What is Bookkeeping? Definition, Types & Examples

Bookkeeping is so much more than numbers and spreadsheets. It’s the meticulous art of recording all the financial transactions a business makes. Bookkeeping gives you an in-depth look at your expenses and revenue, and it gets you on the path to transforming your business into a money-maker. 

But what is bookkeeping? And why is it so important? In this guide, we’ll explain the meaning of bookkeeping and walk you through its purpose and benefits.

Bookkeeping definition

Bookkeeping is the process of recording and organising all financial transactions made by a business. 

Before we expand on this bookkeeping meaning, let’s first talk about the process of recording transactions. Business owners or bookkeepers record transactions based on supporting documents, in line with the accounting method the business uses. Documents can be bills, receipts, invoices, purchase orders, or other financial reports that indicate a transaction.

Bookkeepers use either single-entry or double-entry methods to record transactions. Single-entry tracks income and expenses, like a cash register. Double-entry is more detailed, using journals, ledgers, trial balances, and financial statements.

In short, bookkeeping is a key part of running a business and keeping accurate financial records. Good bookkeeping helps you track your finances and grow your business.

What is the purpose of bookkeeping?

Bookkeeping has two primary objectives:

• To accurately document all financial transactions that result from business activities, using best practices.
• To determine and analyse the financial outcomes of business activities.

Bookkeepers track all business transactions and costs, often categorising them into areas like goods and services, wages, and taxes. When it's time to review finances, they generate key reports, such as the balance sheet and income statement, which offer a clear view of how the business is performing.

Bookkeeping basics

It’s essential for businesses to keep accurate financial reports. You can outsource the work to a professional bookkeeper, or you can handle it yourself. With a balanced bookkeeping system, you can trust that your financial records provide a reliable measure of your business’s success.

To get you started on bookkeeping basics, here are some key concepts: 

• Accounts: These are categories used to group and track different types of financial transactions, such as sales, expenses, assets, and liabilities. 
• Assets: Anything your business owns (or partially owns) is considered an asset. Examples of assets are inventory, property, machinery, and money owed to the business as accounts receivable.
• Balance sheet: A financial statement that shows what your business owns (assets) and what it owes (liabilities) – providing a snapshot of its financial position at a specific point in time.
• Chart of accounts: An organised list of all the accounts used to record financial transactions in your ledger. These accounts, also known as general ledger codes, help categorise and track your business’s finances.
• Equity: This is the owner’s or shareholders’ stake in the business, representing money they’ve invested or withdrawn, plus retained earnings.
• Expenses: These are the costs a business pays to operate, such as rent, wages, utilities, and supplies.
• Financial statements: These show the financial activities of your business. Two examples are the balance sheet and the profit and loss statement. 
• Journal entry: A record of a financial transaction entered into the accounting system, showing the accounts affected and amounts debited or credited.
• Ledger: A detailed record where all business transactions are posted and organised by account, summarising financial activity over time.
• Liabilities: Debts or obligations a business owes, including unpaid bills, taxes, wages, and loans.
• Profit and loss (P&L) statement: A financial report that summarises a business’s revenue and expenses over a specific period, showing its profitability and performance.
• Revenue: Income a business earns from sales, interest, dividends, or other sources.

What’s the difference between bookkeeping and accounting?

Without a firm grasp on bookkeeping basics, it can be easy to confuse terms. For example, the terms ’bookkeeping’ and ‘accounting’ are frequently confused.

What are the types of bookkeeping?

There are two main types of bookkeeping, single-entry bookkeeping and double-entry bookkeeping.

Single-entry bookkeeping

The single-entry method is the preferred method for sole traders, small startups and companies with unfussy or minimal transaction activity. The single-entry system tracks cash sales and expenditures over a period of time. 

With this bookkeeping process, you must maintain three pieces of documentation:

• Cash sales journal: This is where the business records all revenue.
• Cash disbursements journal: This is where the business records all expenses.
• Bank statements: All journal entries should align with the company’s bank statements.

Double-entry bookkeeping

The double-entry framework is more complicated. It’s ideal for enterprises with accrued expenses, or expenditures entered into the bookkeeping system on the purchase date rather than payment date.

Double-entry bookkeeping is common in accounting software programs like QuickBooks Online. With this type of bookkeeping, bookkeepers record transactions under expenses or income. They then create a second entry to classify the transaction on the appropriate account. The following documents comprise double-entry bookkeeping:

• Journal entries
• General ledgers
• Inventory
• Cashbooks
• Accounts payable
• Accounts receivable
• Loans
• Payroll

You can manage your bookkeeping manually with pen and paper, or digitally with online bookkeeping software. Whether you’re a small business or a large corporation, you should choose a method that will lead to the most accurate and organised data.

Bookkeeping examples for small businesses

Here, we’ll provide some bookkeeping examples so you can see how these concepts can be applied in the day-to-day running of your business:

Example 1: Recording an invoice

When a small business issues an invoice to a customer for goods or services, it records the invoice as accounts receivable. This means the business expects payment in the future. The bookkeeper enters the invoice details (such as date, amount, customer name, and due date) into the accounting system. Once the customer pays, the payment is recorded to clear the receivable.

Example 2: Categorising a business lunch

In situations where a small business spends money on a lunch meeting with clients or partners, the bookkeeper records this expense under a specific category like ‘Meals and Entertainment’ or ‘Business Meals.’ Properly categorising helps track deductible expenses and keeps the books organised for tax time.

Example 3: Logging a supplier payment

Whenever your small business pays a supplier for goods or services, your bookkeeper should record the payment to reduce accounts payable (the money you owe). This entry should include the payment date, amount, and supplier details, ensuring your records show up-to-date liabilities and cash flow.

Bookkeeping for tax time

In Australia, businesses must meet legal tax obligations set by the Australian Taxation Office (ATO). Key documents you’ll need to keep up to date include:

• Records of financial transactions
• Financial statements
• Tax compliance documents (such as BAS and GST reports)
• Cash flow statements

Accurate, well-maintained bookkeeping ensures your business stays ATO compliant, and simplifies lodgement of tax returns and activity statements.

The benefits of bookkeeping

Bookkeeping is necessary for the smooth running of any business. It can also have other benefits that go beyond simple recordkeeping. These include:

• Recording transactions: Bookkeeping keeps track of all your business’s financial activities — from sales and purchases to payments and receipts.
• Categorising transactions: It organises your transactions into clear categories like income, expenses, assets, and liabilities, making it easier to understand where your money is going.
• Creating financial statements: The information collected helps generate important reports such as profit and loss statements, balance sheets, and cash flow reports.
• Ensuring accuracy: Keeping complete records means you can make smarter business decisions and stay on the right side of tax laws.
• Using supporting documents: Bookkeeping is backed up by essential paperwork like invoices, receipts, and bank statements to make sure everything is properly recorded and verifiable.

Common bookkeeping mistakes

Bookkeeping mistakes are common, especially for small businesses juggling many tasks. Here are some examples:

• Mixing personal and business finances
• Failing to keep receipts and supporting documents
• Not reconciling bank statements regularly
• Missing or late recording of transactions
• Incorrectly categorising expenses or income
• Neglecting to back up financial data
• Overlooking outstanding invoices or payments
• Using inconsistent bookkeeping methods or software
• Not tracking petty cash properly
• Ignoring tax deadlines and compliance requirements

Errors such as these can lead to costly headaches. However, these pitfalls can be avoided with good habits and attention to detail. By keeping personal and business finances separate, regularly reconciling accounts, organising receipts, and using consistent bookkeeping methods, your business can maintain clear and accurate financial records. 

What are good bookkeeping practices?

Now that you’ve got a firm grasp on the basics of bookkeeping, let’s take a deeper dive into how to practice good bookkeeping. There’s no one-size-fits-all answer to efficient bookkeeping, but there are universal standards. 

The following three bookkeeping practices can help you stay on top of your business finances:

1. Consider a phased approach

Trying to juggle too many things at once only works to put your organisation in danger. If you’re looking to convert from manual bookkeeping to digital, consider a staggered approach. Overhauling all at once can be overwhelming and discouraging, so it’s best to take it slow and make meaningful and intentional shifts.

Those baby steps can help you manage your organisation on a new and improved system. Small steps also give everyone time to familiarise themselves with the new bookkeeping software. Consider using the help of a professional bookkeeper to assist with implementing this transition.

2. Keep your general ledger current

A general ledger is a collection of accounts that classify and store all records associated with a company’s financial transactions. The general ledger includes balance sheet accounts (liabilities, equity, assets ) and income statement accounts (revenue, expenditure, gains, losses).

Under the double-entry accounting structure, every business transaction will affect two or more general ledger accounts. General ledger accounts include:

• Asset accounts, such as cash, accounts receivable, investments, land, equipment and inventory.
• Liability accounts, such as accounts payable, accrued expenses payable, customer deposits and notes payable.
• Shareholders’ equity accounts such as ordinary shares, treasury shares and retained earnings.

Your general ledger should be up to date, so your bookkeeping software must provide functionality that you can navigate easily. QuickBooks Online is an excellent option for novice and experienced digital bookkeepers.

3. Plan for taxes throughout the year

Whether it’s updating your books or keeping in contact with your tax advisor, you should always maintain your company’s financial records and expenses. When it’s time to file taxes with the tax office, you will be well prepared. Without any hiccups or last-minute scrambles, you’ll be able to enter tax time confidently.

Should I do my own bookkeeping?

It can be difficult to figure out whether or not you should do your own bookkeeping. Ultimately, your decision will come down to two key factors: expertise and time.

Do you have the expertise?

How does your accounting and bookkeeping experience size up? You may be hoping for the best and have a few college courses in your back pocket, or maybe you’re relying on your knowledge of bookkeeping basics. Even with these tools, you may not have the expertise you need.

If you’re unfamiliar with GST and tax rules, doing your own bookkeeping may prove challenging. Outsourcing the work to a professional bookkeeper can ensure accuracy and compliance, leaving you to focus on your business.

Do you have the time?

Bookkeeping can be time-consuming and tedious. If you’re a new business owner, you’re likely already spread thin. You might be trying to determine which bank account is best for your business and the difference between debits and credits, in addition to the many record-keeping habits you need to manage. Adding bookkeeping to the mix may overwhelm you.

But if you have the time to dedicate to updating your books regularly, doing your own bookkeeping may be feasible.

If you’re like most modern business owners, the odds are that you didn’t become one so that you could practice professional-grade bookkeeping. Outsourcing the work to a professional bookkeeper can allow you to focus on your business plan and growth.