Why is bookkeeping important for a business?

Bookkeeping is the science and art of correctly recording in the books of accounts all those business transactions that result in the transfer of money or money’s worth. It is important for every business to record all transactions and bookkeeping helps a business do so. It tells you us how to keep a record of business transactions.

For laymen who want to know why bookkeeping is important, below is a list of points signifying its value in the subject of Accounts.

1 They act as permanent and reliable records for all money and money’s worth related transactions. Whenever a transaction has to be referred to, it can be done using bookkeeping.

2 It helps to identify if the business has made a profit or loss. If there are more expenses then income there is a loss to the business, whereas if there are more income streams than expenses, the company has made a profit.  

3 It is the first step in the preparation of Final Accounts. It all starts with entering transactions in a book and then entering the records in a Journal. Then posting the journal entries to a ledger followed by creating a Trial Balance and ultimately creating Final accounts.

4 It helps you identify what goods you have bought on credit and how much you need to pay to the supplier of goods(Accounts Payable) and what goods have been sold on Credit to customers and the total amount that is to be recovered(Accounts receivables)

5 It satisfies legal and tax purpose for the country you live in. If you have a claim on someone for money or money’s worth, book keeping will help you know what the claim amount is and what is the due date. It will also help you file your taxes.

6 It helps in keeping control over the assets and liabilities of a business. For example, buildings and machines are assets. During the course of a year, you may buy new machinery or expand to a different location. There is also some depreciation and amortization that is applied to the assets, which means with time the assets like machinery may lose value and that loss of value has to be accounted for in the business. Book keeping can help the business in the same

7 It helps the business to keep a check on the total debts and borrowing business has made during the course of a year.

8 It helps the manager make decisions on purchases and sales based on the data available and make decisions related to procurement.

9 It helps the manager determine the selling price of the goods manufactured based on what expenses are incurred in the making of the product

10 Bookkeeping helps us to record these transactions, but it will not give you the information about the financial position of the business. Hence, we have the next step in accountancy called ‘Accounting’.

Leave a comment