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Explain the concept of book keeping in accounting.
Bookkeeping is keeping the record of business transactions on day to day basis. It includes identifying, measuring and recording of transactions. Bookkeeping is basis of preparing accounting statements. It records below transactions, but not limited to,
- Payments to suppliers.
- Loan payments.
- Invoice payments.
- Asset depreciation.
- Generating financial reports.
In olden days, that means days before digitalisation. Bookkeeping starts with entries in general ledgers, later in place of general ledgers special ledgers and day books were introduced. Special ledgers are separated ledgers for sales, purchases, cash receipts, cash payments etc. these entries were made on day wise.
Likewise, ledgers for sales, rent, wages, loans etc. are maintained and balanced manually. Manual entry and calculations sometimes results in errors in calculations and balances. Trail balances are prepared to determine these errors. In trail balance, account name and their balances are represented in debit or credit according to their transactions.
After recording, balances are made on debit and credit side. Both sides should be equal, otherwise necessary rectification should be done to make them balance. After rectifications, financial statements are made.
After digitisation or present days bookkeeping are made easy with help of accounting software which minimises errors. A person has to finalise these entries and rectified or re adjusted if required and financial statements are made.
Benefits are as follows −
- Records every transaction in detail.
- Compliant with law.
- Easier plan.
- Instant reporting.
- Tax predictions.
- Faster business time.
- Financial analysis.
- Audits makes easy.
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