What is Bookkeeping?
Bookkeeping is the recordkeeping of the money values of the operation of a business. Bookkeeping gives the figures from which accounts are drafted but is a distinct process, required prior to accounting.
Fundamentally, bookkeeping provides two kinds of information: (1) the current value, or equity, of the business and (2) the change in value—profit or loss—taking place in the entity over a single period.
Management officials, investors, and credit grantors all need this kind of information: management to understand the outcomes of operations, to control costs, to budget for the future, and to make financial policy decisions; investors in order to assess the outcomes of business operations and make decisions about buying, holding, and selling securities; and credit grantors so as to assess the financial statements of an enterprise in assessing whether to grant a loan.
Evidence of financial and numerical record charts are uncovered for just about every civilization with a commercial background. Records of commercial contracts were uncovered in the archaelogical digs of Babylon, and accounts for both farms and estates had been held in ancient Greece and Rome. The dual-entry process of bookkeeping started with the furthering of the commercial republics of Italy, and instruction books for bookkeeping were created within the 15th century in many Italian cities.
During the late 18th and early 19th centuries, the Industrial Revolution permitted a notable stimulus to accounting and bookkeeping.
The development of manufacturing, trading, shipping, and subsidiary services made factual financial recordkeeping a paramount factor. The history of bookkeeping, in fact, resembles closely the history of commerce, industry, and government and, in part, helped shaping it. The international movement of industrial and commercial activity required greater professional decision-making methods, which in turn needed greater sophistication in the selection, classification, and presentation of information, more so with the assistance of computers. Taxation and government legislature became more significant and resulted in increased need for information; entities had to have information available to support their income tax, payroll tax, sales tax, and other tax reports. Governmental agencies and educational and other nonprofit institutions also grew in size, and the need for bookkeeping for their own operations became higher.
Although bookkeeping methods can be extremely complex, all are based on two styles of books employed in the bookkeeping procedure—journals and ledgers. A journal contains the daily transactions (sales, purchases, etcetera), and the ledger must have the records of individual accounts. The daily records from the journals are entered in the ledgers.
Each month, generally, an income statement and a balance sheet are prepared from the trial balance posted out of the ledger. The duty of the income statement or profit-and-loss statement is to show an analysis of any changes that took place in the business equity from the operations of the period. The balance sheet provides the financial condition of the enterprise at a particular date in terms of assets, liabilities, and the ownership equity.
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