Business compliance keeping you awake?
Cleartax's wide range of compliance services is here for you
Explore Now

How to do Bookkeeping

By Mayashree Acharya

|

Updated on: May 4th, 2022

|

8 min read

Bookkeeping is the process of recording financial transactions on a day-to-day basis by a business. It helps to ensure that the records of every individual financial transaction are up-to-date and accurate. Individuals or entities that carry out the bookkeeping process are known as bookkeepers. The bookkeepers are responsible for classifying, recording and organising every financial transaction made in the course of the business operations. 

Bookkeeping Versus Accounting

Bookkeeping and accounting may look similar. However, bookkeeping differs from accounting. In the accounting process, the books kept by the bookkeeper are used to prepare the end of the year accounting statements. In contrast, bookkeeping is the process where the records of expenses and revenues are collected, and these transactions are posted to a general ledger.

Bookkeeping Process

Bookkeeping is the process of recording all the financial transactions from the opening to the closing of the business. The bookkeepers use either the single-entry or double-entry bookkeeping system for recording the financial transactions of the business. Bookkeeping generally involves the following process:

Understanding business accounts

The bookkeepers need to understand the business transactions and accounts before starting the bookkeeping process for that respective business. The basic types of business accounts include assets, liabilities, income or revenue, expenditure or expense and equity.

The bookkeepers need to understand the transactions of the business and record them under the appropriate accounts. Bookkeeping helps to record transactions under the appropriate categories.

Maintenance of books

Original paperwork is involved when a business transaction occurs, such as an invoice, receipt, credit note or petty cash voucher, etc. These original paperwork/documents have to be kept safely where they can be easily found for reference in future.

The details from the original paperwork/documents should be recorded in the original books of entry. These are records such as the purchases book, cash book, petty cash book, sales book or sales returns book. The details recorded in the original books of entry are transferred to a ledger. The ledger is the basic book of accounts that contains records of all the debits and credits in the business operations.

The traditional way of maintaining the books of accounts was general ledgers. However, with the advancement in technology, the process of entry in the original books of accounts is done using different bookkeeping software or in excel sheets or through tally software. 

Recording transactions

It is essential to record all the business transactions in the books of accounts. Once the financial accounts and the bookkeeping system of a business are in place, the bookkeeper will start to record the transactions.

The debit and credit transactions of a business must be recorded under the correct accounts. If the transactions are not recorded under the correct accounts, there will be a mismatch in the account balances, leading to the non-closure of books.

A trial balance can be done from time to time by adding the debit column and credit column separately and comparing these two additions. The current state of financial affairs of a business can be known by comparing the additional total of the two columns.

If the total of the credits is greater than the debits, then the business is making a profit, but if the total of the debits is greater than the credits, then the business is losing money. 

Balancing the books

The bookkeeper needs to compile the complete list of all the accounts, which is known as the adjusted trial balance. The bookkeeper has to ensure that the debits and credits are equal.

If there are any discrepancies in the final balance, then adjustments need to be made by the bookkeeper. The adjustments are recorded as journal entries, and the debits and credits must be tallied. The tallying or balancing of the debits and credits usually happens at the end of a quarter or year.

When the account types are combined, the adjusted balances must meet the equation: Assets = Liabilities + Equity.

Preparing financial reports

After the books are balanced, it is essential to summarise the flow of money in each account. The summary will provide a proper picture of the business’s financial health, which helps make the correct decisions for the future of the business. The standard financial reports created in bookkeeping include profit and loss statements, balance sheets and cash flow statements. 

Methods of Bookkeeping

Every financial transaction of a business needs to be recorded in the books of account based on the supporting documents. The supporting documents may be an invoice, receipt, purchase order, or any other similar type of financial record that reflects the transaction. 

The transactions are recorded depending on the type of accounting system used by the business. The bookkeeping transactions can be recorded in different ways. The ways to maintain the books of accounts are as follows: 

Bookkeeping in a journal/physical bookkeeping

This is the traditional way of bookkeeping, where all transactions are recorded by hand in a journal. It is a paper-based way of bookkeeping. The bookkeeping transactions are recorded manually using a paper-based book of accounts such as ledger books, journal-register, etc.

This way of bookkeeping is commonly used by small businesses which have less complex business transactions. It is easier and cheaper to maintain but requires a lot of time and skill. The entry in the journals needs to record each accounting transaction in chronological order.

The journals include the journal entry number, amounts, accounts and a description of every entry. The benefit of bookkeeping through a journal or general ledger is the bookkeeper can review every journal entry that impacted a particular account.

Bookkeeping in excel sheet

The bookkeeping process can be done through excel sheets/spreadsheets. This is a manual system of bookkeeping to record transactions. It is done on the computers by creating an excel sheet through a spreadsheet program. The bookkeeper will format these spreadsheets according to the business requirements.

However, these sheets usually include the supplier’s or buyer’s names, account number, expense/revenue type, the date on which the invoice was received/created, and the amount owed/paid. The excel sheets are used to record financial transactions such as expenses, purchases and sales in different digital spreadsheets.

The spreadsheets are used to maintain and create records of other business data, such as supplier, inventory, and employee information. Microsoft Excel is easily accessible to do bookkeeping, and it contains a variety of templates to guide the bookkeeper to perform basic bookkeeping using Excel or Google Sheets. Many small businesses use the Excel accounting template at the start of business operations.

Bookkeeping software

There are many bookkeeping software where the entries of the business transactions can be recorded. This is the simplest way for ensuring that the transactions are recorded reliably. Many of these bookkeeping software programs are available for free or a free trial for a limited time. Bookkeeping software concentrates on the basic elements of financial management.

Bookkeeping in tally

Bookkeeping can be done through tally by using bookkeeping and accounting software such as Tally ERP 9 to record transactions. The Tally ERP 9 is detailed and advanced accounting software, but its operations are simple.

This software is developed by looking into the commercial laws and the broad accounting principles that are fundamental for better management of the finance department. Bookkeeping in tally is a faster, easier and convenient way to record business transactions. It eliminates the tedious manual tasks involved in bookkeeping.

inline CTA
Get an expert at affordable price
For ITR, GST returns, Company Registration, Trademark Registration, GST Registration
About the Author

I am an advocate by profession and have a keen interest in writing. I write articles in various categories, from legal, business, personal finance, and investments to government schemes. I put words in a simplified manner and write easy-to-understand articles. Read more

Public Discussion

Get involved!

Share your thoughts!

summary-logo

Quick Summary

Bookkeeping is essential for recording financial transactions in a business. It involves processes like understanding business accounts, maintaining books, recording transactions, balancing books, and preparing financial reports. It can be done traditionally in a physical journal, through excel spreadsheets, or with bookkeeping software like Tally ERP 9.

Was this summary helpful?
liked-feedbackliked-feedback

Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.

Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.

Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

Cleartax is a product by Defmacro Software Pvt. Ltd.

Company PolicyTerms of use

ISO

ISO 27001

Data Center

SSL

SSL Certified Site

128-bit encryption