What is Bookkeeping?
Bookkeeping is the recording of the money values of the transactions of a business. Bookkeeping grants the numbers from which accounts are made but is a distinct process, preliminary to accounting.
Predominantly, bookkeeping records two types of information: (1) the current value, or equity, of the business and (2) any changes in value—profit or loss—taking position in the entity over a singular period.
Management officials, investors, and credit grantors all demand this information: management to understand the upshots of operations, to control costs, to budget for the future, and to make financial policy decisions; investors so as to assess the upshots of business operations and make decisions regarding buying, holding, and selling securities; and credit grantors to assess the financial statements of an enterprise in assessing whether to accept a loan.
Bits and pieces of financial and numerical records are found for almost every society with a commercial backbone. Records of business contracts were discovered in the remains of Babylon, and accounts for both farms and estates have been archived in ancient Greece and Rome. The two-entry method of bookkeeping came with the development of the commercial republics of Italy, and tutorial manuals for bookkeeping were developed within the 15th century in some Italian cities.
During the late 18th and early 19th centuries, the Industrial Revolution gave a significant stimulus to accounting and bookkeeping.
The rise of manufacturing, trading, shipping, and subsidiary services made accurate financial records a requirement. The ancestry of bookkeeping, in fact, reflects the history of commerce, industry, and government and, partially, assisted shaping it. The global revolution of industrial and commercial activity demanded greater sophisticated decision-making processes, which in turn demanded greater sophistication in the selection, classification, and presentation of information, even more so with the assistance of computers. Taxation and government legislation became more detailed and resulted in even greater demand for information; business firms had to provide information to list with their income tax, payroll tax, sales tax, and other tax reports. Governmental agencies and educational and other nonprofit institutions also became sizeable, and the need for bookkeeping for their own operations went up.
Though bookkeeping processes can be very complex, all of it is based on two styles of books used in the bookkeeping process—journals and ledgers. A journal should have the daily transactions (sales, purchases, etcetera), and the ledger should have the record of individual accounts. The daily records in the journals are entered in the ledgers.
Each month, as a general rule, an income statement and a balance sheet are prepared from the trial balance posted within the ledger. The job of the income statement or profit-and-loss statement is to show an analysis of those changes that happen in the business equity from the operations of the period. The balance sheet provides the financial condition of the entity at a particular point in time regarding assets, liabilities, and the ownership equity.
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