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 track the performance of your business. The only way to achieve this is to have a good understanding of basic bookkeeping and the accounting information it provides.
Basic bookkeeping is the process of recording all your business transactions to produce a set of accounting records. Bookkeeping is the start of an accounting process which allows you to produce useful accounting information such as sales, expenses, and working capital.
It is important to remember that the business is a completely separate accounting entity from you the owner.
What is Double Entry Bookkeeping?
Double entry bookkeeping is a system of basic bookkeeping which records each transaction twice. 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. Using T accounts the debit entries show on the left of the T, and the credit entries show on the right of the T.
Each transaction reflects the basic accounting equation Assets = Liabilities + Equity (more of this later). If the entries are correctly recorded the books of account will balance.
Our examples of double entry bookkeeping section shows typical accounting transactions.
Double Entry Bookkeeping Explained
- 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 – Individual accounts (for example an account for electricity) make up accounting records. Each account reflects a type of transaction. Our Debits and Credits Chart acts as a reference for these account types.
- Accounting Records – The records of all the transactions of the business. Sometimes called “the Books”.
- Financial Statements – Accounting records allow the production of financial statements sometimes referred to as accounts. The financial statements include the balance sheet, income statement, and cash flow statement.
- Accounting Period – Financial statements are for a fixed period such as a month or a year. That period is the accounting period.
What you need to know
- The Business is separate from you the Owner, and basic bookkeeping records the transactions of the business.
- Each transaction has two sides, one is a debit and the other a credit for the same amount. The accounting records should always balance.