What is Bookkeeping & its Process?

Bookkeeping is one of the most crucial and yet often underappreciated aspects of the business operations. Effective bookkeeping is not only important for compliances but also ensures accurate reporting and thus enables effective decision making and growth of the business. Businesses may hire inhouse accountants for ensuring bookkeeping, but small businesses and startups prefer outsource bookkeeping service to maintain daily transactions records. 

In this blog, we will discuss what bookkeeping is, step by step procedure of Bookkeeping including its importance. 

What is Bookkeeping? 

Bookkeeping is a process of recording, organizing and maintaining the financial records of any business. These transactions include sales, purchases, payments, receipts and expenses. The main motive of bookkeeping is to maintain accurate and up to date financial records for the future informed decisions.  

Bookkeeping is not just about sales and growth, it's about keeping your financial records organized. Bookkeeping is the backbone of effective financial management. The most commonly used process of bookkeeping that is Double-Entry Bookkeeping includes two sides of each transaction: Debit and Credit. These entries always used to tally with each other to ensure accuracy in financial transactions.

Importance of Bookkeeping for your Business 

Maintaining books of accounts is not just another process of a business but its a need for running it in the long-term. Here is why bookkeeping is important for your business: 

1. Financial Clarity: Bookkeeping helps in understanding the financial position of the business including its cash flow and profit. 
2. Legal Compliance: Bookkeeping is not just important for internal processes but it helps to keep your record audit ready and compliant with tax regulations. 
3. Informed Decision: Recorded data helps in understanding the budget, future planning and forecasting future growth with informed decision making. 
4. Avoiding Errors: Regular Bookkeeping and tracking financial records helps in less chance of eros. Also, it helps in preventing business from any kind of fraud. 

Step By Step Bookkeeping Procedure 

Bookkeeping Procedure usually follows the same structure but some bookers can go for short steps. Here is the ideal and perfect bookkeeping process that every business either small or big including startups should follow: 

Step 01: Set Up the Accounting Software: The first step of bookkeeping is to configure your company details including its name, GSTIN, PAN, FY start and end, base currency, etc. Once all these details are configured, define user roles and access controls to maintain data security and accountability. Also, establish number series, payment terms, and accounting methods (accrual or cash basis) as per your business needs. 

Step 02: Create Chart of Accounts (COA): Design a clear and logical Chart of Accounts covering the details of assets, liabilities, equity, income, and expenses. COA helps in maintaining a proper record of money inflow and outflow within the business while categorizing the transactions. Make sure the structure is simple, consistent, and aligned with both management reporting and statutory compliance requirements. 

Step 03: Set Up Masters: Next you need to set up the master data including the details of inventory, customers, vendors & assets. This data helps in maintaining accuracy and reduces the chance of duplication. This data includes: 

• For Inventory: Detail of SKU (Stock Keeping Unit), UOM (Unit of Measurement), pricing, HSN Codes, categories, etc. 
• For Customers: GSTIN Record, credit terms, contact details, and billing/shipping addresses
• For Vendors: Detail of PAN/GST, bank details, payment terms, etc
• For Assets: Document asset descriptions, purchase cost, useful life, and depreciation method.

Step 04: Collect Required Documents: Next need to collect all the required documents including purchase and sales invoices, delivery challans, receipts, payment proofs, bank statement, payroll sheets, GST/TDS challans, etc. Maintain all these documents in digital form, this will help in quick retrieval and support audits. 

Step 05: Record Transactions: It is essential to keep your books updated by regularly posting all sales, purchases, payments, and receipts while attaching the right documents. Also, automate imports from bank feeds or business platforms wherever possible to cut down on manual tasks and prevent errors.

Step 06: Reconcile Regularly: Next, match bank statements with ledgers, verify customer and vendor balances, reconcile GST/TDS with returns (GSTR-2B, 3B, 26AS), and compare book stock with physical inventory. This step helps to catch discrepancies early and in maintaining reliable accounts. 

Step 07: Review Transactions: After reconciling, review all the transactions and check for any missing invoice, duplicate entry or misclassification. Ensure every entry has the correct tax coding and cost center tagging for accurate reporting. Once the review is complete, approve and lock the finalized period to prevent further changes

Step 08: Statutory Compliances: Compute and file your monthly or quarterly GST returns and TDS statements on time, ensuring all taxes are deposited within their respective due dates. Keep challans and acknowledgments safely for future reference. To stay organized and avoid penalties, maintain a compliance calendar that tracks all upcoming filing deadlines.

Step 09: Post Period End Adjustments: At the end of each period, record necessary adjustments such as depreciation, accruals, prepayments, and inventory changes. If applicable, revalue foreign currency balances to reflect accurate financial positions. After completing these adjustments, review and finalize the trial balance for sign-off.

Step 10: Prepare Financial Reports: Generate key financial reports such as the Profit & Loss, Balance Sheet, Cash Flow, and MIS statements to assess business performance. Include insights like sales analysis, gross margins, and expense trends for a deeper understanding of financial health. Use dashboards or visual reports to present this information clearly and support informed decision-making.

Step 11: Close & Audit: Finalize all ledgers, reconcile outstanding balances, and prepare the necessary schedules for auditors. Once the audit review is completed, incorporate the required adjustments and finalize your statutory financial statements. Lastly, archive all documents and securely back up your financial data for future reference and compliance.

A disciplined accounting process not only keeps you compliant but also gives leadership the clarity needed for smarter decisions.

Automate wherever possible, review where necessary, and always reconcile before reporting.

Conclusion

Bookkeeping is a process of recording, organizing and maintaining the financial records of any business. It is important to maintain the books of accounts for any business as it helps in financial clarity, legal compliance, making informed decisions and avoiding chances of errors. The process of bookkeeping involves identifying and collecting financial transactions, recording transactions in journals, posting entries into ledger, preparing trial balance, adjusting entries, preparing financial statements and closing books. All these steps have their importance in bookkeeping procedure. The last step of closing a book indicates the end of cycle and prepares the system for the next. 

FAQs (Frequently Asked Questions) 

Q. How often should bookkeeping be done?

Usually it is suggested to maintain books on a daily or weekly basis. To avoid errors, it is recommended to focus on daily bookkeeping depending on the business volume. 

Q. Can small businesses do bookkeeping on their own?

Yes, small businesses can do bookkeeping on their own but to save time and focus on work more, it is advised to outsource bookkeeping. 

Q. When should you outsource bookkeeping?

While spending your business or need more time for your business, one can go more outsource bookkeeping. Also, in order to avoid mistakes or to reduce the cost of hiring full-time teams, small business or startups can outsource bookkeeping service.  

Q. Is it better to hire an in-house bookkeeper or outsource? 

Outsourcing bookkeeping services is typically more cost-effective and scalable, offering access to expertise without the overhead costs of an in-house team.

Q. Which software is best for bookkeeping?
Popular bookkeeping software includes Zoho Books and Tally The right choice depends on your business size, industry, and budget.

Q. What’s the difference between single-entry and double-entry bookkeeping?

Single-entry bookkeeping is more suitable for small businesses as it records one side transactions while double-entry bookkeeping includes two sides Debit and Credit of Business ensuring complete financial accuracy.