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Record keeping/bookkeeping

Why have accounting records? Why bother with bookkeeping?

The aim of bookkeeping is to ensure that figures are complete and as free from error as possible. Bookkeeping cannot ensure this, but it does give a sound basis on which controls over the completeness, accuracy and validity of figures may be built. Because of its fundamental aims to record as completely and accurately as possible the events (income and expenses), assets and liabilities of a business, bookkeeping often may appear to 'make a meal' of recording figures - figures are recorded in two places when one entry would appear adequate. It is the control aspect of the exercise that requires this as much as anything.

First, definitions. The simplest way of defining what assets, liabilities, income and expenses are is to consider examples of each.

Assets

Assets are most often tangible real things - buildings, furniture, cash in hand or deposited at a bank or through a sales agreement in which people (debtors) owe money.

Assets owe value to the business - they are thus called debtor (or debit) balances.

Liabilities

Liabilities are amounts of money owed to suppliers of goods or services or to banks or other lenders. Amounts invested by shareholders - share capital - can also be considered a liability as they, the shareholders, are owed the money they invested, albeit they could only have the money returned if the company was wound up, that is, liquidated with sufficient funds to repay them.

Liabilities are amounts owed to others by the business - they are called creditor (or credit) balances.

Income/sales/revenue

These are the amounts due from selling goods or services. It is the sum of the sales transactions for a period that are recorded as credits. The other side of what is called the double-entry equation is that for every sales transaction there should be an equal (in amount) asset increase - either cash received or debtor recorded as owing to the business. These are debtor balances - assets.

 
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