What is Bookkeeping?

Bookkeeping is the recordkeeping of the money values of the function of a business. Bookkeeping creates the details from which accounts are written but is a distinct process, required prior to accounting.

Basically, bookkeeping finds two types of information: (1) the current value, or equity, of a business and (2) the change in value—profit or loss—taking placement in the enterprise over a given time.

Management officials, investors, and credit grantors all have to have such information: management so as to assess the upshots of operations, to control costs, to budget for the future, and to make financial policy decisions; investors in order to understand the outcome of business operations and make decisions about buying, holding, and selling securities; and credit grantors so as to judge the financial statements of an entity in assessing whether to accept a loan.

Bits and pieces of financial and numerical recordkeeping are uncovered for nearly every state with a commercial background. Records of commercial contracts have been discovered in the archaelogical digs of Babylon, and accounts for both farms and estates were made in ancient Greece and Rome. The two-entry way of bookkeeping came with the progression of the commercial republics of Italy, and tutorial manuals for bookkeeping were developed within the 15th century in some Italian cities.

In the late 18th and early 19th centuries, the Industrial Revolution permitted a notable stimulus to accounting and bookkeeping.

The development of manufacturing, trading, shipping, and subsidiary services made correct financial recordkeeping a necessity. The past of bookkeeping, in fact, reflects the past of commerce, industry, and government and, in some part, helped shaping it. The international movement of industrial and commercial activity needed greater sophisticated decision-making methods, which in turn required better sophistication in the selection, classification, and presentation of information, more so with the assistance of computers. Taxation and government legislation became more detailed and resulted in increased demand for information; businesses had to have available information to support their income tax, payroll tax, sales tax, and other tax reports. Governmental agencies and educational and other nonprofit institutions also developed in size, and the requirement for bookkeeping for their inner operations went up.

While bookkeeping processes can be rather detailed, it is all based on two types of books used in the bookkeeping process—journals and ledgers. A journal must have the daily transactions (sales, purchases, etcetera), and the ledger should have the information of individual accounts. The daily records from the journals are put in the ledgers.

At the end of every month, generally speaking, an income statement and a balance sheet are created from the trial balance posted in the ledger. The purpose of the income statement or profit-and-loss statement is to display an analysis of any changes that have occurred in the enterprise equity from the events of the period. The balance sheet provides the financial condition of the business at any particular date derived from assets, liabilities, and the ownership equity.

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