What is Bookkeeping?

Bookkeeping is the recording of the money values of the transactions of a business. Bookkeeping gives the numbers from which accounts are written but is a previous process, required prior to accounting.

Fundamentally, bookkeeping provides two areas of information: (1) the current value, or equity, of an entity and (2) the changes in value—profit or loss—taking place in the entity during a particular time period.

Management officials, investors, and credit grantors all need to have this information: management to interpret the outcomes of operations, to control costs, to budget for the future, and to make financial policy decisions; investors so as to interpret the upshots of business operations and make decisions about buying, holding, and selling securities; and credit grantors so as to judge the financial statements of a business in finding whether to grant a loan.

Evidence of financial and numerical records have been uncovered for almost every society with a commercial history. Records of trading contracts have been found in the remains of Babylon, and accounts for both farms and estates have been created in ancient Greece and Rome. The dual-entry process of bookkeeping began with the progression of the enterprising republics of Italy, and tutorial books for bookkeeping were produced in the 15th century in some Italian cities.

In the late 18th and early 19th centuries, the Industrial Revolution granted a notable stimulus to accounting and bookkeeping.

The development of manufacturing, trading, shipping, and subsidiary services made factual financial books a must-have. The history of bookkeeping, in fact, reflects closely the ancestry of commerce, industry, and government and, in some part, helped to form it. The global market of industrial and commercial activity demanded better cosmopolitan decision-making procedures, which then needed more 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 higher need for information; businesses had to have information available to bolster their income tax, payroll tax, sales tax, and other tax reports. Governmental agencies and educational and other nonprofit institutions also grew in size, and the requirement for bookkeeping for their own inner operations became higher.

Though bookkeeping processes can be rather detailed, all of it is based on two kinds of books employed in the bookkeeping process—journals and ledgers. A journal has the daily transactions (sales, purchases, etcetera), and the ledger must have the records of individual accounts. The daily records in the journals are put in the ledgers.

Every month, generally, an income statement and a balance sheet are prepared from the trial balance posted from the ledger. The point of the income statement or profit-and-loss statement is to provide an analysis of those changes that happen in the enterprise equity because of the transactions of the period. The balance sheet provides the financial situation of the entity at any particular point in time taken from assets, liabilities, and the ownership equity.

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