In this post, we discuss:
- What is Bookkeeping
- Ledger and accounts
- Double Entry System
- True and Fair View
What is Bookkeeping
Bookkeeping is a process of recording daily financial transactions into a bookkeeping system. The way of recording transactions can be done either on paper or in digital format. The most common software systems used for bookkeeping are Xero, QuickBooks or Sage. The bookkeeping entries made ensure that funds earned as income or spent for business purposes are properly accounted for.
The bookkeeping entries are grouped into Accounts (personal, real or nominal), forming an accounting ledger called a Book of Accounts. The bookkeeper’s responsibility is to enter the transactions accurately by using the correct accounts.
Double Entry
The first known double entry was first published in detail by Italian mathematician Luca Pacioli in ca 1494. He was known as ‘Father of Accounting’ and was a math teacher and a close friend of Leonardo Da Vinci. While it was a popular published work, the earliest tracking of numbers known is Lebombo Bone from around 35,000 BC.
The double entry system is used in bookkeeping and means that every transaction has at least two parties. In other words, sale entry would be reflected in receiving cash -thus involving two accounts: Sales and Cash.
The concept of money worth comes when you buy goods from your supplier on credit with a payment later on. For example, you have bought a piece of machinery from Xerox, but your payment terms are 30 days. This transaction is “in money’s worth” and different from paying to an employee. The payment to your employee would be called “in money” or immediate payment.
A sale with 30 days credit as double entry would be in the Sales and Aged Receivables accounts. Once the customer has paid for the invoice, we use Aged Receivables and Cash accounts.
The double-entry system plays a vital role in organizing and balancing the accounts. Thus presenting the financial information as a true and fair. The true and fair view is an accounting concept that was implemented into the UK company law in 1947.
Financial statements are expected to present a ‘true and fair’ view if they:
•comply with any relevant legislation or regulatory requirements;
•comply with accounting standards and generally accepted accounting practice (GAAP);
•provide an unbiased (fair and reasonable) presentation;
•are compiled with sufficient accuracy within the bounds of materiality; and
•faithfully represent the underlying commercial activity (the concept of ‘substance over legal form’). source
So even the smallest business should establish bookkeeping to know how much was bought or sold; was received and paid. Without such a system, it will create chaos. Using the accounting software makes the bookkeeping a much easier process. If bookkeeping tasks are done regularly; the business owners will be up to date to make better decisions. How regularly, it is will depend on the business size and number of transactions. Generally, it can be from daily to weekly tasks, with a monthly salary payments and reconciliation.
What’s Next:
- What Bookkeepers Do. A Typical Day.
- Business Transactions