What Is Bookkeeping, Types, Importance, and Bookkeeping Vs Accounting

Bookkeeping is the process of recording and summarizing the financial information about a business to make it understandable. On the other hand, accounting records are meant to be used for planning and decision-making purposes. Bookkeeping is an integral part of accounting which is necessary because it helps keep the records of financial transactions involved in the business. Bookkeeping helps in identifying the revenue and expenses that a company incurs.

Bookkeeping helps prepare financial statements, which are used for analysis purposes and to predict future results. Bookkeeping helps to protect the organization from fraud by making an audit trail. Recording a transaction seems simple, but that involves planning, collecting information, coding, recording, verifying, and summarizing the data into an understandable form. All these steps are performed manually or electronically with the help of software.

Also Read: Types of Accounts in Accounting

What Is Bookkeeping?

Bookkeeping (also known as Cash Book or Ledger) is the system by which individual items of sales, purchases, and assets are recorded in a particular format to be easily retrieved again. As opposed to accounting, all financial transactions are summarized and summarized in one organized way.

The main idea behind bookkeeping alone is to keep track of physical assets so that the business can trace its financial transactions. Companies generally maintain three different books:

1)Cash Books

2)Inventory Books &

3)Equipment & Supplies Books

These three books are also referred to as running books. These records will also include invoices and purchase orders.

At some point, the business may need to expand its output by purchasing additional items for inventory. In such cases, it is necessary to maintain a detailed record of the purchase order or invoice so that the business can produce its products.

In addition to this, records must be kept for customers if they require some services or products. Similarly, companies will also have to keep track of employees’ salaries and other benefits. In certain situations where a company is involved in foreign exchange transactions, bank statements will be critical. For companies operating in different states, which may include interstate and international commerce, records must be maintained to take necessary action if there are any discrepancies.

Also Read: What Are The Best Accounting Practices For Small Businesses?

Types of Bookkeeping:

1) Basic Bookkeeping

2) Advanced Bookkeeping

Basic bookkeeping is the system in which all information related to the financial transactions of a business is recorded in a way that the accountant or auditor can quickly identify. Basic bookkeeping is used for simple companies and those with small operations. 

Advanced bookkeeping helps in doing calculations, accounting, budgeting, and other significant functions associated with a business. To perform advanced bookkeeping, companies must maintain separate books for each type of transaction within the industry because it has various types of accounts. 

Even though additional records are added as well to this system, they are not considered a different part of the primary bookkeeping system.

Basic bookkeeping is mainly used for small business owners or self-employed individuals.

Also Read: Best Ways To Manage Accounts And Data For e-Commerce Sellers

Significance of Bookkeeping:

Bookkeeping plays a significant role in the life of the individual and an organization because it is the single method through which all financial transactions occur. It has two different forms:

1) Manual Bookkeeping System

2)Electronic Bookkeeping & Accounting Software

With a manual bookkeeping system, all financial transactions undertaken by an individual are recorded in a specific format to be easily understood. On the other hand, with electronic bookkeeping or accounting software, the transactions are recorded automatically using computer software or home-based computer systems. The primary purpose of this particular type is to simplify record-keeping and reduce the time taken up in recording transactions manually. There are several advantages associated with bookkeeping, including being free to carry out, easy to understand, and an effective tool.

Bookkeeping plays an essential role in every organization to have accurate and complete records of financial transactions. The organization needs these records to know what went wrong,  what is expected during the current year, what was done right, and to avoid any problems during the upcoming period. A business must keep track of its products, customers, and employees to maintain control over its operations. Bookkeeping helps identify errors and frauds, which ultimately provides a better experience for the clients or customers about using a particular service provider.

Essential bookkeeping is necessary for every organization because it helps identify problems with their businesses. In the case of other services, it is required to maintain records of each transaction made so that they can be placed on time if there are any issues. Bookkeeping helps make the books used as a form of evidence during court cases or arbitration hearings. These records also help provide an accurate report on businesses’ financial status.

Also Read: Best Ways To Manage Accounts And Data For Retail Shops

Difference Between Bookkeeping & Accounting:

There is a difference between bookkeeping and accounting, known as accountancy. Bookkeeping is the basic process of recording financial information about a business to make it understandable. It includes recording, identifying, and summarizing both receipts and expenses. On the other hand, accounting is a summation of all the financial transactions that an organization does, and it may include both costs and revenues.

Bookkeeping helps prepare financial statements, which are used for analysis purposes and to predict future results. Bookkeeping helps to protect the organization from fraud by making an audit trail. Recording a transaction seems simple, but that involves planning, collecting information, coding, recording, verifying, and summarizing the data into an understandable form. All these steps are performed manually or electronically with the help of software.

Conclusion:

Bookkeeping is one of the most critical tasks for any organization because it helps make records, identify errors and frauds, and maintain accurate financial records. It is a process that needs to be taken very seriously, which means that every person involved must be trained to perform their duties properly. 

Without using a bookkeeping system, an organization will have severe issues with its finances and would not be able to operate efficiently. While bookkeeping software can help reduce the time taken by an individual’s manual work, it cannot entirely replace it.