Bookkeeping is the recording of the money values of the function of a business. Bookkeeping creates the information from which accounts are prepared but is a previous process, required prior to accounting.
Basically, bookkeeping grants two types of information: (1) the current value, or equity, of an enterprise and (2) any changes in value—profit or loss—taking placement in the entity over a single period.
Management officials, investors, and credit grantors all demand this information: management so as to interpret the outcomes of operations, to control costs, to budget for the future, and to make financial policy decisions; investors in order to understand the upshots of business operations and make decisions about buying, holding, and selling securities; and credit grantors so as to judge the financial statements of an enterprise in finding whether to allow a loan.
Bits and pieces of financial and numerical recordkeeping can be uncovered for almost every society with a commercial backbone. Records of trade contracts have been uncovered in the remains of Babylon, and accounts for both farms and estates have been kept in ancient Greece and Rome. The dual-entry way of bookkeeping started with the progression of the commercial republics of Italy, and instruction books for bookkeeping were produced in the 15th century in some Italian cities.
During the late 18th and early 19th centuries, the Industrial Revolution gave a notable stimulus to accounting and bookkeeping.
The development of manufacturing, trading, shipping, and subsidiary services made perfect financial books a requirement. The past of bookkeeping, in fact, resembles the ancestry of commerce, industry, and government and, in part, assisted to form it. The worldwide expansion of industrial and commercial activity called for higher professional decision-making processes, which in turn required higher sophistication in the selection, classification, and presentation of information, even more so with the assistance of computers. Taxation and government legislature became more important and resulted in higher need for information; business entities had to show available information to bolster their income tax, payroll tax, sales tax, and other tax reports. Governmental agencies and educational and other nonprofit institutions also grew in size, and the requirement for bookkeeping for their inner departmental operations went up.
While bookkeeping methods can be rather detailed, all of it is based on two types of books employed in the bookkeeping process—journals and ledgers. A journal must have the daily transactions (sales, purchases, and so forth), and the ledger has the details of individual accounts. The daily records kept in the journals are written in the ledgers.
Each month, by general practice, an income statement and a balance sheet are constructed from the trial balance posted within the ledger. The purpose of the income statement or profit-and-loss statement is to give an analysis of the changes that took place in the ownership equity because of the operations of the period. The balance sheet displays the financial condition of the business at a particular day with regard to assets, liabilities, and the ownership equity.
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