The majority of us doubtless think of accounting and bookkeeping as being essentially the same, but in actual fact bookkeeping is a subcategory of accounting, where accounting includes additional financial processes which support the running of a business. Accountants prepare reports based, in part, on the work of bookkeepers.
Bookkeepers perform all manner of record-keeping tasks. They prepare what are referred to as source documents for all the operations of a business - the buying, selling, transferring, paying and collecting. The documents include papers such as purchase orders, invoices, credit card slips, time cards, time sheets and expense reports. Bookkeepers also determine and enter in the source documents what are called the financial effects of the transactions and other business events. Those include paying the employees, making sales, borrowing money or buying products or raw materials for production.
The bookkeepers of the company also keep a detailed record of the financial effects in either journals or accounts. These are two dissimilar types of record. The journal keeps a record of the financial transactions in a sequential order. On the other hand, an account is an independent calculation of all the assets and the liabilities of the company. In this way, it can be seen that any given financial transaction will often involve a number of different accounts.
Another task that is assigned to the bookkeeping department is the preparation of chronological reports that are created on a weekly, quarterly or annual basis. To do this, all the accounts need to be up to date. This involves detailed tracking of inventory and other assets which must be frequently verified to make sure there are no errors.
The bookkeepers also compile complete listings of all accounts. This is called the adjusted trial balance. While a small business may have a hundred or so accounts, very large businesses can have more than 10,000 of such accounts.
The final step is for the bookkeeper to close the books, which means bringing all the bookkeeping for a fiscal year to a summarized close.
Assets and Liabilities
The ultimate goal of a company is to generate profits and that is achieved by calculating the different financial assets. This is not as straightforward as it may sound because, just as our personal finances are usually run on credit, so it is in the business world. Many businesses sell their products to their customers on credit. Accountants use an asset account called accounts receivable to record the total amount owed to the business by its customers who haven't paid the balance in full yet. Much of the time, a business hasn't collected its receivables in full by the end of the fiscal year, especially for such credit sales that were transacted near the end of the accounting period.
The accountant reconciles the sales profits against the cost of goods sold during the year when these products where actually delivered to the client. This kind of record is called accrual based accounting which tracks the actual time revenue was generated against accrued expenses, for example for the cost of raw materials. When sales are made on credit, the accounts receivable asset account is increased. When cash is received from the customer, then the cash account is increased and the accounts receivable account is decreased.
When a company obtains new products, that cost is a registered in an inventory asset account. The cost is deducted from the cash account, or added to the accounts payable liability account, depending on whether the business has paid with cash or credit.
The cost of goods sold is one of the major expenses of a businesses that sell goods, products or services. Even a service company involves some kind of expenses. A business makes its profit by selling its products at prices high enough to cover the cost of producing them, the costs of running the business, the interest on any money they've borrowed and income taxes, with money left over for profit.
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