Elements of Bookkeeping

Every business must have a method of recording, organizing and analyzing financial data resulting from everyday business transactions. In many cases, businesses and corporations must adhere to Generally Accepted Accounting Principles that require a specific system of bookkeeping and accounting. Smaller businesses, however, also need the basic elements of bookkeeping to prepare for taxes and keep track of earnings. Bookkeeping systems can be set up manually--using physical books--or by using accounting software programs to organize and maintain the information.

Journals

In a bookkeeping system, the journals are the first place you can look to find complete information about a transaction. The general journal, used by many businesses that employ a double-entry accounting system, records the debit and credit amounts for each account as transactions occur. It may also list a short description of the transaction. Some businesses may have specialized journals, each for recording a specific kind of transaction. For example, you may have both a cash disbursements and cash receipts journal, which records checks deposited and written and cash spent and deposited. Other journals include the payroll journal, accounts payable and accounts receivable journals.

Ledgers

Bookkeeping ledgers group transactions according to account and the effect it has on the business. Categories in the ledger may include assets, liabilities, expenses and revenue. Each category contains sections for each of those types of accounts (e.g. expense accounts). Periodically, transactions from business journals get posted or recorded to the ledgers. A basic ledger system has a collection of "T-accounts" that each have two columns, one each for debits and credits. However, three or four-column ledger systems can be used to record other information, such as a running balance of the account.

Worksheets

Worksheets give the bookkeeper or accountant a way to analyze data and test the accuracy of accounting books, journals and other records used to prepare financial statements. One such worksheet, the trial balance, lists the balances of all accounts in the ledger, records adjusting entries to accounts and closes any temporary accounts. When "balanced," the debit balances must equal the credits, otherwise the ledger contains an error that must be corrected. Other worksheets include analysis and reconciliation worksheets. Analysis worksheets analyze the balance of a specific account. Reconciliation worksheets reconcile differences between two or more known amounts, such as the amount of cash you have recorded in the ledger account and the amount the bank statement shows.

Financial Statements

Financial statements communicate essential information about the financial situation of a company to outside parties. Most bookkeeping systems use four major financial statements. The balance sheet gives a snapshot of a company's financial position for a particular date, listing details of its assets, liabilities and shareholder's equity. The purpose of the income statement is to show the business' net earnings for a specific period. Cash flow statements show the increases and decreases in cash for a period as it relates to business operations, investment and financing activities of a business. Finally, the statement of shareholder's or owner's equity details changes in the company's retained earnings, listing items like net income for the year and dividends paid to shareholders.

References

About the Author

Matthew Schieltz has been a freelance web writer since August 2006, and has experience writing a variety of informational articles, how-to guides, website and e-book content for organizations such as Demand Studios. Schieltz holds a Bachelor of Arts in psychology from Wright State University in Dayton, Ohio. He plans to pursue graduate school in clinical psychology.