In order to explain Bookkeeping, we have to first examine and understand what is the end-product of the Bookkeeping exercise. Only then will we understand why we do certain things that we do in the first instance while doing our Bookkeeping.
The end-product of the bookkeeping and accounting cycle are what are known as The Final Accounts.
Here I will explain briefly what are the Final Accounts.
In a later posting I will explain in more detail on how to prepare your Final Accounts.
The Final Accounts are :
1) The Trial Balance
The Trial Balance is a list of all the balances , Debit and Credit (read posting on Double Entry to find out more on Debit and Credit), from your ledgers (read posting on Ledgers to find out more on ledgers).
2) Income Statement, sometimes called The Trading Account and The Profit and Loss Statement
The Income Statement is basically a statement that you would use to calculate your Gross Trading Profit by calculating how much Sales you made, how much was your Purchases and Cost of Goods Sold. After determining your Gross Trading Profit you would then deduct it from your Administrative and other expenses to calculate you Nett Profit or Nett Loss for the year.
3) Balance Sheet
The Balance Sheet is used to calculate your business's or company's Nett Worth by listing all your Current and Fixed Assets, Current and Long Term Liabilities, Shareholdings & Capital and your Profit for the year and your Accumulated Profit or Loss.
Now that we know what is the end-product of the bookkeeping exercise, let us now examine Bookkeeping.
A Simple Definition of Bookkeeping
In simple terms it can be said that Bookkeeping is the recording of your company's Income and Expenses, or Receipts and Expenditures, or Inflows and Outflows into a set of account books known as Ledgers (read posting on Ledgers to know more on Ledgers).
