Bookkeeping is a part of accounting which is concerned with recording business transactions through journal entries and posting those entries in relevant ledger accounts. It is often observed that accounting and bookkeeping are considered as same things, but the fact is that bookkeeping is only a part of accounting that is involved with recording business transactions and related tasks such as maintaining supporting documentation etc. Whereas accounting is a broader term which includes bookkeeping and is concerned with a lot of other areas as well such as preparing financial statements, analysis of financial statements etc. If you recall the chapter accounting cycle, it has 7 steps in total out of which only the first two are related to bookkeeping.
Previously, when accounting software programs were not used, bookkeepers or accountants doing the bookkeeping tasks used various registers to record business transactions. These registers are called accounting journals. The journal which contains all the business transactions of an entity is called general ledger, but for efficient recording, separate ledgers were also used for areas involving frequent transactions, such as sales ledger, purchases ledger, cash book etc. For some accounts such as accounts receivables and accounts payable, subsidiary ledgers were also maintained to keep detailed records such as party-wise breakup of transactions and balances of receivables and payables. In modern-day accounting, businesses all around the world have started using various accounting software programs, which has contributed a lot in terms of reducing the human effort and increasing the accuracy and efficiency of financial reporting. Now a days, bookkeepers or accountants record journal entries in accounting system mentioning relevant accounts that need to be debited or credited. The accounting software does the rest. Journal entries are posted in relevant accounts and system generated trial balance and financial statements can be extracted by just one click. Although the introduction of accounting software programs has helped a lot in terms of increasing efficiency, however accountants should avoid being casual as mistakes can still happen such as duplicate recording, missing some transactions, typing wrong amounts, mentioning incorrect account codes etc.
Importance of bookkeeping
Bookkeeping is the foundation of all the accounting and financial reporting of an entity. If business transactions are recorded accurately and efficiently, only then these can be used by the management in the form of various financial reports for the purpose of making informed decisions. Accuracy of financial statements depends on the accuracy of bookkeeping, which is very important for an entity as accurate financial statements represent the true picture of an entity’s financial position and financial performance.