|Introduction to Bookkeeping|
|Basic Bookkeeping Terms and Phrases|
|Types of Bookkeeping Systems|
|Accounting / Bookkeeping Methods|
|Debits and Credits|
|Quizzes, word scrambles, crossword puzzles ...|
Bookkeeping (also called recordkeeping) is the recording of financial transactions. Transactions include sales, purchases, income, receipts and payments by an individual or organization. Bookkeeping is usually performed by a bookkeeper. Many individuals mistakenly consider bookkeeping and accounting to be the same thing. This confusion is understandable because the accounting process includes the bookkeeping function, but is just one part of the accounting process. The accountant creates reports from the recorded financial transactions recorded by the bookkeeper and files forms with government agencies. There are some common methods of bookkeeping such as the single-entry bookkeeping system and the double-entry bookkeeping system. But while these systems may be seen as "real" bookkeeping, any process that involves the recording of financial transactions is a bookkeeping process.
Keeping records is crucial for the successful management of a business. Many business finance professionals recommend that all entrepreneurs be knowledgeable about basic recordkeeping practices. The entrepreneur who decides to purchase a manual or computerized recordkeeping system, or has a bookkeeper or accountant, still needs to understand the basic premises.
The following is a simplified lexicon of basic recordkeeping that demonstrates how to set up your own accounting system.
A business also needs to determine the type of bookkeeping system that will be used for recording their business transactions. Many small businesses start out using the single entry system.
A checkbook, for example, is a single entry bookkeeping system where one entry is made for each deposit or check written. Receipts are entered as a deposit and a source of revenue. Checks and withdrawals are entered as expenses. If a manual system is used, in order to determine your revenues and expenses you have to prepare worksheets to summarize your income and categorize and summarize your different types of expenses. Bookkeeping software and spreadsheets are also available to do this for you.
The emphasis of this system is placed on determining the profit or loss of a business. It got its name because you record each transaction only once as either revenue (deposit) or as an expense (check). Since each entry is recorded only once, debits and credits (recording method required for the double entry system) are not used to record a financial event.
While the single entry system may be acceptable for tax purposes, it does not provide a business with all the financial information needed to adequately report the financial affairs of a business. In the near future, we'll probably see the single entry system follow the same path as the dinosaur - extinction.
The double entry system also has built-in checks and balances. Due to the use of debits and credits, the double-entry system is self-balancing. The total of the debit values recorded must equal the total of the credit values recorded.
This system, when used along with the accrual method of accounting, is a complete accounting system and focuses on the income statement and balance sheet. This system has worldwide support as the system to use by businesses for recording their financial transactions.
Another decision faced by a new business is what accounting/bookkeeping method is going to be used to track revenues and expenses. An accounting method is just a set of rules used to determine when and how income and expenses are reported.
Some business will be required to use the accrual method of accounting while others may be granted an exception and allowed to use the cash basis along with some special rules (If inventories are a major part of a business).
You're more than likely to encounter both the term method and basis used when this topic is discussed. In some cases you'll see the term cash method used and other cases see the term cash basis used. Likewise you'll see the term accrual method used and the term accrual basis used. They both refer to the same concept and are used interchangeably.
A strict cash method follows the cash flow exactly. A modified cash method includes some elements from the accrual method of accounting and provides special methods for handling items such as inventory and cost of goods sold, payroll tax expenses and liabilities, and recording and depreciating property and equipment. Many small businesses, whether they know it or not, are actually using a modified cash method.
By concentrating on recording revenues and expenses, the purpose of the cash or modified cash method of accounting is on determining the net income or loss for a period based on the cash received and the cash spent.
Information, such as the amounts billed to customers for products and/or services and not paid, and the amounts billed by suppliers for their products and/or services and not paid is not normally recorded and maintained in the "books" using the cash method. Many small businesses start out using the cash basis rather than the accrual basis of accounting.
In order to accomplish this, the accrual method of accounting records revenue as earned when the product and/or service is shipped or rendered and invoiced (billed) to customers. Likewise, expenses and capital expenditures are recorded as incurred when the product and or service is shipped or rendered and invoiced (billed) by the supplier.
Information, such as the amounts billed to customers for products and/or services and not paid, and the amounts billed by suppliers for their products and/or services and not paid is recorded and maintained in the "books" using the accrual method. This is the accounting method that is required to be used in order to conform to generally accepted accounting principles (GAAP) in preparing financial statements for external users.
Difference Between The Two Methods
The difference between the two methods used for recording revenues and expenses results from when the business transaction is recorded in the "books" (timing). A business using the accrual method will record revenues and expenses in their "books" before a business using the cash method. In other words, unlike the cash method, they don't wait until they get paid by the customer or wait until they pay a supplier to record the transaction.
Comment: Cash Flow and Profits are two different "animals". Due to the timing difference as to when revenue and expenses are recorded and when the cash resulting from the revenue and expenses is actually received or paid out , a business using the accrual method of accounting and reporting a "hefty" profit does not necessarily mean that they have the cash to pay their bills.
Relationship Between the Type of Bookkeeping System Used and the Accounting Method Used
The Single Entry bookkeeping system is used along with the Cash Method of accounting.
Debits and Credits are not used to record financial events.
The Double Entry bookkeeping system can be used with both the Cash and Accrual methods of accounting. Debits and Credits are used to record financial events.
With the arrival of computers and accounting software, bookkeeping errors decreased and efficiency increased. For example, the accounting software will refuse a journal entry if the debit amount entered does not equal the credit amount entered. Further, because journal amounts are posted electronically and account balances are calculated electronically, the potential for human error in these tasks is eliminated.
Whether bookkeeping tasks are performed manually by a bookkeeper or electronically by clerks, one thing remains the same: every business transaction involves at least two accounts. This is known as double entry bookkeeping (or "double entry accounting"). Double entry bookkeeping requires that for each transaction, one (or more) account must be debited, and one (or more) account must be credited.
When you are using accounting software, it may not be obvious to you that two accounts are involved with each transaction. This is because the software often updates one of the two accounts automatically. For example, whenever you enter an amount from a vendor's invoice, the computer "recognizes" it as an Accounts Payable and automatically enters the amount as a credit in that account. What you see on the computer screen is a prompt to enter only the "other" account, the one to be debited. Similarly, if you use software to generate checks, the system will automatically credit Cash and prompt you to enter only the account (or accounts) to be debited.