What is Bookkeeping? | A beginner’s guide

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Bookkeeping involves recording monetary business transactions and maintaining accurate books of accounts of the business organization.

Bookkeeping is basically writing business transactions in journals to keep records of business activities. Business transactions are recorded in special journals. Special journals are notebooks that are designed to record transactions according to their category. Special journals include Sales journals, Sales return journals, Purchase journals, Purchase return journals, Cash Books, Petty Cash Books, and The journal. Transactions are segregated into their specified accounting head and recorded in the special journal according to their type. Bookkeeping is the stepping stone for transactions to enter into the accounting cycle. It majorly helps in making business decisions as all the financial data is available for analysis.

Step by Step process of Bookkeeping

Collect and organize source documents

Source documents are the evidence of the transactions recorded in books of accounts. They must be gathered and organized according to their respective categories i.e Sales, Purchase, Payment, or receipt. Source documents include

  • Sales Invoices
  • Purchase orders
  • Receipts
  • Payments
  • Cheque folio
  • Utility bills
  • Contracts and Loan agreements
  • Tax slips

Recording and posting into the ledger

Once source documents are organized, they are then recorded in the special journal according to their category. Transactions are carefully recorded with their Date, Description, and amount in the books. These transactions are then posted on the ledger in their respective account such as Sales, Inventory, Accounts receivables/ Payables, etc.

Trial Balance and adjusting entries

Trial balance shows the detailed summary of Ledger accounts showing that all debits equal credits. An unadjusted trial Balance is drafted showing the general ledger accounts’ balance. Adjusting entries are then posted to adjust the trial balance for Depreciation, Bad debts, Errors, etc.

Financial Statements and Closing

The information in the trial balance is used to make Financial Statements. Financial statements include Profit and loss, Balance sheets, Cash flow statements, and changes in equity. Then the books are closed and closing balances such as revenues and expenses are transferred into the Retained Earnings.

Tools for Bookkeeping

Bookkeeping has now become a fully automated process with many software in the market. These programs are available for all business entities including, Small and medium enter prices, public corporations, Multinational companies, and governments. Accounting software provides complete automation of bookkeeping including recording transactions, bank reconciliation, invoicing, and creating financial reports. Some of the most useful accounting tools are:

  • Microsoft Excel
  • Google sheets
  • Quickbooks
  • Xero
  • Sage

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