How to Keep Bookkeeping Records



The 5 Step Bookkeeping Cycle
The bookkeeping function comprises of 5 main steps. Each step must be completed before the next one is performed.

The steps are:

  1. Enter all transactions and information into your books of prime entry from documents such as cheque books, sales invoices, purchase invoices, etc. (Books of prime entry are the Cashbook, the Journal, as well as the General Journal.)

  2. Each entry in these prime entry books affects a particular category, known as an account. The total of each account is calculated and entered into a ledger, known as a General Ledger. This is a larger account, which contains all the accounts.

  3. From the General Ledger, a Trial Balance is taken out. A Trial Balance is simply the list of all the balances of each account in the General Ledger.

  4. From the Trial Balance the information is used to bring in any amendments to the various accounts. After that, the accountant takes the information from the Trial Balance and prepares the financial statements. Financial statements relate to the Revenue or Profit and Loss Statements and the Balance Sheet.

  5. After the financial statements have been completed the records are closed off for that particular business period.

 

Summary of the Bookkeeping Cycle steps
Based on the bookkeeping cycle, the steps are:

  1. Complete the books of prime entry.
  2. Post all the transactions that are in each of the accounts to the bigger account called the General Ledger.
  3. Take out the list of balances in the General Ledger and create a Trial Balance.
  4. From the Trial Balance, make any adjustments required to ensure that the transactions correctly record what has happened.
  5. From the Trial Balance complete the financial statements (Profit and Loss Account and Balance Sheet).
  6. After the financial statements are completed, the ledger can be closed off for the period.


What is a Book of Prime Entry?
A book of prime entry is the book in which a transaction is first entered or recorded. It is simply a collection of all the basic financial transactions of a business into their own individual books of account. A separate book is written up for each of the main types of transactions - Sales, Purchases, Cash Receipts, Cash Payments and Other Transactions from source paperwork and information as a transaction occurs in the business.

Entries are made on a daily basis in the order that they occur, but then later on each book is broken down into appropriate categories, or what is known as accounts, to provide a more meaningful summary to all the transactions running through the business.