What is Bookkeeping?

Bookkeeping is the recording of the money values of the operation of a business. Bookkeeping creates the details from which accounts are written but is a separate process, prerequisite to accounting.

Essentially, bookkeeping finds two kinds of information: (1) the current value, or equity, of the enterprise and (2) any changes in value—profit or loss—taking position in the business within a particular period.

Management officials, investors, and credit grantors all require such information: management to assess the outcomes of operations, to control costs, to budget for the future, and to make financial policy decisions; investors in order to analyse the upshot of business operations and make decisions about buying, holding, and selling securities; and credit grantors to assess the financial statements of an enterprise in finding whether to grant a loan.

Pieces of financial and numerical records can be seen for almost every group of people with a commercial history. Records of trade contracts were found in the archaelogy of Babylon, and accounts for both farms and estates were kept in ancient Greece and Rome. The dual-entry method of bookkeeping came with the progression of the entrepeneurial republics of Italy, and instruction manuals for bookkeeping were developed within the 15th century in many Italian cities.

In the late 18th and early 19th centuries, the Industrial Revolution provided an important stimulus to accounting and bookkeeping.

The progression of manufacturing, trading, shipping, and subsidiary services made correct financial records a requirement. The past of bookkeeping, in fact, closely reflects the past of commerce, industry, and government and, in part, assisted to form it. The international market of industrial and commercial activity called for more cosmopolitan decision-making processes, which then 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 even greater demand for information; businesses 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 grew, and the need for bookkeeping for their own inner operations increased.

Though bookkeeping procedures can be rather multifaceted, it is all based on two kinds of books utilised in the bookkeeping procedure—journals and ledgers. A journal must have the daily transactions (sales, purchases, and so forth), and the ledger should have the information of individual accounts. The daily records from 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 point of the income statement or profit-and-loss statement is to show an analysis of any changes that occurred in the entity equity resulting from the events of the period. The balance sheet gives the financial position of the enterprise at any particular point with regard to assets, liabilities, and the ownership equity.

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