of any country, be it developed, developing or backward.

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Accounting is considered as ‘the language of business’. It is the language employed to communicate financial information of the business to various parties interested in such information. When an event is to be reported (say in English, Hindi, Kannada), certain rules are followed diligently so that what is communicated is understood by the readers appropriately.

Similarly, in accounting also the events of the business are to be communicated to the users by following certain set of rules diligently, so that the firm does not run into the risk of being misunderstood. Accounting language has two important components – (1) symbols in the form of ‘Debit and Credit’ and (2) grammatical rules in the form of generally accepted accounting principles (GAAP).

Accounting stems from ‘book-keeping’ the science and art of correctly recording in books of account all those business transactions that result in the transfer of money or money’s worth. Accounting relates to the work of maintaining various books of accounts, say, journal proper, subsidiary books, ledger, etc., which are generally done by junior employees as and when the transactions take place.

For this reason these books are called Books of Original Entry. Though the original records are maintained in a systematic way, they cannot by themselves provide information for judgement (decision) unless they are analysed and interpreted. Therefore, accounting comes into the picture.

Examining the cited definitions, we can infer that book-keeping is concerned with recording aspect. On the other hand, being comprehensive in nature, accounting includes book-keeping and spreads its tentacles to the analysis and interpretation of the data recorded. In fact, accounting designs proper system for recording the transactions.

The modern system of accounting is based on ‘double-entry principle’. Being scientific in character, double-entry principle of accounting has definite objectives to fulfill. It prescribes the process through which the objectives can be achieved. Accounting is a macro system.

In its micro system it includes several branches in the form of Financial Accounting, Cost and Management Accounting and others such as Government Accounting, HR Accounting, Inflation Accounting, Environmental Accounting, Farm Accounting, etc.

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Functions of accounting may be broadly classified into four categories:

1. Historical Function:

The primary function of accounting is historical in nature, i.e., to maintain a correct record. It includes recording, classifying, summarizing, analysing and interpreting the recorded data of an enterprise (an accounting unit). The major objective of this function is to report at regular intervals to owners/shareholders, management and other interested parties in a desired form and format through financial statements.

2. Managerial Function:

The major purpose of this function is to maximize operational efficiency. In this form it helps in planning future activities, controlling day-to-day operations by comparing actual results with predetermined standards. In short, accounting helps in decision making.

3. Legal Function:

From the viewpoint of accountability, accounting should satisfy the legal requirements of Accounting Standards Board (ASB) as well as the government. For example, audit is compulsory for ensuring compliance of standards.

4. Communicating Function:

Accounting, as a language of business, should be in a position to communicate the information to the users of information say, owners/shareholders, management, creditors, employees, consumers, investors, government, etc.

Accounting 4. Importance of Accounting and its Users:

The importance of accounting is unique as it is useful not only to the internal users but also to the external users (direct and indirect users). The importance of accounting can be understood in the popular use of this systematic information by the interested parties (i.e., the data processed in the form and format meaningful to the user). This systematic information is used by interested persons for decision making.

However, there is no unanimity in different countries as to who these interested parties are. For example, Accounting Standards Board (ASB) of USA in its Statement of Financial Accounting Concepts (SFAC) No.1 states that ‘Present and potential investors, creditors and others are the users’. The Corporate Report (1975) London lists all types of users who need accounting information. The Stamp Report (1980) Canada states that because of broader accountability concept in Canada, the range of users is also broader.

However, the International Accounting Standards Committee (IASC) lists investors, employees, lenders, suppliers and other trade creditors, customers, government and their agencies, public and management as users in its framework (1989). Taking into consideration the above list of users, categorization is made as users of information having direct interest and users of information having indirect interest.

1. Users having Direct Interest:

The users having direct interest in accounting information are considered to be owners and potential owners/management, shareholders and potential shareholders, creditors and potential creditors, suppliers and potential suppliers, employees and consumers, government and tax authorities.

They are briefly discussed in the following list:

(a) The owners/shareholders provide funds to an enterprise in the form of capital. Hence, they are interested in accounting information to know whether the business is conducted on sound lines, whether the capital is used properly, whether it is in a position to provide best of the returns on their investment and whether the business is run on legal and ethical norms.

The income statement and the statement of affairs prepared from time to time should be in accordance with the accounting standards so that comparability and decision making become easier.

(b) The management is interested in financial accounting to determine whether the business is profitable, whether the position is sound and whether it has competitive advantage. Financial accounting, being the eyes and ears of management, facilitates decision making in relation to expansion, diversification, etc., and framing of suitable policies for future.

(c) The creditors are interested in the financial soundness of a business. They may be suppliers of goods on credit, lenders of money, bankers and others who would support the enterprise by providing credit facilities. Their main interest is security for credit, apart from income. They carefully scrutinize the income statement and position statement from time to time in addition to watching the business operations closely from outside by means of disciplined enquiry.

(d) The investors/prospective investors (apart from shareholders) are interested to know how far their investment is safe or is going to be safe. They examine carefully the statements of income and position to assess the soundness of the business. Altogether they are interested in the safety of their investment along with returns.

(e) The consumers are interested to get the goods at a fair price (comparatively reduced price). They are much interested to know the control mechanism adopted by the enterprise so that cost reduction is made possible.

(f) The employees are interested in accounting of the enterprise so as to assess the profitability which would be the basic factor for determining higher wages, bonus, better working conditions, etc. The sound financial position of the enterprise encourages them to contribute their best to the firm.

(g) The government (central, state and local bodies) is interested in accounting of the enterprise to know the earnings based on which taxes could be collected to formulate revenue. Further, for compiling ‘national income’ accounting prepared on the basis of accountability becomes essential.

(i) The general public is interested in the accounting of a firm from the point of view of the firm’s social responsibility. In addition, it may comprise prospective lenders, investors, consumers who would closely watch the financial progress of the enterprise.

(j) The researchers are equally interested in accounting of an enterprise. They utilize the data for their research purposes to interprete and suggest new ways of maintaining accounts based on standard measurement, usefulness and decision making.

Thus, the importance of accounting is recognized by its users and with the fact that accountability cannot be established without accounting.

2. Users having Indirect Interest:

The users having indirect interest in accounting information are considered to be financial analysts, stock exchanges, lawyers, regulatory authorities, registration authorities, financial press and reporting agencies, trade associations and labour unions. These users are generally agencies which help/protect such persons or potential persons having a direct interest in them.

Table 6.1 provides decision usefulness of accounting information.

write an essay on the purpose of bookkeeping

Accounting is more than just the act of keeping a list of debits and credits . It is the language of business and, by extension, of all things financial. Our senses collect information from our surroundings that our brains then interpret; accountants translate the complexities of finance into information that the public can understand. In this article, we will follow accounting from its roots in ancient times to its modern equivalent.

Key Takeaways

  • Bookkeepers emerged when societies used the barter system and needed to record the agreements that they were making regarding goods or service transactions.
  • Later, accounting ledgers were completed by hand and used either a single- or double-entry system.
  • Luca Pacioli, a monk, laid the groundwork for modern accounting by creating an independent record that provided a clearer picture of an entity’s financial activities: the financial statement.
  • The railroads and the emergence of corporations were the stimulus for the establishment of accounting professionals.

Investopedia / Sabrina Jiang

Accounting is a language that dates back thousands of years and has been used in many parts of the world. The earliest evidence of this language comes from Mesopotamian civilizations more than 7,000 years ago. The Mesopotamians kept the earliest records of goods traded and received, and these activities are related to the early record-keeping of the ancient Egyptians and Babylonians. The Mesopotamians used primitive accounting methods, keeping records that detailed transactions involving animals, livestock, and crops.

In India, philosopher and economist Chanakya wrote “Arthashastra” during the Mauryan Empire around the second century B.C. The book contained advice and details on how to maintain record books for accounts.

The Bookkeepers

Bookkeepers most likely emerged while society was still using the barter system to trade (before 2000 B.C.) rather than a cash-and-commerce economy. Ledgers from these times read like narratives, with dates and descriptions of trades made or terms for services rendered.

Below are two examples of what these ledger entries may have looked like:

  • Monday, May 12: In exchange for three chickens, which I provided today, William Smallwood (laborer) promised a satchel of seed when the harvest is completed in the fall.
  • Wednesday, May 14: Samuel Thomson (craftsman) agreed to make one chest of drawers in exchange for a year’s worth of eggs. The eggs are to be delivered daily once the chest is finished.

All of these transactions were kept in individual ledgers. If a dispute arose, they provided proof when matters were brought before magistrates. Although tiresome, this system of detailing every agreement was ideal, because long periods could pass before transactions were completed.

New and Improved Ledgers

As currencies became available and tradesmen and merchants began to build material wealth, bookkeeping evolved . Then, as now, business sense and ability with numbers were not always found in one person, so math-phobic merchants would employ bookkeepers to maintain a record of what they owed and who owed debts to them.

Until the late 1400s, this information was arranged in a narrative style with all the numbers in a single column—whether an amount was paid, owed, or otherwise. This is called “single-entry” bookkeeping.

Here’s a sample of a bookkeeper’s single-entry system. You can see how the entries are laid out with a date, a description, and whether it was owed or received by the symbols in the amount column.

The bookkeeper had to read the description of each entry to decide whether to deduct or add the amount when calculating something as simple as monthly profit or loss. This was a time-consuming and inefficient tallying method.

The Mathematical Monk

As part of the tradition of learned monks conducting high-level scientific and philosophical research in the 15th century, Italian monk Luca Pacioli revamped the common bookkeeping structure and laid the groundwork for modern accounting. Pacioli, who is commonly known as “the father of accounting,” published a textbook called “Summa de Arithmetica, Geometria, Proportioni et Proportionalita” in 1494, which showed the benefits of a double-entry system for bookkeeping.

The idea was to list an entity’s resources separately from any claims on those resources by other entities. In the simplest form, this meant creating a balance sheet with separate debits and credits. This innovation made bookkeeping more efficient and provided a clearer picture of a company’s overall strength. This record, however, was only for the owner who hired the bookkeeper. The general public had no access to such records—at least not yet.

Here is what the double-entry system may have looked like. You can see the two separate columns for debits and credits, along with the description of each transaction and how it was paid: cash or commodities. In this case, it was chickens, seeds, eggs, and furniture.

Coming to America

Bookkeeping migrated to America with European colonization. Although it was sometimes referred to as accounting, bookkeepers were still doing basic data entry and calculations for business owners. However, the businesses in question were small enough that the owners were personally involved and aware of the financial health of their companies. Business owners did not need professional accountants to create complex financial statements or cost-benefit analyses .

The American Railroad

The appearance of corporations in the United States and the creation of the railroad were the catalysts that transformed bookkeeping into the practice of accounting. Of the two factors, the railroad was by far the most powerful. For goods and people to reach their destinations, you need distribution networks , shipping schedules, fare collection, competitive rates, and some way to evaluate whether all of this is being done in the most efficient way possible. Enter accounting with its cost estimates, financial statements, operating ratios , production reports, and a multitude of other metrics to give businesses the data that they needed to make informed decisions.

The railroads also allowed information to be passed from city to city at great speed. Business transactions could be settled in days rather than months. Even time was uneven across the country before the railroad. Previously, each township decided when the day began and ended by general consensus. This was changed to a uniform system in 1883 because it was necessary to have goods delivered and unloaded at certain stations at predictable times.

The shrinking of the country thanks to the railroads and the introduction of uniformity encouraged investment, which, in turn, put more focus on accounting. Up to the 1800s, investing had been either a game of knowledge or luck. People acquired issues of stock in companies with which they were familiar through industry knowledge or acquaintanceships with the owners. Others blindly invested according to the encouragement of relatives and friends. There were no financials to check if you wanted to invest in a corporation or business; thus, the risks involved ensured that investing was only for the wealthy—a rich man’s sport, tantamount to gambling. This image persists today.

Early Financial Statements

To attract investors, corporations began to publish their financials in the form of a balance sheet, income statement , and cash flow statement . These documents were proof of a company’s profit-making abilities. Although investment capital stimulated operations and profits for most corporations, it also increased the pressure on management to please their new bosses: the shareholders . For their part, the shareholders did not completely trust management , which exposed the need for independent financial reviews of a company’s operations.

Birth of a Profession

Accountants were already essential for attracting investors, and they quickly became essential for maintaining investor confidence. The American Association of Public Accountants (AAPA) was established in 1887, and the accounting profession was formally recognized in 1896 with the establishment of the professional title of certified public accountant (CPA). The title is awarded to those who pass state examinations and have three years of experience in the field. The creation of professional accountants came at an opportune time. Less than 20 years later, the demand for CPAs skyrocketed as the U.S. government, in need of money to fight a war, began charging income tax in 1913 .

Technology has changed accounting today. Bookkeeping is now automated. Since the first records were kept in America, bookkeepers have used a number of tools. William Seward Burroughs’ adding machine, created in 1887 and perfected for commercial sale in the 1890s, helped early accountants calculate receipts and quickly reconcile their books.

When IBM released its first large computer in 1952, it was based on the vacuum tube, which was small enough that it made it possible for businesses to buy them and led to accountants being among the first to use them. By 1959, transistors were replacing the tubes and making computers even more accessible. As early as 1961, transistors were being supplanted by microchips, which eventually led to computers for everyone.

Today, technology has brought accounting software such as QuickBooks. These new advancements are much more intuitive, helping accountants do their job quicker, more accurately, and with more ease.

Fremont College. “ History of Accounting .”

Encyclopaedia Britannica. “ Artha-shastra .”

New World Encyclopedia. “ Luca Pacioli .”

Circulus. “ 1860–1880 History of Accounting .”

History. “ Railroads Create the First Time Zones .”

Circulus. " History of Accounting: 1880 thru 1900 ."

Smithsonian Magazine. “ How America’s First Adding Machine is Connected to ‘Naked Lunch’ .”

IBM. “ Chronological History of IBM: 1950s .”

University of Nebraska-Lincoln, Computer Science and Engineering. “ Electrifying Microchips .”

Intuit. “ QuickBooks Online .”

  • Accounting History and Terminology 1 of 35
  • Absorption Costing Explained, With Pros and Cons and Example 2 of 35
  • What Is an Amortization Schedule? How to Calculate with Formula 3 of 35
  • Average Collection Period Formula, How It Works, Example 4 of 35
  • Bill of Lading: Meaning, Types, Example, and Purpose 5 of 35
  • What Is a Cash Book? How Cash Books Work, With Examples 6 of 35
  • Cost of Debt: What It Means and Formulas 7 of 35
  • Cost of Equity Definition, Formula, and Example 8 of 35
  • Cost-Volume-Profit (CVP) Analysis: What It Is and the Formula for Calculating It 9 of 35
  • Current Account: Definition and What Influences It 10 of 35
  • Days Payable Outstanding (DPO) Defined and How It's Calculated 11 of 35
  • Depreciation: Definition and Types, With Calculation Examples 12 of 35
  • Double-Declining Balance (DDB) Depreciation Method Definition With Formula 13 of 35
  • EBITDA: Definition, Calculation Formulas, History, and Criticisms 14 of 35
  • Economic Order Quantity: What Does It Mean and Who Is It Important For? 15 of 35
  • 4 Factors of Production Explained With Examples 16 of 35
  • Fiscal Year: What It Is and Advantages Over Calendar Year 17 of 35
  • How a General Ledger Works With Double-Entry Accounting Along With Examples 18 of 35
  • Just-in-Time (JIT): Definition, Example, and Pros & Cons 19 of 35
  • Net Operating Loss (NOL): Definition and Carryforward Rules 20 of 35
  • NRV: What Net Realizable Value Is and a Formula To Calculate It 21 of 35
  • No-Shop Clause: Meaning, Examples and Exceptions 22 of 35
  • Operating Costs Definition: Formula, Types, and Real-World Examples 23 of 35
  • Operating Profit: How to Calculate, What It Tells You, and Example 24 of 35
  • Production Costs: What They Are and How to Calculate Them 25 of 35
  • What Is a Pro Forma Invoice? Required Information and Example 26 of 35
  • Retained Earnings in Accounting and What They Can Tell You 27 of 35
  • Revenue Recognition: What It Means in Accounting and the 5 Steps 28 of 35
  • What Is a Sunk Cost—and the Sunk Cost Fallacy? 29 of 35
  • Triple Bottom Line 30 of 35
  • Variable Cost: What It Is and How to Calculate It 31 of 35
  • Work-in-Progress (WIP) Definition With Examples 32 of 35
  • Write-Offs: Understanding Different Types To Save on Taxes 33 of 35
  • Year-Over-Year (YOY): What It Means, How It's Used in Finance 34 of 35
  • Zero-Based Budgeting: What It Is and How to Use It 35 of 35

write an essay on the purpose of bookkeeping

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Accounting Essay Examples

An essay about accounting serves as a means to explore the principles, practices, and significance of accounting in the world of business and finance. The purpose of such an essay is to provide insights into how accounting functions as a vital tool for tracking financial transactions, making informed decisions, and ensuring the transparency and integrity of financial reporting. Essays on accounting shed light on the complexities and implications of this discipline, while also highlighting its role in shaping economic systems and business operations. Exploration of Accounting Principles in Accounting Essay Topics One of the primary goals of an essay about accounting is to delve into the fundamental principles that underlie accounting practices. This involves discussing concepts such as the accrual basis of accounting, the matching principle, revenue recognition, and more. Essays on this topic aim to explain how these principles guide financial reporting and decision-making. Essays about accounting often focus on the process of financial reporting, including the preparation of financial statements such as the balance sheet, income statement, and cash flow statement. These essays explore how accurate and transparent financial reporting is essential for stakeholders to assess a company’s financial health. Accounting plays a crucial role in aiding business decision-making. Essays in this field can discuss how financial data and reports help businesses evaluate profitability, assess risks, and make informed strategic decisions. These essays showcase how accounting information impacts various aspects of business operations. Tips for Writing an Essay About Accounting:

Choose a Focus: Select a specific aspect of accounting to explore, such as a particular principle, concept, or its role in a specific industry. Thesis Statement: Begin with a clear thesis that outlines the main topics or questions your essay will address. Explain Concepts: Ensure that you provide clear explanations of accounting concepts for readers who may not be familiar with the subject. Real-World Examples: Use real-world examples and case studies to illustrate the application of accounting principles. Consider Ethical Implications: Discuss the ethical considerations that accountants face, such as the importance of honesty and integrity in financial reporting. Address Current Trends: Explore how technological advancements are impacting the field of accounting, such as the use of AI and automation. Cite Sources: Properly cite sources to support your arguments and provide credibility to your essay.

An accounting essay provides a window into the intricate world of financial management and reporting. By analyzing principles, practices, and real-world applications, these essays contribute to a better understanding of the crucial role that accounting plays in shaping business decisions, financial transparency, and the overall health of economic systems.

Navigating Ethical Dilemmas in Accounting

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AMAC was formed in 2006. Head office is located in Federal-B Area Karachi. It is engaged in the services, supplies, distribution and marketing of petroleum & petrochemical products. It have expertise in fuel and lubricants industry. Being in the business since last ten years and...

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Peru is an emerging economy, but still considered a developing country, which began to introduce the widely-used IFRS accounting standards during 1994. Prior to this introduction, the Peruvian system had become a hybrid of many other country’s accounting policies, taking influence over time from areas...

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Accounting is the process of recording financial transactions to help a company or a small business to keep records of their financial health. These reports support the company, help them manage their money better, and are used by every unit that is related to the...

The Use of Technology in Accounting: Accounting Software

Technology has always been revolving and improving as time pass by. Many things were emerging because of it. Life has been easy and people rely more to it ever since it flourished. The continuous growth of technology is not only evident in the everyday lives...

Being an Accountancy Student: Reflections on the Journey Thus Far

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The increased accounting scandals in the past previous years that caused subside of high reputable companies such as Enron have led several sectors to focus on amending accounting quality and corporate governance (Emmanuel & Salisu, 2018). Corporate governance is the system that is used to...

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