What bookkeeping is and why it is important for business?
Posted in accounting, PayTraq U, 101
Bookkeeping has been in existence in one form or another for many years. It appeared approximately when people started trading.
Bookkeeping makes sense because, if we want to run a business in an orderly manner, we need a certain system of records to help us properly trace and regulate business transactions.
Bookkeeping can be defined as a regulated system for the collection, registration, and consolidation of information expressed in terms of money about the assets status, the company’s commitments and their changes (flow of funds) by comprehensive, continuous, and documented accounting of all economic operations.
In simple terms, bookkeeping is the recording of all operations someway related to the company’s field of business.
Initially, bookkeeping was established by Luca Pacioli, an Italian friar and mathematician who lived at the turn of XV-XVI centuries. When a child, he assisted a merchant in trading record keeping, which subsequently became his occupation. The book "Particularis de Computis et Scripturis" (About accounts and other writings) made Luca famous. Pacioli was very productive and described a lot of ideas which found use in financial accounting. However, special attention should be given to his "General Ledger" and "Double Entry" concepts. While it’s very common now, the use of journals and ledgers were a completely new and revolutionary creation in Pacioli’s time.
"General Ledger" is indeed the main accounting book documenting all the business history of a firm. It is an analytical register containing information on all the commercial operations of a company. Purchases, sales, production, wages, and taxes – all these data are kept in the accounting ledgers.
"Double Entry" ("Venetian Entry") is when two accounting records are done: what was taken and where it was referred to, i.e. both debit (Dr) and credit (Cr) are recorded. Double entry allows tracing the start and the end of each transaction, which account was debited, and which account was credited.
What is the value of bookkeeping?
Bookkeeping is essential if you want to be able to measure your business and make some definite growth forecasts.
Availability of a tracing system for assets, liabilities, and revenues of your business enables you to make balanced and justified business decisions and have a clear idea about the entire business situation.
Having a robust and well-arranged accounting system in place, you are able not only to analyze the financial data of your company, but also to facilitate development and profit.
Knowing the financial status of your company in terms of income and expense gives you a better vision of your future steps to maintain the current level or to provide support for further development.
Bookkeeping also helps trace your debtors and what debts you owe, record wages, attract potential investors, maintain the budget, and provide all the necessary tax data.
Who should do bookkeeping?
Everything depends on the size of your business and how rapidly you expect your business to grow.
In large entities, financial matters are managed by a Chief Financial Officer (CFO) together with one or more accountants.
A small or a mid-sized company can outsource accounting services or have a staff accountant.
In micro-companies or start-ups accounting can be done by the business owner. It is good as it is very important for owners to be sound in the financial accounting, especially at the very start of their businesses.
Whoever is involved in bookkeeping, this work is easier and more efficient if you use good accounting software.