Bookkeeping: Meaning, Objectives and Importance of Bookkeeping

We often use the terms accounting and bookkeeping interchangeably. However, bookkeeping is actually just one part of the accounting process which deals with the recording of the transactions. So let us learn about book-keeping and its differences with accounting.

Bookkeeping

Bookkeeping is the activities concerned with the systematic recording and classification of financial data of an organization in an orderly manner. It is essentially a record-keeping function done to assist in the process of accounting. It is a key component in forming the financial statements of the organization at the end of the financial year.

Bookkeeping also concerns itself with the classification of financial transactions and events. Such classification of transactions is essential to maintain proper financial accounts. It also involves preparing source documents for the financial transactions and other business operations being carried out.

There are many methods of book-keeping. The most common ones are the double-entry system and the single-entry system. But even methods other than these, which involves the process of recording financial transactions in any manner are acceptable book-keeping systems or processes.

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Objectives of Bookkeeping

The main objective of book-keeping is to keep a complete and accurate record of all the financial transactions in a systematic orderly, logical manner. This ensures that the financial effects of these transactions are reflected in the books of accounts.

Then the second main objective is to ascertain the overall effect of all recorded transactions on the final statement of the company. Book-keeping will eventually ascertain the final accounts of the company, namely the Profit and Loss Account and the Balance Sheet.

Need for Bookkeeping

One of the main reasons for bookkeeping is so records can be maintained to show the financial position of each and every head/account of income and expenditure. Through book-keeping, detailed information about each expense or income could be obtained instantaneously.

Say for example a company makes sales in both cash and credit. Each of these sale transactions will be recorded. When a credit sale is made, the creditor’s account will be recorded. So at any time, the management of the company can determine which creditors owe them how much money by just looking at the records/accounts.

Also, the maintenance of books of accounts and financial statements is a legal requirement in many cases. In the case of companies or banks or insurance companies, there are acts that require such firms to keep and maintain financial records. In such a case, book-keeping becomes mandatory.

Activities of Bookkeeping

Book-keeping comprises of a lot of functions and activities bundled together. Some such activities are

Recording all financial transactions
Posting debit and credits in the respective ledgers
Producing and organizing all source documents such as invoices
Payroll accounting and upkeep may also be clubbed in with book-keeping

Bookkeeping vs. Accounting

Bookkeeping	Accounting
Book-keeping consists of recording financial transactions in a logical fashion	Accounting concerns itself with summarizing of such recorded financial transactions
It is the basis of the process of accounting	Accounting is the basis for the Business Language
Financial statements are not a part of the bookkeeping	Preparing financial statements is the ultimate aim of accounting
Managers do not take decisions on the basis of bookkeeping records	Accounting records are used to assist managers in making decisions
Bookkeeping does not have any branches	Accounting has branches such as Cost Accounting, Management Accounting, etc
It is done by bookkeepers, who do not require any special skill or knowledge	Accountants, on the other hand, require special accounting knowledge and skills