Bookkeeping is a systematic method of keeping and maintaining a record of day to day business transactions in words and figures in the books of accounts so as to show clearly and correctly the financial position of a business.
Thus bookkeeping involves the following actions:
- To record summarized and systematic financial business transactions in the main book of accounts called “Journal”. Similarly, the creation of different accounts in another book of accounts called “Ledger”.
- At the end of each and every accounting year, balancing out all the accounts opened and operated in the ledger.
- On the basis of the balance extracted from different accounts, preparing a trial balance for various accounting use cases.
What are the importance of bookkeeping?
In this present dynamic world, every day a businessman enters into a number of business transactions with different customers and the nature of each of those transactions are different. It is not possible for a businessman to remember all such transactions, and therefore it is necessary to record these transactions.
Without an authentic record of business transactions, businessman will not able to manage his financial operations in business.
Accounting records provide valuable and much needed information to the owner, managers, partners, investors, government authorities and public. When all the business transactions are systematically recorded, they are useful for detection and prevention of theft, fraud, and dishonesty committed in business.
Bookkeeping is a great importance to businessmen, because from accounting records, one can know the size of income and expense of the business.
This enables the businessman to apply control and check on the expenses, to increase the profitability of the business. Information provided by the accounting system is also of great importance in avoiding wastage and unnecessary expenses. It is also helpful to achieve success in business ventures.
Classification of bookkeeping system
Book keeping system is classified as,
- Indian system of recording accounting information and,
- English system of recording accounting information.
The traditional method of recording and keeping the records of accounts in any one of the Indian languages Hindi, Marathi, Gujarati, Urdu, etc. is called the Indian system. When business information is recorded like in the books of accounts in the English language as per modern advanced method, it is called the English accounting system.
Nowadays, the English accounting system is more advanced and popular and universally followed even in India in many large scale business organization.
English accounting system is sub classified as,
- Single-entry accounting system and,
- Double-entry bookkeeping system.
This is all about the bookkeeping system. In a later article, we’ll read more about the double-entry bookkeeping system, that is used universally by everyone.