S.S Choudhary & Co.

What is Bookkeeping?

Bookkeeping is the activity of keeping records of the financial affairs of a business or organization. It requires preparing and arranging the source documents for all transactions, such as bills, receipts, payments, sales, purchases, etc.
Bookkeeping helps to monitor the income and expenses of a business and to produce financial reports that show the performance and position of the business.
Bookkeeping is essential for all businesses because it provides precise and trustworthy information for making strategic decisions, planning budgets, filing taxes, applying for loans, etc. Bookkeeping also helps to prevent fraud, errors, and losses by ensuring that all transactions are recorded and verified.

Why do we need Bookkeeping?

The owner, even if they are sole proprietor and not the business itself. The Business exists for the owner but it is a separate entity. This is simple yet complex differentiation.
Bookkeeping helps you make this differentiation clear by recording each transaction that relates to and belongs to the business and those that relate to the owner separately.

What are the main principles of Bookkeeping?

The principles of bookkeeping are the rules that guide how to record and report the financial transactions of a business or organization. They ensure that the bookkeeping is accurate, consistent, and comprehensive. Some of the main principles of bookkeeping:

• Accounting method: This is the choice between cash or accrual basis of accounting. Cash accounting records transactions when cash is received or paid, while accrual accounting records transactions when they occur, regardless of cash flow.
• Debit and credit:This is the system of recording transactions in two accounts: one that is debited (increased) and one that is credited (decreased). The total debits and credits must always balance for each transaction.
• Account types:There are five main types of accounts in bookkeeping: assets, liabilities, equity, revenue, and expenses. Assets are what the business owns, liabilities are what the business owes, equity is the owner’s share of the business, revenue is the income earned by the business, and expenses are the costs incurred by the business.
• Journal entries:These are the records of each transaction in a chronological order. They show the date, amount, accounts, and description of each transaction. Journal entries are used to prepare the financial statements and reports of the business.

• Matching principle:This is the principle that requires matching the revenue earned in a period with the expenses incurred to generate that revenue. This ensures that the income statement reflects the true profit or loss of the business for that period.

What are the benefits of Bookkeeping?

Bookkeeping has many advantages for businesses of all sizes and types. Some of the advantages of bookkeeping are:

• It makes tax filing easier: When you have current and precise financial records, you can easily compute and file your taxes without any trouble. You can also claim deductions and credits that you are qualified for and avoid penalties and audits.

• It helps with cash flow management:Bookkeeping helps you to track and manage your cash flow, which is the vital force of any business. You can see how much money is coming in and going out, and plan your budget accordingly. You can also identify any cash flow issues and take corrective actions before they become serious.

• It provides reliable information for decision making:Bookkeeping provides you with reliable and comprehensive information about your business’s financial situation. You can use this information to make informed and strategic decisions that can enhance your profitability and growth. You can also measure your performance against your goals and benchmarks, and identify any areas that need improvement.

• It improves relations with stakeholders: Bookkeeping helps you to maintain good relations with your stakeholders, such as investors, lenders, suppliers, customers, etc. By having transparent and accurate financial records, you can show them that your business is trustworthy and healthy. You can also attract more funding and credit opportunities, and negotiate better terms and deals.

• It prevents fraud and errors: Bookkeeping helps you to prevent fraud and errors by ensuring that all transactions are recorded and verified. You can also detect any discrepancies or irregularities in your accounts, and take appropriate actions to resolve them. Bookkeeping also helps you to comply with the legal and regulatory requirements of your industry.

Bookkeeping vs Accounting

Bookkeeping and accounting are both related to the financial transactions of a business, but they have some differences in their scope and functions. Bookkeeping is the process of recording and organizing the financial transactions of a business, such as sales, purchases, payments, receipts, etc. Accounting is the process of analyzing, summarizing, and reporting the financial information of a business, such as income statement, balance sheet, cash flow statement, etc.

Some of the main differences between bookkeeping and accounting are :

• Objective:The objective of bookkeeping is to keep a systematic record of financial activities and transactions chronologically. The objective of accounting is to provide relevant and reliable information for decision making and performance evaluation.

• Skills: Bookkeeping requires basic skills in data entry, arithmetic, and organization. Accounting requires advanced skills in analysis, interpretation, problem-solving, and communication.

• Output:The output of bookkeeping is the books of accounts, such as journals and ledgers. The output of accounting is the financial statements, such as income statement, balance sheet, cash flow statement, etc.

• Standards:Bookkeeping follows certain rules and procedures for recording transactions. Accounting follows certain principles and standards for preparing and presenting financial statements.

• Scope:Bookkeeping is a part of accounting and has a narrower scope than accounting. Accounting starts where bookkeeping ends and has a broader scope than bookkeeping.