A Simple Definition of Bookkeeping
In very simple and basic terms, it can be said that Bookkeeping is the recording of your company’s Income and Expenses into a set of account books known as Ledgers (read section on Ledgers to know more on Ledgers), Income and Expenses are also known as Receipts and Payments, Inflows and Outflows, Revenues and Expenditures, depending on the accepted terminology used by your company, industry or trade.
The Double Entry System
The basis of a good bookkeeping practice is The Double Entry System.
Many non-accountants and non-bookkeepers, these are people who are normally unfamiliar with bookkeeping and accounting principles, get lost in their bookkeeping from the very start, by not fully understanding Double Entry.
What is meant by Double Entry?
Simply put, Double Entry is to enter each piece of data, transaction or information twice (double) into your ledgers.
Whether the data, transaction or information isa sales invoice, a receipt issued for a payment received or a payment voucher for a payment made. All these data will be entered once as a Debit and once as a Credit.
The end result would be, that by entering the same piece of data twice, once as a Debit and once as a Credit, the accounts therefore balances and leaves a balance of zero (0), when the total Debits and total Credits are deducted from each other.
For example, if you receive a payment of $100 for a Cash Sale, you would Debit the Cash or Bank Account and Credit the Sales Account, with the $100. So when you prepare your Trial Balance, your Cash Account balance would have a Debit balance of $100 and your Sales Account balance would have a Credit balance of $100, meaning your Trial Balance balances.
Why Double Entry and not Single Entry?
Of course, some may argue that a Single Entry System is easier to use, since you only need to enter the data or information once.
But what has to be noted, is that a double entry system gives an automatic check and balance and therefore will alert you of any errors and/or omissions that may have occurred in your bookkeeping.
A single entry system will not allow you this check and balance.
So I will only discuss about The Double Entry System and will ignore the Single Entry System.
In the next article, I will write on Debit and Credit.
By: Raja Idris Kamarudin
Posts Tagged ‘Receipt’
Easy Understanding of Bookkeeping – Part 1 – Introduction
December 23rd, 2009Accounting – A Practical Definition
December 7th, 2009
What is accounting?
A simple definition is the recording of financial or money transactions. Not all transactions need to be recorded. Mostly, only business transactions are recorded, personal transactions are rarely recorded by individuals.
For example, you purchase a book for $10. You give the book seller $10; you receive the book & a receipt for $10. More often than not you throw the receipt away; you only want to read the book. The book seller however is operating a business so the transaction will be recorded.
The book seller will record the $10 as a cash sale and at the end of the day will total all of the book cash sales. That is easy, count the money in the till less the float amount at the start of the day and you have the total sales for the day. The book seller now has a problem, how many books were sold, what books were sold and was there a profit for the day?
Does it matter? It does if the book seller wishes to continue the business. This is where the accounting system or process begins to be a little more complicated.
The book seller now has to figure out a few things. How many books were sold is relatively easy, 45 transactions for the day so 45 books sold today. All at $10, unlikely, so the book seller needs an accounting system to record or show this information. This accounting system should show what books were sold, at what price and how many were sold.
The book seller needs this information because tomorrow there will be more sales. If there were 10 books titled “Book 1″ today and four were sold then tomorrow there will only be six on the shelf. If four more are sold tomorrow, there will be two left for the day after tomorrow. If customers come into the book shop to buy “Book 1″ and it is not available they will go somewhere else to get it.
It may take a week to receive more books after an order is made.
So the accounting system must show the book seller when more books need to be ordered not just how many were sold and at what price. In the example “Book 1″ the book seller will need more books arriving tomorrow or early the day after so no book sale is lost. The new book order would have needed to be made a week ago for there to be no loss of book sales.
How much did the book seller pay for the books? That information also needs to be available to show whether a profit is being made. The simple transaction of one $10 sale is not so simple for the book seller.
Accounting is far more than the simple recording of a financial transaction. Accounting needs to be able to provide more information than the financial amount of the transaction alone.
A better definition would be accounting is the process of recording all aspects of the money transaction from a financial, physical and non-financial informational point.
Mind you not all transactions are completely money so even the better definition is not complete when it comes to a definition of accounting. Accounting involves so many different areas of business that any definition given is always going to be open to debate, especially amongst accountants.
By: Michael Russell