Implementing Security Measures in Automated Online Accounting SystemsUnderstanding the Need for Security in Amazon FBA Accounting AutomationAs businesses increasingly rely on automated systems like Link My Books for managing their Amazon FBA accounting, the importance of implementing robust security measures cannot be overstated. This method ensures that reimbursements are accounted for correctly without requiring additional effort from sellers, thus preventing losses that could arise from overlooked returns.
This includes detailed records of item prices and total revenue generated, which are essential for assessing profitability and preparing accurate tax calculations. Tools like Link My Books are designed to automate the complex and specific requirements of Amazon FBA accounting, transforming how sellers manage their finances. This level of detail helps sellers understand their true profit margins after deducting the necessary operational costs. Traditional manual entry is not only time-consuming but also prone to errors, which can be costly in eCommerce accounting. This involves not just noting down transactions but also interpreting these figures to forecast future trends, manage budgets effectively, and ensure tax compliance.
This includes the meticulous tracking of sales, inventory management, and navigating through various Amazon-specific fees and tax obligations. The unique financial dynamics handled by these systems, including sales tracking, fee management, and tax calculations, make them attractive targets for cyber threats. Automation helps in accurately logging returned items along with their reasons and reimbursements issued by Amazon. Tax Compliance SimplifiedOne of the most critical aspects for any business is tax compliance.
Case Studies: Success Stories of Automating Accounting with Link My BooksIntroduction to Automation with Link My BooksLink My Books is designed to streamline the complex and often tedious tasks of Amazon accounting and bookkeeping. Handling Reimbursements EfficientlyDealing with returns is another crucial aspect where Amazon provides reimbursements that must be correctly logged into your accounting system. Cost EfficiencyWhile there's an upfront investment involved in setting up automated accounting systems like Link My Books or hiring experts to manage these tools effectively; the long-term savings are substantial.
Using an automated tool helps generate detailed reports that can be used directly for tax filings or can be handed over to a professional accountant who handles your finances. As a round upThe integration of Link My Books into your Amazon selling strategy offers significant benefits by automating complex bookkeeping tasks and providing comprehensive insights into financial performance while ensuring compliance with taxing authorities-streamlining operations significantly for both new entrants and seasoned e-commerce sellers alike. With powerful tools like Link My Books automating most of the cumbersome tasks associated with Amazon FBA accounting-including accurate tracking of sales across different currencies-sellers can focus more on growing their business while ensuring fiscal health and compliance across borders. Detailed Financial AnalysisThe integration of Link My Books with your accounting system allows for detailed financial analysis regarding reimbursements and returns. Keeping meticulous records of these costs helps in creating an accurate picture of overall expenses and aids in strategic pricing and sales tactics.
Automated accounting tools ensure these disbursements are recorded meticulously. Begin by creating an account on their website and connecting it to your Amazon Seller Central account. These include FBA storage and fulfillment fees along with referral and closing fees among others. Enhanced Compliance and Security FeaturesE-commerce businesses face various regulatory challenges, including tax obligations across different regions. These records are vital for accurate financial reporting and are used as a base for more strategic decision-making processes that involve forecasting and tax filing. Furthermore, it keeps track of reimbursements for returns-ensuring that sellers receive every dollar they are owed-and accurately records Amazon settlements or disbursements within the designated two-week pay cycle. Similarly, managing expenses accurately - especially various seller fees like referral fees or FBA fees - plays a critical role in understanding your business's financial health. This includes documenting the gross amount received along with any deductions made by Amazon such as those aforementioned seller or FBA fees.
Understanding Amazon FBA Fees and How to Account for Them EffectivelyDecoding Amazon FBA FeesAmazon FBA (Fulfillment by Amazon) simplifies selling by handling the storage, packing, and shipping of products. This automation not only saves time but also reduces the likelihood of errors that can occur with manual bookkeeping.
Link My Books addresses this issue by automating the recording of Amazon reimbursements. Leveraging automation through platforms like Link My Books transforms complex data into actionable insights promoting informed decisions that drive success. Navigating Tax ObligationsFor an Amazon seller dealing with VAT, GST, or other forms of sales tax depending on their operational region is inevitable. Access Controls and Authentication MechanismsStrengthening system defenses against unauthorized access involves stringent access controls and robust authentication mechanisms. By using such automation software, sellers can ensure accurate and real-time tracking of currency conversions, helping to maintain clear and compliant financial records. The result is a significant reduction in administrative overhead and an increase in accuracy, allowing sellers to focus more on strategic decision-making rather than data entry. These audits should assess all aspects of the system's security architecture-from software components to user access protocols. Each fee needs to be tracked meticulously as they collectively deduct from the overall revenue.
For Amazon sellers, this means meticulously entering sales data, inventory changes, returns, and fees into ledgers or spreadsheets. Handling Taxes and FeesLink My Books excels in simplifying the complexity of handling taxes like VAT, GST or sales tax relevant to your region. Automated accounting solutions integrate seamlessly with Amazon's systems to track stock levels, calculate costs of goods sold (COGS), and monitor inventory turnover rates. Accurate Disbursement RecordingEvery two weeks, Amazon settles accounts with sellers by issuing payments that need meticulous recording in your books. Setting Up Tax Settings in Amazon Seller CentralTo effectively manage VAT, GST, or sales tax through Amazon FBA, sellers need to correctly set up their tax settings in Amazon Seller Central. With accurate tracking features, tools like Link My Books ensure you're collecting the right amount of taxes and making timely remissions as required by law. The benefit here is twofold: it reduces manual data entry errors and provides real-time access to financial information.
This feature aids sellers in maintaining an accurate account balance and provides insights into patterns that might indicate issues with specific products or shipment batches. Optimizing Profit Margins Despite Currency FluctuationsCurrency fluctuations can either erode or increase profit margins; hence managing this volatility is crucial for maintaining profitability in international selling environments. This feature allows users to consolidate their accounting from various channels into one unified system without having to manually harmonize data across different sources. Discrepancies in exchange rates can lead to significant differences in reported earnings. The system ensures that each return is logged accurately, reasons for returns are noted, and any resulting financial adjustments are recorded without requiring manual input from the seller. Additionally, when it comes to benefits like VAT refunds from Amazon transactions, automated tools ensure you don't miss out on reclaimable amounts due to oversight or record-keeping errors. Initially, your focus might solely be on recording transactions - sales, returns, and fees.
Link My Books automates this task by capturing each settlement payment along with detailed breakdowns of deductions or additional charges applied by Amazon during the payout period. Training Users on Security Best PracticesHuman error remains one of the largest security risks in any technological setup. Tax Compliance Made EasierFor tax compliance – be it VAT, GST or sales tax – accuracy in records is non-negotiable for Amazon sellers operating across different regions. It keeps a precise record of the total amounts received every two weeks while detailing any deductions made by Amazon. Automation brings efficiency and accuracy but also introduces vulnerabilities that can be exploited if not properly secured. For global Amazon sellers dealing with VAT, GST or sales tax becomes an intricate part because each region has its own regulations and rates. This seamless integration creates an ecosystem where data flows unhindered from one platform to another ensuring consistency and reliability in financial records.
Moreover, it facilitates accurate tracking of reimbursements for returns which ensures that sellers are compensated correctly without any discrepancies. Integration Capabilities of Automated SystemsAutomated accounting software typically offers excellent integration capabilities with other tools used by Amazon sellers-including inventory management systems and tax compliance tools across different regions (dealing with VAT/GST). Key Features of Link My BooksLink My Books is designed to address specific challenges faced by Amazon sellers.
By automatically capturing every transaction directly from Amazon, these tools eliminate the need for manual entry, reducing errors and saving time. Preparing for Year-End Financials as an Amazon Seller Using Automation ToolsOverview of Amazon FBA Accounting NeedsAmazon accounting is distinct from general eCommerce accounting due to its focus on specific financial activities like managing inventory, handling Amazon fees, and complying with tax obligations. This automation ensures that all transaction details are captured accurately, eliminating the manual entry errors and providing a real-time view of your financial status. Broader Picture: Additional Amazon Seller FeesBeyond FBA-specific charges, Amazon imposes several other seller fees that can impact your bottom line. Financial Forecasting and Strategic PlanningThe analytics provided by Link My Books serve as a basis for financial forecasting and strategic business planning. Each sale, refund, or adjustment needs to be recorded with precise details about the amount taxed.
Integrating Link My Books with Other Accounting Software for Enhanced FunctionalityIntroduction to Link My Books and Accounting Software IntegrationLink My Books is an essential tool for Amazon FBA sellers looking to automate and streamline their accounting processes. By leveraging this data, you can gain insights into patterns and trends related to product returns, such as identifying products that are frequently returned or pinpointing issues in the sales process that lead to higher return rates. Additionally, as sales volumes grow, keeping up manually becomes nearly impossible without hiring additional staff-a significant cost factor. This granular level of detail is particularly important for FBA sellers who must stay vigilant over their financial health to maintain a competitive edge. Accurate tax collection, recording, and timely submission are non-negotiable to avoid legal penalties or fines. Amazon Fulfillment Costs Management
Tax Handling SimplifiedAn essential aspect managed through such automated systems is tax calculation and submission. Advanced automation software helps track these fluctuations and provides insights into optimal times for currency exchanges or hedging strategies that might protect against unfavorable shifts. Tax Compliance Made EasyDealing with VAT, GST, or sales tax requires precision to avoid legal pitfalls; thus using Link My Books helps maintain compliance effortlessly. Accurate tracking and reporting of these taxes are not only essential for compliance but also for maintaining a clear financial picture of your business. The Importance of Accurate Fee RecordingAmazon charges several types of fees that can significantly impact your profit margins if not tracked properly.
In effect this meansBy automating these processes using Link My Books, you not only save time but also ensure accuracy across all financial aspects of your Amazon FBA business. The process involves tracking returns accurately within your accounting framework to handle reimbursements correctly. Moreover, they can assist in maximizing returns such as VAT refunds from Amazon which can be a substantial benefit for your business. This software automates the entry of sales data, expenses, and other critical financial information directly from Amazon's platform into your accounting system. Implementing multi-factor authentication (MFA), where users must provide two or more verification factors to gain access, significantly reduces the risk of intrusion.
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Accounting, also known as accountancy, is the process of recording and processing information about economic entities, such as businesses and corporations.[1][2] Accounting measures the results of an organization's economic activities and conveys this information to a variety of stakeholders, including investors, creditors, management, and regulators.[3] Practitioners of accounting are known as accountants. The terms "accounting" and "financial reporting" are often used interchangeably.[4]
Accounting can be divided into several fields including financial accounting, management accounting, tax accounting and cost accounting.[5] Financial accounting focuses on the reporting of an organization's financial information, including the preparation of financial statements, to the external users of the information, such as investors, regulators and suppliers.[6] Management accounting focuses on the measurement, analysis and reporting of information for internal use by management to enhance business operations.[1][6] The recording of financial transactions, so that summaries of the financials may be presented in financial reports, is known as bookkeeping, of which double-entry bookkeeping is the most common system.[7] Accounting information systems are designed to support accounting functions and related activities.
Accounting has existed in various forms and levels of sophistication throughout human history. The double-entry accounting system in use today was developed in medieval Europe, particularly in Venice, and is usually attributed to the Italian mathematician and Franciscan friar Luca Pacioli.[8] Today, accounting is facilitated by accounting organizations such as standard-setters, accounting firms and professional bodies. Financial statements are usually audited by accounting firms,[9] and are prepared in accordance with generally accepted accounting principles (GAAP).[6] GAAP is set by various standard-setting organizations such as the Financial Accounting Standards Board (FASB) in the United States[1] and the Financial Reporting Council in the United Kingdom. As of 2012, "all major economies" have plans to converge towards or adopt the International Financial Reporting Standards (IFRS).[10][11]
Accounting is thousands of years old and can be traced to ancient civilizations.[12][13][14] One early development of accounting dates back to ancient Mesopotamia and is closely related to developments in writing, counting and money;[12] there is also evidence of early forms of bookkeeping in ancient Iran,[15][16] and early auditing systems by the ancient Egyptians and Babylonians.[13] By the time of Emperor Augustus, the Roman government had access to detailed financial information.[17]
Many concepts related to today's accounting seem to be initiated in medieval's Middle East. For example, Jewish communities used double-entry bookkeeping in the early-medieval period[18][19] and Muslim societies, at least since the 10th century also used many modern accounting concepts.[20]
The spread of the use of Arabic numerals, instead of the Roman numbers historically used in Europe, increased efficiency of accounting procedures among Mediterranean merchants,[21] who further refined accounting in medieval Europe.[22] With the development of joint-stock companies, accounting split into financial accounting and management accounting.
The first published work on a double-entry bookkeeping system was the Summa de arithmetica, published in Italy in 1494 by Luca Pacioli (the "Father of Accounting").[23][24] Accounting began to transition into an organized profession in the nineteenth century,[25][26] with local professional bodies in England merging to form the Institute of Chartered Accountants in England and Wales in 1880.[27]
Both the words "accounting" and "accountancy" were in use in Great Britain by the mid-1800s and are derived from the words accompting and accountantship used in the 18th century.[28] In Middle English (used roughly between the 12th and the late 15th century), the verb "to account" had the form accounten, which was derived from the Old French word aconter,[29] which is in turn related to the Vulgar Latin word computare, meaning "to reckon". The base of computare is putare, which "variously meant to prune, to purify, to correct an account, hence, to count or calculate, as well as to think".[29]
The word "accountant" is derived from the French word compter, which is also derived from the Italian and Latin word computare. The word was formerly written in English as "accomptant", but in process of time the word, which was always pronounced by dropping the "p", became gradually changed both in pronunciation and in orthography to its present form.[30]
Accounting has variously been defined as the keeping or preparation of the financial records of transactions of the firm, the analysis, verification and reporting of such records and "the principles and procedures of accounting"; it also refers to the job of being an accountant.[31][32][33]
Accountancy refers to the occupation or profession of an accountant,[34][35][36] particularly in British English.[31][32]
Accounting has several subfields or subject areas, including financial accounting, management accounting, auditing, taxation and accounting information systems.[5]
Financial accounting focuses on the reporting of an organization's financial information to external users of the information, such as investors, potential investors and creditors. It calculates and records business transactions and prepares financial statements for the external users in accordance with generally accepted accounting principles (GAAP).[6] GAAP, in turn, arises from the wide agreement between accounting theory and practice, and changes over time to meet the needs of decision-makers.[1]
Financial accounting produces past-oriented reports—for example financial statements are often published six to ten months after the end of the accounting period—on an annual or quarterly basis, generally about the organization as a whole.[6]
Management accounting focuses on the measurement, analysis and reporting of information that can help managers in making decisions to fulfill the goals of an organization. In management accounting, internal measures and reports are based on cost–benefit analysis, and are not required to follow the generally accepted accounting principle (GAAP).[6] In 2014 CIMA created the Global Management Accounting Principles (GMAPs). The result of research from across 20 countries in five continents, the principles aim to guide best practice in the discipline.[37]
Management accounting produces past-oriented reports with time spans that vary widely, but it also encompasses future-oriented reports such as budgets. Management accounting reports often include financial and non financial information, and may, for example, focus on specific products and departments.[6]
Intercompany accounting focuses on the measurement, analysis and reporting of information between separate entities that are related, such as a parent company and its subsidiary companies. Intercompany accounting concerns record keeping of transactions between companies that have common ownership such as a parent company and a partially or wholly owned subsidiary. Intercompany transactions are also recorded in accounting when business is transacted between companies with a common parent company (subsidiaries).[38][39]
Auditing is the verification of assertions made by others regarding a payoff,[40] and in the context of accounting it is the "unbiased examination and evaluation of the financial statements of an organization".[41] Audit is a professional service that is systematic and conventional.[42]
An audit of financial statements aims to express or disclaim an independent opinion on the financial statements. The auditor expresses an independent opinion on the fairness with which the financial statements presents the financial position, results of operations, and cash flows of an entity, in accordance with the generally accepted accounting principles (GAAP) and "in all material respects". An auditor is also required to identify circumstances in which the generally accepted accounting principles (GAAP) have not been consistently observed.[43]
An accounting information system is a part of an organization's information system used for processing accounting data.[44] Many corporations use artificial intelligence-based information systems. The banking and finance industry uses AI in fraud detection. The retail industry uses AI for customer services. AI is also used in the cybersecurity industry. It involves computer hardware and software systems using statistics and modeling.[45]
Many accounting practices have been simplified with the help of accounting computer-based software. An enterprise resource planning (ERP) system is commonly used for a large organisation and it provides a comprehensive, centralized, integrated source of information that companies can use to manage all major business processes, from purchasing to manufacturing to human resources. These systems can be cloud based and available on demand via application or browser, or available as software installed on specific computers or local servers, often referred to as on-premise.
Tax accounting in the United States concentrates on the preparation, analysis and presentation of tax payments and tax returns. The U.S. tax system requires the use of specialised accounting principles for tax purposes which can differ from the generally accepted accounting principles (GAAP) for financial reporting.[46] U.S. tax law covers four basic forms of business ownership: sole proprietorship, partnership, corporation, and limited liability company. Corporate and personal income are taxed at different rates, both varying according to income levels and including varying marginal rates (taxed on each additional dollar of income) and average rates (set as a percentage of overall income).[46]
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Forensic accounting is a specialty practice area of accounting that describes engagements that result from actual or anticipated disputes or litigation.[47] "Forensic" means "suitable for use in a court of law", and it is to that standard and potential outcome that forensic accountants generally have to work.
Political campaign accounting deals with the development and implementation of financial systems and the accounting of financial transactions in compliance with laws governing political campaign operations. This branch of accounting was first formally introduced in the March 1976 issue of The Journal of Accountancy.[48]
Professional accounting bodies include the American Institute of Certified Public Accountants (AICPA) and the other 179 members of the International Federation of Accountants (IFAC),[49] including Institute of Chartered Accountants of Scotland (ICAS), Institute of Chartered Accountants of Pakistan (ICAP), CPA Australia, Institute of Chartered Accountants of India, Association of Chartered Certified Accountants (ACCA) and Institute of Chartered Accountants in England and Wales (ICAEW). Some countries have a single professional accounting body and, in some other countries, professional bodies for subfields of the accounting professions also exist, for example the Chartered Institute of Management Accountants (CIMA) in the UK and Institute of management accountants in the United States.[50] Many of these professional bodies offer education and training including qualification and administration for various accounting designations, such as certified public accountant (AICPA) and chartered accountant.[51][52]
Depending on its size, a company may be legally required to have their financial statements audited by a qualified auditor, and audits are usually carried out by accounting firms.[9]
Accounting firms grew in the United States and Europe in the late nineteenth and early twentieth century, and through several mergers there were large international accounting firms by the mid-twentieth century. Further large mergers in the late twentieth century led to the dominance of the auditing market by the "Big Five" accounting firms: Arthur Andersen, Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers.[53] The demise of Arthur Andersen following the Enron scandal reduced the Big Five to the Big Four.[54]
Generally accepted accounting principles (GAAP) are accounting standards issued by national regulatory bodies. In addition, the International Accounting Standards Board (IASB) issues the International Financial Reporting Standards (IFRS) implemented by 147 countries.[1] Standards for international audit and assurance, ethics, education, and public sector accounting are all set by independent standard settings boards supported by IFAC. The International Auditing and Assurance Standards Board sets international standards for auditing, assurance, and quality control; the International Ethics Standards Board for Accountants (IESBA) [55] sets the internationally appropriate principles-based Code of Ethics for Professional Accountants; the International Accounting Education Standards Board (IAESB) sets professional accounting education standards;[56] and International Public Sector Accounting Standards Board (IPSASB) sets accrual-based international public sector accounting standards.[57][4]
Organizations in individual countries may issue accounting standards unique to the countries. For example, in Australia, the Australian Accounting Standards Board manages the issuance of the accounting standards in line with IFRS. In the United States the Financial Accounting Standards Board (FASB) issues the Statements of Financial Accounting Standards, which form the basis of US GAAP,[1] and in the United Kingdom the Financial Reporting Council (FRC) sets accounting standards.[58] However, as of 2012 "all major economies" have plans to converge towards or adopt the IFRS.[10]
At least a bachelor's degree in accounting or a related field is required for most accountant and auditor job positions, and some employers prefer applicants with a master's degree.[59] A degree in accounting may also be required for, or may be used to fulfill the requirements for, membership to professional accounting bodies. For example, the education during an accounting degree can be used to fulfill the American Institute of CPA's (AICPA) 150 semester hour requirement,[60] and associate membership with the Certified Public Accountants Association of the UK is available after gaining a degree in finance or accounting.[61]
A doctorate is required in order to pursue a career in accounting academia, for example, to work as a university professor in accounting.[62][63] The Doctor of Philosophy (PhD) and the Doctor of Business Administration (DBA) are the most popular degrees. The PhD is the most common degree for those wishing to pursue a career in academia, while DBA programs generally focus on equipping business executives for business or public careers requiring research skills and qualifications.[62]
Professional accounting qualifications include the chartered accountant designations and other qualifications including certificates and diplomas.[64] In Scotland, chartered accountants of ICAS undergo Continuous Professional Development and abide by the ICAS code of ethics.[65] In England and Wales, chartered accountants of the ICAEW undergo annual training, and are bound by the ICAEW's code of ethics and subject to its disciplinary procedures.[66]
In the United States, the requirements for joining the AICPA as a Certified Public Accountant are set by the Board of Accountancy of each state, and members agree to abide by the AICPA's Code of Professional Conduct and Bylaws.
The ACCA is the largest global accountancy body with over 320,000 members, and the organisation provides an 'IFRS stream' and a 'UK stream'. Students must pass a total of 14 exams, which are arranged across three levels.[67]
Accounting research is research in the effects of economic events on the process of accounting, the effects of reported information on economic events, and the roles of accounting in organizations and society.[68][69] It encompasses a broad range of research areas including financial accounting, management accounting, auditing and taxation.[70]
Accounting research is carried out both by academic researchers and practicing accountants. Methodologies in academic accounting research include archival research, which examines "objective data collected from repositories"; experimental research, which examines data "the researcher gathered by administering treatments to subjects"; analytical research, which is "based on the act of formally modeling theories or substantiating ideas in mathematical terms"; interpretive research, which emphasizes the role of language, interpretation and understanding in accounting practice, "highlighting the symbolic structures and taken-for-granted themes which pattern the world in distinct ways"; critical research, which emphasizes the role of power and conflict in accounting practice; case studies; computer simulation; and field research.[71][72]
Empirical studies document that leading accounting journals publish in total fewer research articles than comparable journals in economics and other business disciplines,[73] and consequently, accounting scholars[74] are relatively less successful in academic publishing than their business school peers.[75] Due to different publication rates between accounting and other business disciplines, a recent study based on academic author rankings concludes that the competitive value of a single publication in a top-ranked journal is highest in accounting and lowest in marketing.[76]
The year 2001 witnessed a series of financial information frauds involving Enron, auditing firm Arthur Andersen, the telecommunications company WorldCom, Qwest and Sunbeam, among other well-known corporations. These problems highlighted the need to review the effectiveness of accounting standards, auditing regulations and corporate governance principles. In some cases, management manipulated the figures shown in financial reports to indicate a better economic performance. In others, tax and regulatory incentives encouraged over-leveraging of companies and decisions to bear extraordinary and unjustified risk.[77]
The Enron scandal deeply influenced the development of new regulations to improve the reliability of financial reporting, and increased public awareness about the importance of having accounting standards that show the financial reality of companies and the objectivity and independence of auditing firms.[77]
In addition to being the largest bankruptcy reorganization in American history, the Enron scandal undoubtedly is the biggest audit failure[78] causing the dissolution of Arthur Andersen, which at the time was one of the five largest accounting firms in the world. After a series of revelations involving irregular accounting procedures conducted throughout the 1990s, Enron filed for Chapter 11 bankruptcy protection in December 2001.[79]
One consequence of these events was the passage of the Sarbanes–Oxley Act in the United States in 2002, as a result of the first admissions of fraudulent behavior made by Enron. The act significantly raises criminal penalties for securities fraud, for destroying, altering or fabricating records in federal investigations or any scheme or attempt to defraud shareholders.[80]
Accounting fraud is an intentional misstatement or omission in the accounting records by management or employees which involves the use of deception. It is a criminal act and a breach of civil tort. It may involve collusion with third parties.[81]
An accounting error is an unintentional misstatement or omission in the accounting records, for example misinterpretation of facts, mistakes in processing data, or oversights leading to incorrect estimates.[81] Acts leading to accounting errors are not criminal but may breach civil law, for example, the tort of negligence.
The primary responsibility for the prevention and detection of fraud and errors rests with the entity's management.[81]
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Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business and other organizations.[1] It involves preparing source documents for all transactions, operations, and other events of a business. Transactions include purchases, sales, receipts and payments by an individual person, organization or corporation. There are several standard methods of bookkeeping, including the single-entry and double-entry bookkeeping systems. While these may be viewed as "real" bookkeeping, any process for recording financial transactions is a bookkeeping process.
The person in an organisation who is employed to perform bookkeeping functions is usually called the bookkeeper (or book-keeper). They usually write the daybooks (which contain records of sales, purchases, receipts, and payments), and document each financial transaction, whether cash or credit, into the correct daybook—that is, petty cash book, suppliers ledger, customer ledger, etc.—and the general ledger. Thereafter, an accountant can create financial reports from the information recorded by the bookkeeper. The bookkeeper brings the books to the trial balance stage, from which an accountant may prepare financial reports for the organisation, such as the income statement and balance sheet.
The origin of book-keeping is lost in obscurity, but recent research indicates that methods of keeping accounts have existed from the remotest times of human life in cities. Babylonian records written with styli on small slabs of clay have been found dating to 2600 BC.[2] Mesopotamian bookkeepers kept records on clay tablets that may date back as far as 7,000 years. Use of the modern double entry bookkeeping system was described by Luca Pacioli in 1494.[3]
The term "waste book" was used in colonial America, referring to the documenting of daily transactions of receipts and expenditures. Records were made in chronological order, and for temporary use only. Daily records were then transferred to a daybook or account ledger to balance the accounts and to create a permanent journal; then the waste book could be discarded, hence the name.[4]
The primary purpose of bookkeeping is to record the financial effects of transactions. An important difference between a manual and an electronic accounting system is the former's latency between the recording of a financial transaction and its posting in the relevant account. This delay, which is absent in electronic accounting systems due to nearly instantaneous posting to relevant accounts, is characteristic of manual systems, and gave rise to the primary books of accounts—cash book, purchase book, sales book, etc.—for immediately documenting a financial transaction.
In the normal course of business, a document is produced each time a transaction occurs. Sales and purchases usually have invoices or receipts. Historically, deposit slips were produced when lodgements (deposits) were made to a bank account; and checks (spelled "cheques" in the UK and several other countries) were written to pay money out of the account. Nowadays such transactions are mostly made electronically. Bookkeeping first involves recording the details of all of these source documents into multi-column journals (also known as books of first entry or daybooks). For example, all credit sales are recorded in the sales journal; all cash payments are recorded in the cash payments journal. Each column in a journal normally corresponds to an account. In the single entry system, each transaction is recorded only once. Most individuals who balance their check-book each month are using such a system, and most personal-finance software follows this approach.
After a certain period, typically a month, each column in each journal is totalled to give a summary for that period. Using the rules of double-entry, these journal summaries are then transferred to their respective accounts in the ledger, or account book. For example, the entries in the Sales Journal are taken and a debit entry is made in each customer's account (showing that the customer now owes us money), and a credit entry might be made in the account for "Sale of class 2 widgets" (showing that this activity has generated revenue for us). This process of transferring summaries or individual transactions to the ledger is called posting. Once the posting process is complete, accounts kept using the "T" format (debits on the left side of the "T" and credits on the right side) undergo balancing, which is simply a process to arrive at the balance of the account.
As a partial check that the posting process was done correctly, a working document called an unadjusted trial balance is created. In its simplest form, this is a three-column list. Column One contains the names of those accounts in the ledger which have a non-zero balance. If an account has a debit balance, the balance amount is copied into Column Two (the debit column); if an account has a credit balance, the amount is copied into Column Three (the credit column). The debit column is then totalled, and then the credit column is totalled. The two totals must agree—which is not by chance—because under the double-entry rules, whenever there is a posting, the debits of the posting equal the credits of the posting. If the two totals do not agree, an error has been made, either in the journals or during the posting process. The error must be located and rectified, and the totals of the debit column and the credit column recalculated to check for agreement before any further processing can take place.
Once the accounts balance, the accountant makes a number of adjustments and changes the balance amounts of some of the accounts. These adjustments must still obey the double-entry rule: for example, the inventory account and asset account might be changed to bring them into line with the actual numbers counted during a stocktake. At the same time, the expense account associated with use of inventory is adjusted by an equal and opposite amount. Other adjustments such as posting depreciation and prepayments are also done at this time. This results in a listing called the adjusted trial balance. It is the accounts in this list, and their corresponding debit or credit balances, that are used to prepare the financial statements.
Finally financial statements are drawn from the trial balance, which may include:
The primary bookkeeping record in single-entry bookkeeping is the cash book, which is similar to a checking account register (in UK: cheque account, current account), except all entries are allocated among several categories of income and expense accounts. Separate account records are maintained for petty cash, accounts payable and accounts receivable, and other relevant transactions such as inventory and travel expenses. To save time and avoid the errors of manual calculations, single-entry bookkeeping can be done today with do-it-yourself bookkeeping software.
A double-entry bookkeeping system is a set of rules for recording financial information in a financial accounting system in which every transaction or event changes at least two different ledger accounts.
A daybook is a descriptive and chronological (diary-like) record of day-to-day financial transactions; it is also called a book of original entry. The daybook's details must be transcribed formally into journals to enable posting to ledgers. Daybooks include:
A petty cash book is a record of small-value purchases before they are later transferred to the ledger and final accounts; it is maintained by a petty or junior cashier. This type of cash book usually uses the imprest system: a certain amount of money is provided to the petty cashier by the senior cashier. This money is to cater for minor expenditures (hospitality, minor stationery, casual postage, and so on) and is reimbursed periodically on satisfactory explanation of how it was spent. The balance of petty cash book is Asset.
Journals are recorded in the general journal daybook. A journal is a formal and chronological record of financial transactions before their values are accounted for in the general ledger as debits and credits. A company can maintain one journal for all transactions, or keep several journals based on similar activity (e.g., sales, cash receipts, revenue, etc.), making transactions easier to summarize and reference later. For every debit journal entry recorded, there must be an equivalent credit journal entry to maintain a balanced accounting equation.[5][6]
A ledger is a record of accounts. The ledger is a permanent summary of all amounts entered in supporting Journals which list individual transactions by date. These accounts are recorded separately, showing their beginning/ending balance. A journal lists financial transactions in chronological order, without showing their balance but showing how much is going to be entered in each account. A ledger takes each financial transaction from the journal and records it into the corresponding account for every transaction listed. The ledger also determines the balance of every account, which is transferred into the balance sheet or the income statement. There are three different kinds of ledgers that deal with book-keeping:
A chart of accounts is a list of the accounts codes that can be identified with numeric, alphabetical, or alphanumeric codes allowing the account to be located in the general ledger. The equity section of the chart of accounts is based on the fact that the legal structure of the entity is of a particular legal type. Possibilities include sole trader, partnership, trust, and company.[7]
Computerized bookkeeping removes many of the paper "books" that are used to record the financial transactions of a business entity; instead, relational databases are used today, but typically, these still enforce the norms of bookkeeping including the single-entry and double-entry bookkeeping systems. Certified Public Accountants (CPAs) supervise the internal controls for computerized bookkeeping systems, which serve to minimize errors in documenting the numerous activities a business entity may initiate or complete over an accounting period.
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