B1: 1.01 Bookkeeping

What is bookkeeping?

Bookkeeping is the process of recording a business’ financial transactions and then presenting financial information for use by managers and owners of the business as well as others such as lenders and suppliers to the business.

Main types of financial transactions

  • Sales and purchases of goods and services
  • The collection of customers debts and payment of amounts owed to suppliers
  • Purchases and sales of assets such as property, equipment and vehicles
  • Payment of employee wages and salaries
  • Taking out and repaying loans
  • And so on…

Bookkeepers will be involved with the preparation, checking and storage of documents that record these financial transactions. They will also record these transactions in a business’ books so that the data can be analysed and the business’ financial performance and position can be reviewed.

Why is bookkeeping important?

Bookkeeping is important for two main reasons

1 Bookkeeping provides useful information

A business’ books provide information for use by the business’ management and other stakeholders. A stakeholders is an individual, group or organisation that has some interest in the business and includes owners, lenders, suppliers, customers, HM Revenue & Customs and sometimes the general public.

For example:

  • The owners of a business will want to know whether the business is profitable and whether their investment is at risk
  • Management will want information about:
    • The amounts owed by customers
    • The amounts owed to suppliers
    • The business’ ability to pay its debts as they fall due
    • How different parts of the business are performing
  • Banks will want to know whether the business will be able to repay any loans or overdrafts
  • Suppliers will want to know whether the business will pay for the goods or services supplied to the business
  • HM Revenue & Customs will want to ensure the business is paying the correct amount of tax

2 Bookkeeping is a legal requirement

Businesses and other organisations in the UK are legally required to keep and maintain financial records and penalties can be incurred if they don’t.