What is Bookkeeping – Types, Importance & Benefits

What is the difference between bookkeeping & accounting?

To put it in simple terms, bookkeeping is the starting point of accounting. 

Traditionally, bookkeeping was limited to maintaining a company’s book. A bookkeeper’s job was to only record the transactions. An accountant’s job, on the other hand, was to adjust the entries, analyse the data & prepare comprehensive financial reports & statements. 

Now, bookkeeping & accounting have converged into one. 

With the advent of finance automation software, managing bookkeeping & accounting is no more a two-person job. Any finance professional can enter the details of invoices, purchase orders, etc. The software then automatically reconciles the data, adjusts the entries, and updates the accounts to create financial reports. 

Single entry v/s double-entry bookkeeping

Single-entry bookkeeping refers to recording a transaction only once in the journal. Small businesses use this to keep a daily or weekly record of cash flow. This method is ineffective as it doesn’t allow accurate vetting of financial transactions. 

Here’s an example :

Suppose, you are a business owner and have Rs 10,000 cash in your hand as of the 1st of December 2020. Till 31st December, you have the following inflows and outflows. 

• Salary payments of Rs 4,500 to your office staff 
• Received Rs 3,000 as an advance from a customer
• Purchased a table fan for Rs 1,000 for your office

Here’s what your single-entry bookkeeping system will reflect. 

Although this method reflects the current balance in your books but does not provide the bifurcation of transactions into expenses, fixed assets or advances. You will have to pass a different entry of all these transactions to provide an accurate financial report. 

The double-entry method overcomes this problem 

In this method, each financial transaction is recorded twice, in two different categories – debit and credit. Here, every debit entry in an account should be equal to the corresponding credit entry in another account. If not, it leads to accounting errors in the books, like the error of omission or error of commission & which requires a check. 

In accounting, every business transaction follows the equation of Asset = Liability + Equity. By recording both these, i.e., the credit & debit, this equation will be balanced. 

To understand this better, let’s use transactions from previous examples. Under the double-entry bookkeeping method, the following entries will be passed. 

Salary payments of Rs 4,500 to your office staff 

Salary A/C Dr. Rs 4,500 

To Cash A/C  Cr. Rs 4,500

Here, salary is reported as an expense under the Profit & Loss Account and the cash account is debited with the same amount. This way, businesses do not have to pass two entries to record one transaction and can get accurate financial reports. 

Bookkeeping, back in the day 

Before the days of finance automation, businesses recorded their day-to-day transactions manually. The traditional way of bookkeeping required maintaining separate journals for sales,  purchases, etc.,  by hand. 

The different transactions were then matched with separate accounts (ledgers) like sales, employee expenses, loan payments, etc. Each account’s balance was calculated manually to prepare financial reports. 

Maintaining such sensitive financial data in physical books or spreadsheets is inefficient & risky. It’s prone to human error & requires a lot of manual bandwidth which can be better utilised in scaling the business. 

Till date, small businesses with fewer transactions use manual methods but are slowly warming up to the idea of automated methods. 

The era of automation

Automated bookkeeping software provides a smart way of recording financial transactions, right from vendor payments to employee expenses. 

It automates the categorisation of your transactions, reconciles your bank statements & prepares actionable financial reports. 

While the software automates repetitive bookkeeping tasks, finance professionals can invest more time in interpreting financial statements & reports. Finance automation frees them from tedious manual tasks & puts them in control of making key business decisions.

New-age Business Banking in the same way has helped shape the financial operations of businesses today significantly.

• One-stop banking solutions platforms like RazorpayX allow business owners to open current accounts, pay taxes, schedule payments, pay vendors seamlessly and check invoices from a single dashboard. This saves valuable time and effort. 
• It is an accounting and banking platform that fills the gap between advanced banking solutions and finance professionals. It allows easy accounting software integration.
• With RazorpayX Payroll, businesses can automate salary payments and provide insurance policies to their employees.

Bookkeeping is a crucial, yet small piece of your overall company’s finances. We at RazorpayX are empowering businesses to manage their entire finances from a single platform with our business banking solution. 

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