Bookkeeping is the process of recording and maintaining a systematic and organized record of financial transactions of a business. Here’s how a teacher would explain the process:
- Record transactions: Keep a record of all financial transactions of the business, including sales, purchases, payments, and receipts. This can be done manually in a ledger book or using accounting software.
- Classify transactions: Classify the transactions recorded into different categories, such as income, expenses, assets, liabilities, etc. This helps in preparing the financial statements of the business.
- Journalize transactions: Transfer the classified transactions into the journal, which is a chronological record of financial transactions. This helps to maintain a clear and organized record of transactions.
- Post transactions to ledger accounts: After journalizing the transactions, post them to the relevant ledger accounts. A ledger account is a record of all transactions of a specific type, such as cash, accounts receivable, etc.
- Prepare trial balance: A trial balance is a statement that lists the total of all debit and credit balances in the ledger. This statement is prepared to check if the debit and credit balances are equal, indicating that the ledger accounts are balanced.
Example: Suppose a business has recorded the following transactions in January:
- Sold goods worth PKR 50,000 to a customer on credit
- Purchased goods worth PKR 30,000 on credit from a supplier
- Paid PKR 10,000 in rent
- Received PKR 15,000 as cash from a customer
To maintain the bookkeeping, we would first classify these transactions:
- Sales (income) – PKR 50,000
- Purchases (expense) – PKR 30,000
- Rent (expense) – PKR 10,000
- Cash received (income) – PKR 15,000
Next, we would journalize these transactions:
Accounts Receivable PKR 50,000
Sales PKR 50,000
Purchases PKR 30,000 Accounts
Payable PKR 30,000
Rent Expense PKR 10,000
Cash PKR 10,000
Cash PKR 15,000
Accounts Receivable PKR 15,000
Finally, we would post these transactions to the relevant ledger accounts and prepare a trial balance.
Ledger Account Debit Balance Credit Balance
Cash PKR 25,000 PKR 15,000
Accounts Receivable PKR 65,000 PKR 65,000
Purchases PKR 30,000 PKR 0
Rent Expense PKR 10,000 PKR 0
Sales PKR 50,000 PKR 0
Accounts Payable PKR 0 PKR 30,000
Total PKR 160,000 PKR 110,000
As we can see, the total of all debit balances (PKR 160,000) is equal to the total of all credit balances (PKR 110,000), indicating that the ledger accounts are balanced, and no errors have been made in recording transactions.
It is important to maintain accurate bookkeeping records, as it helps to prepare accurate financial statements, make informed business decisions, and meet tax and legal obligations.