If it weren’t for the hard work of bookkeepers, businesses would be clueless about their balance sheets. Without accurate bookkeeping, business owners wouldn’t know how many sales were made and how much cash was collected. Company owners also wouldn’t know how much cash was paid to employees or how much cash was spent on other operating expenses throughout the year. If you subscribe to the theory that information is power, you will definitely agree that the bookkeeper wields a tremendous amount of power within a company.
In order to adjust the balance of accounts in the bookkeeping world, the bookkeeper uses a combination of debits and credits. There are two basic methods of bookkeeping, single entry and double entry. According to the website InvestorWords.com, in single-entry bookkeeping transactions are recorded as single entries. “Taxable income is just the difference between cash expenses and cash receipts over the relevant time period,” the site explains, adding that this type of accounting “tends to be suitable only for small companies with simple financial statements.” By contrast, double-entry bookkeeping is a holistic method of recording financial transactions.
The double-entry method of bookkeeping, modern capitalism’s first and foremost calculative technology, “records each transaction as both a credit and a debit,” according to InvestorWords.com. Credit entries stand for sources of financing, while debit entries stand for the ways in which that financing has been used. Because each credit has at least one corresponding debit, double-entry bookkeeping always results in balanced ledger accounts. The bookkeeper can then use entries from these ledger balances to prepare his or her employer’s income statement.
When it comes to double-entry bookkeeping, the key formula for the balance sheet (i.e., “assets = liabilities + equity”) plays a major role. The distinguishing factor between the single- and double-entry systems is that in single-entry bookkeeping, as a rule, one entry is made in the ledger for each transaction, whereas in double-entry bookkeeping at least two entries are recorded in the ledger for each transaction — a debit and an equal credit.
Conclusion
Though there are thousands of bookkeeping techniques, all with their own advantages, a bookkeeper does not need to be familiar with them all. All bookkeeping techniques are based on a few fundamental principles, and the professional who understands those principles thoroughly can see how they have been applied to the various forms of bookkeeping that he or she may come across in his or her bookkeeping career.
Sources
Lerner, Joel J. Schaum’s Outline of Theory and Problems of Bookkeeping and Accounting. New York: McGraw-Hill, 1994.
WebFinance Inc. “Double-Entry Bookkeeping.” InvestorWords.com. http://www.investorwords.com/1554/double_entry_bookkeeping.html.
WebFinance Inc. “Single-Entry Bookkeeping.” InvestorWords.com. http://www.investorwords.com/4585/single_entry_bookkeeping.html.
