What is Bookkeeping?
Bookkeeping is the recordkeeping of the money values of the function of a business. Bookkeeping provides the figures from which accounts are prepared but is a distinct process, preliminary to accounting.
Predominantly, bookkeeping records two parts of information: (1) the current value, or equity, of an enterprise and (2) the changes in value—profit or loss—taking placement in the business from a given period.
Management officials, investors, and credit grantors all demand such information: management to interpret the results of operations, to control costs, to budget for the future, and to make financial policy decisions; investors to assess the outcome of business operations and make decisions for buying, holding, and selling securities; and credit grantors so as to regard the financial statements of an entity in finding whether to give a loan.
Bits and pieces of financial and numerical records are uncovered for just about every state with a commercial background. Records of business contracts were found in the archaelogy of Babylon, and accounts for both farms and estates have been kept in ancient Greece and Rome. The double-entry method of bookkeeping came up with the furthering of the commercial republics of Italy, and instruction manuals for bookkeeping were produced in the 15th century in various Italian cities.
In the late 18th and early 19th centuries, the Industrial Revolution provided a significant stimulus to accounting and bookkeeping.
The development of manufacturing, trading, shipping, and subsidiary services made perfect financial books a requirement. The history of bookkeeping, in fact, closely resembles the ancestry of commerce, industry, and government and, in part, assisted forming it. The worldwide spread of industrial and commercial activity required better professional decision-making methods, which itself called for more sophistication in the selection, classification, and presentation of information, more so with the assistance of computers. Taxation and government legislation became more important and resulted in higher need for information; enterprises had to show information to go 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 demand for bookkeeping for their own operations increased.
While bookkeeping methods can be very detailed, all are 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 contains the records of individual accounts. The daily records in the journals are written in the ledgers.
Each month, generally speaking, an income statement and a balance sheet are prepared from the trial balance posted within the ledger. The point of the income statement or profit-and-loss statement is to show an analysis of the changes that have occurred in the ownership equity due to the transactions of the period. The balance sheet displays the financial situation of the corporation at a particular day regarding assets, liabilities, and the ownership equity.
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