Bookkeeping is the recording of financial transactions, and is part of the process of accounting in
business and other organizations. It involves preparing source documents for all transactions,
operations, and other events of a business. Transactions include purchases, sales, receipts and
payments by an individual person or an organization/corporation. There are several standard
methods of bookkeeping, including the single-entry and double-entry bookkeeping systems. While
these may be viewed as "real" bookkeeping, any process for recording financial transactions is a
bookkeeping process.
The person in an organisation who is employed to perform bookkeeping functions is usually called
the bookkeeper (or book-keeper). They usually write the daybooks (which contain records of sales,
purchases, receipts, and payments), and document each financial transaction, whether cash or
credit, into the correct daybook—that is, petty cash book, suppliers ledger, customer ledger,
etc.—and the general ledger. Thereafter, an accountant can create financial reports from the
information recorded by the bookkeeper. The bookkeeper brings the books to the trial balance
stage, from which an accountant may prepare financial reports for the organisation, such as the
income statement and balance sheet.
Process
The primary purpose of bookkeeping is to record the financial effects of transactions. An important
difference between a manual and an electronic accounting system is the former's latency between
the recording of a financial transaction and its posting in the relevant account. This delay, which is
absent in electronic accounting systems due to nearly instantaneous posting to relevant accounts, is
characteristic of manual systems, and gave rise to the primary books of accounts—cash book,
purchase book, sales book, etc.—for immediately documenting a financial transaction.
In the normal course of business, a document is produced each time a transaction occurs. Sales and
purchases usually have invoices or receipts. Deposit slips are produced when lodgements (deposits)
are made to a bank account. Checks (spelled "cheques" in the UK and several other countries) are
written to pay money out of the account. Bookkeeping first involves recording the details of all of
these source documents into multi-column journals (also known as books of first entry or daybooks).
For example, all credit sales are recorded in the sales journal; all cash payments are recorded in the
cash payments journal. Each column in a journal normally corresponds to an account. In the single
entry system, each transaction is recorded only once. Most individuals who balance their check-book
each month are using such a system, and most personal-finance software follows this approach.
After a certain period, typically a month, each column in each journal is totalled to give a summary
for that period. Using the rules of double-entry, these journal summaries are then transferred to
their respective accounts in the ledger, or account book. For example, the entries in the Sales
Journal are taken and a debit entry is made in each customer's account (showing that the customer
now owes us money), and a credit entry might be made in the account for "Sale of class 2 widgets"
(showing that this activity has generated revenue for us). This process of transferring summaries or
individual transactions to the ledger is called posting. Once the posting process is complete,
accounts kept using the "T" format (debits on the left side of the "T" and credits on the right side)
undergo balancing, which is simply a process to Arrive at the balance of the account.
As a partial check that the posting process was done correctly, a working document called an
unadjusted trial balance is created. In its simplest form, this is a three-column list. Column One
contains the names of those accounts in the ledger which have a non-zero balance. If an account has
a debit balance, the balance amount is copied into Column Two (the debit column); if an account has
a credit balance, the amount is copied into Column Three (the credit column). The debit column is
then totalled, and then the credit column is totalled. The two totals must agree—which is not by
chance—because under the double-entry rules, whenever there is a posting, the debits of the
posting equal the credits of the posting. If the two totals do not agree, an error has been made,
either in the journals or during the posting process. The error must be located and rectified, and the
totals of the debit column and the credit column recalculated to check for agreement before any
further processing can take place.
Once the accounts balance, the accountant makes a number of adjustments and changes the
balance amounts of some of the accounts. These adjustments must still obey the double-entry rule:
for example, the inventory account and asset account might be changed to bring them into line with
the actual numbers counted during a stocktake. At the same time, the expense account associated
with use of inventory is adjusted by an equal and opposite amount. Other adjustments such as
posting depreciation and prepayments are also done at this time. This results in a listing called the
adjusted trial balance. It is the accounts in this list, and their corresponding debit or credit balances,
that are used to prepare the financial statements.
Finally financial statements are drawn from the trial balance, which may include:
the income statement, also known as the statement of financial results, profit and loss account, or
P&L
the balance sheet, also known as the statement of financial position
the cash flow statement
the statement of changes in equity, also known as the statement of total recognised gains and losses
Single-entry system
Main article: single-entry bookkeeping
The primary bookkeeping record in single-entry bookkeeping is the cash book, which is similar to a
checking account register (in UK: cheque account, current account), except all entries are allocated
among several categories of income and expense accounts. Separate account records are
maintained for petty cash, accounts payable and accounts receivable, and other relevant
transactions such as inventory and travel expenses. To save time and avoid the errors of manual
calculations, single-entry bookkeeping can be done today with do-it-yourself bookkeeping software.
Double-entry system
Main article: double-entry bookkeeping
A double-entry bookkeeping system is a set of rules for recording financial information in a financial
accounting system in which every transaction or event changes at least two different nominal ledger
accounts.
Daybooks
A daybook is a descriptive and chronological (diary-like) record of day-to-day financial transactions;
it is also called a book of original entry. The daybook's details must be transcribed formally into
journals to enable posting to ledgers. Daybooks include:
Sales daybook, for recording sales invoices.
Sales credits daybook, for recording sales credit notes.
Purchases daybook, for recording purchase invoices.
Purchases debits daybook, for recording purchase debit notes.
Cash daybook, usually known as the cash book, for recording all monies received and all monies paid
out. It may be split into two daybooks: a receipts daybook documenting every money-amount
received, and a payments daybook recording every payment made.
General Journal daybook, for recording journal entries.
Petty cash book
A petty cash book is a record of small-value purchases before they are later transferred to the ledger
and final accounts; it is maintained by a petty or junior cashier. This type of cash book usually uses
the imprest system: a certain amount of money is provided to the petty cashier by the senior
cashier. This money is to cater for minor expenditures (hospitality, minor stationery, casual postage,
and so on) and is reimbursed periodically on satisfactory explanation of how it was spent. The
balance of petty cash book is Asset.
Journals
Journals are recorded in the general journal daybook. A journal is a formal and chronological record
of financial transactions before their values are accounted for in the general ledger as debits and
credits. A company can maintain one journal for all transactions, or keep several journals based on
similar activity (e.g., sales, cash receipts, revenue, etc.), making transactions easier to summarize
and reference later. For every debit journal entry recorded, there must be an equivalent credit
journal entry to maintain a balanced accounting equation.[5][6]
Ledgers
A ledger is a record of accounts. The ledger is a permanent summary of all amounts entered in
supporting Journals which list individual transactions by date. These accounts are recorded
separately, showing their beginning/ending balance. A journal lists financial transactions in
chronological order, without showing their balance but showing how much is going to be charged in
each account. A ledger takes each financial transaction from the journal and records it into the
corresponding account for every transaction listed. The ledger also sums up the total of every
account, which is transferred into the balance sheet and the income statement. There are three
different kinds of ledgers that deal with book-keeping:
Sales ledger, which deals mostly with the accounts receivable account. This ledger consists of the
records of the financial transactions made by customers to the business.
Purchase ledger is the record of the purchasing transactions a company does; it goes hand in hand
with the Accounts Payable account.