What Is Bookkeeping?

Finance Glossary
FAQs

Table Of Content

One-liner

Bookkeeping involves keeping track of all financial records, including receipts, invoices, and other documents related to a business's financial activities. Bookkeeping is a crucial aspect of any business, as it provides a clear and accurate record of the company's financial position and allows for the preparation of financial statements, such as income statements and balance sheets.

Details

  • Recording financial transactions: This involves creating a record of all financial transactions that take place within the business, including sales, purchases, and expenses.
  • Classifying transactions: Transactions should be classified according to their nature, such as whether they are related to sales, expenses, or investments.
  • Summarizing transactions: After transactions have been recorded and classified, they should be summarized in a way that makes it easy to understand the overall financial position of the business.
  • Preparing financial statements: Based on the information recorded in the bookkeeping system, financial statements such as income statements and balance sheets can be prepared.

Key definitions

  • Financial transaction: A financial transaction is any exchange of money, goods, or services that involves a business. Examples of financial transactions include sales, purchases, and expenses.
  • Ledger: A ledger is a record of financial transactions that are organized by account. Each account has its own ledger, and the ledger records all transactions that affect that account.
  • Journal: A journal is a record of financial transactions that are organized by date. It is used to record all transactions as they occur, and is the first step in the bookkeeping process.
  • Debit: A debit is an entry in a ledger or journal that represents an increase in an asset or expense account, or a decrease in a liability or equity account.
  • Credit: A credit is an entry in a ledger or journal that represents a decrease in an asset or expense account, or an increase in a liability or equity account.
  • Chart of accounts: A chart of accounts is a list of all the accounts used by a business to record financial transactions. It includes accounts for assets, liabilities, equity, revenues, and expenses.
  • Double-entry bookkeeping: Double-entry bookkeeping is a system of bookkeeping in which every financial transaction is recorded in at least two accounts. This helps to ensure the accuracy and completeness of the financial records.
  • Accrual basis of accounting: The accrual basis of accounting is a method of accounting in which revenue is recorded when it is earned, regardless of when it is received, and expenses are recorded when they are incurred, regardless of when they are paid.
  • Cash basis of accounting: The cash basis of accounting is a method of accounting in which revenue is recorded when it is received, and expenses are recorded when they are paid.
  • Financial statements: Financial statements are documents that summarize a company's financial position and performance. They include the balance sheet, income statement, statement of cash flows, and statement of equity.

KPIs

  1. Accuracy: This measures the degree to which the financial records are free from errors and discrepancies. High accuracy is important for ensuring that the financial statements accurately reflect the financial position and performance of the business.
  1. Timeliness: This measures the speed at which transactions are recorded and financial statements are prepared. Timeliness is important for ensuring that the business has access to up-to-date financial information in order to make informed decisions.
  1. Completeness: This measures the extent to which all relevant financial transactions are recorded in the bookkeeping system. Completeness is important for ensuring that the financial statements accurately reflect the financial position and performance of the business.
  1. Compliance: This measures the extent to which the bookkeeping system is in compliance with all relevant laws, regulations, and standards. Compliance is important for avoiding potential legal issues and ensuring that the business is operating in an ethical and transparent manner.
  1. Efficiency: This measures the extent to which the bookkeeping system is streamlined and efficient. A more efficient bookkeeping system can reduce costs and save time, allowing the business to focus on other areas of operation.
  1. User-friendliness: This measures the ease of use of the bookkeeping system. A user-friendly system can reduce training time and increase productivity, leading to better overall performance.
  1. Data security: This measures the extent to which the bookkeeping system is secure and protects sensitive financial data. Data security is important for protecting the business from potential breaches and maintaining the trust of customers and partners.

10 best practices

  • Chart of accounts - A chart of accounts is a list of all the accounts used by a business to record financial transactions. It is important to use a chart of accounts in order to ensure that transactions are recorded in the appropriate accounts and to make it easier to prepare financial statements. Try to carefully curate an exhaustive CoA in order to ensure uniformity.
  • Account Codes - Once the transactions exceed a certain limit, it’s advisable to use account codes and ensure code creation or deletion is done only after approval from managerial levels. This ensures accuracy in classification and consolidation for reporting and FP&A purposes.
  • Close the books once a month - It is important to regularly reconcile accounts in order to ensure that the financial records are accurate and complete. This involves comparing the balances in the bookkeeping records to the corresponding accounts in the bank statements or other documentation. To start with monthly closing is very important and when the company starts growing it can come down to weekly and daily closing.
  • Use a system for tracking expenses - It is important to have a system in place for tracking expenses, such as a system for recording and categorizing payments. All the payments have to be tagged to proper categories and reporting tags. This will help to ensure that all expenses are recorded accurately and that the business is aware of its overall financial position.
  • Bookkeeping not only for compliance but also for decision-making: Bookkeeping must be done not only from the compliance point of view but also from the decision-making point of view. The founders must be made available real-time or near real-time data in order to ensure the right key and strategic decision-making.
  • Maintaining registers and books as required by local laws: Ensure to maintain all mandatory registers such as fixed assets register, members register, etc. as required by the local law in order to avoid hassles.

10 mistakes to avoid

  1. Mixing personal and business finances: It is important to keep personal and business finances separate in order to maintain accurate financial records and avoid confusion and also ensure compliance with taxation laws.
  1. Not recording transactions in a timely manner: It is important to record financial transactions as they occur in order to ensure that the financial statements accurately reflect the financial position and performance of the business.
  1. Failing to classify transactions correctly: Transactions should be classified according to their nature, such as whether they are related to sales, expenses, or investments. Failing to classify transactions correctly can lead to inaccurate financial statements.
  1. Not keeping accurate records of expenses: It is important to keep accurate records of all business expenses in order to accurately track the financial position and performance of the business. This includes keeping receipts and other documentation for all expenses.
  1. Not keeping track of inventory: If a business maintains an inventory of goods, it is important to accurately track the quantity and value of those goods in the bookkeeping records. This includes keeping track of purchases, sales, and any changes in the inventory.
  1. Not keeping track of accounts payable and accounts receivable: It is important to keep accurate records of accounts payable (amounts owed to suppliers and creditors) and accounts receivable (amounts owed to the business by customers). This will help to ensure that the business is able to manage its cash flow effectively.
  1. Not having a professional accountant or outsourced partner: In order to keep costs in check, startups usually tend to avoid having a professional accountant on payroll or outsourced. But its always advisable to have an accountant (whether inhouse or outsourced) in order to add value to its business.

Top Recommendations for Tools

  • Zoho Books (India)
  • Tally with add-ons (India)
  • Sage (US)
  • Quickbooks (US)

Additional Reading