Bookkeeping is the recording of financial transactions for a business. It involves systematically recording all income and expenses.
Key Characteristics / Core Concepts
- Systematic Record-Keeping: Maintaining detailed, organized records of all financial activity.
- Double-Entry Bookkeeping: A method where each transaction affects at least two accounts (debit and credit), ensuring the accounting equation remains balanced.
- Source Documents: Using original documents (invoices, receipts, bank statements) as the basis for recording transactions.
- Chart of Accounts: A categorized list of all accounts used in the bookkeeping system.
- Financial Statements: Generating reports like income statements, balance sheets, and cash flow statements from the recorded data.
How It Works / Its Function
Bookkeeping involves recording transactions in a journal (chronological order) and then posting them to a general ledger (categorized by account). This organized record-keeping provides a clear picture of a company’s financial health.
Examples
- Recording sales invoices in a sales journal.
- Tracking payments to suppliers in a purchases journal.
- Recording cash receipts and disbursements in a cash book.
Why is it Important? / Significance
Accurate bookkeeping is crucial for making informed business decisions, filing taxes correctly, securing loans, and attracting investors. It provides a vital foundation for financial management and accounting.
Related Concepts
- Accounting
- Financial Reporting
- Auditing
Bookkeeping is the foundation upon which sound financial management is built.