• Rana Bhaumik

The Virtuous Cycle of Bookkeeping

Updated: Jan 11


Books of Account (BoA) are similar to the human palm. Just as lines or impressions of palm reflect the human journey, transactions in the BoA represent the business journey. How do we ensure the BoA represent a good business journey?


#bookkeeping #compliance #mis #vouchers #chartofaccounts #accountcode #accountingpolicies #bookofaccounts #ledger #trialbalance #financialstatements


Birth was not our choice. Death will not be our choice. But the way we live our life is absolutely our choice.
We make our choices, then our choices make us.

While this is the eternal equation in the life of a human being, it is not very different from the financial journey of a business. The virtuous and transparent system of accounting shall drive and determine the prosperity, consistency, stability, and reliability of the business.


The BoA capture the financial journey of the business just like the lines on our palm that represent the what, how, why, where, and when of our human journey.


As we travel from the previous decade to the current times, all of us realize that never ever in the history of mankind has the difference between office and home ceased to exist as much as it has now, thanks to work from home (WFH) and technology.


It is in this context that the word virtuosity becomes so critical and transparency is granted and non-negotiable. In other words, governance in what, how, and when are what will separate the good from the bad.


Sounds difficult? Not really and since this transition has become an imperative and can no longer be denied. Communication, simple, clear, concise, and crisp, is the need of the hour.


Based on our years of cross-functional, -cultural, -continental, and -industrial experience, we present here a simple and practical explanation of some of the fundamental concepts in accounting and finance.


The far-reaching consequences of an accounting entry and accounting norm have been explained lucidly since “what we understand is never forgotten and misinterpreted”.


Technology, which is now omnipresent and powerful, will only be relevant when the concepts are well understood and configured in the solutions.


In the world of accounting and finance, this virtuosity and character have far-reaching consequences. The BoA, where transactions are from inception and continue to remain till eternity, reflect and capture the thought process of the bookkeeper and accountant.



Bookkeeping, Bookkeeper, and Accountant


Bookkeeping refers to the work of a Bookkeeper or an Accountant. A bookkeeper is also referred to as a Bookkeeping Clerk.


A bookkeeper records the raw financial data (e.g. paid Rs. 500 to a lawyer X on Monday for fighting a case).


An accountant, on the other hand, classifies, analyzes, and presents the data appropriately (e.g. Rs. 500 paid to Mr. X for the labor case. This amount is classified as a legal charge and shown in the Ledger and Trial Balance.)


Presently, in a modern organization, the distinction between bookkeeper and accountant does not really exist.



What Makes for Good Accounting?


Here is the chain of events or the bookkeeping process that ensures a good business journey.



Accounting Vouchers


Accounting vouchers capture and record the transactions. Narration records the reasons for all times.


All financial transactions need to stand the test of time through:

  • Documentation or capturing the event.

  • Substantiation or independent evidence of the transaction.

  • Justification or why it is recorded in the manner it has been.

  • Authorization or approval.

These aspects are addressed through vouchers. Vouchers are internal documents generated or raised by the organization or business to record:

  • The parties, giver and receiver, in each transaction.

  • The value involved, which has to be recorded in the books.

  • The date of the transaction.

  • The nature of accounts that would get affected,

  • The designations or positions that acknowledge, approve and authorize transactions

  • Rectification of errors committed through journal vouchers.



Chart of Accounts


Chart of Accounts (CoA) establishes the account heads for recording these transactions.


Associated with each voucher is a ledger account. The ledger account (or simply an account) is the address or destination where each transaction must be recorded, placed, or housed.

  • Purchase transactions are recorded at the same address called Purchase Account

  • Sale transactions are recorded at the same address called Sales Account

  • Cash transactions are recorded at the same address called Cash Account

  • Bank transactions are recorded at the same address called Bank Account

  • Expenses are recorded at addresses that relate to the outflow of money

  • Incomes are recorded at addresses that relate to the inflow of money. Thus, inflow towards sales is all accounted for under Sales accounts.

Note that expenses are of several types like travel, entertainment, advertisement, communication, salaries, etc.


Thus, expenses towards tickets (air, train, road, cab hire charges, etc.) are accounted for under travel, and those towards mobile, Internet, and telephone will be accounted for under communication.



Accounting Policies


Accounting policies establish rules and rationale for capturing, classifying, and presenting the transactions in the BoA.



Books of Account (BoA)


BoA collectively refers to ledgers, trial balance, and financial statements.



Ledgers and Sub Ledgers


The ledger is a summary of all transactions of similar nature (purchases, sales income, expenses) entered into an account based on the supporting documents or vouchers.


As on a particular date, the ledger summarises all the individual transactions. Ledger accounts are always prefixed by the type of transactions it houses.


Thus, on March 31, 20XX, the end of the fiscal year:

  • The Sales ledger account will capture all invoices raised during the year and total sales as of that date.

  • The Purchase ledger account will capture all purchases during the year and reflect total purchases as of that date.

  • The Cash ledger will capture all cash transactions during the year.


A Sub-ledger, as the name suggests, refers to a sub-set or part of Ledger. Any organization has transactions with several parties and all parties cannot be displayed individually.


For instance, if for a certain locality, Schools was the address or ledger, then the various educational institutions in the nature of schools would be similar to the Sub-ledger that residents new to the locality would want to check out.



Trial Balance


All ledger accounts are summarised and presented for review through a Trial Balance. Unlike a CoA that only shows the ledger accounts, a trial balance shows the ledger accounts and balances of each of those accounts as on a particular date.



How it Ensures a Good Business Journey


The above-described bookkeeping process when followed strictly mitigates ambiguity and confusion around accounting. The seeds of business continuity are sown through the institutionalization of this process.


ERP systems are configured around this process to achieve seamlessness, standardization, scalability, and globalization.


Decision-making is facilitated through the Management Information System (MIS) reports obtained through designing and querying the accounting database.


Integrated analysis of CoA, accounting policies, and BoA provides data about relevant regulations and compliance status.



An Example


Accounting a payment to a statutory auditor towards professional fees and out of pocket expenses captures the virtuous cycle.


PROFESSIONAL FEES:


OUT OF POCKET EXPENSES:



In Closing


At BookKeeper.co.in, we are passionate about making every work enriching, learning, and fulfilling. Usually, bookkeeping and accounting are seen as mundane, routine, and “no brainer” work but nothing could be further from the truth.


A good and professional accountant makes all the difference between good data and irrelevant data. A mistake committed at this very basic stage can make all the difference.


Even software needs to be programmed by a good bookkeeper or accountant first and then only can it make a difference. BookKeeper.co.in is determined to build an empowered and knowledgeable accountant since whatever one does has to be the first time right and a stitch in time saves nine.


The BookKeeper.co.in team is Relevance in Deed.