Definition: What is Bookkeeping?
Bookkeeping involves recording of all the financial transactions on a daily basis. With accurate bookkeeping, the company’s management is able to track all the financial information. They can make rational operating, financing and investing decisions.
Those who manage and record financial transactions are known as bookkeepers. Without bookkeepers, business owners may not aware of the current financial position.
It is important to distinguish between accounting and bookkeeping. Bookkeeping is mechanical part of accounting. You can say, it is an important function of accounting. On the other side, accounting is the language of the business.
To get to know the basic difference between accounting and bookkeeping, check out this blog.
Types of Bookkeeping
There are two main types of bookkeeping:
- Single Entry System
- Double Entry System
In single entry, we record only one type of financial activity or a transaction. It is a basic system in which company’s management may record only daily receipts to generate daily, weekly or monthly reports of cash flow.
Cash from Sale $100 (no credit entry is recorded in singe entry system)
In this system, we record double entry for each financial activity or transaction. Double entry is important to keep check and balance on corresponding credit entry of each debit entry. Further, double entry is based not cash based.
Debit: Admin Expense $500
Credit: Cash on Hand $500
Aside from that we can further categorize bookkeeping in more types such as accrual vs cash, in-house bookkeeping vs virtual bookkeeping, and so on.
Importance of Book-keeping
Bookkeeping is highly important for various reasons. First of all, it provides reliable measure of the company’s performance.
Further, it is helpful for the higher management to make general operational and strategic key decisions.
Furthermore, the reports generated based on bookkeeping is useful for internal as well for external users for various purposes such as investment and lending purpose.
Similarly, the government institutions may instruct the business entities to setup proper accounting and bookkeeping system for couple of reasons i.e. income and sales tax.
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