23 Jun 10 What is Bookkeeping?
Bookkeeping is the charting of the money values of the function of a business. Bookkeeping gives the information from which accounts are drafted but is a separate process, preliminary to accounting.
Essentially, bookkeeping records two types of information: (1) the current value, or equity, of an entity and (2) changes in value—profit or loss—taking position in the business within a particular time.
Management officials, investors, and credit grantors all need to have such information: management so as to analyse the outcomes of operations, to control costs, to budget for the future, and to make financial policy decisions; investors in order to analyse the outcome 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 accept a loan.
Bits and pieces of financial and numerical records can be seen for nearly every group of people with a commercial backbone. Records of business contracts were discovered in the archaelogy of Babylon, and accounts for both farms and estates had been archived in ancient Greece and Rome. The dual-entry way of bookkeeping came up with the development of the commercial republics of Italy, and tutorial manuals for bookkeeping were created during the 15th century in some Italian cities.
During the late 18th and early 19th centuries, the Industrial Revolution permitted a significant stimulus to accounting and bookkeeping.
The development of manufacturing, trading, shipping, and subsidiary services made accurate financial recordkeeping a necessity. The history of bookkeeping, in fact, reflects the history of commerce, industry, and government and, partially, helped in shaping it. The international expansion of industrial and commercial activity needed more sophisticated decision-making methodology, which in its turn called for greater sophistication in the selection, classification, and presentation of information, even more so with the aid of computers. Taxation and government legislature became more detailed and resulted in increased demand for information; businesses had to have available information to list with their income tax, payroll tax, sales tax, and other tax reports. Governmental agencies and educational and other nonprofit institutions also developed in size, and the requirement for bookkeeping for departmental operations became higher.
Though bookkeeping procedures can be extremely complex, all of it is based on two styles of books employed in the bookkeeping procedure—journals and ledgers. A journal contains the daily transactions (sales, purchases, and so forth), and the ledger should have the records of individual accounts. The daily records in the journals are put in the ledgers.
At the end of each month, by general practice, an income statement and a balance sheet are made from the trial balance posted within the ledger. The duty of the income statement or profit-and-loss statement is to give an analysis of the changes that happen in the business equity from the operations of the period. The balance sheet gives the financial situation of the corporation at any particular day with regard to assets, liabilities, and the ownership equity.
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