BOOKKEEPING
- Bookkeeping is the process of recording financial transactions by a bookkeeper.
- Bookkeeping is one of the processes of accounting.
- It is the day to day recording of business financial transactions.
- Bookkeeping is the base from which accounts are prepared.
- Through Bookkeeping, companies get information about their books to make operating, investing, and financing decisions.
- Transactions that are recorded include Sales, Purchase, Receipts and Payments, etc.
-
Bookkeeping is record keeping aspects of financial accounting.
Importance of Bookkeeping
- A reliable measure of the business performance
- Helps to prepare financial statements
- Helps Management to focus on business strategy and plan for future
- Ensure meeting legal obligations by recording and tracking revenue and expenditure to pay taxes appropriately.
- It helps to make decisions on expenditure, planning investments and controlling your cash flows.
- Helps in preparation of Budget
- Reporting to Investors.
Functions of Bokkeeping
- Recording financial transactions
- Recording financial transactions
- Generating Invoices
- Maintain ledgers
Three Golden Rules of Accounts
- Debit what Comes in, Credit what Goes out.
- Debit all Expenses and Losses, Credit all Incomes and Gains.
- Debit the Receiver, Credit the Giver.
Types of Accounts
|
Real |
All assets which are tangible and intangible are Real accounts. |
|
Personal |
All accounts related to individuals, firms, companies, etc. are personal accounts. |
|
Nominal |
All accounts related to expenses, losses, incomes or gains |
Methods of Bookkeeping
There are two methods of Bookkeeping which are as follows:
-
SINGLE ENTRY
A single entry system records accounting transactions with a single entry in a log. The main book in this method of Bookkeeping is a cash book. Separate accounts are maintained for petty cash, accounts payable and receivable. New small businesses generally use this method of Bookkeeping because of cost-effective and simplicity.
Two types of Single entry system of accounts:
1.Pure Single Entry System: Personal accounts are maintained, but real and nominal accounts are not opened.
2.Popular Sense: Double entry system for cash received and cash paid but the single entry for expenses paid, purchase of goods, and fixed assets. Provisional entry are not made. -
DOUBLE ENTRY BOOKKEEPING:
A double-entry bookkeeping is recording financial transactions that affects two ledger accounts. The main principle of this method of Bookkeeping is that for every debit/credit, there must be corresponding credit/ debit of an equal amount of money.
Approaches of Double Entry Bookkeeping:
1.Traditional Approach: In these approach of Bookkeeping accounts are classified as Real, Personal, and nominal accounts. Real accounts are accounts relating to assets and liabilities, including capital accounts of the owner.
Personal accounts are accounts relating to persons or organizations with whom the business has transactions, mainly debtors and creditors.
Nominal accounts are revenue, expense, gains, and losses.
Transactions are entered by applying golden rules of accounting:-
a.Personal account: Debit the Receiver, Credit the Giver.
b.Real account: Debit what comes in, credit what goes out
c.Nominal account: Debit all expenses and losses, Credit all incomes and gains.
2.Accounting Equation Approach: Golden Rule of accounting under this Approach: "ASSETS= LIABILITIES + EQUITY."
In this, all accounts are classified into five following types:
a. Assets accounts: Debit the increase in assets & Credit decrease in assets.
b. Capital accounts: Credit the increase in capital & Debit decrease in capital
c. Liabilities accounts: Credit the increase in liabilities & Debit decrease in liabilities
d. Revenue or Income accounts: Credit the increase in incomes or gains & Debit decrease in incomes or gains
e. Expenses or Losses accounts: Debit the increase in expense or losses & Credit decrease in expense or losses
| DEBIT | CREDIT |
ASSET | Increase | Decrease |
LIABILITY | Decrease | Increase |
INCOME(REVENUE) | Decrease | Increase |
EXPENSE | Increase | Decrease |
CAPITAL | Decrease | Increase |
Difference between Single entry system and Double entry system.
Basis | Single Entry | Double Entry |
Reliable | No | Yes |
Arithmetical Accuracy | Not possible | Possible |
P&L, Balance sheet | Not possible | Possible |
Basic Types of Bookkeeping Books
- CASH BOOK: In this book, transactions held in cash or by cheque are recorded. There are two sides in the cash book, left-hand side all cash receipts are recorded while the right-hand side all cash payments are recorded.
There are five cash book types:-
a. Single column cash book: Records cash receipt and cash payment.
b. Double column cash book: Records cash receipt, receipt of cash discount, cash payment, cash discount allowed
c. Triple column cash book: All transactions of double column cash book along with cheque received and cheque paid.
d. Bank cash book: Records receipt and payment of cheque & cash discount allowed and received.
e. Petty cash book: Small payments of cash are recorded.
- PURCHASE BOOK: Credit purchase of goods is recorded here. Cash Purchase and credit purchase of assets are not recorded.
- SALES BOOK: Records all sales. Cash sales and credit sales of assets are not recorded.
- PURCHASE RETURN BOOK:This book is also known as Return Outward Book, which records the credit purchase, which is a return.
- SALES RETURN BOOK: This book is also known by name Return Inward Book, which records sales that are returned by customers.
- BILLS RECEIVABLE BOOK: When credit sales are made, a guarantee in the form of a bill is taken from customers that payment will be made in the future. These bills are maintained in Bills receivable book.
- BILLS PAYABLE BOOK: When credit purchase is made, a guarantee in the form of a bill is given to the seller that payment will be made in the future. These bills are maintained in Bills payable book.
- JOURNAL: Entries like adjustment entries, opening entries, closing entries, transfer entries, purchase and sale of assets on Credit, interest on capital, and interest on the drawing are recorded in a journal.
- LEDGERS: Ledger is the record of accounts. It sums up each account’s total, which is then transferred to balance sheet and Profit /Loss.
Abbreviations used in Bookkeeping
A/C | Account |
A/R | Account receivable |
A/P | Account Payable |
c/d | Carried down |
b/d | Brought down |
c/f | Carried forward |
b/f | Brought forward |
Dr. | Debit |
Cr. | Credit |
Dep | Depreciation |
G/L | General Ledger |
B/S | Balance Sheet |
TB | Trial Balance |
PL | Profit & Loss |
Popular Articles
Advantages of Company Incorporation
The Benefits of Corporate Incorporation In everyday language, the term “incorporation” refers to “the process of forming a business entity, or other organization as a
ROC forms guidelines
Instructions for Uploading ROC Forms Upon incorporation of a business, various compliance requirements under the Companies Act, 2013 must be met. Every company registered under
Companies Act 2013 compliances
Conformity with the Companies Act 2013 A corporation incorporated in India is required to comply with the Companies Act, 2013. The Companies Act, 2013 governs
post incorporation compliances private limited company
Compliance with post-incorporation Regulations for Private Limited Companies Over the years, establishing a business has been simplified, which encourages firms to comply fully. Management should
What Is GST eWay Bill?
The transporters in India should carry an e-Way bill under GST when they are moving goods to one place from another place when some particular
What is GST Composition Scheme?
The Composition Scheme is a convenient and straightforward method for tax-paying citizens under GST. At a specified return rate, small taxpayers will get rid of
Frequently Asked Questions (FAQ's)
- What is the critical feature of Bookkeeping?
- In Systematic order, a complete and accurate record of all financial transactions is an essential Bookkeeping feature.
- What are the advantages of Bookkeeping?
- The advantage of Bookkeeping is that it ensures to meet legal obligations by maintaining accurate financial reports of the business. It also helps to keeps track of income and taxes to pay appropriate taxes annually.
- What are the advantages of the double-entry system of Bookkeeping?
- As for every debit/credit, there is corresponding credit/debit of the equal amount, so it ensures arithmetical accuracy in books of accounts.
- What are the three accounting rules?
-
Three golden rules of accounting are as follows:
Debit what comes in, Credit what goes out
Debit all expenses and losses, Credit all incomes and gains
Debit the Receiver, Credit the Giver. - What is bookkeeping?
- Bookkeeping is part of the process of accounting that involves the recording of financial transactions of a business.
- What are the 3 types of accounts?
-
The three types of accounts are: Real, Personal, and Nominal.
Real : All assets which are tangible and Intangible are Real accounts.
Personal : All accounts related to individuals, firms, companies, etc. are personal accounts.
Nominal : All accounts related to expenses, losses, incomes or gains - What is the difference between Bookkeeping and accounting?
-
Bookkeeping : It is a recording of all financial transactions. It is a part of the process of accounting
Accounting : It is interpreting, classifying & analyzing financial data. It includes Bookkeeping