The bookkeeping is the systematic recording and arranging financial transactions in a company or a nonprofit organization. This accounting practice is essential for the growth and maintenance of a business.
Some financial transactions that are involved with bookkeeping include: billing for goods or services provided to customers, recording customer receipts, verifying and recording supplier invoices, paying suppliers, processing of employee pay and government reports, and the creation of financial reports.
The most important aspect of bookkeeping is keeping an accurate and up-to-date record of all information. Accuracy is the most important part of this whole process.
This element is prepared to be able to provide the preliminary information necessary to create financial statements. Every transaction must be recorded in the books and all changes must be continually updated.
Today, most of the bookkeeping around the world is done with the help of software.
It requires knowledge of debits and credits, as well as a basic knowledge of financial accounting, which includes the balance sheet and income statement.
Main Features of Bookkeeping
Bookkeeping is the record, updated daily, of financial transactions and information related to a business.
Ensures that the records of individual financial transactions are correct, up-to-date and comprehensive. For this reason, precision is vital to this process.
This element provides the information by which the accounts and invoices are prepared. This distinctive process occurs within the wide range of accounting. Every transaction, be it a purchase or a sale, must be recorded in the books.
There are usually structures created for bookkeeping, called quality controls, which help ensure accurate and adequate records.
Transaction log
As a principle of bookkeeping, all transactions that take place within the organization must be recorded daily in the books or in the accounting system.
For each transaction there must be a document that describes the business transaction. This can include a sales invoice, payments to a vendor, a sales receipt, a vendor invoice, payments to the bank, and minutes.
These accompanying documents provide the audit trail (anything that provides the documented history of a transaction in a company) for each transaction and are an important part of keeping adequate records in the event that an audit occurs.
Double entry system
The double entry system is the accounting system in which each transaction has a corresponding positive and negative entry (debits and credits). This system is the most popular in bookkeeping.
This double-entry bookkeeping system is based on the fact that each transaction has two parts, thus affecting two books of accounts.
This is because every transaction involves a debit entry on one account and a credit entry on the other.
This means that each transaction must be registered in two accounts; one account will be debited because a security is removed and the other account will be credited because it receives a security. The main rule of this principle is to debit the receiver and credit the giver.
Account book
Account books can be handwritten or computerized; They contain records of each asset and each liability of the business and the capital (the amount invested) of the owner. A separate record is kept for each item involved in business transactions.
The double entry system requires two entries for each transaction: a debit and a credit. Any purchases, such as raw materials or goods, as well as any customer payments, must be recorded in two places in the ledger under this system.
origins
The double entry system can be credited with the development of modern accounting. It basically defined the methods to obtain accurate records across any industry.
Historical records indicate that the double entry system was first observed by merchants during the Middle Ages . This meant a great improvement to the abacus and the single-starting systems used during the Old Age.
As the double entry system became popular, it began to expand to include detailed descriptions of products and services, income, expenses, credits, debts, and so on.
Examples
Marcelino's business makes a purchase from a supplier for $ 3,000 worth of raw materials. These materials are needed to make products that you will then sell to your customers.
When you register under the double entry system, you must debit your inventory record as an asset and credit your cash account.
Marcelino runs a cloth business and issues an invoice to a customer for an $ 800 blanket. This transaction would be recorded as follows:
A debit of $ 800 on your accounts receivable.
A $ 800 credit to your earnings account.
More detailed records could also include a double-entry system for managing inventory and cost of goods sold (COGS):
A $ 400 debit to the COGS account.
A $ 400 credit to the inventory account. These entries would allow Marcelino to have a better record of his total winnings.
The accounting equation
The accounting equation should balance the totals found in the debit and credit accounts. This can be illustrated as follows:
Assets + Expenses = Liabilities + Equity + Earnings.
Therefore: Debit accounts (Assets + Expenses) = Credit accounts (Liabilities + Earnings + Equity).
The debits are on the left side and increase the debit account and reduce the credit account. Also, credits are to the right and increase the credit account and decrease the debit account.
The double entry system requires the existence of an entry on the left side of each account and a corresponding entry on the right side. In a ledger it should be remembered that:
Expenses are always debits.
Earnings are always credits.
It is debited from the cash account when the money is received.
It is credited to the cash account when the money is credited.
