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What is Bookkeeping?

Keeping records of all financial transactions

What is Bookkeeping?

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 its 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.

 

Bookkeeping

 

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. In short, once a business is up and running, spending extra time and money on maintaining proper records is critical.

Many small companies don’t actually hire full-time accountants to work for them because of the cost. Instead, small companies generally hire a bookkeeper or outsource the job to a professional firm. One important thing to note here is that many people who intend to start a new business sometimes overlook the importance of matters such as keeping records of every penny spent.

 

The Accrual vs Cash Basis of Accounting

In order 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 BasisAccrual Basis
DefinitionRecord transaction only when cash is actually received or paidRecord 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 recordedTransaction recorded through an accounts payable (liability) account

 

Video Explanation of 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:

  • Free Accounting Fundamentals Course
  • Financial Accounting Job Titles
  • Analysis of Financial Statements
  • 3 Statement Model
  • Source Documents
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