Accounting is a process of gathering and reporting financial information. Understanding accounting often begins with learning basic terms and principles. These can help you learn the foundations of accounting.
Basic Accounting Terms
Explore the accounting basic terms in able to create a foundation where you can expand your knowledge of accounting vocabulary;
What is bookkeeping?
Bookkeeping is the recording and summarizing of financial transactions, while accounting is the process of analyzing those records.
Every business needs bookkeeping for them to survive. Bookkeeping is the backbone of any business. It helps you track your expenses and income, which will help you make better decisions for your company. Bookkeepers are like coaches; they help you improve your game by looking at historical data and making recommendations based on past results.
Why is bookkeeping important?
Bookkeeping keeps track of all your business’s transactions and provides a statement of financial position and financial performance. The bookkeeper can also provide information for decision making, as well as tax purposes.
It helps you identify problems and trends in your business, so that you can plan for the future and make better decisions.
Significance of bookkeeping
Purpose of bookkeeping
Bookkeeping is the process of recording transactions and events, in order to prepare financial statements that can be used for management decisions. Bookkeeping also includes preparing financial reports, such as profit and loss statements, balance sheets or income statements.
The main purpose of bookkeeping is to provide information for people who need it:
Investors who buy shares in a company may also want to see its books before deciding whether or not to invest in it.
Bookkeeping vs Accounting
To put simply, bookkeeping is more transactional and administrative, concerned with recording financial transactions. Bookkeeping involves recording financial transactions, posting the debits and the credits, raising invoices, maintaining subsidiaries, general ledgers and historical accounts.
On the other hand, accounting is more subjective and it gives you insights into your business’ financial health based on the bookkeeping data. It is a high-level process that uses financial data compiled by a bookkeeper to produce financial models. Accounting involves preparing, adjusting entries, reviewing accuracy and completeness of the company financial statements information, cost analysis, completing taxes returns and guiding the business stakeholders in understanding the impact of the financial decisions.
A key part of the accounting process is the analysis of the financial reports in making business decisions.
Basis of Accounting
Cash Basis Accounting
Cash basis accounting deals with cash-based transactions, such as sales and purchases. Cash basis accounting records revenue and expenses when actual payments are received or disbursed, respectively. A cash book is used to record all transactions related to cash in a company’s system.
Cash books are generally simple and straightforward. The balance from a cash book gives an idea of how much money you have on hand or in your bank account at any given time. The amount in the bank will always match exactly what’s shown in the cash book, minus any withdrawals made during the day or week (to pay bills or pay staff wages).
Accrual-based bookkeeping records all transactions regardless of whether they involve cash or not. It involves recording income when it’s earned and expenses when they’re incurred rather than when they’re paid out.
Single-entry bookkeeping is a form of accounting that involves recording transactions in one account. It is considered the most basic form of bookkeeping and is used by small businesses and individuals alike. This type of accounting is used when there are only a few transactions to record on a regular basis, such as with a sole proprietorship or a small business.
When using single-entry bookkeeping, you only need to record each transaction once in your general ledger. You can then use the information from your general ledger to create reports that help you make informed decisions about your business operations. Examples include monthly financial statements and year-end tax returns.
Double-entry bookkeeping is a method of recording economic transactions that uses two entries to record each debit and credit. The double entry approach is used for recording all financial transactions as well as non-financial ones so that an entity’s financial statements remain consistent, accurate and complete.
The double entry approach requires every transaction from both parties involved in an economic exchange to be recorded separately with equal effect on both sides of an account or ledger. This means that every debit has a corresponding credit, which are offset against each other so that they cancel each other out leaving no net balance on either side.
In conclusion, bookkeeping is an essential part of any business. It helps to manage the financial records and keep track of money coming in and going out of the company. Bookkeeping helps you make better decisions about how much money should be invested in different areas of the business so that they will improve profits.
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