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What is Bookkeeping?
Understand the meaning of bookkeeping, what it entails, and how it supports accurate financial reporting, tax preparation, and business decision making.
What is Bookkeeping? Overview and Why It Matters
Bookkeeping involves the recording, on a regular basis, of a company’s financial transactions. With proper bookkeeping, companies are able to track all information on their books to make key operating, investing, and financing decisions.
Bookkeepers are individuals who manage all financial data for companies. Without bookkeepers, companies would not be aware of their current financial position, as well as the transactions that occur within the company.
Accurate bookkeeping is also crucial to external users, which includes investors, financial institutions, or the government — people or organizations that need access to reliable information to make better investments or lending decisions. Simply put, business entities rely on accurate and reliable bookkeeping for both internal and external users.
Importance of Bookkeeping
Proper bookkeeping gives companies a reliable measure of their performance. It also provides information to make general strategic decisions and a benchmark for its revenue and income goals. Accurate bookkeeping supports:
- Internal decision making: Business owners rely on financial records to track performance, set goals, and manage cash flow.
- External reporting: Investors, lenders, and government agencies require reliable records for audits, loans, and tax filings.
- Strategic planning: Clean books allow for trend analysis, financial forecasting, and growth planning.
Beyond the basics, strong bookkeeping helps avoid costly errors, catch discrepancies early, and simplify year-end tax preparation. Businesses that stay organized with their finances are better positioned to adapt, grow, and respond to challenges with confidence.
For small business owners, good bookkeeping can make or break the success of the company. Many hire a professional bookkeeper or outsource to a bookkeeping service to ensure accuracy and consistency.
Want to learn more about bookkeeping careers? Check out our career overview of What Does a Bookkeeper Do?
The Accrual vs Cash Basis of Accounting
To properly implement bookkeeping, companies need to first choose which basis of accounting they will follow. Companies can choose between two basic accounting methods: the cash basis of accounting or the accrual basis of accounting.
The difference between these types of accounting is based on the timing for when the company actually records a sale (money inflow) or purchase (money outflow) in the books.
| Cash Basis | Accrual Basis | |
|---|---|---|
| Definition | Record transaction only when cash is actually received or paid | Record transaction when it occurs, even if cash is not received or paid |
| Example: You purchased 100 units of a product and will pay for it next month. | No transaction recorded | Transaction recorded through an accounts payable (liability) account |
Small businesses often start with the cash basis method, while larger or growing businesses may adopt the accrual method to align with GAAP (Generally Accepted Accounting Principles).
Video Explanation of the Bookkeeping Process
Check out the video below to learn more about the bookkeeping process.
Additional Resources
Thank you for reading CFI’s guide to the Bookkeeping Process. To keep advancing your career, the additional CFI resources below will be useful:
- Analysis of Financial Statements
- Disbursement
- 3-Statement Modeling
- Source Documents
- See all Accounting resources
Get Certified for Financial Modeling and Valuation (FMVA®)
Gain in-demand industry knowledge and hands-on practice that will help you stand out from the competition and become a world-class financial analyst.
FAQs: Bookkeeping Basics
Is bookkeeping hard for beginners?
Bookkeeping can be manageable for beginners, especially with the help of modern accounting bookkeeping software and basic training. Many people start with simple data entry tasks and build up to more advanced responsibilities like generating reports or managing payroll. With consistent practice and the right tools, bookkeeping skills can grow quickly.
What does bookkeeping entail?
Bookkeeping typically includes recording daily transactions (such as sales, expenses, and invoices), categorizing and reconciling bank statements, managing payroll and tax deductions, maintaining the general ledger, generating financial reports like income statements and balance sheets, and preparing documentation for accountants during tax season.
What are the two types of bookkeeping?
The two main types of bookkeeping are single-entry and double-entry systems.
- Single-entry bookkeeping is similar to managing a personal checkbook where each transaction is recorded once and tracked in a single ledger.
- Double-entry bookkeeping records both a debit and a credit for every transaction, offering a fuller picture of a business’s financial activity and improving accuracy.
What is the meaning of bookkeeping?
Bookkeeping refers to the process of recording, organizing, and maintaining a business’s financial transactions. It lays the groundwork for preparing financial statements, managing taxes, and making informed business decisions. Whether handled manually or with software, accurate bookkeeping is essential to financial health.
