What is Bookkeeping?

What is Bookkeeping?

Learning bookkeeping is essential in understanding the accounting process that which communicates the financial condition and performance of a business.

By studying the fundamentals of accounting and bookkeeping, you will have a deeper appreciation of how the financial statements are generated, what conclusion can be formed, and why financial data resulted that way.

In this article, you will take with you the necessary information in learning bookkeeping.  You will be educated on the definition of bookkeeping, its importance in business and its role in the accounting process.  We will also provide you with sample illustration for better understanding.

Introduction to Bookkeeping

Bookkeeping is defined as the process of recording the financial transactions and activities of a business.  In bookkeeping, the process of recording the business transaction is systematic and in chronological order.

Bookkeeping is an integral part of accounting because it is the foundation of the whole accounting system, which is the recording process.  Bookkeeping is an essential procedure because it is the basis of the all the other accounting procedures, which are summarizing, reporting and interpreting.  Without proper recording keeping process, there will be no reliable financial information to be reported.

Role of Bookkeeping in Business

A business is defined as an individual, group of individuals or organization engaged in economic activities, such as trade or sale of products and services, with the intention of gaining and maximizing profit.

Every business, in the course of its operations, is engaged with what we call business transactions.  These transactions are economic activities identified, analyzed and recorded in the accounting books, also known as the book of accounts.  The process of recording business transaction is what is known as bookkeeping.

Bookkeeping is important in any business because it is where the relevant financial data are recorded and kept.  Bookkeeping ensures that all business transactions are accurately and completely recorded in the accounting books.  Furthermore, bookkeeping is responsible in keeping necessary documents or evidences to support the recorded and reported financial information.  As a result, the owners and other stakeholders are able to form sound judgment and decisions on the condition and performance of the business.

Story and Illustration

To have a clear understanding of the nature and purpose of bookkeeping, here’s a sample illustration:

Joe Smith opened a car accessory shop and registered it under his name, Joe Smith Car Accessory Shop, declaring himself as the sole proprietor and owner.

 The shop was operating smoothly.  There were a lot of customers visiting and buying from Joe’s car accessory shop.  His shop is never runs out of stock because he ensures that the inventory is always full of new and quality stocks.  He makes weekly purchase from suppliers to ensure stock availability.

 Joe has good trading, sales and marketing skills, however, he has no knowledge in accounting and bookkeeping.  He did not see its relevance until a day came when he no longer have available cash to buy inventory and continue operating his business.  As a result, there was an increase in customer complaint and decrease in sales.

 Joe immediately consulted an accountant to find out what happened to his business.  Fortunately, Joe was able to keep all the documents (such as official receipts, sales invoice, bank statements, etc.) since he opened his car accessory shop business. 

 The accountant performed the bookkeeping procedures to analyze and record the transactions of Joe’s business.  After completing the bookkeeping process, the accountant went back to Joe with a financial report. 

 Joe found out that he was spending too much on his purchases of supplies.  As a result of overpriced inventory, the business incurred loses.  Additionally, he found out that his sales was not enough to pay off all the business expenses, such as rental of the business facility, salary of his employees, utility bills and other expenses.  The low amount of sales was due to the low mark up on inventory costs. 

 With the help of the accountant and the bookkeeping process performed, Joe was able to understand the condition and performance of his car accessory shop business.  And from there, he can now make decision on how to move forward with his business to regain the losses and gain more profits.  Or else, his business will go bankrupt and he may need to close it down.

 I hope this article has been helpful for you to learn and understand bookkeeping.  Your comments and feedbacks will be appreciated.

Recommended Reading


This is a great book for beginners or new to bookkeeping and accounting for small business.  It’s a comprehensive yet user friendly and easy to understand.  Packed with illustrations, worksheets, and forms helpful as reference and tool for small business entrepreneurs who wants to understand and perform bookkeeping procedures. Read more here.

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Comments

  1. i now understand what book keeping really meant

  2. Alma T. Ceneze says:

    new to this site but i think i will learn a lot from those topics

  3. Excellent
    what a way to teach book keeping specially illustration

  4. Euniceblink says:

    Now i understood what it meant by bookkeeping. So interesting

  5. Idah Sondashi says:

    I have learnt of book keeping and will apply it to my business and knowledge in my learning.Will keep learning

  6. Idah Sondashi says:

    When ever I run out of ideas will always be on this page to get and learn more ideas

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  1. […] Bookkeeping is the process of recording, in chronological order, the daily transactions of a business entity. It forms part of the accounting information system. […]

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