Bookkeeping is the process of documenting business transactions in a systematic manner. Similarly, transactions are economic events involving the receipt or payment of money. That is to say, when you buy goods, sell goods or pay for electricity, you have performed a transaction. For instance, purchases, sales, receipts, and payments are examples of transactions. All these transactions are collected on source documents and subsequently entered into the books of accounts.
therefore, Bookkeeping is an important part of the accounting process in business. The bookkeeper is the person who is employed to perform the functions of recording transactions. The bookkeeper’s primary duty is to prepare the daybooks or journals. After that, the accountants make use of the journals to prepare financial reports such as income statements and statements of financial position.
There are two methods of bookkeeping; Manual and Computer-based bookkeeping.
- Manual Bookkeeping – This is the traditional or conventional method of bookkeeping. That is to say, business transactions are recorded by hand using pen and paper. However, this method is mainly used by small businessmen having minimal and less complex transactions in recent times. That is because this method is cheaper and easier to maintain but it involves the tedious task of performing arithmetic which requires a lot of skill and time.
- Computer-Based Method – on the other hand, the computer-based method is the use of computer software for recording business transactions. Considering the complexity of the modern-day business world, this method offers a better alternative. because transactions are recorded and processed faster. similarly, this method eliminates most of the shortcomings of manual accounting and promotes the reliability and accuracy of financial reports.
The Bookkeeping process
The bookkeeping process refers to the various steps involved in recording transactions beginning from when a transaction is performed to when it is reflected in the final accounts of a business. in other words, the process is also called the accounting cycle. It involves identifying transactions, recording such transactions in journals, posting the transactions to the ledgers, preparing the trial balance, adjusting entries, and preparing final accounts.
1. identifying transactions
When transactions occur, they are captured on source documents. That is to say, source documents are the original documents on which the details of a business transaction are recorded. Therefore they are evidence that transactions take place. In addition, they provide the basis for any entry into the books of accounts. Examples of source documents include:
- Purchase invoice
- Sales invoices
- Cash receipts
- Payment vouchers
- Credit memos
- Employee time cards
- Deposit slips
- Purchase orders
Source documents provide basic information such as Date, Customer details, Description of goods or service, Price, Amount, and in most cases authorized signatures of both the customer buyer and seller. Meanwhile, they form the audit trail during an audit.
The work of the bookkeeper begins with the source documents. Firstly, the bookkeeper identifies transactions captured on the source documents and enters them in the relevant book of original entry or journal.
2. Journal Entry
After identifying transactions, the next thing is to enter them in the journals. That is to say entering transactions from source documents into the journal is called journalizing. Similarly, A journal on the other hand is a temporary book of accounts where transactions are first recorded before they are posted to the ledger. In other words, Journals are also called books of prime entry or books of original entry. Examples of journals and their uses are:
- Sales journal – records credit sales.
- Purchase Journal – records Credit purchase
- Cash Book – Records cash receipt and payment
- Sales return day book – records goods returned by customers
- Purchase return daybook – records goods returned by suppliers
- General journal – records transactions that don’t fit in any of the above. Examples are equity, assets, borrowing, and correction of errors
3. Posting transactions to the ledger
The process of recording transactions from the journal to the ledger is called posting. A ledger is the principal book of account where all the entries made in the journals are permanently posted. Ledgers can be Sales, Purchases, and general ledgers.
- Sales ledger – Records all the sales of the business both cash and credit.
- Purchases ledger – records all the purchases of the business both cash and credit.
- General Ledger – records any other transaction that does not fall under sales and purchases journal such as income, expenses, equity, asset, and liabilities.
4. Balancing Books of accounts
This process involves matching the debit and credit sides of all accounts to obtain a balance. Ledger accounts are maintained based on the double-entry system of accounting. Each account has a debit and a credit column. To balance an account, add the entries on the debit side and that of the credit side differently. Minus the total on the debit side from that of the credit side. The difference between them is called balance. It’s a debit balance if the total on the debit side is more and vice versa. Normally, all assets and expenses will have debit balances while equity, liabilities, and incomes will have credit balances.
5. Extract a Trial Balance
A trial balance is a list of ledger balances extracted to test the arithmetical accuracy of entries made in the ledger accounts within an accounting period. The trial balance is prepared from the list of all the balances on the ledger accounts. All debit balances are listed on the debit column while all credit balances are listed on the credit column when preparing the trial balance. If everything is ok, the total on the debit column will be the same as that on the credit column.
6. Adjusting the trial Balance
At the end of the accounting period, there could be some accruals or prepayments that were not taken note of in the trial balance. These adjustments will involve making journal entries to reflect the effects of prepayments and accruals and depreciation and others.
7. Preparing final Accounts
After adjusting your trial balance, you are now set to prepare your final accounts. which incl the income statement, statement of financial position, Changes in equity and cash flow statement, etc. The Income statement is prepared using Opening stock, Purchase, sales, closing stock, incomes, and expenses. While equity, asset, and liabilities are used to prepare the statement of financial position.