Bookkeeping – Recording of Financial Transactions
Bookkeeping involves recording of financial transactions with the main purpose to create records of various financial transactions. Financial transactions include but are not limited to, sales, revenues, taxes paid, interest earned, salaries, investments, debts and other operational expenses. Bookkeeping, a component of accounting, support the interpretation and analysis of financial transactions to help generate reports.
Financial Transactions Recording System
Posting and Documentation
Financial transactions are posted in ledgers using information available from various documentation including cash books, debtor or creditor invoices, receipts etc. Ledgers help in summarising all financial transaction records and regular posting of financial transactions into the ledger helps generate current financial statements and reports.
Documentation is another key element of financial transaction recording system. It involves maintaining up-to-date files of all cash receipts, debtor and creditor invoices and receipts and other documents. Period for which records are to be maintained varies from company to company depending on their company policy and legal and tax requirements.
In bookkeeping, an accounting period is the period where financial statements are prepared and the books of accounts are balanced. This period is usually for 12 twelve months, however, the start and finish months can vary from business to business. For instance, one company may follow the regular calendar year, i.e. January to December as the accounting period, while another company may follow September to August or July to June as the accounting period.
Chart of Accounts
The chart of accounts lists the names of all the accounts that a company has identified for recording as financial transactions in its ledger. These charts of accounts will have unique names and numbers, and each company can tailor its chart of accounts according to its business operational needs. The chart of accounts usually consists of balance sheet accounts such as assets, liabilities, stockholders’ equity, and the income statement accounts such as revenues, expenses, gains and losses.
Methods of Bookkeeping
There are two methods of bookkeeping, single-entry bookkeeping and double-entry bookkeeping. Single-entry bookkeeping requires companies to record one entry for each financial transaction or activity, whereas, double-entry bookkeeping requires companies to record double entries for each financial transaction. All companies whether they use the cash-basis or the accrual accounting method, use the double-entry bookkeeping method as it helps minimize errors and increase the chances that the books balance and reconcile with a company’s cash flow.
Steps in Recording Financial Transactions
The sequence of five steps in recording and reporting financial transactions includes:
1. Financial transaction documents: These are the source/original records of any financial activity or transaction.
2. Preparation of a Journal: A Journal is the book of original entry and includes a formal sequential listing of each financial activity or transaction and how it affects the balances in the books of accounts. Recording of tasks takes place at this stage.
3. Preparation of a Ledger: Ledger is the collection of all accounts used by a company and transactions from the journal are posted into the ledger.
4. Preparation of the Trail Balance: The Trial Balance is a simple listing of the accounts in the ledger together with their balances. It summarised the ledger balances in a list form.
5. Preparation of Financial Statements: Financial Statements are then prepared at the end of each accounting period for a company to understand and analyse it’s financial state of affairs. are then prepared