What is Bookkeeping?
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Bookkeeping is the charting of the money values of the function of a business. Bookkeeping gives the figures from which accounts are prepared but is a distinct process, required prior to accounting.
Predominantly, bookkeeping provides two parts of information: (1) the current value, or equity, of an enterprise and (2) any changes in value—profit or loss—taking position in the business within a single period.
Management officials, investors, and credit grantors all demand such information: management to understand the upshots of operations, to control costs, to budget for the future, and to make financial policy decisions; investors in order to analyse the outcomes of business operations and make decisions regarding buying, holding, and selling securities; and credit grantors so as to judge the financial statements of a business in deciding whether to accept a loan.
Pieces of financial and numerical records are seen for nearly every group of people with a commercial backbone. Records of business contracts have been discovered in the remains of Babylon, and accounts for both farms and estates have been created in ancient Greece and Rome. The two-entry method of bookkeeping started with the furthering of the entrepeneurial republics of Italy, and tutorial manuals for bookkeeping were created within the 15th century in various Italian cities.
During the late 18th and early 19th centuries, the Industrial Revolution provided a significant stimulus to accounting and bookkeeping.
The progression of manufacturing, trading, shipping, and subsidiary services made factual financial bookkeeping a must-have. The ancestry of bookkeeping, in fact, resembles closely the ancestry of commerce, industry, and government and, in part, helped forming it. The global movement of industrial and commercial activity required higher sophisticated decision-making processes, which in its turn needed greater sophistication in the selection, classification, and presentation of information, even more so with the assistance of computers. Taxation and government legislation became more significant and resulted in even greater requirement for information; business entities had to provide information to bolster their income tax, payroll tax, sales tax, and other tax reports. Governmental agencies and educational and other nonprofit institutions also become larger, and the requirement for bookkeeping for their own departmental operations went up.
Although bookkeeping methods can be very detailed, it is all based on two kinds of books used in the bookkeeping process—journals and ledgers. A journal has the daily transactions (sales, purchases, and so forth), and the ledger should have the details of individual accounts. The daily records in the journals are written in the ledgers.
At the end of every month, as a general rule, an income statement and a balance sheet are made 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 those changes that happen in the business equity due to the events of the period. The balance sheet gives the financial condition of the entity at any particular point in time regarding assets, liabilities, and the ownership equity.
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