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Bookkeeping is the recording of financial transactions, and is part of the process of
accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compare with other ob ...
in
business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a business name A trad ...

business
and other organisations. It involves preparing source documents for all transactions, operations, and other events of a business. Transactions include purchases, sales, receipts and payments by an individual person or an organization/corporation. There are several standard methods of bookkeeping, including the single-entry and double-entry bookkeeping systems. While these may be viewed as "real" bookkeeping, any process for recording financial transactions is a bookkeeping process. The person in an organisation who is employed to perform bookkeeping functions is usually called the bookkeeper (or book-keeper). They usually write the ''
daybook A general journal is a daybook or subsidiary journal in which transactions relating to adjustment entries, opening stock, depreciation, accounting errors etc. are recorded. The source documents for general journal entries may be journal vouchers ...
s'' (which contain records of sales, purchases, receipts, and payments), and document each financial transaction, whether cash or credit, into the correct daybook—that is, petty cash book, suppliers ledger, customer ledger, etc.—and the
general ledger In bookkeeping Bookkeeping is the recording of financial transactions, and is part of the process of accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantificat ...

general ledger
. Thereafter, an accountant can create financial reports from the information recorded by the bookkeeper. The bookkeeper brings the books to the
trial balance A trial balance is a list of all the general ledger In bookkeeping Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business and other organisations. It involves preparing source documents ...
stage, from which an accountant may prepare financial reports for the organisation, such as the
income statement An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''statemen ...
and
balance sheet In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...

balance sheet
.


History

The origin of book-keeping is lost in obscurity, but recent researches indicate that methods of keeping accounts have existed from the remotest times of human life in cities. Babylonian records written with styli on small slabs of clay have been found dating to 2600 BCE. The term "waste book" was used in colonial America, referring to the documenting of daily transactions of receipts and expenditures. Records were made in chronological order, and for temporary use only. Daily records were then transferred to a daybook or account ledger to balance the accounts and to create a permanent journal; then the waste book could be discarded, hence the name.


Process

The primary purpose of bookkeeping is to record the ''financial effects'' of transactions. An important difference between a manual and an electronic accounting system is the former's latency between the recording of a financial transaction and its posting in the relevant account. This delay, which is absent in electronic accounting systems due to nearly instantaneous posting to relevant accounts, is characteristic of manual systems, and gave rise to the primary books of accounts—cash book, purchase book, sales book, etc.—for immediately documenting a financial transaction. In the normal course of business, a document is produced each time a transaction occurs. Sales and purchases usually have
invoice :''See also Voucher: an invoice is within the European union primarily legally defined by the EU VAT directive as an accounting voucher (to verify tax and VAT reporting) and secondly as a Civil law (common law) document. An invoice, bill or tab is ...

invoice
s or
receipt A receipt (also known as a packing list, packing slip, packaging slip, (delivery) docket, shipping list, delivery list, bill of parcel, Manifest (transportation), manifest or customer receipt) is a document acknowledging that a person has rece ...

receipt
s. Deposit slips are produced when lodgements (deposits) are made to a
bank account A bank account is a financial account maintained by a bank or other financial institution in which the financial transaction A financial transaction is an Contract, agreement, or communication, carried out between a buyer and a seller to Trade ...
. Checks (spelled "cheques" in the UK and several other countries) are written to pay money out of the account. Bookkeeping first involves recording the details of all of these ''source documents'' into multi-column ''journals'' (also known as ''books of first entry'' or ''daybooks''). For example, all credit sales are recorded in the sales journal; all cash payments are recorded in the cash payments journal. Each column in a journal normally corresponds to an account. In the single entry system, each transaction is recorded only once. Most individuals who balance their check-book each month are using such a system, and most personal-finance software follows this approach. After a certain period, typically a month, each column in each
journal A journal, from the Old French ''journal'' (meaning "daily"), may refer to: *Bullet journal, a method of personal organizations *Diary, a record of what happened over the course of a day or other period *Daybook, also known as a general journal, a ...

journal
is totalled to give a summary for that period. Using the rules of double-entry, these journal summaries are then transferred to their respective accounts in the
ledger A ledger is a book or collection of accounts in which account transactions are recorded. Each account has an opening or carry-forward balance Balance may refer to: Common meanings * Balance (ability) in biomechanics * Balance (accounting) * Bal ...

ledger
, or ''account book''. For example, the entries in the Sales Journal are taken and a debit entry is made in each customer's account (showing that the customer now owes us money), and a credit entry might be made in the account for "Sale of class 2 widgets" (showing that this activity has generated revenue for us). This process of transferring summaries or individual transactions to the ledger is called ''posting''. Once the posting process is complete, accounts kept using the "T" format undergo ''balancing'', which is simply a process to arrive at the balance of the account. As a partial check that the posting process was done correctly, a working document called an ''unadjusted trial balance'' is created. In its simplest form, this is a three-column list. Column One contains the names of those accounts in the
ledger A ledger is a book or collection of accounts in which account transactions are recorded. Each account has an opening or carry-forward balance Balance may refer to: Common meanings * Balance (ability) in biomechanics * Balance (accounting) * Bal ...

ledger
which have a non-zero balance. If an account has a ''debit'' balance, the balance amount is copied into Column Two (the ''debit column''); if an account has a ''credit'' balance, the amount is copied into Column Three (the ''credit column''). The debit column is then totalled, and then the credit column is totalled. The two totals must agree—which is not by chance—because under the double-entry rules, whenever there is a posting, the debits of the posting equal the credits of the posting. If the two totals do not agree, an error has been made, either in the journals or during the posting process. The error must be located and rectified, and the totals of the debit column and the credit column recalculated to check for agreement before any further processing can take place. Once the accounts balance, the accountant makes a number of adjustments and changes the balance amounts of some of the accounts. These adjustments must still obey the double-entry rule: for example, the ''
inventory Inventory (American English American English (AmE, AE, AmEng, USEng, en-US), sometimes called United States English or U.S. English, is the set of varieties of the English language native to the United States. Currently, American English ...
'' account and asset account might be changed to bring them into line with the actual numbers counted during a stocktake. At the same time, the ''expense'' account associated with usage of inventory is adjusted by an equal and opposite amount. Other adjustments such as posting
depreciation In accountancy, depreciation refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the allocation in a ...

depreciation
and prepayments are also done at this time. This results in a listing called the ''adjusted trial balance''. It is the accounts in this list, and their corresponding debit or credit balances, that are used to prepare the financial statements. Finally
financial statement Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...
s are drawn from the trial balance, which may include: * the
income statement An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''statemen ...
, also known as the ''statement of financial results'', ''profit and loss account'', or ''P&L'' * the
balance sheet In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...

balance sheet
, also known as the ''statement of financial position'' * the
cash flow statement In financial accounting, a cash flow statement, also known as ''statement of cash flows'', is a financial statements, financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the a ...
* the
statement of changes in equity A statement of changes in equity and similarly the statement of changes in owner's equity for a , statement of changes in partners' equity for a , statement of changes in shareholders' equity for a or statement of changes in taxpayers' equity for ...
, also known as the ''statement of total recognised gains and losses''


Single-entry system

The primary bookkeeping record in single-entry bookkeeping is the ''cash book'', which is similar to a checking account register (in UK: cheque account, current account), except all entries are allocated among several categories of income and expense accounts. Separate account records are maintained for petty cash, accounts payable and receivable, and other relevant transactions such as
inventory Inventory (American English American English (AmE, AE, AmEng, USEng, en-US), sometimes called United States English or U.S. English, is the set of varieties of the English language native to the United States. Currently, American English ...
and travel expenses. To save time and avoid the errors of manual calculations, single-entry bookkeeping can be done today with do-it-yourself bookkeeping software.


Double-entry system

A ''double-entry bookkeeping system'' is a set of rules for recording financial information in a
financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporat ...
system in which every transaction or event changes at least two different nominal
ledger A ledger is a book or collection of accounts in which account transactions are recorded. Each account has an opening or carry-forward balance Balance may refer to: Common meanings * Balance (ability) in biomechanics * Balance (accounting) * Bal ...

ledger
accounts.


Daybooks

A ''daybook'' is a descriptive and chronological (diary-like) record of day-to-day
financial transactions A financial transaction is an agreementAgreement may refer to: Agreements between people and organizations * Gentlemen's agreement A gentlemen's agreement, or gentleman's agreement, is an informal and legally non-binding wikt:agreement, agreem ...
; it is also called a ''book of original entry''. The daybook's details must be transcribed formally into journals to enable posting to ledgers. Daybooks include: *Sales daybook, for recording sales invoices. *Sales credits daybook, for recording sales credit notes. *Purchases daybook, for recording purchase invoices. *Purchases debits daybook, for recording purchase debit notes. *Cash daybook, usually known as the cash book, for recording all monies received and all monies paid out. It may be split into two daybooks: a receipts daybook documenting every money-amount received, and a payments daybook recording every payment made. *General Journal daybook, for recording journal entries.


Petty cash book

A ''
petty cash Petty cash is a small amount of discretionary funds in the form of cash In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (e ...
'' book is a record of small-value purchases before they are later transferred to the ledger and final accounts; it is maintained by a petty or junior cashier. This type of cash book usually uses the
imprest system The imprest system is a form of financial accountancy, accounting. The most common is petty cash. The basic characteristic of an imprest system is that a fixed amount is reserved, which after a certain period of time or when circumstances require, ...
: a certain amount of money is provided to the petty cashier by the senior cashier. This money is to cater for minor expenditures (hospitality, minor stationery, casual postage, and so on) and is reimbursed periodically on satisfactory explanation of how it was spent. And also the balance of petty cash book is
Asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...
.


Journals

''
Journals
Journals
'' are recorded in the general journal daybook. A journal is a formal and chronological record of
financial transactions A financial transaction is an agreementAgreement may refer to: Agreements between people and organizations * Gentlemen's agreement A gentlemen's agreement, or gentleman's agreement, is an informal and legally non-binding wikt:agreement, agreem ...
before their values are accounted for in the general ledger as
debits and credits Debits and credits in double entry bookkeeping are entries made in account ledger A ledger is a book or collection of accounts in which account transactions are recorded. Each account has an opening or carry-forward balance Balance may refer ...
. A company can maintain one journal for all transactions, or keep several journals based on similar activity (e.g., sales, cash receipts, revenue, etc.), making transactions easier to summarize and reference later. For every
debit Debits and credits in double entry bookkeeping are entries made in account ledger A ledger is a book or collection of accounts in which account transactions are recorded. Each account has an opening or carry-forward balance Balance may refe ...
journal entry recorded, there must be an equivalent
credit Credit (from Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally spoken in the area around Rome, known as Latium. Through the power of the R ...
journal entry to maintain a balanced accounting equation.


Ledgers

A ''
ledger A ledger is a book or collection of accounts in which account transactions are recorded. Each account has an opening or carry-forward balance Balance may refer to: Common meanings * Balance (ability) in biomechanics * Balance (accounting) * Bal ...

ledger
'' is a record of accounts. The ledger is a permanent summary of all amounts entered in supporting Journals which list individual transactions by date. These accounts are recorded separately, showing their beginning/ending
balance Balance may refer to: Common meanings * Balance (ability) in biomechanics * Balance (accounting) * Balance or weighing scale Arts and entertainment Film * Balance (1983 film), ''Balance'' (1983 film), a Bulgarian film * Balance (1989 film), ''Bal ...
. A journal lists
financial transactions A financial transaction is an agreementAgreement may refer to: Agreements between people and organizations * Gentlemen's agreement A gentlemen's agreement, or gentleman's agreement, is an informal and legally non-binding wikt:agreement, agreem ...
in chronological order, without showing their balance but showing how much is going to be charged in each account. A ledger takes each financial transaction from the journal and records it into the corresponding account for every transaction listed. The ledger also sums up the total of every account, which is transferred into the
balance sheet In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...

balance sheet
and the
income statement An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''statemen ...
. There are three different kinds of ledgers that deal with book-keeping: *Sales ledger, which deals mostly with the accounts receivable account. This ledger consists of the records of the financial transactions made by customers to the business. *Purchase ledger is the record of the purchasing transactions a company does; it goes hand in hand with the Accounts Payable account.


Abbreviations used in bookkeeping

* A/c – Account * Acc – Account * A/R – Accounts receivable * A/P – Accounts payable * B/S – Balance sheet * c/d – Carried down * b/d – Brought down * c/f – Carried forward * b/f – Brought forward * Dr – Debit side of a ledger. "Dr" stands for "Debit register" * Cr – Credit side of a ledger. "Cr" stands for "Credit register" * G/L – General ledger; (or N/L – nominal ledger) * PL – Profit and loss; (or I/S – income statement) * P/R - Payroll * PP&E – Property, plant and equipment * TB – Trial Balance * GST –
Goods and services taxGST may refer to: Taxes * Sales tax, General sales tax * Generation-skipping transfer tax, in the United States * Goods and Services Tax, the name for the value-added tax in several jurisdictions: ** Goods and Services Tax (Australia) ** Goods and ...
* SGST- State goods & service tax * CGST- Central goods & service tax * IGST- integrated goods & service tax * VAT –
Value added tax A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law L ...
* CST – Central sale tax * TDS – Tax deducted at source * AMT – Alternate minimum tax * EBITDA – Earnings before interest, taxes, depreciation and amortisation * EBDTA – Earnings before depreciation, taxes and amortisation * EBT – Earnings before tax * EAT – Earnings after tax * PAT – Profit after tax * PBT – Profit before tax * Depr – Depreciation * Dep – Depreciation * CPO – Cash paid out * CP - Cash Payment * w.e.f. - with effect from * @ - at the rate of * L/F - ledger folio * J/F - Journal Folio * V.no.- voucher number * V/N - voucher number


Chart of accounts

A
chart of accounts A chart of accounts (COA) is a list of financial accounts set up, usually by an accountant, for an organization, and available for use by the bookkeeper for recording transactions in the organization's general ledger In bookkeeping Boo ...
is a list of the accounts codes that can be identified with numeric, alphabetical, or alphanumeric codes allowing the account to be located in the general ledger. The equity section of the chart of accounts is based on the fact that the legal structure of the entity is of a particular legal type. Possibilities include ''sole trader'', ''partnership'', ''trust'', and ''company''.Marsden,Stephen (2008). Australian Master Bookkeepers Guide. Sydney: CCH


Computerized bookkeeping

Computerized bookkeeping removes many of the paper "books" that are used to record the financial transactions of a business entity; instead, relational databases are used today, but typically, these still enforce the norms of bookkeeping including the single-entry and double-entry bookkeeping systems. CPAs supervise the internal controls for computerized bookkeeping systems, which serve to minimize errors in documenting the numerous activities a business entity may initiate or complete over an accounting period.


See also

*
Accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compare with other ob ...
*
Comparison of accounting software The following comparison of accounting software documents the various features and differences between different professional accounting software Accounting software describes a type of application software Application software (app for short) ...
* POS system: records sales and updates stock levels *
Institute of Certified Bookkeepers The Institute of Certified Bookkeepers ("ICB") is a British not for profit organisation with the objective of promoting the bookkeeping profession worldwide and offering trusted bookkeeping qualifications to its students and members. ICB was founded ...


References


External links


Guide to the Account Book from Italy 1515-1520
{{Authority control Accounting systems Accounting https://www.tandfonline.com/doi/abs/10.1080/09585209500000049?journalCode=rabf20