The comprehension of a fundamental bookkeeping process is critical to both charitable organizations and profit organizations. Even though most charitable firms use automated accounting programs for bookkeeping, it is still significant to comprehend the system of bookkeeping. The improvement of bookkeeping expertise within an organization makes it possible for the firm to assess its available reserves and put strategic measures for the future. In determining the best system of bookkeeping, the recordkeeping necessities of the firm must be considered. Generally, each system of bookkeeping must provide, comprehensive working statements, the correlation between the present results and the financial plan, fiscal statements, documents for tax returns, and adequate control to guard the assets. This paper concentrates on the system of bookkeeping, basic principles in bookkeeping, and other steps towards an effective bookkeeping system.
Bookkeeping is a practice that aims at tracking an organization’s funds through an official record system. The process entails writing down how and when the firm’s fund is used up. The process of recording the expenditure of an organization’s money aids in the keeping of a general outlook of how the funds are working for the firm. There are two types of the bookkeeping system. These types are the single entry system and the double-entry system. Single-entry systems of bookkeeping are usually easier to comprehend and exercise. The double entry system of bookkeeping is widely known for providing higher accuracy levels and intricacy as compared to the single entry system.
The single-entry accounting system of bookkeeping is usually explained as a loose and substandard technique of recording financial transactions. A single entry system of bookkeeping usually entails the recording of business transactions in their two-fold aspect. However, some business transactions in this system of bookkeeping are recorded the moment they happen with only one fold aspect while in other cases, the business transactions are never recorded. Therefore, single-entry systems do not have explicit tactics. Generally, ledgers and cash books are maintained under the single entry system (Long, 2011).
The single entry system of bookkeeping is usually associated with a wide range of drawbacks. First, because each debit lacks its analogous credit, it is impossible to extort a trial balance. The trial balance usually aids in the assessment of the arithmetic accurateness of the entries. Secondly, in most cases, the system lacks a correct record of assets and allowances for downgrading. This makes it difficult for the company to come up with a balance sheet. In a single entry system, faults land deceits are the order of the day. The method itself makes it easy to commit mistakes and forge the arithmetic figures. It is also hard to notice the faults and frauds that were committed while recording.
The double-entry accounting system of bookkeeping can be compared to weighing balance that should have loads of similar weight for them to be balanced on the scale. The addition or reduction of a certain weight to one part of the scale will require a similar addition or reduction to the other side of the scale. The equation of accounting portrays a universal expression of a double-entry accounting system of bookkeeping. The equation of accounting necessitates that all the assets of an organization/company must be equivalent to the equities. This mirrors an elementary equation of A = E. In this equation, A designates assets while E designates equity. An asset can be referred to as property owned by an organization. An asset can also be defined as uncollected properties that the organization claims against foreigners. Kravitz gives the definition of equities as “claims against the assets and shows the source of assets; the source may be owners themselves or outsiders, e.g., owners invest funds in the organization, and creditors lend money in the organization” (Kravitz, 1999).
The double-entry accounting system of bookkeeping has a wide range of merits. Since most fiscal transactions are associated with twin aspects, the double-entry system allows the bookkeeper to record both aspects. The double entry system of bookkeeping offers the most consistent information for regulating the performance of an organization resourcefully and competently. This is because, in a double-entry system of bookkeeping, the fiscal transactions are technically and systematically recorded leading to the provision of consistent information in the books of account. Based on the necessity of equity in total debit and total credit, it is attested that the mathematical accurateness of the books of account can be assessed by the use of a trial balance.
After incorporating a double-entry accounting system within a company, a bookkeeper can develop an account of income and expenditure for a specific period. After developing an account of income and expenditure, it is easier for an individual to determine whether there has been an increase in income or an increase in expenditure. It is also easier to determine the causes for the increase in income or, expenditure. While exercising a single entry accounting system of bookkeeping, it may be difficult to determine the firm’s financial position. However, when one uses a double-entry accounting system, it is easier to determine the company’s financial position. A company’s financial position can be determined by developing a balance sheet. In a double-entry system, fraud is highly evaded. Figures cannot be changed in this system since the state of accounts will be tampered with. Additionally, the detection of mistakes is highly affected in the double-entry system (Flannery, 2005).
The double-entry accounting system is usually recommended for recording business transactions. It is the basis of an average system employed in different organizations to record fiscal transactions. The name double entry was given to the system after considering certain aspects entailed in the recording process. The name double entry was assigned to the system since all of the financial transactions are recorded in no less than two accounts. Kravitz (1999) stated:
In the double-entry accounting system, every fiscal transaction consequences in a minimum of one account being debited and a minimum of one account being accredited with the whole debits of the financial transaction equivalent to the sum of the credits. The debit values are written on the left of the ledger while the credit entries are written on the right of the ledger. (p. 69)
As part of the accounting process, a manuscript is usually produced every time a financial transaction takes place. In most cases, invoices are usually produced for sales while receipts are produced after purchases. Most companies produce deposit slips, especially when depositing cash to a bank account. Thus, bookkeeping is a comprehensive subject that entails writing down the niceties of all these source credentials in daybooks.
The recordings take place for a considerably long period, normally a month. At the end of the month, the arithmetic values in the columns of every journal are added to produce a summary for that month. Taking into account the rules of double-entry, the journal digest is relocated to its relevant account in the ledger. This is acknowledged as posting. Subsequently to the posting process, ‘T’ formatted accounts go through the balancing process. At the end of the day, the balance of the account is attained.
It is also important to understand some of the fundamental bookkeeping principles. These are net assets, assets, and liabilities. The alteration in these principles within an organization is usually ascertained by keeping records through a bookkeeping system. Assets are structures, equipment, and properties of value that a firm possesses. In charitable firms, assets include prepaid expenses, office stationery and furniture, plots, automobiles, constructions, cash and investments, and finances payable to the firm. Liabilities are the amount overdue that a firm needs to pay. Liabilities may include all kinds of loans. The net asset is the term used to denote the equity that a firm has attained. A net asset is achieved by deducting the total yearly expenditures from the total yearly revenues. This is usually recorded accumulatively from the firm’s business year.
Ledger accounts are usually prepared while basing on the records in the cash book. A cash book is thus considered an auxiliary book. These books also serve as cash and book accounts. Costa observed that “it has a debit side where receipts are recorded and a credit side where payments are recorded” (Costa, 2008). It does not show the credit balance and it is also a journal. Journals usually keep sequential records on fiscal transactions. A balanced journal entry depicts equivalent amounts on the credit and debit side. A general ledger is usually used as reference material regarding financial transactions within a business. The book usually sums up all fiscal transactions. The book is also relevant in the preparation of financial statements. The book has a lot of information that is relevant to the management of a company. Some of the relevant information contained in the ledger is a cash balance and the number of sales for a considerable period (Costa, 2008).
A trial balance is a situation where after a fiscal transaction, the sum on the debit column is equivalent to the sum on the credit column. This state of comparison between the two columns leading to equivalence is referred to as trial balance. It acts as calculated evidence of the accurateness in the records. A balance sheet is developed to create a picture of the fiscal state of a company at the closure of a bookkeeping period. It shows assets, liabilities, and equity. A balance sheet determines the trend of a firm in terms of receivables and the payables
While ascertaining a relevant bookkeeping system for a company, certain exceptional wishes must be put into consideration. One should consider the firm’s configuration, the kind of factory, the total number of members of staff, and the number of services or departments supported within the organization. Additionally, one should also weigh the merits and the demerits of the chosen system of bookkeeping. Bookkeeping should not be taken as a light matter since the development of an organization is highly influenced by the system of bookkeeping.
Costa, C. (2008). Alpha Teach Yourself Bookkeeping in 24 Hours. New York: Alpha Publisher.
Flannery, D. A. (2005). Bookkeeping Made Simple. New York: Three Rivers Press.
Kravitz, W. W. (1999). Bookkeeping the Easy Way. New York: Barron’s Educational Series Inc.
Long, M. L. (2011). How to Start a Home-based Bookkeeping Business. Guilford, Connecticut: Globe Pequot.