Tuesday, August 14, 2007

The basis of book keeping

To start with, I am never sure if it's bookkeeping, book keeping or book-keeping. A quick search on Wikipedia seems to confirm this confusion is not confined to me as all three are deemed acceptable.

And that, to me is the only confusing part. Once you get past that, everything else is, as we are so fond of saying here in Malaysia, kacang putih (peanuts)!

Most are daunted by it, but it is actually very simple and precise. Bookkeeping is simply the act of recording a business transaction. That's it, nothing more, nothing less.

Double entry concept
Business transactions have two aspects, the giving aspect and the receiving aspect. Think of it as when someone gives, another receives. These two aspects are named Debit (the receiving aspect) and Credit (the giving aspect).

So in recording a transaction, you need to ask yourself who is giving and who is receiving. For instance, if you pay salary to your employee, the bank is the giving aspect, and the employee is the receiving aspect. Easy huh?

The bank gives and the employee receives.

Debit aspects are recorded on the left and credit on the right.

Most business transactions can be grouped together. For instance when you pay an employee, or your utility bill or your creditor, the common giving aspect here is the bank (assuming you make all these payments by cheque).

For transactions that occur regularly, we create an account so that we can group or categorise them. An account is essentially a name that describes the transaction, for example, we would name banking transactions with the name of the bank that we maintain an account with. (See some similarity here? Banks create an account with our name when we when we open an account with them.) So if your bankers were XYZ Bankers Ltd, you would name the account "XYZ Bank" or to that effect.

Grouping of transactions is relatively straight forward, and depends on the depth of information you require about your business. For instance, you pay for electricity, water and telephone. If you absolutely need to know what the business expended on each, you would create an account for each. In practical terms it would be more prudent to group all 3 under an account called "Utilities" or simply "Electricity, water and telephone".

On the same note, payment of salaries can be grouped under one account rather than in separate accounts for each employee.

Why group transactions?
We group transactions so that we can obtain information about the business. Transactions, if not grouped, do not offer information. It's nothing more than a list of transactions that need to be analysed further if any sort of meaningful information is to be gleaned from it.

If we grouped them however, we would be able to extract meaningful information such as how much was expended on rental or what was the total sales this month.

If you look back at the figure above, at a glance you can ascertain that RM1,000.00 was paid out in salaries.

Is that it?
Well, yes and no. There is much more to bookkeeping than just debits and credits, but this is the basis of everything else.

1 comment:

Virginia Bookkeeping Services said...

That's really great. i would suggest everyone to read it because it provides a very good information on bookkeeping . There is still much more in bookkeeping. Bookkeeping services plays a very important role in the field of accounting.