What is Bookkeeping?
Bookkeeping is the recordkeeping of the money values of the function of a business. Bookkeeping provides the details from which accounts are made but is a previous process, prior to accounting.
Predominantly, bookkeeping provides two areas of information: (1) the current value, or equity, of an enterprise and (2) the changes in value—profit or loss—taking position in the enterprise over a given period of time.
Management officials, investors, and credit grantors all have to have this information: management so as to understand the results of operations, to control costs, to budget for the future, and to make financial policy decisions; investors to interpret the upshot of business operations and make decisions regarding buying, holding, and selling securities; and credit grantors to analyze the financial statements of an entity in judging whether to accept a loan.
Bits and pieces of financial and numerical charts are seen for almost every civilization with a commercial history. Records of trading contracts were discovered in the remains of Babylon, and accounts for both farms and estates were made in ancient Greece and Rome. The double-entry way of bookkeeping came up with the development of the entrepeneurial republics of Italy, and instruction books for bookkeeping were created in the 15th century in some Italian cities.
During the late 18th and early 19th centuries, the Industrial Revolution permitted an important stimulus to accounting and bookkeeping.
The development of manufacturing, trading, shipping, and subsidiary services made perfect financial records a must-have. The history of bookkeeping, in fact, reflects the ancestry of commerce, industry, and government and, partially, assisted shaping it. The worldwide spread of industrial and commercial activity called for greater professional decision-making methodology, which in its turn called for better sophistication in the selection, classification, and presentation of information, even more so with the assistance of computers. Taxation and government regulation became more significant and resulted in greater requirement for information; firms 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 become larger, and the need for bookkeeping for their own inner departmental operations became higher.
While bookkeeping processes can be extremely detailed, it is all based on two kinds of books employed in the bookkeeping procedure—journals and ledgers. A journal must have the daily transactions (sales, purchases, and so forth), and the ledger must have the record of individual accounts. The daily records kept in the journals are entered in the ledgers.
Each month, generally, an income statement and a balance sheet are constructed from the trial balance posted within the ledger. The job of the income statement or profit-and-loss statement is to give an analysis of any changes that have taken place in the enterprise equity due to the transactions of the period. The balance sheet displays the financial condition of the entity at any particular date taken from assets, liabilities, and the ownership equity.
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