What is Bookkeeping? Explanation and Bookkeeping Methods

Definition

Bookkeeping is an orderly system for collecting, recording, and summarizing information in monetary terms about the state of assets and obligations of the organization and their changes by means of continuous recordkeeping of all business transactions in a sequential manner.

What is Bookkeeping? Explanation and Bookkeeping Methods

Why does an entrepreneur need bookkeeping?

First of all, with the help of bookkeeping, a business owner documents all business transactions and can prepare tax returns accurately and in a timely manner. However, the need for bookkeeping exists not only in order to pay taxes, as some believe.

Obtaining a complete picture of the results of your work in the form of numbers or graphs, as well as the movement of money helps not to work at a loss and prevent the very possibility of bankruptcy. Bookkeeping helps to make plans for your activities, identify risks, highlight the most demanded product, the most profitable consumer and increase the efficiency of your business.

In addition, bookkeeping allows you to track your obligations, as well as the fulfillment of obligations before your company by customers and other parties. The main tasks of bookkeeping can be summarized as follows:

  • formation of complete and reliable information about the activities of the organization and status of its assets and liabilities, which is necessary for internal users of financial statements – managers, founders, and shareholders, as well as external ones – for investors, creditors, and other users of financial statements;
  • provision of information necessary for internal and external users of financial statements to monitor compliance with the legislation, its feasibility, the presence and movement of property and obligations, the use of material, labor, and financial resources in accordance with the approved norms, standards, and estimates,
  • prevention of negative results of the economic activity of the organization and the identification of on-farm reserves to ensure its financial stability.

Types of bookkeeping

There are two types of bookkeeping systems: single-entry system and double-entry system. Single-entry bookkeeping is kind of like cash accounting. All it does is look at the inflow and outflows of cash from something like your bank account.

What is Bookkeeping? Explanation and Bookkeeping Methods

When you look at your bank account, you can see cash coming out of your bank account (e.g. you paid some bills) and the cash coming in (you collected some revenue). This is what single-entry bookkeeping is all about. Single entry is very simple. In fact, it is too simple for most businesses, especially those who need to show financials to investors. This method does not account for expenses or revenue that occurred in a different period.

A double-entry is a bookkeeping method where an entry is made to an account, a corresponding and opposite entry is made to a different account. It is the foundation of GAAP and accrual accounting. This is how you should want to run your business because it more accurately shows revenue and expenses in the periods that they are incurred.

For example, you are collecting revenue, so your revenue goes up, and simultaneously your cash also goes up. If you, for instance, invoice your client, you will record this both under your revenue and under accounts receivable.

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