Bookkeeping is the process of recording all business financial transactions in a systematic manner.
It answers:
It is important to note that bookkeeping is not accounting. Bookkeeping is merely recording transactions while accounting refers to interpreting transactions and then proceeding to record them.
Everything in bookkeeping is based on the accounting equation, the formula is as follows:
Assets = Owner's Equity + Liabilities| Element | Meaning |
|---|---|
| Assets | What the business owns |
| Liabilities | What the business owes |
| Equity | Owner's claim to the business |
Every transaction affects at least two accounts.
For every DEBIT there must be a CREDIT.
'Debit' refers to money coming into the business while 'Credit' refers to money owed by the business.
| Account Type | Increase | Decrease |
|---|---|---|
| Assets | Debit | Credit |
| Expenses | Debit | Credit |
| Drawings | Debit | Credit |
| Liabilities | Credit | Debit |
| Income | Credit | Debit |
| Capital | Credit | Debit |
Transactions are recorded in documents. Here are the different document types and their purposes:
| Document | Purpose |
|---|---|
| Invoice | Sales on credit |
| Receipt | Cash received |
| Cash slip | Bank deposits |
| Purchase Invoice | Credit purchase |
| Bank statement | Bank transactions |
| Journal | Records |
|---|---|
| Cash Receipts Journal | Money received |
| Cash Payments Journal | Money paid |
| Sales Journal | Credit sales |
| Purchases Journal | Credit purchases |
| General Journal | Adjustments & corrections |
Transactions from journals go to Ledger Accounts (T-Accounts).
Example:
| Debit | Credit |
|---|---|
| Capital | Rent |
| Sales | Wages |
A Trial Balance lists all ledger balances. Your total debits should equal your total credits — if they match, the arithmetic is likely correct.