What is Bookkeeping?
Bookkeeping is the charting of the money values of the function of a business. Bookkeeping provides the details from which accounts are made but is a distinct process, prerequisite to accounting.
Fundamentally, bookkeeping grants two parts of information: (1) the current value, or equity, of an entity and (2) any changes in value—profit or loss—taking position in the business during a given period of time.
Management officials, investors, and credit grantors all demand such information: management so as to interpret the upshots 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 judge the financial statements of an enterprise in judging whether to allow a loan.
Traces of financial and numerical charts have been found for nearly every civilization with a commercial backbone. Records of commercial contracts were discovered in the ruins of Babylon, and accounts for both farms and estates had been made in ancient Greece and Rome. The double-entry manner of bookkeeping began with the furthering of the enterprising republics of Italy, and tutorial manuals for bookkeeping were developed during the 15th century in many Italian cities.
In the late 18th and early 19th centuries, the Industrial Revolution provided a notable stimulus to accounting and bookkeeping.
The progression of manufacturing, trading, shipping, and subsidiary services made correct financial books a paramount factor. The past of bookkeeping, in fact, resembles closely the past of commerce, industry, and government and, in some part, helped to shape it. The international movement of industrial and commercial activity needed higher sophisticated decision-making processes, which itself needed higher sophistication in the selection, classification, and presentation of information, increasingly with the progression of computers. Taxation and government legislation became more detailed and resulted in increased demand for information; firms had to show available information to support 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 departmental operations became higher.
Although bookkeeping methods can be very detailed, it is all based on two kinds of books employed in the bookkeeping procedure—journals and ledgers. A journal should have the daily transactions (sales, purchases, and so on), and the ledger must have the records of individual accounts. The daily records kept in the journals are written in the ledgers.
At the end of every month, generally speaking, an income statement and a balance sheet are created from the trial balance posted from the ledger. The purpose of the income statement or profit-and-loss statement is to display an analysis of the changes that have taken place in the enterprise equity resulting from the events of the period. The balance sheet displays the financial situation of the corporation at a particular point in time derived from assets, liabilities, and the ownership equity.
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