How the Bookkeeping Process Works

The bookkeeper is responsible for overseeing the company’s finances, including purchasing, expenditures, debt, sales and collection.

Typically, businesses use a standard bookkeeping system. Documents, such as invoices and receipts, are created for sales and purchases. Deposit slips are generated when money is placed in the bank. Checks are written to pay bills.

Enter Data

To begin, enter data from documents into daybooks. Each daybook is associated with a certain type of transaction, such as sales in a sales journal or payments in a cash payments journal.

Bookkeeping can involve single- or double-entry, where each journal column is connected to an account. When using double-entry bookkeeping, each transaction is recorded twice in the daybook—debit and credit entries—with the total of the debits and credits equaling zero. This allows for a comprehensive and accurate view of financial transactions over a certain period of time.

Review the Journal Entries

A month later, the bookkeeper or accountant reviews the journal entries for the month, one account at a time. They then add up the amounts in the debit and credit columns for that account and record the total in the corresponding account in the ledger. This is the second step of the bookkeeping process, known as posting.

This process is repeated for each account, with the totals from the journal being posted to each corresponding account in the ledger. Once all the accounts have been posted, the bookkeeper or accountant will have a complete record of all transactions for the month.

Balance the Accounts

Once all the accounts have been posted to, the bookkeeper or accountant checks to make sure that the accounts balance. This means that the sum of the debits must equal the sum of the credits. This is the final step in the bookkeeping process and allows the business to keep track of their financial activity and make sure that the books are in order.

A working document, the unadjusted trial balance, is made after balancing. This allows the bookkeeper to check the postings.

Balances with a debit amount go in the debit column, while credit amounts go in the credit column. Both must match or an error must be found and corrected. Totals must then be redone to continue.

Adjusted Trial Balance

The adjusted trial balance is created by adjusting and changing the original balance amounts for the accounts. This adjusted trial balance is used to generate a financial statement, which can include the income statement, profit/loss statement, balance sheet, cash flow, and retained earnings.

The income statement will show the revenues and expenses of the company, and the profit/loss statement will show the net profit or loss of the company over a period of time.

The balance sheet will show the assets, liabilities, and equity of the company.

The cash flow statement will show the sources and uses of cash.

Lastly, the retained earnings statement will show the retained earnings of the company. All these statements together provide a comprehensive overview of the company’s financial position.