Introduction to Basic Bookkeeping
When you set out to start a business as an entrepreneur you need to be in control of your finances and be able to monitor closely the overall performance of the business. The only way to achieve this is to have good understanding of basic bookkeeping and accounting information and be able to understand what the information is telling you.
Basic bookkeeping is the process of recording all your business transactions to produce a set of accounting records, it is the start of the accounting process which allows you to produce useful accounting information such as details of your sales, expenses, working capital etc.
It is important to remember that the business is a completely separate accounting entity from you the owner.
Whether or not you decide to do your own basic bookkeeping, a knowledge of basic bookkeeping will allow you understand where the information comes from and what is available.
What is Double Entry Bookkeeping?
Double entry bookkeeping is a system of basic bookkeeping which records each transaction twice and originated from a 15th Century monk Luca Pacioli. The first entry records what comes into the business (a debit) and the second entry what goes out of the business (a credit). Every Debit must have a corresponding equal and opposite Credit. Sometimes the entries are written in T accounts so that the debit entries can be shown on the left of the T, and the credit entries can be shown on the right of the T.
Each transaction reflects the basic accounting equation Assets = Liabilities + Equity (more of this later). If each entry is recorded correctly the books of account will balance.
Double Entry Bookkeeping Explained
We have a full dictionary of Bookkeeping and Accounting Terms, but before going ahead it is useful to outline some of the main terms used in the Bookkeeping section.
- Owner – The person who controls the business.
- Business – A separate entity from the Owner, the bookkeeping shows the records of the business
- Transaction – Exchange of goods or services.
- Entry – The recording of a Transaction in an Account in the Accounting Records using Debits and Credits.
- Debit – The left side of a transaction which records something coming into the business.
- Credit – The right side of a transaction which records something going out of the business
- Account – Accounting records are made up of individual accounts (for example an account for Electricity). Each Account reflects a type of transaction. A reference for account types is shown in our Debits and Credits Chart.
- Accounting Records – The records of all the transactions of the business. Sometimes called “the Books”.
- Financial Statements – The Financial Statements (Balance Sheet, Profit and Loss, and Cash Flow Statement) are produced from the Accounting Records. They are sometimes referred to as the Accounts.
- Accounting Period – The period over which the Accounts are drawn up. This is usually monthly and yearly.
What you need to know
- The Business is separate from you the Owner, and the basic bookkeeping records the transactions of the business.
- Each transaction is entered twice, once as a debit and then an equal amount as a credit. The accounting records should always balance.