Bookkeeping

Bookkeeping Information

Personal record keeping often uses a simple single-entry system, in which amounts are recorded in column form. Such entries include the date of the transaction, its nature, and the amount of money involved. Record keeping of organizations, however, is based on a double-entry system, whereby each transaction is recorded on the basis of its dual impact on the organization’s financial position or operating results or both.

Information relating to the financial position of an enterprise is presented in a balance sheet, while disclosures about operating results are displayed in an income statement. Data relating to an organization’s liquidity and changes in its financial structure are shown in a statement of changes in financial position. Such financial statements are prepared to provide information about past performance, which in turn becomes a basis for readers to try to project what might happen in the future.

History

Bookkeeping and record-keeping methods, created in response to the development of trade and commerce, are preserved from ancient and medieval sources. Double-entry bookkeeping began in the commercial city-states of medieval Italy and was well developed by the time of the earliest preserved double-entry books, from 1340 in Genoa.

The first published accounting work was written in 1494 by the Venetian monk Luca Pacioli. Although it disseminated rather than created knowledge about double-entry bookkeeping, Pacioli’s work summarized principles that have remained essentially unchanged. Additional accounting works were published during the 16th century in Italian, German, Dutch, French, and English, and these works included early formulations of the concepts of assets, liabilities, and income.

The Industrial Revolution created a need for accounting techniques that were adequate to handle mechanization, factory-manufacturing operations, and the mass production of goods and services. With the emergence in the mid-19th century of large, publicly held business corporations, owned by absentee stockholders and administered by professional managers, the role of accounting was further redefined.

Bookkeeping, which is a vital part of all accounting systems, was in the mid-20th century increasingly carried out by machines. The widespread use of computers broadened the scope of bookkeeping, and the term data processing now frequently encompasses bookkeeping.

Bookkeeping Cycle

Modern accounting entails a seven-step accounting cycle. The first three steps fall under the bookkeeping function—that is, the systematic compiling and recording of financial transactions. Business documents provide the bookkeeping input; such documents include invoices, payroll time cards, bank checks, and receiving reports. Special journals (daily logs) are used to record recurring transactions; these include a sales journal, a purchases journal, a cash-receipts journal, and a cash-disbursements journal. Transactions that cannot be accommodated by a special journal are recorded in a general journal.

Step One

Recording a transaction in a journal marks the starting point for the double-entry bookkeeping system. In this system the financial structure of an organization is analyzed as consisting of many interrelated aspects, each of which is called an account (for example, the “wages payable”account). Every transaction is identified in two aspects or dimensions, referred to as its debit (or left side) and credit (or right side) aspects, and each of these two aspects has its own effect on the financial structure. Depending on their nature, certain accounts are increased with debits and decreased with credits; other accounts are increased with credits and decreased with debits. For example, the purchase of merchandise for cash increases the merchandise account (a debit) and decreases the cash account (a credit). If merchandise is purchased on the promise of future payment, a liability would be created, and the journal entry would record an increase in the merchandise account (a debit) and an increase in the liability account (a credit). Recognition of wages earned by employees entails recording an increase in the wage-expense account (a debit) and an increase in the liability account (a credit). The subsequent payment of the wages would be a decrease in the cash account (a credit) and a decrease in the liability account (a debit).

Step Two

In the next step in the accounting cycle, the amounts that appear in the various journals are transferred to the organization’s general ledger—a procedure called posting. (A ledger is a book having one page for each account in the organization’s financial structure. The page for each account shows its debits on the left side and its credits on the right side, so that the balance—that is, the net credit or debit—of each account can be determined.)

In addition to the general ledger, a subsidiary ledger is used to provide information in greater detail about the accounts in the general ledger. For example, the general ledger contains one account showing the entire amount owed to the enterprise by all its customers; the subsidiary ledger breaks this amount down on a customer-by-customer basis, with a separate subsidiary account for each customer. Subsidiary accounts may also be kept for the wages paid to each employee, for each building or machine owned by the company, and for amounts owed to each of the enterprise’s creditors.

Step Three

Posting data to the ledgers is followed by listing the balances of all the accounts and calculating whether the sum of all the debit balances agrees with the sum of all the credit balances (because every transaction has been listed once as a debit and once as a credit). This determination is called a trial balance. This procedure and those that follow it take place at the end of the fiscal period. Once the trial balance has been successfully prepared, the bookkeeping portion of the accounting cycle is concluded.

Step Four to Six (Accounting Cycle) are in the Accounting entry.

More Accounting Entries

Accounting information can be classified into two categories: financial accounting or public information and managerial accounting or private information.
Read about Financial Accouting here
Read about Managerial Accouting here

Specialized Accounting

Of the various specialized areas of accounting that exist, the three most important are auditing, income taxation, and nonbusiness organizations. Auditing is the examination, by an independent accountant, of the financial data, accounting records, business documents, and other pertinent documents of an organization in order to attest to the accuracy of its financial statements. Read about Auditing here

The second specialized area of accounting is income taxation. Read about income taxation here

A third area of specialization is accounting for nonbusiness organizations, such as universities, hospitals, churches, trade and professional associations, and government agencies. Read about accounting for nonbusiness organizations here

Financial Reporting

Traditionally, the function of financial reporting was to provide proprietors with information about the companies that they owned and operated. Read about financial reporting here

Accounting Principles

Accounting as it exists today may be viewed as a system of assumptions, doctrines, tenets, and conventions, all encompassed by the phrase “generally accepted accounting principles.”Read about accounting principles here

The Balance Sheet

Of the two traditional types of financial statements, the balance sheet relates to an entity’s position, and the income statement relates to its activity. The balance sheet provides information about an organization’s assets, liabilities, and owners’ equity as of a particular date (such as the last day of the accounting or fiscal period). Read about income balance sheet here

The Income Statement

The traditional activity-oriented financial statement issued by business enterprises is the income statement. Read about Income Statements here

Regulations and Standards in the United States

Until 1973, accounting principles in the United States had traditionally been established by certified public accountants. Read about Accounting Regulations and Standards in the United States

Source: “Accounting and Bookkeeping”Microsoft® Encarta® Online Encyclopedia

See Also

Bookkeeping in the World

Bookkeeping

Resources

See Also

• Accounting
• Book