The Purpose of Bookkeeping
The purpose of bookkeeping is to
- enter the financial transactions resulting from business activities accurately and in accordance with good bookkeeping practices
- and to communicate the financial results of those activities.
1. Entering Financial Transactions
This is done by identifying and organizing the business transactions into account categories.
Say I sell a hat for $10.00.
The transaction is identified as a sale.
The transaction is “measured” by the amount involved, which is established as $10.00.
This is then recorded into the Bookkeeping system to the appropriate Account Category, for this sale it will be an Income account.
Go to Chart of Accounts to learn more about these account categories.
Activities and Transactions
Here are a few examples of business activities that result in financial transactions.
Activity : Selling goods (PDF books, crafts, courses and other items) and services
Transactions: Sales invoices and depositing check or cash payments or receiving credit card and bank payments.
Activity: Purchasing goods and services
Transactions: Purchase invoices and paying bills with check, bank card, credit card or cash
Transactions: Entering credit notes for goods returned or services not completed
Activity: Employing people
Transactions: Payment of wages and salaries
A transaction that has no currency value attached to it should not be recorded in the system. For example, phoning the Bank Manager - this is not a financial transaction so it doesn't get entered into the books.
2. Communicating Results
Once all the transactions are entered, useful reports can be created to communicate what has occurred with the business money.
The main reports are the Income Statement and the Balance Sheet.
These reports should be easy to read and understand so that anyone in business can pick up one up and quickly interpret how well or not the business is doing, hence the need for national accounting standards (more on this below) so that every report has a similar layout with the same types of accounts.
What is Bookkeeping