Ever wondered what bookkeeping is all about? Let's give you a brief introduction to it!
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No matter what kind of business you own, it is important to have your accounting needs met. Sometimes, it is not easy to understand the basics of the accounting process. One of the important parts of the entire accounting process is bookkeeping. Don't worry! The big bookkeeping words are not as difficult to understand as they sound. We promise!
A bookkeeper is someone who records the financial transactions of a company. Transaction means buying or selling something or any activity that affects the financial health of the company.
Where are these transactions recorded?
We'll tell you. Every transaction is first entered in the book of prime entry. There are many books of prime entry. Each one records a specific kind of transaction.
Books of prime entry include sales daybook, purchases daybook, sales returns daybook, purchases returns daybook, cashbook, petty cashbook, and the journal.
Let's talk about the journal!
A journal serves many purposes. It is maintained for keeping a track of errors made while manually recording any transaction so that they are corrected. It also records transactions that have not been recorded in other books of prime entry. The financial accountant reviews the entries from the journal.
In the old days (before computers!), all the transaction data was manually recorded in a journal. Eventually, people started maintaining a ledger to ease the process.
Ledger? What in the world is a ledger?
Glad you asked! Ledgers are principle books. The transactions are arranged according to their date. A General Ledger is a compilation of all the ledger accounts.
But wait. It's not over. There are kinds of ledgers too.
Personal ledgers maintain individual accounts of suppliers and customers of the business, which helps in recognizing the amount the company has to pay to or receive from them.
A payable ledger control account maintains how much suppliers owe the company, i.e., how much the suppliers have to pay to the company.
A receivable ledger control account maintains how much a customer has to pay to the company, i.e., how much a company has to receive from a customer.
Okay, that sounded simple.
I know, right? But what you also need to know is that every transaction has a double effect, which can be classified into debit and credit. Double entry in a ledger forms the basis of bookkeeping. It records both debit and credit and the concept is that the amount on both sides should be the same.
The transaction recorded in the books of prime entry is categorized into different accounts in the ledger. It has information about all the accounts of the company. The accounts are assets, liabilities, and equity. The number of accounts in a company depends on its size.
Okay, now what is the meaning of these words?
Don't worry! We'll explain.
Assets are what the company owns and controls. It is of positive value to the business. For example, buildings, vehicles.
Liabilities, in simple words, are what the company owes others. For example, loans, mortgages.
Equity, also known as capital, is what the company has used in investment.
Anything else you need to know?
There are two principles according to which companies recognize their income.
The accrual method records the revenue and expenses at the time they occur regardless of payment being made. The cash method records the revenue and expenses when the payment is made.
Wow. That was easy to understand, right?
Of course, it was!
Knowing the basics of bookkeeping helps in understanding the processing of financial data and their analysis. This understanding gives us a perspective on the accounting business that forms an integral part of running a company.
This is why we take bookkeeping extremely seriously and have come up with customized packages that will suit all your business needs without having to learn how to use these terms practically.
So, if you want to know more, just get in touch with us!
Works Cited (2017).
In Financial Accounting. Kaplan Publishing.