Bookkeeping is the recording of all financial transactions, including financial records of purchases, sales, receipts and payments, as well as accruals for payables or receivables. The goal of bookkeeping is to record all of the company’s financial transactions in a detailed way that provides useful information without being overwhelming.
Bookkeeping also involves storing and retrieving the records of the company’s financial transactions. It requires knowledge of debits and credits and a basic understanding of the financial statements. Bookkeeping can be done manually using spreadsheets, but, increasingly, bookkeeping software is used.
In bookkeeping, it is important to consider who will be using the records. Senior managers will have significantly different needs for analyzing the company’s performance, compared to the accountant who prepares and files the financial statements or various tax returns and government remittances. Also, if an auditor is to use the records, they may need to be able to track the details of transactions in their testing.
For small businesses, there are four main steps in the bookkeeping process:
The most common bookkeeping accounts used by small businesses include: