What is Bookkeeping?
Bookkeeping is the recording of the money values of the operation of a business. Bookkeeping provides the details from which accounts are drafted but is a different process, prior to accounting.
Basically, bookkeeping records two areas of information: (1) the current value, or equity, of the business and (2) any changes in value—profit or loss—taking place in the enterprise over a given period.
Management officials, investors, and credit grantors all need this kind of information: management in order to understand the upshots of operations, to control costs, to budget for the future, and to make financial policy decisions; investors in order to understand 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 a business in judging whether to accept a loan.
Traces of financial and numerical recordkeeping have been seen for nearly every country with a commercial backbone. Records of trade contracts were discovered in the archaelogical digs of Babylon, and accounts for both farms and estates were kept in ancient Greece and Rome. The double-entry process of bookkeeping started with the development of the entrepeneurial republics of Italy, and tutorial books for bookkeeping were created within the 15th century in various Italian cities.
Within the late 18th and early 19th centuries, the Industrial Revolution granted an important stimulus to accounting and bookkeeping.
The rise of manufacturing, trading, shipping, and subsidiary services made factual financial records a necessity. The history of bookkeeping, in fact, reflects the ancestry of commerce, industry, and government and, in some part, helped to form it. The worldwide revolution of industrial and commercial activity called for more sophisticate decision-making methods, which in its turn needed greater sophistication in the selection, classification, and presentation of information, even more so with the aid of computers. Taxation and government regulation became more detailed and resulted in even greater demand for information; enterprising firms had to show available information to go with their income tax, payroll tax, sales tax, and other tax reports. Governmental agencies and educational and other nonprofit institutions also become larger, and the demand for bookkeeping for their own inner operations became larger.
Although bookkeeping procedures can be extremely detailed, it is all based on two styles of books used in the bookkeeping process—journals and ledgers. A journal should have the daily transactions (sales, purchases, and so on), and the ledger should have the details of individual accounts. The daily records kept in the journals are entered in the ledgers.
Every month, as a general rule, an income statement and a balance sheet are prepared from the trial balance posted out of the ledger. The purpose of the income statement or profit-and-loss statement is to display an analysis of any changes that have taken place in the business equity resulting from the transactions of the period. The balance sheet displays the financial position of the corporation at the particular day regarding assets, liabilities, and the ownership equity.
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