QandAs: Business

What Is Bookkeeping?

Answer:
Bookkeeping is one of the components of accounting. It is the process of recording and classifying business financial transactions.

In other words, bookkeeping is maintaining the records of the financial activities of a business or individual.

The objective of bookkeeping is to simply record and summarize financial transactions into a form that is usable in order to provide financial information about a business or individual. An accountant will normally set up the accounting and bookkeeping system, and then another employee will take care of the day to day data entry. With the widespread use of computers today, a lot of the bookkeeping is done using bookkeeping software and spreadsheets.

There are two main types of bookkeeping systems, single entry and double entry.

A single entry system is more of an informal bookkeeping system where the clerk only needs to make a single entry in order to enter a business financial transaction. This type of system will usually include a daily summary of cash receipts as well as a monthly record of receipts and payments (disbursements). An example of a single entry system is a checkbook. Only one entry needs to be made for each deposit or check that is written. Receipts are entered as a deposit, and checks and withdrawals are records as expenses. If you do not want to manually prepare the monthly spreadsheets, a lot of bookkeeping software will do this for you. This system got its name because you record each transaction only once as either revenue (deposit) or as an expense (check). A single entry system is acceptable for tax purposes, but it does not give a business all the tools that it needs to get a full picture of the profitability of a business.

A double entry system is currently the standard system used by businesses and organizations to record their financial transactions. Business transactions involve an exchange of one thing for another, so double entry bookkeeping uses debits and credits to show this on the books. Debits and credits are used to show this double entry effect. This system is self balancing, as both entries must balance.