Knowledge Base

What is Bookkeeping?

Imagine the kind of mess you would be in if you did not keep an eye of how much you have in the bank vis à vis the cheques you have issued? If you have a record of the cheques you have issued and the payment you have received, you will know exactly how much balance you have available in the bank. In its simplest form, bookkeeping is the practice of maintaining a record of day to day transactions, be it an organization or an individual. For a business to be successful, bookkeeping needs to record the daily transactions in a consistent way. Banks are one of the most prominent examples of organizations which need to undertake perfect bookkeeping. Recording how and when money is spent and made helps to keep an overall view of how your money is working for you. 

Before we talk about bookkeeping, let us delve a bit into the basic terms that are used in tracking of finance. There are two ways an enterprise or business keeps track of the money – revenue and expenses. Anything a business earns is revenue, and anything the business spends is expense. Businesses typically make money by selling goods and / or services, and spend money on raw materials, employee salary, overheads like electricity, rent, hardware, etc. businesses keep track of income and expenditure through journal entries and ledgers.  While a journal is typically one set of records pertaining to one area of the business, the ledger is the record of all the transactions of the business. It is the job of the ledger entries to collate all the journal data and show the overall financial picture of the business. There are two ways this can be done, either with journal type entries for every transaction listed above all in one large ledger, or by summarizing each journal into one ledger entry.

There are two most common bookkeeping methods – the single entry and double entry. 

Single Entry Bookkeeping
As the name implies, the single-entry bookkeeping involves each transaction record only once. At first sight, it looks like the most logical thing to do, and it is indeed the most form of maintaining financial records. It is indeed simply the practice of listing of income and expenditure. Numerous small organization, individuals and proprietary concerns follow this practice. Every time someone issues a cheque, or makes a NEFT / RTGS transaction, the bookkeeping person simply writes down all the relevant details like payee name, amount, cheque number and the date. Every time something is paid into the bank, the details are entered elsewhere in the book. Same is true of the cash paid or received as well. While such single entry systems are far easier to understand and use, they do not offer the same level of accuracy and complexity that a double entry system (explained later in this article) can provide.  While it is very simple to maintain, there are certain limitations of single entry bookkeeping system. Apart from the obvious drawback that a single missed entry can mess up the entire accounting, the other drawbacks of single entry bookkeeping include the following:

  • it does not track inventory, accounts payable and accounts receivable
  • long-term assets are not shown
  • single entry bookkeeping is useful in calculating net income, but you can’t use it to develop a balance sheet and track the asset and liability accounts.

Double Entry Bookkeeping

The principles of double entry bookkeeping were mooted way back in the late 15th century. It is believed that an Italian monk penned the concepts in order to overcome the lacunae of the single entry bookkeeping system. The essential concept underlying double entry bookkeeping is that any transaction involves a credit and debt. This is very logical since if money changes hands, there is a taker and a giver. Each transaction is therefore written twice in the books, once as a credit and once as a debit. The most tangible benefit of double entry bookkeeping is that the system must balance; the total of credits must equal the total of debits. Unlike the single entry system, a set of double-entry books enables a complete view of the transaction that has taken place.

There are a few simple time honoured principles for double entry bookkeeping as below:

  • Debit is written to the left, credit on the right
  • For every debit, there must be a corresponding credit
  • Debit receives the benefit, credit gives the benefit

There are different types of accounts, and double entry bookkeeping rules apply to them differently:

  • Personal account: Debit the receiver, credit the giver
  • Real account: Debit what comes in, credit what goes out
  • Nominal account: Debit all the expenses, credit all the incomes

Here are the advantages of double bookkeeping accounting system:

  • Since each transaction is recorded twice, there is an increase in accuracy over the single entry bookkeeping
  • The financial position of the business on any day can be had
  • Correct valuation of assets and liabilities at any point of time by preparing Balance sheet
  • The value of cash in hand at any point in time can be ascertained precisely

Disadvantages of double bookkeeping accounting system:

  • Double entry bookkeeping is dependent on the personal judgment of accountant. At times, it can be inconsistent
  • An event that cannot be measured in terms of money cannot be recorded
  • In case of an error, it is difficult (as compared to single entry bookkeeping) to track the error
  • It is time consuming than single entry bookkeeping

The last point is very important. More than anything else, it is comparatively costly to maintain complete ledgers and journals needed for double entry bookkeeping, especially for small companies. Many small companies don’t actually hire full-time accountants to work for them because the costs are usually higher. In today’s troubled times, when every rupee counts, it is a prudent practice to outsource accounting and bookkeeping to a professional accounting and bookkeeping firm. Start-ups especially, in their zeal to prove their mettle and generate more business, ignore bookkeeping. However, generating money is the most important part of any business. How strongly you maintain your books and keeping a proper financial trail give companies a reliable measure of how well or how poor they are doing. Over a period of times, it also gives a business valuable insight into how it has fared in terms of revenue and expenditure over the years. It is also needed to comply with legal requirements, especially income tax. Bookkeeping is therefore a very important aspect of any business small or large. If you do not have in-house expertise, it is a good idea to outsource or hire a professional accounting / bookkeeping consultant.

Bookkeeping in Pune
After Mumbai, Pune is the second largest city in Maharashtra, India. A huge number of businesses thrive in the city, and consequently, there is a big demand for professional bookkeeping, accounting, GST and tax consultants in Pune.