Bookkeeping System

Bookkeeping is defined as the system of keeping records and categorising all financial transactions pertaining to business operations on a daily basis in a sequential manner.

The term “transaction” refers to a business activity in which money or money’s worth is exchanged for goods or services.

It is the first step in the accounting process, and it provides the preliminary data necessary to plan and maintain accounts. As a result, accounting is based on a proper bookkeeping system. It entails:

• Obtaining basic financial information.
• Identifying transactions and events with a financial aspect, i.e. only monetary transactions should be recorded in the books of accounts.
• Calculating the value of transactions in monetary terms.
• Keeping track of the financial impact of transactions in the order in which they occur.
• Identifying the impact of transactions
• Making a statement, i.e. a trial balance.

The Relationship Between Bookkeeping and Accounting

Accounting, which takes place within the broader scope of accounting, is a separate process from bookkeeping. The information provided by bookkeeping is used to prepare the accounts. To take the business to the next level, a strong relationship between these two functions is required.

Bookkeeping is a component of the accounting system as a whole. Accounting is based on bookkeeping because it keeps proper records of all financial transactions, whereas bookkeeping involves organising, summarising, categorising, and reporting financial transactions.

A company’s accounting will be correct if its bookkeeping is correct. Thus, accounting encompasses more than bookkeeping, and a company’s accounting is dependent on a proper and accurate bookkeeping system. Bookkeeping assists both internal and external users in interpreting accounting information for decision making. Bookkeeping is a subset of accounting that is clerical in nature and entails the following tasks:

• Keeping track of financial transactions

• Credits and debits must be posted.

• Creating invoices

• Maintaining and balancing general ledgers and current accounts

• Payroll completion

Bookkeeping Objectives

To keep track of the transactions

The first goal of bookkeeping is to keep accurate and complete records of all financial transactions in a systematic manner. It records all transactions in a systematic manner and ensures that all financial transactions are reflected in the books of accounts. These transactions can be used as references in the future.

To demonstrate the correct position

Bookkeeping aids in determining the overall impact of a company’s financial transactions. It reflects the financial impact of all business transactions that occurred during a fiscal year. It provides financial information to the company’s shareholders and management, assisting them in developing future policies and plans.

Errors and fraud must be detected

Bookkeeping aids in the identification of transactions and their chronological summarization in a systematic manner. It ensures that the financial records are correct, up to date, chronological, and complete. As a result, it aids in the detection of any errors or frauds in the business.

The Importance of Bookkeeping

Bookkeeping is required for all businesses, regardless of size, nature, business transactions, or industry. Maintaining adequate records is critical when starting a business. 

The source of transactions is recorded

Bookkeeping serves as a source for all financial transactions of a business because it records all financial transactions from the point of origin, such as receipts, invoices, payment notes, and so on. Bookkeeping records every transaction made from and by the business, including payments, receipts, purchases, and sales. A company’s financial statements or other balance sheets are derived from its books of accounts. As a result, all businesses, regardless of size, require proper bookkeeping.

It aids in decision making

An accurate measure of a company’s performance is provided by a correct and proper bookkeeping process. It also serves as a guideline for general strategic decisions and a benchmark for the company’s income and revenue targets. Companies can measure their financial performance using bookkeeping, which is a reliable source. One of the primary reasons for bookkeeping is to keep all of a company’s financial records, which show the financial position of each head or account of income and expenditure. Through bookkeeping, businesses can obtain detailed information about each income and expense in real-time.

Provides data for the preparation of financial statements

Bookkeeping is the process of summarising expenditures, income, and other ledger records on a regular basis. Because bookkeeping records and tracks all financial transactions, it serves as the foundation for accounting. If a company’s bookkeeping is not up to standard, its accounting will be inaccurate. Bookkeeping provides information for the preparation of financial reports, which state-specific information about the business, such as how much profit it has made or the value of the business at a given point in time.

The obligation under the law

Many acts make it a legal requirement to keep financial statements and books of accounts. The acts that govern banks, corporations, and insurance companies require such entities to keep and maintain financial records. As a result, bookkeeping becomes necessary for such businesses.

Conclusion

Bookkeeping systems are formally known as single or double-entry software systems that are pre-programmed with a set of rules for recording financial data and related financial transactions that occur in business. Some systems are far more advanced than others, but a bookkeeping software system is any system that aids in the recording of financial transactions. Continue reading to learn more about the different types of systems you might use and how they can help you be the best bookkeeper or accountant possible.