Bookkeeping is the process of maintaining records of financial transactions on a day-to-day basis.
Few activities involved under bookkeeping are;
- Entering invoice and voucher details into Accounting software or ERP systems
- Recording payments received by customers.
- Recording payments made to vendors.
- Recording of expenses made during the year etc.
- Recording depreciation and other adjustments etc.
Bookkeeping is a basis for accounting process. The duty of bookkeeper is to record each and every transaction in the daybook or journal. A bookkeeper records the financial transactions in such a way that it gives a clear picture of activities performed in business. The last stage of bookkeeping is to prepare the trial balance, find and correct errors. Based on this, an accountant prepares the financial statements of the business.
Purpose of Bookkeeping
A Business involves various financial transactions every day and over time it becomes difficult to keep track of numerous transactions and use them for future reference. Thus, Bookkeeping helps in organizing the records in an effective and efficient manner for its further usability.
A bookkeeper prepares a complete record of your business income and expenses for every financial year. Where on the other hand, an accountant takes the data for book keeping and prepares the necessary books of accounts for tax compliance. The work performed by the bookkeeper has a direct impact on the work of the accountant. Therefore, Correct Books of accounts prepared will show the correct accounting reports. Incorrect accounting can lead to financial losses.
Caxpert © is providing you dual benefits of the convenience of daily book-keeping as well as the preparation of books from a tax compliance perspective. To know more go here
Types of Bookkeeping
There are two methods of bookkeeping –
i) Single entry method
ii) Double entry method.
Single entry system of accounting is most suitable for small businesses. A single entry system records each accounting transaction with a single entry, rather than double entry system.In single entry, only payments, receipts, sales and purchases are recorded. Inventory, capital and others such entries are recorded as notes. Double entry bookkeeping system is more detailed in nature.
Double-entry system of accounting is constructed on the principle that every financial transaction has a contradictory impact on at least two different accounts i.e. debit in one and credit in the other. This is used to satisfy the equation Assets = Liabilities + Equity. This is the standard method of bookkeeping, which is used by bookkeepers and accountants.
Caxpert © will undertaking the system of double entry in all its packages.
Let us understand with an example:
ABC Pvt. Ltd purchased a Machinery for business purpose and paid Rs. 3,00,000 for this.
Single Entry System – Only the purchase amount of Machinery will be recorded.
Double Entry System – The amount will be recorded twice and have double effect i.e. by debiting Machinery A/c and crediting Cash or bank A/c.
Machinery A/c Dr. Rs. 3,00,000
To Cash/ Bank A/c Rs. 3,00,000
Why should you maintain proper Books of Accounts?
Income Tax Law makes a mandatory requirement for businesses and professionals to maintain books of accounts as per Section 44AA and Rule 6F.
A) A person carrying on a specified profession would be required to maintain the book of accounts if his or her gross receipts are more than Rs.1,50,000 in previous three years. Specified profession under section 44AA and rule 6F of the Income Tax Act includes professions such as:
- Technical Consultancy
- Interior Decoration
- Authorized Representative
- Company Secretary
- Film artist
B) Businesses or Professions other than specified above:
As per section 44AA(2), it is mandatory to maintain books of accounts in the following cases:
In case of income from business or profession, book of accounts must be mandatorily maintained if the income exceeds Rs.2,50,000 Or if total sales or turnover or gross receipts exceed Rs.25 lakhs in any one of the previous 3 years.
Where in case of a new business or profession, if the income is expected to exceed Rs 2,50,000 or the total sales or turnover or gross receipts are expected to exceed Rs 25 lakhs.
If the assessee is covered under section 44AD (Hyperlink to 44AD article) or section 44AE (Hyperlink to 44AE article) or section 44AF (Hyperlink to 44AF article) and the assessee has claimed his income lower than the profits or gains deemed under section 44AD or section 44AE or section 44AF respectively in the income tax return.
Note: The limit of Rs. 150,000 has been increased to Rs. 250,000 from FY 2017-18 (AY 2018-19).