Bookkeeping is the process of recording the financial transactions of a business. It shouldn’t be confused with accounting, although it often is, with the two terms regularly being used interchangeably. However, bookkeeping is merely one part of the wider accounting process.
In most businesses, a specified bookkeeper is responsible for the bookkeeping process. Usually, this will involve taking responsibility for the upkeep of the “daybooks.” This involved recording sales, receipts, purchases and payments. A bookkeeper will usually maintain the books before handing them over to the accountant at the trial balance stage, when the accountant will then prepare income statements, balance sheets, and anything else they need to by using the information provided.
Bookkeepers use either a single entry or double entry system for maintaining books. The single-entry system usually involves tracking cash flow using a cashbook, in which income and expenses are allocated to specific accounts, such as inventory expenditure, sales, or advertising. Separate records will be maintained for petty cash usage, accounts payable and receivable, and travel expenses, in addition to anything else a business wishes to track.
Double entry bookkeeping, as the name suggests, involves entering transactions twice, and involves keeping financial records in more than one cashbook. Transactions are entered first as the total, and then as the specific reason for the transaction, whether this is an incoming or an outgoing. In theory, this should minimise bookkeeping errors, but isn’t a 100% guarantee, as debits might be listed as credits, for example, and vice versa.
Here is an overview of the main tools used in bookkeeping.
The daybook is essentially a chronological diary of financial transactions relating to the business. Various daybooks a business might use include:
- A sales daybook to track incomings.
- A purchases daybook to track expenditure.
- A cash daybook for tracking the movement of money, whether in physical cash or electronically. Some businesses might use two cash daybooks, one for incomings, and one for outgoings.
- A general journal daybook.
Petty Cash Book
Businesses use this to track small spending, and it is usually associated with reimbursing employees for travel expenses, or paying for postage.
Journals are recorded in their relevant daybook, and represent a formal record of transactions before they’re officially accounted for as debits and credits. Using journals allows a business to track their incomings and outgoings before finalising ledgers.
Business ledgers are accounting records that show opening and closing balances as well as transactions specific to each account. Typically, a business will have a sales ledger, a purchases ledger, and a general ledger that deals with assets, liabilities, expenses, equity, and income, which are the five main accounts of a business.
Many businesses take advantage of online software to manage their bookkeeping processes, although there is still demand for traditional bookkeepers.