What is Bookkeeping?

Bookkeeping is the process of recording the financial transactions of a company on a regular basis. With the process of bookkeeping, companies can track important financial information that helps management in making crucial decisions. 

Bookkeeping is done by a person known as bookkeeper who manages the company’s financial data. With the help of bookkeepers, companies can keep track of their transactions and their financial position. 

Bookkeeping in Context

Bookkeeping is an important part of accounting, which is one of the important functions of an organization. Accounting helps management to make decisions, plan activities and also measure the organization's performance.   

Two important types of accounting done by any organization are cost accounting and management accounting. While management accounting helps with decision making, cost accounting helps in fixing the cost for a product. 

Generally accepted accounting principles, or GAAP, are the standards based on which accountants prepare financial statements.  

GAAP is based on a double entry system of bookkeeping in which every debit has corresponding credit. It is essential for accountants to follow these standards because proper accounting results in quality financial statements, which are used by many people like investors, financial institutions, suppliers, etc. 

Differences Between Bookkeeping and Accounting 

Bookkeeping is also a process of recording. But there are differences between bookkeeping and accounting: 

• Bookkeeping is the process of recording all transactions of an organization with the help of supportive documents. On the other hand, accounting is the process of preparation of financial statements from ledger balances. 
• Bookkeeping is considered to be the first stage in the entire accounting process. It is one part of accounting, which is itself a larger process.
• Activities included in bookkeeping include identification, recording and posting of transactions.  Accounting involves preparation of trial balances from ledger balances and further preparation of financial statements. 

Importance of Bookkeeping

Bookkeeping is a key component of any successful organization's operations. It is important for many reasons, including:

• Budgeting: Bookkeeping involves recording transactions. By recording transactions, a company can get an accurate picture of its income and expenses. This helps in reviewing the available resources and various types of costs to ensure they are within the organization's budget.
• Organization: If a company's books are not properly organized, it can create various kinds of problems like tax issues. This can make the company always feel stressed and panic. On the other hand, organized books can result in satisfaction and give peace of mind to the organization as a whole. 
• Government regulations: Maintenance of proper books of accounts is one of the requirements of the government. This can help the organization to avoid unnecessary charges and penalties from the government.
• Decision making: Bookkeeping can help the organization stay informed about its operations. Up-to-date bookkeeping can help management make smart business decisions. 
• Achieving targets: Poor financial records can stop a business from growing. Inaccurate numbers can make the task of analysis difficult. Maintaining a high standard of books can help management to map their goals and achieve growth. 
• Accuracy: Regular bookkeeping can help companies to avoid mistakes. Whether it is a small or a big organization, financial mistakes can result in lost profits and headaches. With bookkeeping, even small missed information can be updated. 
• Tax purposes: Regular maintenance of accounts is important for tax purposes. If all the accounting information is up to date, a company need not struggle at the time of filing its tax returns. 

Hence, bookkeeping is important for any organization to have things organized and to achieve its goals. 

Cash Accounting and Accrual Accounting

Two widely used accounting methods are cash accounting and accrual accounting. 

• Cash accounting: The cash accounting method is a widely used accounting method especially for small business organizations. It is also a simple method of recording transactions, as only cash received and spent by the organization is recorded under this method. In cash accounting, for example, a sale is recorded only when the payment is made. Similarly, an expense is recorded only at the receipt of the payment. Apart from small businesses, individuals also use cash accounting in order to manage their personal finances. 

• Accrual accounting: The accrual accounting method is a method that works on the basis of matching principle. The idea behind matching principle is to match revenue along with recognition of expenses. This method of provides the true picture of the company’s financial condition. 

The accrual method is considered to be the opposite of the cash method of accounting. Using accrual accounting, transactions are recorded at the time when they are incurred, and bookkeepers need not wait for the payment to be received. For example, when using accrual accounting, a purchase order made by the organization is immediately recorded in the accounts books rather than waiting for payment receipt. The same applies for revenue also. 

Context and Applications   

This topic is significant in the professional exams for both undergraduate and graduate courses, especially for    

• BBA 
• MBA 
• Bachelor of Commerce