Bookkeeping
Encyclopedia
Bookkeeping is the recording of financial transactions. Transactions include sales, purchases, income, receipts and payments by an individual or organization. Bookkeeping is usually performed by a bookkeeper. Bookkeeping should not be confused with accounting
. The accounting process is usually performed by an accountant
. The accountant creates reports from the recorded financial transactions recorded by the bookkeeper and files forms with government agencies. There are some common methods of bookkeeping such as the Single-entry bookkeeping system and the Double-entry bookkeeping system
. But while these systems may be seen as "real" bookkeeping, any process that involves the recording of financial transactions is a bookkeeping process.
A bookkeeper (or book-keeper), also known as an accounting clerk or accounting technician, is a person who records the day-to-day financial transactions of an organization. A bookkeeper is usually responsible for writing the "daybooks." The daybooks consist of purchases, sales, receipts, and payments. The bookkeeper is responsible for ensuring all transactions are recorded in the correct day book, suppliers ledger, customer ledger and general ledger.
The bookkeeper brings the books to the trial balance
stage. An accountant may prepare the income statement
and balance sheet
using the trial balance and ledgers prepared by the bookkeeper.
between the recording of the financial transaction and its posting in the relevant account. This delay, absent in electronic accounting systems due to instantaneous posting into relevant accounts, is not replicated in manual systems, thus giving rise to primary books of accounts such as Sales Book, Cash Book, Bank Book, Purchase Book for recording the immediate effect of the financial transaction.
In the normal course of business, a document is produced each time a transaction occurs. Sales and purchases usually have invoice
s or receipt
s. Deposit slips are produced when lodgements (deposits) are made to a bank account
. Cheques are written to pay money out of the account. Bookkeeping involves, first of all, recording the details of all of these source documents into multi-column journals (also known as a 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 cheque-book each month are using such a system, and most personal finance software follows this approach.
After a certain period, typically a month, the columns in each journal
are each totaled to give a summary for the period. Using the rules of double entry, these journal summaries are then transferred to their respective accounts in the ledger
, or book of accounts. 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 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. The first column 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 - this agreement 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 debit column and 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 asset account might be changed to bring them into line with the actual numbers counted during a stock take. At the same time, the expense account associated with usage 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:
. Single-entry bookkeeping uses only income and expense accounts, recorded primarily in a revenue and expense journal. Single-entry bookkeeping is adequate for many small businesses. Double-entry bookkeeping requires posting (recording) each transaction twice, using debits and credits
.
and travel expenses. These days, single entry bookkeeping can be done with DIY bookkeeping software to speed up manual calculations.
Sample revenue and expense journal for single-entry bookkeeping
book is a record of small value purchases usually controlled by imprest system
. Items such as coffee
, tea
, birthday cards for employees, stationery for office working, a few dollars if you're short on postage, are listed down in the petty cash
book.
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 (i.e. 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.
is a record of accounts. 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 transactions from the journal and records them 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 income statement
. There are 3 different kinds of ledgers that deal with book-keeping. Ledgers include:
is a list of the accounts codes that can be identified with numeric, alphabetical, or alphanumeric codes allowing the account to be located in the general ledger.
.
Accountancy
Accountancy is the process of communicating financial information about a business entity to users such as shareholders and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management; the art lies in...
. The accounting process is usually performed by an accountant
Accountant
An accountant is a practitioner of accountancy or accounting , which is the measurement, disclosure or provision of assurance about financial information that helps managers, investors, tax authorities and others make decisions about allocating resources.The Big Four auditors are the largest...
. The accountant creates reports from the recorded financial transactions recorded by the bookkeeper and files forms with government agencies. There are some common methods of bookkeeping such as the Single-entry bookkeeping system and the Double-entry bookkeeping system
Double-entry bookkeeping system
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....
. But while these systems may be seen as "real" bookkeeping, any process that involves the recording of financial transactions is a bookkeeping process.
A bookkeeper (or book-keeper), also known as an accounting clerk or accounting technician, is a person who records the day-to-day financial transactions of an organization. A bookkeeper is usually responsible for writing the "daybooks." The daybooks consist of purchases, sales, receipts, and payments. The bookkeeper is responsible for ensuring all transactions are recorded in the correct day book, suppliers ledger, customer ledger and general ledger.
The bookkeeper brings the books to the trial balance
Trial balance
A trial balance is a list of all the nominal ledger accounts contained in the ledger of a business. This list will contain the name of the nominal ledger account and the value of that nominal ledger account. The value of the nominal ledger will hold either a debit balance value or a credit value...
stage. An accountant may prepare the income statement
Income statement
Income statement is a company's financial statement that indicates how the revenue Income statement (also referred to as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that...
and balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
using the trial balance and ledgers prepared by the bookkeeper.
Bookkeeping process
The bookkeeping process refers primarily to recording the [financial effects] of financial transactions only into accounts. The variation between manual and any electronic accounting system stems from the latencyLatency (engineering)
Latency is a measure of time delay experienced in a system, the precise definition of which depends on the system and the time being measured. Latencies may have different meaning in different contexts.-Packet-switched networks:...
between the recording of the financial transaction and its posting in the relevant account. This delay, absent in electronic accounting systems due to instantaneous posting into relevant accounts, is not replicated in manual systems, thus giving rise to primary books of accounts such as Sales Book, Cash Book, Bank Book, Purchase Book for recording the immediate effect of the financial transaction.
In the normal course of business, a document is produced each time a transaction occurs. Sales and purchases usually have invoice
Invoice
An invoice or bill is a commercial document issued by a seller to the buyer, indicating the products, quantities, and agreed prices for products or services the seller has provided the buyer. An invoice indicates the buyer must pay the seller, according to the payment terms...
s or receipt
Receipt
A receipt is a written acknowledgment that a specified article or sum of money has been received as an exchange for goods or services. The receipt is evidence of purchase of the property or service obtained in the exchange.-Printed:...
s. Deposit slips are produced when lodgements (deposits) are made to a bank account
Bank account
A Bank account is a financial account recording the financial transactions between the customer and the bank and the resulting financial position of the customer with the bank .-Account types:...
. Cheques are written to pay money out of the account. Bookkeeping involves, first of all, recording the details of all of these source documents into multi-column journals (also known as a 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
Single-entry accounting system
A single-entry bookkeeping system or single-entry accounting system is a method of bookkeeping relying on a one sided accounting entry to maintain financial information.-Overview:...
, each transaction is recorded only once. Most individuals who balance their cheque-book each month are using such a system, and most personal finance software follows this approach.
After a certain period, typically a month, the columns in each journal
Journal entry
A journal entry, in accounting, is a logging of transactions into accounting journal items. The journal entry can consist of several items, each of which is either a debit or a credit. The total of the debits must equal the total of the credits or the journal entry is said to be "unbalanced"...
are each totaled to give a summary for the period. Using the rules of double entry, these journal summaries are then transferred to their respective accounts in the ledger
Ledger
A ledger is the principal book or computer file for recording and totaling monetary transactions by account, with debits and credits in separate columns and a beginning balance and ending balance for each account. The ledger is a permanent summary of all amounts entered in supporting journals which...
, or book of accounts. 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 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. The first column contains the names of those accounts in the ledger
Ledger
A ledger is the principal book or computer file for recording and totaling monetary transactions by account, with debits and credits in separate columns and a beginning balance and ending balance for each account. The ledger is a permanent summary of all amounts entered in supporting journals which...
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 - this agreement 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 debit column and 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
Inventory
Inventory means a list compiled for some formal purpose, such as the details of an estate going to probate, or the contents of a house let furnished. This remains the prime meaning in British English...
" account asset account might be changed to bring them into line with the actual numbers counted during a stock take. At the same time, the expense account associated with usage of inventory is adjusted by an equal and opposite amount. Other adjustments such as posting depreciation
Depreciation
Depreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used ....
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
Financial statements
A financial statement is a formal record of the financial activities of a business, person, or other entity. In British English—including United Kingdom company law—a financial statement is often referred to as an account, although the term financial statement is also used, particularly by...
are drawn from the trial balance, which may include:
- the income statementIncome statementIncome statement is a company's financial statement that indicates how the revenue Income statement (also referred to as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that...
, also known as the statement of financial results, profit and loss account, or P&L - the balance sheetBalance sheetIn financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
, also known as the statement of financial position - the cash flow statementCash flow statementIn financial accounting, a cash flow statement, also known as statement of cash flows or funds flow statement, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing...
- the statement of retained earningsStatement of retained earningsThe Statement of Retained Earnings are basic financial statements.The statements explain the changes in a company's retained earnings over the reporting...
, also known as the statement of total recognised gains and losses or statement of changes in equity
Bookkeeping systems
Two common bookkeeping systems used by businesses and other organizations are the single-entry bookkeeping system and the double-entry bookkeeping systemDouble-entry bookkeeping system
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....
. Single-entry bookkeeping uses only income and expense accounts, recorded primarily in a revenue and expense journal. Single-entry bookkeeping is adequate for many small businesses. Double-entry bookkeeping requires posting (recording) each transaction twice, using debits and credits
Debits and credits
Debit and credit are the two aspects of every financial transaction. Their use and implication is the fundamental concept in the double-entry bookkeeping system, in which every debit transaction must have a corresponding credit transaction and vice versa.Debits and credits are a system of notation...
.
Single-entry system
The primary bookkeeping record in single-entry bookkeeping is the cash book, which is similar to a checking (cheque) account register but allocates the income and expenses to various income and expense accounts. Separate account records are maintained for petty cash, accounts payable and receivable, and other relevant transactions such as inventoryInventory
Inventory means a list compiled for some formal purpose, such as the details of an estate going to probate, or the contents of a house let furnished. This remains the prime meaning in British English...
and travel expenses. These days, single entry bookkeeping can be done with DIY bookkeeping software to speed up manual calculations.
Sample revenue and expense journal for single-entry bookkeeping
| No. | Date | Description | Revenue | Expense | Sales | Sales Tax | Services | Inventory | Advert. | Freight | Office Suppl | Misc |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 7/13 | Balance forward | 1,826.00 | 835.00 | 1,218.00 | 98.00 | 510.00 | 295.00 | 245.00 | 150.00 | 83.50 | 61.50 | |
| 1041 | 7/13 | Printer- Advert flyers | 450.00 | 450.00 | ||||||||
| 1042 | 7/13 | Wholesaler - inventory | 380.00 | 380.00 | ||||||||
| 1043 | 7/16 | office supplies | 92.50 | 92.50 | ||||||||
| -- | 7/17 | bank deposit | 1,232.00 | |||||||||
| - Taxable sales | 400.00 | 32.00 | ||||||||||
| - Out-of-state sales | 165.00 | |||||||||||
| - Resales | 370.00 | |||||||||||
| - Service sales | 265.00 | |||||||||||
| bank | 7/19 | bank charge | 23.40 | 23.40 | ||||||||
| 1044 | 7/19 | petty cash | 100.00 | 100.00 | ||||||||
| TOTALS | 3,058.00 | 1,880.90 | 2,153.00 | 130.00 | 775.00 | 675.00 | 695.00 | 150.00 | 176.00 | 184.90 |
Daybooks
A daybook is a descriptive and chronological (diary-like) record of day-to-day financial transactions also called a book of original entry. The daybook's details must be entered formally into journals to enable posting to ledgers. Daybooks include:- Sales daybook, for recording all the sales invoices.
- Sales credits daybook, for recording all the sales credit notes.
- Purchases daybook, for recording all the purchase invoices.
- Purchases credits daybook, for recording all the purchase credit notes.
- Cash daybook, usually known as the cash book, for recording all money received as well as money paid out. It may be split into two daybooks: receipts daybook for money received in, and payments daybook for money paid out.
- Petty Cash daybook, for recording small value purchases paid for by cash
- General Journal daybook, for recording journals
Petty cash book
A petty cashPetty cash
Petty cash is a small amount of discretionary funds in the form of cash used for expenditures where it is not sensible to make any disbursement by cheque, because of the inconvenience and costs of writing, signing and then cashing the cheque...
book is a record of small value purchases usually controlled by imprest system
Imprest system
The Imprest system is a form of financial accounting system. The most common imprest system is the petty cash system. The base characteristic of an imprest system is that a fixed amount is reserved, which will be replenished at the end of a period or when circumstances require. This replenishment...
. Items such as coffee
Coffee
Coffee is a brewed beverage with a dark,init brooo acidic flavor prepared from the roasted seeds of the coffee plant, colloquially called coffee beans. The beans are found in coffee cherries, which grow on trees cultivated in over 70 countries, primarily in equatorial Latin America, Southeast Asia,...
, tea
Tea
Tea is an aromatic beverage prepared by adding cured leaves of the Camellia sinensis plant to hot water. The term also refers to the plant itself. After water, tea is the most widely consumed beverage in the world...
, birthday cards for employees, stationery for office working, a few dollars if you're short on postage, are listed down in the petty cash
Petty cash
Petty cash is a small amount of discretionary funds in the form of cash used for expenditures where it is not sensible to make any disbursement by cheque, because of the inconvenience and costs of writing, signing and then cashing the cheque...
book.
Journals
Journals are recorded in the General Journal Daybook. A journalJournal entry
A journal entry, in accounting, is a logging of transactions into accounting journal items. The journal entry can consist of several items, each of which is either a debit or a credit. The total of the debits must equal the total of the credits or the journal entry is said to be "unbalanced"...
is a formal and chronological record of financial transactions before their values are accounted for in the general ledger as debits and credits
Debits and credits
Debit and credit are the two aspects of every financial transaction. Their use and implication is the fundamental concept in the double-entry bookkeeping system, in which every debit transaction must have a corresponding credit transaction and vice versa.Debits and credits are a system of notation...
. A company can maintain one journal for all transactions, or keep several journals based on similar activity (i.e. sales, cash receipts, revenue, etc.) making transactions easier to summarize and reference later. For every debit
Debits and credits
Debit and credit are the two aspects of every financial transaction. Their use and implication is the fundamental concept in the double-entry bookkeeping system, in which every debit transaction must have a corresponding credit transaction and vice versa.Debits and credits are a system of notation...
journal entry recorded there must be an equivalent credit
Debits and credits
Debit and credit are the two aspects of every financial transaction. Their use and implication is the fundamental concept in the double-entry bookkeeping system, in which every debit transaction must have a corresponding credit transaction and vice versa.Debits and credits are a system of notation...
journal entry to maintain a balanced accounting equation.
Ledgers
A ledgerLedger
A ledger is the principal book or computer file for recording and totaling monetary transactions by account, with debits and credits in separate columns and a beginning balance and ending balance for each account. The ledger is a permanent summary of all amounts entered in supporting journals which...
is a record of accounts. These accounts are recorded separately showing their beginning/ending balance
Balance (accounting)
In banking and accountancy, the outstanding balance is the amount of money owed, , that remains in a deposit account at a given date, after all past remittances, payments and withdrawal have been accounted for. It can be positive or negative ....
. 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 transactions from the journal and records them 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
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
and income statement
Income statement
Income statement is a company's financial statement that indicates how the revenue Income statement (also referred to as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that...
. There are 3 different kinds of ledgers that deal with book-keeping. Ledgers include:
- Sales ledger, which deals mostly with the Accounts Receivable account. This ledger consists of the financial transactions made by customers to the business.
- Purchase ledger is a ledger that goes hand and hand with the Accounts Payable account. This is the purchasing transaction a company does.
- General ledger representing the original 5 main accounts: assets, liabilities, equityEquity (finance)In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...
, incomeIncomeIncome is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
, and expenses
Abbreviations used in bookkeeping
- A/C - Account
- Acc - Account
- A/R - Accounts Receivable
- A/P - Accounts Payable
- B/S - Balance Sheet
- c/d - Carried down
- b/d - Brought down
- c/f - Carried forward
- b/f - Brought forward
- Dr - Debit record
- Cr - Credit record
- G/L - General Ledger; (or N/L - Nominal Ledger)
- P&L - Profit & Loss; (or I/S - Income Statement)
- PP&E - Property, Plant and Equipment
- TB - Trial Balance
- GST - Goods and Services TaxGoods and Services TaxA goods and services tax or value added tax is a tax on exchanges.By country:*Goods and Services Tax *Goods and Services Tax *Goods and Services Tax *Goods and Services Tax...
- VAT - Value Added TaxValue added taxA value added tax or value-added tax is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the "value added" to a product, material or service, from an accounting point of view, by this stage of its...
- CST - Central Sale Tax
- TDS - Tax Deducted at Source
- AMT - Alternate Minimum Tax
- EBITDA - Earnings before Interest, Taxes, Depreciation and Amortisation
- EBDTA - Earnings before Depreciation, Taxes and Amortisation
- EBT - Earnings before Taxes
- EAT - Earnings after Tax
- PAT - Profit after tax
- PBT - Profit before tax
- Depr - Depreciation
- Dep'n - Depreciation
Chart of accounts
A chart of accountsChart of accounts
__FORCETOC__A chart of accounts is a created list of the accounts used by a business entity to define each class of items for which money or the equivalent is spent or received...
is a list of the accounts codes that can be identified with numeric, alphabetical, or alphanumeric codes allowing the account to be located in the general ledger.
Computerized bookkeeping
Computerized bookkeeping removes many of the paper "books" that are used to record transactions and usually enforces double entry bookkeepingDouble-entry bookkeeping system
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....
.