1. Introduction. Bookkeeping – what is it all about ?

Keeping Track of Transactions

Some company owners keep track of transactions by collecting notes, receipts, invoices and the like in a shoebox. At the end of the year they hand the shoebox over to their accountant and pay large amounts for the final accounts to be extracted. There is a better way. Bookkeeping is the skill of keeping track of all transactions as they occur in a logical and systematic way.

A good bookkeeper will:

  1. Make use of an appropriate bookkeeping package such as Express Accounts.
  2. Understand transactions and know how they should be entered.
  3. Enter transactions on a regular basis.
  4. Reconcile statements as they are received. The most important of these statements are the bank statements.
  5. Prepare reports as and when they are required.
  6. Retain original documentation (invoices, etc.) in a systematic way.
  7. Understand the big picture and recognize problem areas.

 

Some Basic Definitions

Basic bookkeeping involves transactions, accounts and reports.
A transaction is an exchange of value – for example, the sale of an ice-cream is a transaction.
An account is a collection of similar records. For example, all sales for cash might be recorded in the Cash Account.  
A report is a statement that summarizes certain accounts or transactions at a certain time or for a certain period.
Accounts, transactions and reports will be dealt with in greater detail in chapters 2, 3 and 4. There will also be many examples given.
 
Bookkeeping Conventions
  • Double Entry Bookkeeping

Every money transaction is recorded in two different accounts in the ledger. This is recognition that there are always two sides to every transaction. If Mary Smith lends me $5 then my cash account will increase by $5 and the Mary Smith account must show that I owe her $5. By convention the two entries have to be made on opposite sides. If the entry in the cash account is on the left-hand-side then the entry in the Mary Smith account must be made on the right hand side. At any stage the totals of all of the entries into the LHS must be the equal to the totals of all the entries into the RHS. The system must be in balance.

Fortunately, the double entry system is vastly simplified by Express Accounts, the software package that he uses to facilitate what used to be a difficult process. Normally a single entry in an appropriate “journal” is all that is required.

  • Debit and Credit.

The money entries in an account can be entered in either the left hand column or the right hand column. Beginners often find it difficult to understand in which column to place an entry.

      • The left hand column in an account is called the Debit column and the right hand column is called the Credit column.
      • Money that you receive goes on the debit column of the cash account (or check or savings) account. Money that you pay goes on the credit column of the cash account. The debit / credit nature of all other transactions can be determined by comparing their similarity to this simple transaction. If I sell goods to John Smith for $10 cash. I would receive $10 and my cash account would be debited. Sales would be credited. Note that in this case I do not have to record anything under John Smith's name as he paid in cash. If, however, he bought on account, the transaction would be similar in that Sales would be credited and John Smith would be debited. Thus it turns out that people who owe me money have mainly debit entries in their account.
      • Different View from Different Column Confusion.

When we receive our Bank Statement each month, it will show a credit balance if we have money in the bank. This is from the bank's viewpoint. The bank sees us as their creditor because they owe us money. However in our books our bank account should show a debit balance. Thus a credit entry in our account at the bank is reflected by a debit entry in the Bank Account in our books.

 

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