What is Bookkeeping?

Bookkeeping is the charting of the money values of the function of a business. Bookkeeping grants the information from which accounts are written but is a previous process, prerequisite to accounting.

Predominantly, bookkeeping records two kinds of information: (1) the current value, or equity, of the entity and (2) the changes in value—profit or loss—taking place in the business from a given time period.

Management officials, investors, and credit grantors all need to have such information: management in order to analyse the results of operations, to control costs, to budget for the future, and to make financial policy decisions; investors in order to analyse the outcomes of business operations and make decisions about buying, holding, and selling securities; and credit grantors in order to regard the financial statements of an entity in deciding whether to give a loan.

Bits and pieces of financial and numerical charts are uncovered for nearly every nation with a commercial history. Records of commercial contracts have been uncovered in the remains of Babylon, and accounts for both farms and estates were archived in ancient Greece and Rome. The double-entry manner of bookkeeping came with the furthering of the commercial republics of Italy, and tutorials for bookkeeping were developed within the 15th century in various Italian cities.

Within the late 18th and early 19th centuries, the Industrial Revolution granted a significant stimulus to accounting and bookkeeping.

The rise of manufacturing, trading, shipping, and subsidiary services made accurate financial recordkeeping a necessity. The history of bookkeeping, in fact, resembles closely the ancestry of commerce, industry, and government and, in some part, assisted in forming it. The global expansion of industrial and commercial activity needed greater sophisticated decision-making methodology, which itself called for more sophistication in the selection, classification, and presentation of information, even more so with the assistance of computers. Taxation and government legislature became more detailed and resulted in greater need for information; entities had to have information available to list with their income tax, payroll tax, sales tax, and other tax reports. Governmental agencies and educational and other nonprofit institutions also developed in size, and the need for bookkeeping for their own inner departmental operations became larger.

Though bookkeeping methodology can be extremely complex, all are based on two types of books employed in the bookkeeping process—journals and ledgers. A journal should have the daily transactions (sales, purchases, and such), and the ledger should have the details of individual accounts. The daily records kept in the journals are put in the ledgers.

At the end of every month, as a general rule, an income statement and a balance sheet are prepared from the trial balance posted from the ledger. The job of the income statement or profit-and-loss statement is to give an analysis of those changes that occurred in the ownership equity due to the events of the period. The balance sheet displays the financial situation of the entity at any particular day regarding assets, liabilities, and the ownership equity.

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