What is Bookkeeping?

Bookkeeping is the process of keeping full and up-to-date business records. It's the recording of financial transactions. Transactions include sales, purchases, income, and payments whether by organizations or individuals. A bookkeeper must make sure all transactions are recorded in the correct daybook, suppliers ledger, customer ledger, and general ledger. Although a bookkeeper is called an accounting clerk, or an accounting technician, don't confuse bookkeeping with accounting. An accountant uses a bookkeeper's records to create financial reports. Since the jobs are similar, many bookkeepers have the potential to become (or are) accountants also.

There are two common systems that bookkeepers use to record financial transactions. Small businesses primarily use the single-entry system. This system uses only income and expense accounts, recorded primarily in a revenue (money earned) and expense journal. The double-entry system is more complicated, and makes sure that the books are error-free. This system does this by recording transactions in two different nominal ledgers (two parts) of the books, and using a balance system of debits and credits. Having the data recorded in two different ledgers allows the bookkeeper to recover from an error in one, by looking at the other...at least in theory.

Financial transactions are recorded in several different books. These, starting with the daybook, contains the most detailed records. Sometimes daybooks are not kept, so everything is recorded in journals. The totals in each section (sales, purchases, credits, cash etc.) are recorded in the ledgers. Ledgers also have different sections, and they are used to make the balance sheet and income statement. Ledgers often include:

* Customer ledger, for financial transactions with a customer (sometimes called a sales ledger).

* Supplier ledger, for financial transactions with a supplier (sometimes called a purchase ledger).

* General (nominal) ledger representing assets, liabilities, income, and expenses.

When a bookkeeper wants to check the books for errors, they bring them to a trial balance stage. At this stage, they create a worksheet listing the balance of each ledger account, in two columns (debit and credit), at a certain date. Under the double-entry system,a transaction's debits must equal it's credits. Trial balance is often used as a tool to probe for errors. If the debits and credits don't balance, then there is an error. Even if the difference of the debits and credits is zero (debits-credits=0); there can still be errors. For instance: if a transaction is omitted (error of omission), the totals will not be effected. A trial balance is a statement of ledger.

Now, bookkeeping can be done on the computer. This is called computerized bookkeeping. Computerized bookkeeping allows much of the paper "books" to be eliminated, therefore saving trees (but not electricity). The main advantage however, is the increased speed at which bookkeeping can be accomplished.

Bookkeeping can be very time consuming. Therefore most small business owners use a bookkeeping service. Large businesses on the other hand often hire a bookkeeper--or several. There is no need to visit a bookkeeper when you have the internet, however. You can submit financial information to a bookkeeper online, in the convenience of your own office!

So what are these books used for? Aside from providing strategic information to the owner, a company's books are used to allow an accountant to create financial reports, and determine what taxes companies must pay. Its for you and the government.

See also: http://en.wikipedia.org/wiki/Bookkeeping

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