Importance of Bookkeeping
What is Bookkeeping?
Bookkeeping is the practice is a systematic recording, organizing and reporting financial transactions in an organization. It is an accounting process where financial transactions are recorded, analyzed and interpreted to tell the financial performance and position of an organization as at a particular date.
Some of the financial transactions captured in the bookkeeping process include:
- · Recording receipts from customers,
- · Paying vendors and suppliers,
- · Recording and monitoring accounts payable and receivables,
- · Billing of sales to customers,
- · Verifying and recording supplier invoices.
Processing staff salaries, determining and recording depreciation of organization's assets, and preparation of financial reports also form part of the bookkeeping.
The recording of these financial transactions forms the basis of accounting. It is from these records that final accounts are prepared. A bookkeeper, therefore, must ensure financial transactions are timely recorded with utmost accuracy to minimize errors during the financial reporting which can adversely affect the materiality of the accounts.
The Basics of Bookkeeping
Bookkeeping is principled in supporting documents. Principally, each transaction must be recorded in the books of accounts on a daily basis, as and when they occur. Each transaction must, however, be accompanied by a supporting document, basically, evidence, justification, or explanation for the transaction. The supporting material describes the nature and purpose of the business transaction.
As an example of a sale, for instance, it must be supported by a sales invoice and a sales receipt. Other common documents that support transactions include cash receipts, bank statements, journals, and supplier invoices.
The primary reason for recording transaction supporting documents is not only to serve as an evidence of the transaction, but also to provide for transparency in the management of funds in an organization. Besides, given the fact that prepared accounts are subject to independent audit, these documents provide an audit trail for every transaction. It is natural of humans to forget, as such, should certain transactions be queried during an audit exercise, these documents provide clear evidence, nature and the purpose of the transactions in question.
The Principle of Double Entry
In principle, each financial transaction is accompanied by a counter entry. Other than accompanying a transaction with a supporting document, the principle of double entry is also one of the set structures in bookkeeping that ensure the accuracy of records. Collectively, the processes are referred as internal controls.
Double entry is based on the fact that every transaction affects two sides of a ledger book. Just, for every debit entry, there is a credit entry of the same monetary value. For instance, a cash sale transaction affects two ledger books.
Example Of A Double Entry
As goods worth $10 are sold, the sales ledger is credited with the cost of the products sold to document the goods leaving the stock. Correspondingly, because it is a cash sale, cash of $10 is received in the organization's cashbook. As a counter entry, the cash book is debited by $10 to document the additional money coming in.
The sum of the two corresponding entries in the ledger book must be equal. The double entry serves as an error-detection system, where, should the total debit entries not equalize the total credit entries; an investigation is immediately launched to that effect to unearth the discrepancy.
However, the balancing of the two sides of the accounts does not expressly guarantee the accuracy of the records as there may be other errors that cannot be detected by a simple check on the sums of the corresponding entries.
These other errors include the error of omission where a financial transaction is wholly omitted or not recorded in the books of accounts, and the error of original entry where an error is made during the recording of the first transaction, hence the error is carried forward to other proceeding books.
Main Functions of Bookkeeping
The primary role of bookkeeping is to record financial transactions. This majorly involves the posting of the transactions (debits and credits) in the ledger books. Also, it consists of producing invoices, preparing payroll and corresponding entries including tax and other statutory deductions, as well as maintaining of general ledgers.
Besides, there are benefits that come along with the recording and maintaining financial transactions. These include reduction of the workload of the accountant during the preparation of the final accounts, hence reducing the accounting fees. This is because the statements are already organized with all the supporting documents in place. Also, reliable financial records help an organization does their budgeting basing on the reported income and expense patterns.
The Role of a Bookkeeper
The primary role of a bookkeeper is to enable the production of financial reports in the most accurate and timely manner. To be able to execute this purpose, a bookkeeper must be able to correctly set up accounting systems and software, enter the transactions in the system, perform checks and reconciliation on the accounts to ensure accuracy and authenticity, and to provide general administrative support to the organization.
In conclusion, the importance of bookkeeping cannot be overlooked by any serious and financially disciplined organization since it provides the basis for analyzing the performance and the reason for continuing to do business. Besides, it is one sure method of ensuring that transparency prevails in the management of funds. A morally healthy organization, therefore, must put forward, as a matter of priority, bookkeeping as a road to financial health.
You may also be interested in taking a look at the following articles:
These two posts will give you an insight into the accounting and basic investing world.