Bookkeeping



How Does Bookkeeping Work?
 Bookkeeping or "keeping books" is not difficult. Before examining bookkeeping and seeing how it all comes together, it is important to be clear on 5 basic accounting classifications into which every financial transaction of any business will fit. 
 
These are:
  1. Assets
    Assets are what a business owns or moneys due to it.  For example, cash, equipment, debtors.

  2. Liabilities.
    Liabilities are what a business owes to others.  For example, bank overdraft, loans from a finance company, creditors, etc.

  3. Equity. 
    Equity is the investment that belongs to the owners.  That is, it is the initial investment made by the owners, plus any profits that have been added since, or any extra capital that the owner has put into the business.

  4. Income. 
    Income or revenue earned from business operations will include such things as sales, dividends or interest from outside investments, etc.

  5. Expenses
    The expenses are the costs of the business, which are incurred in running the business, as well as producing the sales or income of the business.  For example, the cost of goods, rent paid out, telephone, etc. 
All these classifications are subcategorised so that each transaction within a classification will have meaning when they are grouped together in the bookkeeping system.

The subject of bookkeeping and accounting is very specialised and cannot be covered in a simple web site or manual such as this.  There are many courses available for business owners who wish to update their knowledge in this area and these courses are highly recommended.

Unless you, as a business owner, understand what is happening on the financial side of your business, you will always be dependent on what your accountant has to say.  Unfortunately, your accountant is not always available on a day to day basis, so problems can arise which are not picked up until later on, if you don’t have a basic understanding of bookkeeping and accounting principles.
 
 
 



Main Categories in a Bookkeeping System
The main categories, known as accounts, for a small business include the following:
 
  • Assets: Land, building, plant and equipment, office machinery, motor vehicles, balance in the bank, petty cash, debtors, stock, work in progress, investments, and prepayments.

  • Liabilities: Bank overdraft, creditors, loans from finance companies, hire purchase, accumulated depreciation, owner’s current accounts, taxation provision.

  • Equity: This will depend on whether the business is a company or a non-company, but generally will have share capital, issued shares, retained earnings or profit and loss appropriation, shareholder’s funds or owner’s capital account.

  • Revenue: This will include sales, income from other sources, interest and dividends, income from other investments.

  • Expenses: Purchase of goods, cartage, wages, advertising, bank fees, depreciation, entertainment, electricity, insurance, interest, licences, lease, motor vehicle costs, printing, rent and rates, salaries, stationery, telephone.

What is Double Entry Bookkeeping?
The term double entry bookkeeping has the same meaning as double entry accounting and is in fact the one and same thing. 
 
There are 2 basic bookkeeping methods used, that is, single entry and double entry. 
  1. Single entry - is a system whereby only one entry is recorded for each transaction, hence the term single.  Many businesses can run quite well using the single entry system. The only problem is that there is no check on accuracy and if you leave out an item then it is very difficult to pick up if that item has been missed.  Single Entry is sufficient for smaller businesses where there is little need for a double entry type system.

  2. Double entry - requires 2 entries for every transaction.  It means that for every debit there has to be a credit.  For every transaction going out there must be a corresponding transaction coming in.  This double entry method provides a cross check and ensures that errors are minimised.  It is the best option and is the accepted accounting system in use for most businesses today.