Meaning of Book Keeping

Book keeping is the process of recording all business transactions in a systematic and orderly manner.

Every business buys, sells, pays, and receives money. Book keeping helps the business to record all these activities so that the owner will always know the true financial position of the business.

In simple terms, book keeping is the art of keeping financial records of a business in an accurate and organized form.

Book keeping is very important in every business, no matter how small or large it may be. It helps a business to achieve success in the following ways:

1. It helps you to know the financial position of the business at any time.


2. It shows how much the business owes to others and how much others owe the business.


3. It helps the business to know if it is making a profit or loss.


4. It provides records that can be used to prepare financial statements like the Profit and Loss Account and the Balance Sheet.


5. It provides information that helps management to make good decisions.


6. It helps in the control of funds and prevents fraud or waste.


7. It helps to keep the image of the business neat and trustworthy.


8. It makes auditing and government inspections easy and clear.

When records are properly kept, the business can operate smoothly and successfully because there is always clear information to guide decision making.

For book keeping to be accurate and useful, the person keeping the records must have the right qualities.

A good book keeper must be:

1. Honest and trustworthy.


2. Hardworking and punctual.


3. Neat and well organized.


4. Careful and attentive to detail.


5. Responsible and reliable.


6. Able to keep records clearly and accurately.


7. Transparent and accountable.

When a book keeper has these qualities, the business will have confidence that its financial records are correct and safe.

Every business that keeps records must follow some common book keeping practices to make sure the records are correct and complete. These practices include:

1. Recording every transaction as soon as it happens.


2. Using source documents such as receipts, invoices, and vouchers as evidence for every transaction.


3. Classifying transactions into the right accounts (for example, assets, liabilities, expenses, and income).


4. Posting entries into books of original entry (journals) and then to the ledger.


5. Balancing the accounts at regular intervals.


6. Preparing trial balance, profit and loss account, and balance sheet when necessary.


7. Ensuring transparency, accountability, and honesty in all financial records.

These practices make book keeping complete and dependable, which in turn brings success to the business.

A book keeper uses certain documents to record transactions. These are called source documents.

Some important book keeping documents are:

1. Receipts – Proof that money has been received.


2. Invoices – Requests for payment for goods or services supplied.


3. Vouchers – Internal documents that authorize payments.


4. Payment slips – Evidence of payments made through banks.


5. Bank statements – Records from the bank showing transactions in the business account.

These documents serve as evidence of business activities and are the basis for entries in the books of account.

Book keeping uses the double entry system. This means that every transaction has two sides: something is given and something is received.

(a) Meaning

Double entry book keeping is a system where every transaction affects at least two accounts — one is debited and the other is credited with the same amount.

(b) Principle

The principle of double entry states that for every debit entry, there must be a corresponding credit entry.

(c) Example

When a business buys furniture for cash:

1. Furniture Account is debited (because the business has received furniture).


2. Cash Account is credited (because cash has been given out).

When goods are sold on credit:

1. Debtor’s Account is debited (because the customer now owes the business).


2. Sales Account is credited (because goods have been sold).

(d) The Books Used

Journal: This is the book of original entry where all transactions are first recorded in date order.

Ledger: This is the book of secondary entry where transactions from the journal are posted into individual accounts to show their balances.

(e) Classification of Accounts

There are three main types of accounts:

1. Real Accounts – relate to physical assets such as building, land, furniture.


2. Personal Accounts – relate to persons or organizations such as debtors and creditors.


3. Nominal Accounts – relate to expenses, income, losses, and gains such as rent, wages, and commission.

Ethics are the moral principles that guide the behaviour of people in business. In book keeping, ethics means being honest and fair when keeping records.

Three important ethical principles are known as TAP:

1. Transparency – Being open and clear in all financial dealings.


2. Accountability – Being ready to explain and justify financial records and actions.


3. Probity – Having strong moral principles such as honesty and uprightness.

Ethical book keeping helps to prevent corruption and ensures that all business transactions are fair and truthful.

Book keeping is very important for the success of any business because it helps in many ways:

1. Helps you to make decisions – The owner can use financial records to plan for the future.


2. Improves control – It helps to monitor income and expenses and prevent waste or theft.


3. Shows progress – It helps to know whether the business is making profit or loss.


4. Encourages investors – Accurate records give confidence to investors and lenders.


5. Ensures compliance – It helps the business to follow government and tax rules.


6. Builds reputation – A business with proper records appears reliable and well managed.

Therefore, good book keeping is not just about writing figures but about building a strong and successful business.

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Summary

1. Book keeping is the systematic recording of business transactions.


2. It helps the business to know its financial position and to make wise decisions.


3. A good book keeper must be honest, careful, and organized.


4. The double entry system is used to record every transaction properly.


5. Ethical behaviour (TAP – Transparency, Accountability, and Probity) must be followed.


6. Book keeping is a key factor that leads to business success.

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Revision Questions

1. Define book keeping.


2. List five importance of book keeping to a business.


3. State four qualities of a good book keeper.


4. Explain what is meant by the double entry system.


5. Mention and explain the three classes of accounts.


6. State three book keeping documents and their uses.


7. What does TAP stand for in book keeping ethics?


8. Explain three ways book keeping leads to business success.


9. Why should a business keep proper records?


10. State the difference between a journal and a ledger.