Bookkeeping: Definition

Bookkeeping is the art of recording business transactions in a systematic manner. However, bookkeeping has been defined in various ways by different authors. Some of the major definitions are given below:

  1. Bookkeeping is an activity concerned with recording financial data related to business operations in a significant and orderly manner
  2. The part of accounting that is concerned with recording data is often known as bookkeeping (Frank Wood)
  3. Bookkeeping is the daily operation of an accounting system, which involves recording and classifying routine transactions (Meigs & Meigs)

In simplified words, bookkeeping is the art of recording business transactions comprehensively and in a prescribed, careful way in the books of accounts.

Bookkeeping: Explanation

What Is Bookkeeping?

This is an important question that deserves a basic but important answer. Bookkeeping is the process of correctly recording cash, credit, and other transactions in the books of account.

What Are Books of Account?

The primary book of account is called the ledger. It is known as the ledger because all transactions, after first being recorded in subsidiary books, are afterward grouped or summarized in the form of accounts in the ledger.

Why Are Goods/Services Bought or Sold on Credit?

Almost all business dealings are conducted on a credit basis to avoid the inconvenience and danger of carrying large amounts of cash.

The supplier of goods or services is usually satisfied to receive payment at some further date. The main exception is the real trade for a private individual.

Why Record These Transactions?

Even in the smallest business, the proprietor or manager will want to have accurate and up-to-date information about how much has been brought and sold, how much money has been received for sales, and how much has been paid away for purchases.

Private individuals often find it convenient to have the same information for their cash receipts and payments. You can imagine that with a very large business, chaos would quickly result without this information.

Does Bookkeeping Really Involve Analyzing Transactions?

It is reasonable to say that bookkeeping involves recording transactions so as to permit analysis in a systematic fashion, in a way that can be applied to all businesses of whatever kind, and that is intelligible not only now but at any future time.

How Has Bookkeeping Changed?

The term “books of account” has a distinctly old-fashioned sound. It perhaps makes you think of a Charles Dickens novel set in early Victorian England, with rows of clerks perched on high stools writing in large books.

Bookkeeping today is likely to be done with the aid of a computer rather than with handwritten books, and this is a virtual certainty in a business of any size or significance.

Nevertheless, modern bookkeepers are doing exactly the same as the clerks were in the novels of Charles Dickens.

Today we are doing it faster and more accurately, but the Victorian clerks achieved very high standards. Whether or not they were any happier is a question for another book!

Importance of Bookkeeping

All businesses, without exception, need to keep accurate and readily accessible records of their financial transactions.

As a child, I had a neighbor who died at the age of 75, leaving records that accounted for every penny of their income and expenditures since their 21st birthday.

Surprisingly, he was a charming, generous man and in no way a miser. Perhaps you too have a personal bookkeeping system to record your own financial affairs, though I would not recommend taking it to these extreme lengths.

The benefits of dependable financial records in business are probably self-evident. They include:

  • The law requires all companies, as well as many other organizations, to prepare accounts satisfying certain criteria. This can only be done if the basic, supporting financial records are in place.
  • The tax authorities require it. If you don’t believe me, try telling Her Majesty’s Revenue and Customs that you can’t complete a VAT return because you haven’t kept proper records.
  • It’s necessary to manage bank accounts, cash, and borrowing. Otherwise, checks might bounce and an unproductive surplus may build up.
  • When intelligently used, accounting records warn of impending financial difficulties or even insolvency.
  • Financial records provide the basis for efficiency savings and profitable business decisions.
  • Without proper bookkeeping, the owners cannot know the worth of the business.
  • It is, in many instances, essential to engage in bookkeeping in order to comply with money laundering regulations.

Frequently Asked Questions

Why record these transactions?

It is reasonable to say that Bookkeeping involves recording transactions so as to permit analysis in a systematic fashion, in a way that can be applied to all businesses of whatever kind, and that is intelligible not only now but at any future time.

Does bookkeeping really involve analyzing transactions?

The term “books of account” has a distinctly old-fashioned sound. It perhaps makes you think of a charles dickens novel set in early victorian england, with rows of clerks perched on high stools writing in large books.

How has bookkeeping changed?

Today we are doing it faster and more accurately, but the victorian clerks achieved very high standards. Whether or not they were any happier is a question for another book!

What is the importance of bookkeeping?

All businesses, without exception, need to keep accurate and readily accessible records of their financial transactions.

How can we maintain accurate accounts?

The law requires all companies, as well as many other organizations, to prepare accounts satisfying certain criteria. This can only be done if the basic, supporting financial records are in place.

Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.