It refers to the recording of financial transactions on a daily basis by a business or other organization. It includes purchases and sales and all forms of expenditure and income.
In old times, these records were kept in physical books called account books, therefore, the name bookkeeping emerges. Now also businesses use this method.
But with the arrival and growth of technology, software, databases, and remote data storage facilities, financial records have increasingly been kept in time-saving and convenient digital media formats.
Whether your financial records are kept in textbooks or in electronic data form, there’s a limited number of ordinary systems governing the way during which they’re organized and presented.
In practice, one among two systems is usually adhered to. These are referred to as single entry and double entry.
The simpler and quicker bookkeeping system to work and maintain essentially involves running daily records of receipts and payments made.
Single-entry bookkeeping is ideally suited to sole traders and other small businesses for whom double entry would be too complex and time-consuming to be justified for the extra information it provides.
In this system, the financial transactions and assets of a business are distributed among numerous accounts, each of which can be represented by a reputation or numeric code. for each transaction recorded, a credit to at least one account is matched with a debit of an equivalent amount to a different. Thus, every transaction is recorded in two accounts i.e. double-entry.
The advantages of this technique are chiefly twofold. Firstly, breaking down the affairs of the corporate into many accounts provides a basis for detailed and precise aggregated management information and controls. Secondly, the balancing of credit and debit across two accounts for each transaction allows for controls to be conducted to spot errors.
Training in the double-entry is required to know which accounts to debit and which to credit for every sort of transaction – this is often employed that business owners don’t often find straightforward, or cost-effective to undertake themselves. Those choosing to use double-entry often like better to outsource the work to dedicated professionals.
Double-entry bookkeeping may be a tried and tested system. it’s been in widespread use on the ECU continent since the center Ages and was popularised in England within the mid-1550s. It’s now typical around the world.
Bookkeeping and therefore the law
The legal requirements and standards for bookkeeping vary under different national jurisdictions. In the UK, until the businesses Acts of 1981 and 1985 implemented several EU directives on accounting practices, no legal stipulations had been set for bookkeeping; and therefore the UK remains one among the less prescriptive countries in Europe today, allowing a free choice of single-entry and double-entry systems for businesses of all sizes.
Other European countries regulate bookkeeping standards far more closely. as an example, in Germany, double-entry is compulsory for businesses whose turnover or profit exceeds a particular threshold; while in Sweden, it’s compulsory for all businesses (including sole traders), regardless of turnover.
The European Union has developed a standard set of International Financial Reporting Standards (IFRS). However, its implementation is mandatory only in some EU states (e.g. Germany and therefore the UK), then typically just for stock exchange-listed companies. Other standards like the Plan Comptable Général (PCG) in France may alternatively be utilized in some countries.
Under most jurisdictions, it’s required to stay not only accounts but also physical proofs of each transaction (printed receipts, invoices, etc.), in order that within the event of disputes with or inspections by the tax authorities, a corporation can provide evidence that the transaction happened.
When you are exporting goods or services overseas or importing them from abroad, due to the complexity of VAT law and other applicable regulations, it’s going to be necessary to provide proofs of the destination and source countries of products and services that you’re accounting in your bookkeeping.
Whether you’re a sole trader or a corporation, it’s an EU and HMRC requirement to retain all of your bookkeeping records and proofs of transactions for inspection for 6 years. this is applicable albeit you’ve got ceased trading.
Bookkeeping and VAT
In the UK, all businesses with an annual turnover of £85,000 or more are obliged to register for VAT; for smaller businesses, VAT registration is optional. Most other European countries enforce much lower thresholds for VAT registration, with some making it compulsory for all businesses including sole traders, regardless of how low the turnover.
If you’re registered for VAT, you want to account for it in your bookkeeping, clearly showing the VAT component of all payments made and received, also as your outgoing payments of VAT to HMRC. VAT rates on goods and services purchased and sold within the UK are currently 20% apart from certain classes of products that are zero-rated or rated at 5%.
VAT must be charged not only on your sales within the united kingdom but also on all export sales within the EU. Sales to non-EU countries are exempt from VAT.
Because VAT rates vary considerably both within Europe and around the world, businesses trading internationally will find the method of accounting and bookkeeping for VAT more complicated. The VAT rate effective within the country where the transaction is deemed to possess taken place will generally apply; but if you’re trading with another VAT-registered business elsewhere within the EU, the method of VAT collection and accounting, and thus also bookkeeping, will differ from the one that applies if you’re trading with consumers or non-VAT-registered businesses.
If your turnover of sales to specific export markets within the EU exceeds the VAT threshold set by those EU countries’ national governments, you’ll need to register separately for VAT within the EU destination country and conduct your bookkeeping for all of your exports thereto country supported accounting for your VAT dues to the national tax office of that country.
Profit and loss accounts
At the top of every fiscal year, all UK businesses, from limited companies to sole traders, are required to undergo HMRC annual trading accounts showing an operating profit or loss. this is often the province of accountants, but small businesses and sole traders may prefer to submit their own annual return. These annual profit and loss accounts are going to be supported the records of transactions kept by the bookkeeper through the year. within the event of a dispute with HMRC over the correctness of the annual return, you’ll need to have your account books and proofs of transactions ready for inspection.