What is Bookkeeping?
June 23rd, 2010
Bookkeeping is the charting of the money values of the transactions of a business. Bookkeeping gives the details from which accounts are drafted but is a different process, prerequisite to accounting.
Predominantly, bookkeeping finds two types of information: (1) the current value, or equity, of an enterprise and (2) the changes in value—profit or loss—taking place in the business during a particular time.
Management officials, investors, and credit grantors all need this kind of information: management in order to assess the results of operations, to control costs, to budget for the future, and to make financial policy decisions; investors so as to analyse the upshots of business operations and make decisions for buying, holding, and selling securities; and credit grantors so as to assess the financial statements of a business in finding whether to give a loan.
Traces of financial and numerical record charts can be found for almost every state with a commercial backbone. Records of commercial contracts have been discovered in the ruins of Babylon, and accounts for both farms and estates were made in ancient Greece and Rome. The double-entry manner of bookkeeping came up with the development of the entrepeneurial republics of Italy, and tutorial books for bookkeeping were created in the 15th century in several Italian cities.
During the late 18th and early 19th centuries, the Industrial Revolution gave a significant stimulus to accounting and bookkeeping.
The development of manufacturing, trading, shipping, and subsidiary services made accurate financial books a necessity. The past of bookkeeping, in fact, resembles closely the ancestry of commerce, industry, and government and, partially, assisted shaping it. The international revolution of industrial and commercial activity demanded better sophisticated decision-making methods, which itself called for greater sophistication in the selection, classification, and presentation of information, even more so with the aid of computers. Taxation and government legislature became more detailed and resulted in greater requirement for information; businesses had to provide information to support their income tax, payroll tax, sales tax, and other tax reports. Governmental agencies and educational and other nonprofit institutions also become larger, and the demand for bookkeeping for their own inner operations became higher.
While bookkeeping processes can be very multifaceted, all of it is based on two kinds of books used in the bookkeeping procedure—journals and ledgers. A journal contains the daily transactions (sales, purchases, and so on), and the ledger contains the information of individual accounts. The daily records kept in the journals are put in the ledgers.
At the end of every month, by general practice, an income statement and a balance sheet are prepared from the trial balance posted in the ledger. The duty of the income statement or profit-and-loss statement is to present an analysis of any changes that have taken place in the entity equity resulting due to the events of the period. The balance sheet gives the financial situation of the entity at a particular point in time in terms of assets, liabilities, and the ownership equity.
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