The difference between bookkeeping services and accounting
may be unclear to the uninitiated while both are of vital
importance to financial success. Bookkeeping is an
important part of the accounting function and is
essentially the record keeping of the financial
transactions. Accounting is while incorporating the record
keeping also includes the presentation, interpretation and
financial control functions including interpretation of the
numbers for the financial health of a business of which
taxation can play a major part.
Bookkeeping stems from the recording of financial
transactions and the accounting term for a business
accounts as books. In effect the accounting function
prepares a record of the monetary affairs of a business and
stores the information in files called books. Hence the
term bookkeeping often misspelled as book keeping which is
the function of a librarian not that of a bookkeeper.
The financial affairs of a business involve many aspects
and start with the recording of what is termed the prime
documents. The task of a bookkeeping service which some
businesses outsource is to record the prime documents,
those prime documents being the sales, purchases and
cash/bank transactions. All small businesses do bookkeeping
and the most successful use the bookkeeping records as a
basis for an accounting function to generate a more
efficient financial service.
All business involves buying or selling something and the
consequent function of receiving or paying money to the
value of those transactions. Recording these transactions
in larger business organisations is done by accounts clerks
who work under the supervision of the accountant.
Invariably medium and larger businesses use a double entry
system for recording transactions. Double entry accounting
evolves from the fact that every transaction as a double
effect on the business of which these are prime examples.
A sale is made. That creates a record of income for the
business which is taxed on that income the other side of
the financial transaction, the double entry, is the fact
that the organisation who was sold the goods now owes the
value of that sales invoice to the business. That is the
double entry, record the sales income and also record the
debt due from the customer who is now called a debtor.
Someone who owes the business a debt is called a debtor.
A purchase is made. That creates a record of expense for
the business which can be deducted from income and lowers
taxes and the other side of the financial transaction, the
double entry, is the fact that the organisation who
supplied the purchase on credit is now owed the money. That
is the double entry, record the sales income and also
record the credit due to the supplier who is now called the
creditor.
Someone who has supplied goods on credit is called a
creditor.
The third type of prime transaction is the transfer of
money between the debtors and creditors and the business.
When a debtor pays his sales invoice the double entry is to
add that amount of money to the business financial records
and the opposite double entry goes to the debtor account to
reduce the amount owed to the business since it has now
received the cash.
When a creditor is paid the amount owed the money is
recorded as reducing the cash resources of the business by
for example deducting the money from the bank balance and
the double entry reduces the amount the business now owes
to the creditor account since it has reduced the credit
received.
The bookkeeping function is to record these prime
transactions. Since every financial transaction has an
equal and opposite entry in the books there has to be a
mathematical check that both sides of the transactions add
up to zero. This check process is called a trial balance
where both sides of the entries should be in agreement and
normally the point at which the bookkeeping service is
deemed to be complete.
Double entry bookkeeping is required for all businesses
that require to produce a statement of its assets and
liabilities. This statement of assets and liabilities is
the total of all the balances from the trial balance and is
called a balance sheet.
Many small businesses do not require a balance sheet. In
the UK the production of a balance sheet is optional for
every self employed business as it is not an obligatory
requirement of the self assessment tax return form. A self
employed bookkeeping system is not required to produce a
balance sheet because the business effectively belongs to
the owner and is that owners personal business.
Limited companies must produce a balance sheet under
various financial acts and submit the balance sheet to both
Companies House and the tax authority each year. The
different rules applying to a limited company is because
the accounts including the balance sheet are public records
available to the members of that company and not
necessarily the property of a single individual or
partnership.
The self employed bookkeeping system can be simpler being
produced from a single entry style of bookkeeping rather
than double entry. Single entry bookkeeping makes a single
entry for each financial transaction which is sufficient to
produce an income and expenditure account, a profit and
loss account, but does not make the reciprocal entry that
establishes the value of the assets and liabilities.
Single entry can be as simple as making a list of the sales
income and the purchase expenses. Such a bookkeeping system
is valuable to the smaller business as it requires little
or no bookkeeping or accounting knowledge. A smaller
business can produce its own accounts without the need for
a bookkeeper or accountant particularly if it has access to
bookkeeping templates through bookkeeping software to
produce the accounts in the accounting format required.
----------------------------------------------------
Terry Cartwright,qualified accountant and CEO at DIY
Accounting in the UK designs accounting software
http://www.diyaccounting.co.uk/smallbusinessaccounting.htm
on excel spreadsheets providing complete single and double
entry bookkeeping systems
http://www.diyaccounting.co.uk/bookkeeping.htm
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