Bookkeeping System
Bookkeeping is a process of recording, classifying, and summarizing of such day-to-day financial transactions as sales and purchases, into a usable form that provides financial information about a business or an individual. It's a part of overall account system.
Sound bookkeeping practice is a prerequisite to complete a full accounting cycle. Using the trial balance and ledgers prepared in the bookkeeping process, a bookkeeper or an accountant prepares financial statements, which are used to analyze the organization financial performance, as well as to file tax forms with government agencies.
A bookkeeping system is a set of rules for recording financial information in an accounting system. There are two common methods of bookkeeping systems, which are the single-entry bookkeeping system and the double-entry bookkeeping system. A business owner must decide what bookkeeping system to be used.
Single-entry
The single-entry system of bookkeeping is the simplest to maintain, but it may not be suitable for everyone. It is based on the income statement (profit or loss statement). It can be a simple and practical system if you are starting a small business. The system records the flow of income and expenses through the use of:
- A daily summary of cash receipts, and
- Monthly summaries of cash receipts and disbursements.
Double-entry
Today bookkeeping is associated with the double entry principle, first codified in the 15th century by the Italian friar Luca Pacioli. While Friar Luca is often called the "Father of Accounting," he did not invent the system. Instead, he simply described a method used by merchants in Venice during the Italian Renaissance period. His system included most of the accounting cycle as we know it today.
A double-entry bookkeeping system is a set of rules for recording financial information in a financial accounting system in which every transaction or event changes at least two different nominal ledger accounts. A double-entry bookkeeping system uses journals and ledgers. You may find the double-entry system better because it has built-in checks and balances to assure accuracy and control.
- Transactions are first entered in a journal and then posted to ledger accounts. These accounts show income, expenses, assets (property a business owns), liabilities (debts of a business), and net worth (excess of assets over liabilities).
- You close income and expense accounts at the end of each tax year. You keep asset, liability, and net worth accounts open on a permanent basis.
In the double-entry system, each account has a left side for debits and a right side for credits. It is self-balancing because you record every transaction as a debit entry in one account and as a credit entry in another. Under this system, the total debits must equal the total credits after you post the journal entries to the ledger accounts. If the amounts do not balance, you have made an error and you must find and correct it.
Tags: bookkeeping system, single entry, double-entry
