What is bookkeeping?
Definition of bookkeeping
The simplest explanation of bookkeeping is to say that it is the recording of financial transactions in an organised way.
There is, of course, more to it than this!
A better description would be to say that it is the accurate and timely recording of financial transactions according to a well established, internationally recognised, uniform system of organisation.
How bookkeeping records are organised
Bookkeeping records are organised into different sections according to the type of transaction. The traditional name for these sections is “ledger”. I understand that they are called ledgers because in ye olden days they were big books that were kept on a shelf or “ledge”.
The ledgers in a standard bookkeeping system are:
- Petty cash
- Cashbook (representing cash in the bank)
- Sales or Accounts Receiveable
- Purchases or Accounts Payable
- General or Nominal
Petty cash is actual cash kept in the business for minor spends. So for example, if you need to go out and buy a handful of stamps at the post office, you might choose to get some cash out of the petty cash tin to pay for them. The petty cash tin is usually a small lockable box kept in a safe on the business premises.
The cashbook is the ledger which represents the business bank account in the accounting system. It is used to record the money coming into and going out of the bank account.
Sales Ledger or Accounts Receiveable
This is where all your sales transactions are recorded. Individual customer accounts are recorded in the sales ledger showing invoices issued, which have been paid and more importantly which have not been paid.
Purchase Ledger or Accounts Payable
This is where all your transactions with your main suppliers are recorded. Individual supplier accounts are recorded in the purchase ledger showing invoices received, which have been paid and which are still outstanding.
General or Nominal Ledger
When transactions are entered into the other ledgers above they have to be categorised into one of four categories, income, expense, asset or liability. For example, for income you may have a category for sales and another for other income (e.g. bank interest). For expenses there are usually categories to cover the range of typical expenses that your business might incur. If you have bought an expensive item of equipment that will last for several years this would be categorised as an asset, a loan to be repaid over several years would be categorised as a liability.
It is from the income and expense categories in your general ledger that your profit and loss statement will be constructed. Your balance sheet will be constructed from the asset and liability categories.
Why is bookkeeping important?
Up to date, accurate bookkeeping gives you a clear picture of the financial status of your business. This can help you to plan the survival and future growth of your business. It also means that the essential preparatory work has been done to enable you to meet your financial reporting and taxation obligations.