What is bookkeeping and why you need to do it

Bookkeeping… the word alone can send shivers down the spine of the hard-pressed businessperson. However, it is a necessity, a vital function of a legitimate business. But what exactly is bookkeeping and why do you need to do it?

Bookkeeping, in its modern form, was first recorded in 1494 by a Cistercian monk called Lucia Pacioli. The purpose of bookkeeping was to ensure that all the financial transactions of an organisation are clearly and legitimately accounted for.

The name derives from the fact that such records were kept and maintained in handwritten books, although today such records are usually maintained electronically on computers. In a business context and in its basic form, bookkeeping is the recording of financial transactions. These transactions take the form of sales, purchases, receipts and payments by or to an individual or organisation.

Bookkeeping is not totally synonymous with accountancy; they are two different disciplines. However, accountancy does require the bookkeeping function to be undertaken, and this is why people often conflate the two. This is also why people who are not accountants can legitimately maintain their own books if they choose to.

Based on the records compiled by a bookkeeper, an accountant will create reports from recorded financial transactions that are required by government agencies and other bodies, and will formally file those accounts by the appropriate deadline. In the UK, the government body that oversees the filing of these reports is HMRC (Her Majesty’s Revenue & Customs).

Any process that records financial transactions is considered to be bookkeeping, but there are different widely-recognised methods of doing so. Single-entry bookkeeping is the simplest form of recording financial records, a linear account of expenditure and income. Double-entry bookkeeping is a more sophisticated form of record management, which treats expenditure and income as two separate columns, from which a bookkeeper or an accountant can see what financial profits and liabilities an organisation or an individual has from the discrepancy between the two columns.

Who is a ‘bookkeeper’?

A bookkeeper is a person who maintains the day-to-day financial records of an organisation or an individual. Traditionally, bookkeepers were often employed by accountancy firms to work on behalf of their clients, and bookkeepers could (and still can) be hired as individuals away from accountancy firms.

With the widespread adoption of IT technologies in the home and in the workplace, however, it is now possible for many people to maintain their own books on their own computers. Some choose to do so within a spreadsheet such as Microsoft Excel, although this can ultimately be cumbersome.

As an IT professional with an accountancy background, I developed Prelude Accounts which streamlines the bookkeeping process even further, allowing books to be automatically maintained and updated when a user generates an invoice for a customer.

Why do I need to maintain my books?

All people who are engaged in financial transactions of a commercial nature need to maintain their books. It doesn’t matter whether you are a handyman working as a sole trader or a vast multinational, a clear detailed log of your financial history needs to be maintained.

Why is this? In the most basic and fundamental sense, bookkeeping allows a business or an individual to see whether their venture is profitable or not. If you are spending more money that you or your organisation is earning, you will be making a loss on your professional activities. If that is the case, one has to honestly assess whether the business in question is viable and calculate how much more loss your business can tolerate without being declared insolvent.

On a more positive note, bookkeeping can also demonstrate how successful a business is to its owner; if your business is making a huge profit, you may want to reinvest that money into the business or even elsewhere.

There is, however, a more pressing, essential need to maintain your books, for they are ultimately used to calculate how much tax you owe to the government of the country you live in. An accountant will help you do this if you do not choose to self-assess your tax obligation, but to submit your accounts you will need records and without detailed records you are stuck. Failure to pay the tax you owe is punishable by law and, in extreme circumstances, can result in prison sentences.

“Help! I’m now worried about my bookkeeping…”

Don’t panic; bookkeeping and accountancy is a vital function for a modern economy, and there are plenty of professionals out there who can offer advice and training on how to maintain your books.

When starting a business, make an appointment with a reputable accountant in your area and they will talk you through the bookkeeping process. Some may offer bookkeeping services for you, but the most cost-effective and quickest way of maintaining your books will be by doing it yourself using an online accounts package.

As long as you take a disciplined approach, bookkeeping will cease to be a necessary chore but will become a vital tool with which you can assess the health of your business.