What Is Bookkeeping and Why Is It Important?

A business’s financial transactions must be recorded accurately. Bookkeeping handles the details of recording, organizing, and tracking these transactions for a company.Bookkeeping

Bookkeepers log each credit or debit into an accounting journal using source documents like invoices and receipts. The entries are later posted to the firm’s general ledger at the end of an accounting period. To learn more, visit

Bookkeeping is the transactional part of accounting, documenting business activities in the company’s financial records. Every event that takes place, including purchases, sales, payments and deposits, must be recorded in order for a business’s financial statements to accurately reflect its current status and performance.

The process begins with identifying each event as it occurs, classifying it in terms of its impact on the company’s assets and liabilities and assigning a monetary value to it. Then it must be recorded in the appropriate journal entry. For example, cash transactions are recorded in the cash receipts journal, while credit sales are recorded in the sales journal. The final step is to post each journal entry into the company’s general ledger, which is a list of all accounts that hold information about the various assets, liabilities, equity and revenue streams for a business.

As each account has a unique name, it is listed on the chart of accounts, which is used to organize and record all the transactions and events that occur during an accounting period. This is done using a double-entry system that ensures that total debits always match total credits.

Once all of the entries have been posted into the general ledger, the accountant reviews and interprets them and prepares year-end reports for the business firm in accordance with Generally Accepted Accounting Principles. This includes preparing balance sheets, profit and loss statements and cash flow statements. The accountant also explains the results of the review to company management and other stakeholders.

In the past, most companies kept their records on paper and stored them in file folders or drawers. Today, most businesses use accounting software, which makes it easier to record and organize information. In some cases, the software is designed to produce essential company financial reports automatically, reducing the time that accountants must spend analyzing and reviewing data. It also helps to reduce the likelihood of errors.

General Ledger

The general ledger, or GL, is the master accounting document for all transactional activity within your business. It collects data from other sub-ledgers, also known as journals, and summarizes the account totals of each journal for a reporting period (typically a month, quarter or year).

A GL gives business owners and accountants a clear picture of all the money that goes in and out over time and how it is distributed across various accounts, including assets, liabilities, revenue and expenses. It is also the foundation for financial statements such as income statements and balance sheets.

Each entry into the GL has two parts, a debit and a credit, which makes up the accounting system’s double-entry method. The genius of this is that it self-balances, ensuring that at the end of each period, total debits should equal total credits. This makes it easier to spot errors, catch fraudulent activities and make adjustments.

The GL typically includes all accounts in your financial records, which include control accounts such as Accounts Receivable, Inventory and Fixed Assets and miscellaneous expenses. Control accounts are used to group together similar transactions or activities and allow for a more efficient reporting process. For example, when preparing your company’s budget, you might group your fixed assets under a control account called “Fixed Assets.” Then, when it comes to tracking your inventory, you can report on the entire cost of goods sold by pulling a summary total from this account in the GL.

In addition to the convenience that a GL provides, it is essential for businesses that prepare tax returns and for those who have outside investors or lenders. By keeping a detailed record of all money in and out, the GL is used to support the information contained in other financial documents such as financial statements and cash flow statements. A properly maintained GL is also important for regulatory compliance and establishing the accuracy of tax returns. This is why it’s important to hire an experienced bookkeeper and accounting professional to manage your GL. The wrong people might manipulate the GL and create inaccurate financial statements that can erode stakeholder trust and lead to costly mistakes.

Financial Statements

Financial statements are formal reports that summarize the financial and accounting information a company has recorded throughout an accounting period, which is typically a month, quarter or year. They include the balance sheet, income statement and cash flow statement. Larger corporations may also incorporate supplementary notes that explain the line items on these main statements. Financial statements are important to help make financial decisions and determine a business’s strength and weaknesses. They are used by investors, lenders and other parties to gauge the financial health of a company and its earnings potential.

The balance sheet is a snapshot of the company’s assets (what it owns) and liabilities (what it owes) at a specific point in time. It includes the company’s current assets (cash, marketable securities, inventory, short-term investments and accounts receivable) as well as its long-term debt and shareholder’s equity. The balance sheet is usually reported as of a date in the past, although companies report current assets and debts on the current period’s financial statements.

A company’s income statement is a record of all of its revenues and expenses during a given period. It shows the total amount of revenue it received from selling products or services, plus the cost of materials and labor that went into producing those goods and services. Subtracting these expenses from the revenue is the profit figure, which can be positive or negative. An income statement also includes the company’s operating cash flows, which are the amounts of money coming into and going out of the company, such as money from customers and payments from suppliers.

Lastly, the company’s cash flow statement records all of the company’s money coming in and out during a specific period, including the amount of cash invested by shareholders as well as the amounts received from lenders and investors. The cash flow statement also shows how much of the company’s current assets are liquid, which can be useful in determining whether the company is able to cover its short-term expenses such as supplies and payroll.

Once Bob or his bookkeeper has finalized the three primary financial statements, he must print them and review them for errors. Once he finds any errors, he must create journal entries to correct the mistakes and then reprint the financial statements. He must then close all subsidiary ledgers by recording closing entries and then he must prepare an income tax expense based on the corrected income statement. Finally, he must assemble all the statements into packets and distribute them to a standard list of recipients.


Tax season requires accurate records and timely reports. Bookkeepers help small businesses prepare for tax filings by maintaining accurate records and implementing proper accounting systems that are easily audited. This helps the business avoid expensive penalties for inaccurate or late filings and ensures they are aware of any tax liabilities.

Strong bookkeeping is an important part of the entire accounting system and enables accountants to provide comprehensive guidance on strategic financial planning, budgeting, and financial forecasting. It also allows them to identify any potential fraud or forensic accounting issues by reviewing the details of income and expenses. Moreover, it gives them the insight they need to make informed decisions about cash flow and investments.