Bookkeeping and Accounting
Updated: Aug 20, 2021
It is essential for every entrepreneur to have a basic knowledge and understanding of business accounting and book keeping. Typically, after incorporation, most business entities tend to focus less on day-to-day book keeping and more on profit-generating business activities. However, maintaining detailed records and books of account is not only logical, but also mandatory as per applicable laws and regulations. Hence, every entrepreneur must know and understand the following primary accounting requirements: All business transactions, payments and receipts, must be recorded with appropriate supporting documentation. In general, business and individual/personal funds should never be mixed or used for purposes other than those designated, i.e. personal funds should not be used for business purposes and vice versa. Where it becomes necessary to use personal funds for business purposes, such funds should be recorded as a receipt and their usage entered/explained in the appropriate books of account. Where business funds are used for personal purposes, they should be recorded as payment/withdrawal/loan in all relevant business records. Bookkeeping Any business organization including a Company or an LLP should maintain proper books of accounts with respect to: Money received and expended Sales and purchase of goods and services Assets and liabilities Both companies and LLPs should follow the double entry system to maintain their respective books of accounts. However, the method of recording entries differs; companies are required to use the accrual method, while LLPs can choose between cash or accrual methods. Vouchers Book keeping is an essential element of doing business and involves preparing vouchers for each business transaction. Basically, vouchers are of three types Payment, Receipt and Journal. The first tasks to be carried out after the incorporation of a company or LLP are to procure printed payment and receipt vouchers for the day-to-day recording of all business transactions. Books of Account All incorporated businesses should maintain the following main books: Cash Book Sales Book Purchase Book Vouchers and Records including all supporting documents. The Company / LLP and Income Tax laws mandate the maintenance of proper books of accounts throughout the course of business, as well as the preparation of Balance Sheets and Profit and Loss Statements at the end of each financial year. Basic Files and Records for book keeping 1. Payment Vouchers File All payments made for and in the course of business (purchase of goods and/or services, travel costs, etc.) should be recorded in separate vouchers with proof of such payments. Payment includes cash, cheque and electronic payments. If personal funds are used for business purposes, such funds should be first recorded as capital or loan in the company/LLP account and thereafter, its usage in a payment voucher along with necessary proof should be recorded. It is advisable to file all payment vouchers for a given year together, sorted by date and month, facilitating future validation. 2. Receipt Vouchers File A record of all monies received for and in the course of business, including cash, cheque/draft, and electronic receipts. Receipts may pertain to invoices raised by the business, loans and advances from individuals/institutions, etc. 3. Cash Book This is a register/ledger for recording cash transactions, tracking inflow and outflow over a given period of time. The book balance and cash-in-hand of a company or LLP should always match. 4. Invoice File Businesses are required to maintain copies of all invoices raised and sent to customers for each financial year. Invoices should be referenced by serial numbers in ascending order and filed by date of creation. 5. Bank Statements File All registered companies and LLPs should maintain a file containing statements of accounts pertaining to all bank transactions undertaken in a financial year (deposits, withdrawals, bank charges, interest earned, etc). If the company or LLP has accounts with more than one bank, it is advisable to maintain separate annual files for each bank. Accounting In layman terms, accounting is the process of recording all business transactions, following applicable accounting rules and standards. Business accounting requires a high degree of technical knowledge and skills, and needs to be updated based on current and frequent amendments to accounting rules and regulations. Typically, business books are maintained according to the double entry method, i.e. each transaction is recorded twice, as a credit on one side and as a debit on the other. In other words, accounting is the process of segregating the payments and receipts to categories such as income, expense, assets and liabilities and recording to respective heads of accounts. Accounting results in preparation of trial balance at the year end and helps to prepare the Profit and Loss Account and Balance Sheet. It is advisable to obtain professional help for keeping your business books. Companies Inn provides all help and systems for maintaining books and records, including outsourced services for keeping books and papers.