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Significance of Bookkeeping and Maintenance of Accounting Records

Ashish M. Shaji

| Updated: Apr 03, 2021 | Category: CFO Service, Finance & Accounting

Significance of Bookkeeping and Maintenance of Accounting Records

As per experts, accounting business is expected to have a valuation of 11.8 billion dollars by 2026. Further, many start-ups and small organizations consider accountants as one of the significant professions in their organization. This is because organizations have realized the importance of bookkeeping and how it can assist them in streamlining their operations and managing their finances.  In this article, we shall discuss in detail the significance of bookkeeping (BK) and maintenance of accounting records.

What is Bookkeeping (BK) and maintenance of accounting records?

Bookkeeping refers to the activities concerned with systematic recording and classification of financial data of an organization in a proper manner. It can be called a record keeping function which is done to help in the accounting process. It helps in forming the financial statements of an organization at the end of the financial year.

BK also involves classification of financial transactions and events. The classification of transactions is done to maintain proper financial accounts. It also includes preparing source documents for the financial transactions and other business operations.

Why do we need bookkeeping and maintenance of accounting records?

BK is a crucial part of accounting process for a few reasons. When you keep records of transaction updated, you can generate accurate financial reports that help in measuring business performance. Detailed records will also help in the case of a tax audit.

It will also help in knowing detailed information regarding every expense or income instantly. Also, the maintenance of accounting records is a legal requirement in many cases. In case of companies, banks, or insurance companies, they may be required to keep and maintain financial and accounting records. Therefore bookkeeping becomes mandatory.

Right BK also assists accountants to make custom financial reports to process tax filings on time and stay clear of any compliance issues.

Some other reasons to have BK include the following:

Why do we need bookkeeping and maintenance of accounting records?
  • To enhance financial analysis and management

Unorganized cash flow and account management can cause a burden at the last instance and also affect the decision making process. BK can ensure that things such as follow-ups, invoicing, payment for suppliers are well organized and is up to date.

  • To simplify business planning

BK can keep you in a position where you would be able to easily work with your business planning as one will have an idea regarding the financial details and know if the firm is on the right path. 

  • To simplify reporting with investors

BK allows you to have lists of data in the form of charts and graphs that will allow you to prepare reports quite easily. When the investors have a clear picture about your business and its financial status, they are more likely to trust your business.

Methods of Bookkeeping

Before beginning with the Bookkeeping, a business must decide which methods is it going to follow. While choosing the method, consider the volume of daily transactions that the business has and the amount of revenue it earns. If you have a small business, a complicated method for enterprises can cause unnecessary complications.

Now let’s look at some of the methods.

  • Single entry bookkeeping

It is a simple method where one entry is made for each transaction in your book. Such transactions are made in cash book to track inbound revenue and outbound expenses. You don’t require a formal accounting training for this method. It suits small private companies as well as sole proprietorships.

  • Double entry bookkeeping

This method is more robust. It goes by the principle that each transaction affects at least two accounts and are recorded as debits and credits. Using this method makes more sense for large businesses. Enterprises choose the double entry system as it has less scope of error. It sort of double checks your books.

  • Cash-based or accrual-based

One can choose between either cash-based or accrual-based method. In the cash based method, you recognize revenue when you get cash into your business. In simple words, any time cash enters or exits your account they are recognised in the books. In the accrual method, revenue is recognized when it is earned. Likewise, expenses are recorded when it’s incurred. The actual cash doesn’t have to enter or exit for transaction to be recorded.

How is bookkeeping different from accounting?

Some people often use BK and accounting interchangeably. However, there are certain differences between the two.

In this segment, we shall look at the differences:

  • BK involves recording financial transactions, but accounting is concerned with recording, classifying, and summarizing financial transactions.
  • BK is clerical in nature, and the junior staff does this, whereas accounting requires skills of an accountant and knowledge about accounting policies.
  • BK is the base for accounting, and accounting starts where the bookkeeping ends therefore it can be said that accounting is broader in scope than BK.
  • Bookkeeping is as per the accounting concepts and conventions, but accounting methods for analyzing and interpreting financial reports may differ from one entity to another.
  • Financial statements are not a part of bookkeeping. These are prepared from the accounting process.
  • The accounting reports assist in determining the financial position of an entity but not bookkeeping records.

How to record entries in Bookkeeping?

Recording transactions begins with documents such as purchase and sales orders, bills, invoices, etc. When these documents are gathered, you can record transactions using journals, ledgers, and trial balance. If you have a small company, cash register is all you need.

A cash register is an electronic machine to calculate and register transactions. Cash registers[1] can be used to record cash flow in stores. It can also store transaction receipts. These registers are common in all kinds of businesses, but they are not the primary method of recording transactions as they use the single entry cash based BK system. This makes it convenient for small businesses.

A Journal is called the book of original entry. Here businesses chronologically record its transactions. It may be either physical or digital.  It provides the transaction date, accounts credited or debited, and the amount involved.

Ledger is a book or can be called as a compilation of accounts. Once you enter transactions in journal they are classified into separate accounts and then moved into ledger. Like journal, ledger can also be either physical or digital spreadsheets.

Trial balance is produced from complied and summarized ledger entries. It is like a test to see if your books are balanced.

Conclusion

A proper bookkeeping can drive your company to path of success. It can lead to accurate financial management, and it can also help to grab investor’s attention. Although the thought of learning to bookkeep may seem a bit overwhelming, a basic understanding of it can work wonders for your business.

Read our article:An Overview of Financial Lease Accounting in India

Ashish M. Shaji

Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on criminal and corporate law. He is a creative thinker and has a great interest in exploring legal subjects.

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