Bookkeeping is the process of recording transactions in the financial records of a business entity. Before transactions are recorded, they need to be classified according to their type so that similar items can be recorded in the same record or account . For example, a business entity will keep records of sales and purchases of goods or services, each classified according to their nature. Originally records detailing similar types of transactions were kept together in a book or ledger, with one or more pages dedicated to a particular kind of transaction, for example, sales of specific goods. Therefore, records often are collectively referred to as the ‘books’ of a business.
Bookkeeping goes back many hundreds, even thousands, of years. It began because people needed to record business transactions as a means of keeping track of who owed them money and to whom they owed money, and of knowing whether businesses were financially successful or not. For many years, bookkeeping was based on common sense – businesses recorded the data they considered necessary in order to obtain the information they required. ‘Bookkeeping’ as a term is used to denote not only recording transactions in the way described here, but also frequently as an abbreviation for double-entry bookkeeping , a particular system of recording transactions devised about 500 years ago, and first written about by an Italian monk called Luca Pacioli. Today, double-entry bookkeeping remains the most widespread method of bookkeeping.
It is the job of the bookkeeper to maintain the books of a business and keep them up to date. This is done by ensuring that transactions are recorded in a timely and logical manner, either chronologically, as they occur, or by dealing with like items in batches, for example, recording all sales of a particular good in a defined period of time (day, week or month, according to the needs of a business). Recording may be done manually using paper and pen, but it is now more commonly done by using a computerised bookkeeping or accounting program.
Recording items in individual accounts (see above) is also referred to as posting , and a computer program can ensure that all necessary records are completed quickly and accurately (provided that data have been entered correctly, of course!).
Link between accounting and writing
Arguably the need felt by the Sumerian civilisation in Mesopotamia to keep account of livestock was also the origin of writing, as this account was recorded. The concept of ‘wealth’ is much older than that of ‘money’. Livestock was often regarded as an indication of wealth – which is still the case in some developing countries. Anyone who has read Alexander McCall Smith’s The No. 1 Ladies’ Detective Agency , set in Botswana in recent years, will recall that Mma Ramotswe was bequeathed a herd of 180 prime cattle by her father, who had regarded them as an investment.
As a result of posting transaction details to individual accounts in this way, each account will show a history or list of transactions that have occurred, so the management of a business can keep track of them individually. It can also track movements (increases and decreases in the volume of transactions recorded) over a period of time (e.g., to monitor sales of a new product). Businesses also need to know how well they are faring in all aspects, and the existence of accounts enables them to draw up a formal report to show this. The list of monetary transactions in an individual account can be totalled so, for example, the total sales of a good in a particular period can be determined. This totalling of individual accounts also may reveal that one side of a double-entry account exceeds another in value. This enables a balance to be calculated. The individual account balances for all accounts are then listed in a separate document, which is known as a trial balance . The process of balancing off individual accounts and drawing up a trial balance is an important part of determining whether a business has made a profit or loss overall.
Imagine a business recorded what it had sold, to whom, the date it was sold, the price at which it was sold, and the date it received payment from the customer, along with similar data concerning the purchases made by the business.
What information do you think that the business could produce from these data? Take ten minutes or so to type your answer.
These data would enable the business to know how much it had sold and how much it had purchased, how much cash it had received and paid, how much was owing to it and how much was owed by it (both in respect of any individual customer or supplier and in respect of the overall business transactions), and whether it was making a profit or a loss over a particular time period. It might also be possible to compare how much had been sold to the customer and purchased from the supplier with amounts sold and purchased previously.