Wednesday, March 12, 2008

Bookkeeping in your life and business

Bookkeeping is a big part of any business as it keeps the track of all transactions being made daily. Individual or family bookkeeping keeps a track of income and expenses in a cash account, checking account, or savings account. Individuals who borrow or lend money also track how much they owe to others or are owed from others. Bookkeeping can be done with only a sheet of paper and a pencil, which is usually done by families and individuals, but businesses usually use bookkeeping software, because the number of daily transactions is much bigger and more complex. There are to systems of bookkeeping: single-entry and double-entry. Single-entry bookkeeping system is not widely used in business as it is too simple, so such practice is left to family bookkeeping. Although it is sometimes used in small businesses for it's simplicity. But usually double-entry bookkeeping is being used, which i will shortly present. Even though double-entry bookkeeping should be done by a trained professional, know a thing or two might never hurt. Always remember - Education is the key to a financial success.

Double-entry bookkeeping

Bookkeepers record the company's daily transactions: sales, purchases, debts, expenses, and so on. Each type of transaction is recorded in a separate account - the cash account, the liabilities account, and so on. Double-entry bookkeeping is a system that records two aspects of every transaction. Every transaction is both a debit - a deduction - in one account and a corresponding credit - an addition - in another. For example, if a company buys some raw materials - the substances and components used to make products - that it will pay for a month later, it debits its purchases account and credits the supplier's account. If the company sells an item on credit, it credits the sales account, and debits the customer's account. As this means the level of the company's stock - goods ready for sale - is reduced, it debits the stock account. There is a corresponding increase in its debtors - customers who owe money for for goods or services purchased - and the debtors or accounts payable account is credited. Each account records debits on the left and credits on the right. If the bookkeepers do their work correctly, the total debits always equal the total credits.

Day books and ledgers

For accounts with a large number of transactions, like purchases and sales, companies often record the transactions in day books or journals, and then put a daily or weekly summary in the main double-entry records.
In Britain, they call the main books of account nominal ledgers. Creditors - suppliers to whom the company owes money for purchases made on credit - are recorded in a bought ledger. They still use these names, even though these days all the information is on a computer.
Balancing the books

At the end of an accounting period, for example a year, bookkeepers prepare a trial balance which transfers the debit and credit balances of different accounts onto one page. As always, the total debits should equal the total credits. The accountants can then use these balances to prepare the organization's financial statements, which tend to be especially important to a shareholders and an executive board at the end of financial year.

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