What is Bookkeeping?
Bookkeeping is the recording of the money values of the function of a business. Bookkeeping provides the numbers from which accounts are prepared but is a separate process, required prior to accounting.
Predominantly, bookkeeping grants two kinds of information: (1) the current value, or equity, of the business and (2) any changes in value—profit or loss—taking position in the entity from a singular time period.
Management officials, investors, and credit grantors all need this information: management to understand the results of operations, to control costs, to budget for the future, and to make financial policy decisions; investors so as to analyse the outcome of business operations and make decisions regarding buying, holding, and selling securities; and credit grantors so as to analyze the financial statements of an entity in assessing whether to give a loan.
Traces of financial and numerical records have been found for just about every country with a commercial history. Records of trading contracts were uncovered in the ruins of Babylon, and accounts for both farms and estates have been created in ancient Greece and Rome. The double-entry method of bookkeeping came with the development of the entrepeneurial republics of Italy, and instruction books for bookkeeping were created within the 15th century in some Italian cities.
During the late 18th and early 19th centuries, the Industrial Revolution provided an important stimulus to accounting and bookkeeping.
The development of manufacturing, trading, shipping, and subsidiary services made accurate financial recordkeeping a requirement. The history of bookkeeping, in fact, closely resembles the past of commerce, industry, and government and, in some part, helped in forming it. The global expansion of industrial and commercial activity demanded better sophisticated decision-making methods, which in its turn called for better sophistication in the selection, classification, and presentation of information, more so with the progression of computers. Taxation and government regulation became more detailed and resulted in greater requirement for information; entities had to show available information to bolster their income tax, payroll tax, sales tax, and other tax reports. Governmental agencies and educational and other nonprofit institutions also developed in size, and the demand for bookkeeping for their inner operations went up.
Though bookkeeping processes can be extremely complex, it is all based on two kinds of books employed in the bookkeeping procedure—journals and ledgers. A journal should have the daily transactions (sales, purchases, etcetera), and the ledger must have the information of individual accounts. The daily records kept in the journals are written in the ledgers.
At the end of each month, as a general rule, an income statement and a balance sheet are made from the trial balance posted from the ledger. The duty of the income statement or profit-and-loss statement is to show an analysis of those changes that took place in the enterprise equity from the events of the period. The balance sheet displays the financial position of the enterprise at a particular day taken from assets, liabilities, and the ownership equity.
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