Bookkeeping | Types, Importance and Objectives

What is Bookkeeping?

Bookkeeping is defined as a process of recording and maintaining the financial transactions of the company on a daily basis. The transactions consist of sales, payments, receipts and purchases, revenue, operational expenses, investments, etc. These details are added into chronological order while maintaining the records. The process of bookkeeping makes sure that all the financial transactions are recorded regularly and correctly. The one who maintains the bookkeeping are known as bookkeepers. Through bookkeeping, companies can track their financial status and make financial decisions. The components of bookkeeping consist of journal, ledger, balance sheet, income statement, cash flow statement, etc.

Types of Bookkeeping

The bookkeeping systems are of two types. Businesses can use any type of bookkeeping system according to their need. Sometimes combination of both types of bookkeeping systems is used by companies.

1. Single Entry Bookkeeping

Single-entry bookkeeping systems are defined as a basic type of system that is used to record daily or weekly transactions and generate a report of cash flow. For every single financial transaction, one entry is recorded by the bookkeeper. In a single-entry bookkeeping system, only one side of the transaction is being maintained, consisting of sales, payments, purchases, and cash receipts. Single-entry bookkeeping systems are majorly used by small businesses and companies that have less number of financial transactions. In single-entry bookkeeping, the bank statements, cash sales journal, and cash disbursements journal are the documentation that is maintained.

Advantages:

• For maintaining single entry bookkeeping system, no professional education is required.
• It is simple as compared to double-entry bookkeeping.
• It is more cost-effective as compared to double-entry bookkeeping.
• Single entry bookkeeping is effective for small businesses.

2. Double Entry Bookkeeping

Double entry bookkeeping system is defined as a type of bookkeeping where for every single financial transaction two entries are recorded. Unlike single-enrty bookkeeping, double entry bookkeeping records credit entries. The transactions in double entry bookkeeping are recorded when either debt is incurred or revenue is earned. In double-entry bookkeeping, every financial entry affects two accounts, i.e., one is debited, and the other one is credited. The system of double entry bookkeeping is majorly adopted by all businesses and is considered efficient and accurate for maintaining financial transactions. For double-entry bookkeeping, the documents that are required include inventory, cash book, account payables, loans, payrolls, etc.

Advantages

• Double entry bookkeeping provides more accurate results and maintenance.
• By preparing the balance sheets and profit and loss accounts, we can know the financial status of the company.
• In double entry, bookkeeping errors can be checked easily.
• Frauds can be detected easily as both credit and debit accounts are reflected.

Objectives of Bookkeeping

1. To Record the Transactions: The most important aim of bookkeeping is to maintain all the financial transactions of the company accurately and regularly. Bookkeeping makes sure that all the financial transactions that take place are reflected in all the account related books. These recorded transactions can be used for further reference.

2. To Detect Errors and Frauds: Bookkeeping helps to maintain all financial transactions. It makes sure that all transactions are correct, up-to-date, complete and chronological. Therefore bookkeeping helps to find the errors and frauds in the transaction.

3. To State the Correct Position: Bookkeeping helps to know the overall impact of all the financial transactions on the company. It reflects on the financial year of the company. It provides more information to the institutions, and shareholders to know the correct position in the market and accordingly formulate their policies and work.

4. Better Preparation of Taxation: Every company needs to comply with the Internal Revenue Service (IRS) to file taxes. Some documents are required to be provided to the government, such as tax compliance, financial statements, financial transactions, etc. Maintaining all the records regularly through bookkeeping helps to correctly pay the taxes.

Importance of Bookkeeping

1. Helps in Decision Making: Recording and maintaining the transactions through bookkeeping helps to measure the performance of companies. Measuring the performance related parameters helps to make financial decisions for the company. These decisions can help to prevent companies from financial loss.

2. Legal Requirement: Maintaining all financial transactions on a regular basis is one of the legal requirements related to businesses. Bookkeeping needs to be done in order to avoid any legal complications.

3. Records the Sources of Transaction: Bookkeeping records all the day-to-day financial activities of the company, such as receipts, payments, orders, etc. Bookkeeping maintains all the transaction-related details correctly. In future, if there is a need to check for details of any transaction, bookkeeping provides it easily.

4. Helps to Prepare Financial Statements: Bookkeeping is considered the starting point of accounting in any company as it records and maintains the financial transactions. If bookkeeping is accurate, the accounting related part of the company will also be accurate. Therefore, companies can prepare all the financial statements easily and correctly with the help of bookkeeping.