Accounting is a vital part of business. Accounting is a comprehensive subject which includes identification of transactions, recording them, classification, summarization, analyzation and communication of the end results to the users of information.
Similarly, Bookkeeping is a part of Accountancy. It means the recording of transactions, classifying them and summarizing them. The analysis part is not covered in the bookkeeping process. Thus, on this basis Accounting can be explained as the process of Bookkeeping, analyzing the details of the bookkeeping and communicating the end results to the financial information users. Thus we can say that bookkeeping is narrower term than accounting. Book keeping is a part of accounting process. Where Bookkeeping ends Accounting starts. Once the book keeper is done with the maintenance of accounts, the accountant takes over and starts with the analysis.
1. Identification: This means to identify if the transaction is a monetary event or not. Accounting takes into consideration only the transactions which can be expressed in quantitative terms. Once the transaction is identified, it is then accounted for in the books of accounts.
2. Recording: Once the transaction is identified it is recorded in the books of accounts i.e. the journal book. Apart from this, the cash book, sales book and purchase book also act as the primary books and the recording is done in these books. The Petty cash book, creditor’s book, debtor’s book etc. are subsidiary books.
3. Classification: After the recording of books the classification needs to be done. All the transaction related to one account need to be put under that account. Thus the whole amount is classified on the basis of transactions and account heads.
4. Preparation of Trial Balance: After the classification, the trial balance Is prepared to total the debit amounts and credit amounts. The total of debits and credits must match to maintain the accuracy.
There are two types of bookkeeping systems. The business adopts the system on the basis of its compatibility.
These two systems are:
These methods vary in applicability, desirability, methodology and suiting to a business.
Single Entry System: It is the system which records only one aspect of the transaction. This is a system which is followed by the small businesses. They generally prepare the Revenue and Expense Account or simply cash account. Due to being a small business this method suits them. The other accounts prepared along with this system are Accounts Receivable and Payable Book, Petty Cashbook etc. This is like half information available. But the accountants use it and find the balancing figures of the rest of the accounts and prepare the financial statements.
Double Entry System: It is the system which records both the aspects of a transaction. The Double entry system lays the basis for this method. For each transaction at least two accounts are affected and the effects are recorded. Thud there is an equal debit and credit which helps in the matching of the totals of debit and credit in the last. This method is widely followed because it is more reliable and the effects are recorded properly. This kind of system can be followed by any of the firm no matter what the size is. Its universal applicability makes it widely compatible. Though Double entry system is an expensive method but its more reliability than single entry system makes it more appealing.
1. Petty Cashbook: The petty cash is based on the reimbursement system. It is the book maintained for recording the miscellaneous and small expenses in the business. These expenses are not maintained in the primary cashbook but are accounted for in a separate petty cash book. Each month a specified amount is allocated to this account. This helps in keeping a separate record for both main expenses and subsidiary ones.
2. Sales daybook: This keeps a record of all the sales transactions that take place. It is recorded every day. This helps in preparing a proper record of transactions and any duplicity of transactions is avoided.
3. Sales credits daybook: It is prepared for keeping a record for all the sales credit notes. It helps in keeping a record of all the sales made and the sales return that took place.
4. Purchases daybook: It records all the purchases that take place in a day. A proper record needs to be there for all the compilation of transactions.
All the bookkeeping transactions are always recorded on the proof basis. Evidence is required for the authenticity of the transaction and then it is recorded in the books of accounts. This authenticity ensures the Verifiable Objective of the Accountancy.
The bookkeeping is a strong tool of the business. It is important to maintain a proper record of books.
1. Financial Comparison: The bookkeeping is very important help in preparing financial comparisons. The proper controlling needs to be done in a business. This controlling can be done only if the differences between the projected results and actual results is known.
Bookkeeping shows this difference in the numerical terms. Thus the financial comparison could be drawn from the information provided by the books of accounts and proper analysis could be made about the expectations and laggings.
2. Budget Monitoring: The planning is a crucial part of the business. There needs to be proper planning. Bookkeeping provides records of past experiences. The records show how the firm works and also shows the trends in the market. This helps in the forecasting of the future conditions of the market and hence the business can formulate the policies as per the projections expected in the market and create a budget accordingly.
3. Tax Deductions: Tax is one of the most important and major obligation to the company. For the calculation of proper taxes, the information about the records need to be present. Bookkeeping presents all this information in a prescribed manner. Also in case of the scrutiny of the tax paid by the business, the book keeping records act as the evidence.
4. Payroll: Bookkeeping keeps a record of the employees in the firm and the wages or salaries paid to them. It keeps a check on the accuracy of the payroll period of the employee so that he is paid properly. This ensures that the employee is not under paid or over paid. This keeps a check on the proper and timely payment of the salary to the employees. This is important in the business so as to keep a track of cash in the business.
5. Proper Records of Transactions: The bookkeeping ensures proper record of transactions. It helps in maintaining the order of transactions, expenses and revenues in the business. This ensures authenticity of the business and mitigating any error in the business.
6. Acts as an Evidence in Court: In case the company sues any person or any other person sues the company, the bookkeeping records act as the evidence which can be produced for seeking justice. The records of accounts act as a strong tool and are accepted as an evidence in the court.
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