Bookkeeping and Accounting
Many people confuse bookkeeping and accounting. They think that bookkeeping is accounting. Bookkeeping is the act of recording transactions in the accounting system in accordance with the accounting principles. Accounting is the way we set up the system, the principles behind it, and the ways we check the system to make sure that it is working properly. Accounting ensures that bookkeeping is honest and accurate and, through financial accounting and management accounting, it provides people outside and inside the business the picture they need of where the company’s money is.
Accountants developed bookkeeping procedures as a way to organize records, to classify the many transactions that take place. Transaction isany event that affects the financial position of the enterprise and requires recording. In some transactions, such as depositing a check, money changes hands. But in others, such as sending an invoice to a customer, no money changes hands. Bookkeeping puts related transactions together into groups so that their impact on the accounting equation can be recorded and analyzed. When we put several transactions together into one account, we’re creating complete set of accounts, i.e. a ledger. It is the “reference book” of the accounting system and is used to classify and summarize transactions and to prepare data for financial statements. It is also a valuable source of information for managerial purposes, giving, for example, the amount of sales for the period or the cash balance at the end of the period. It is desirable to establish a systematic method of identifying and locating each account in the ledger. The chart of accounts, sometimes called the code of accounts, is a listingof the accounts in the accounting system by title and numerical description. Insome companies, the chart of accounts may run to hundredsof items. Some of them may be used every day, such as Cash, and some rarely or even never.
In designing a numbering structure for the accounts, it is important to provide adequate flexibility to permit expansion without having to revise the basic system. Generally, blocks of numbers are assigned to various groups of accounts, such as assets, liabilities, and so on. There are various systems of coding, depending on the needs and desires of the company.
Henceeach account has a ledger that lists allits transactions. Every transaction is entered twice, in two ledgers, once as a credit and once as a debit. The individual lines in a ledger are called entries. In a manual system, each entry is first put on a master page called the journal, or book of first try (first entry), and then copied to the appropriate individual account pages. As a result, the books stay in balance; the total of all credits equals the total of all debits.
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Double Entry
The first principle of accounting we need to understand is called double-entry bookkeeping. Each transaction made in the accounting system is entered twice. No, this does not mean we are keeping two sets of books. We enter every transaction twice, to show where the money comes from and where it is going. An Italian monk, Luca Pacioli, gets the credit for developing double entry in 1494, although it first appeared some 50 years earlier. Next time you think you’re getting confused by double entry, remember this. It’s been around for more than 500 years.
Most of the people who used it didn’t know how to program VCRs. You are way ahead at the start.
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