Book-keeping is the recording of financial transactions in a business. It is part of accounting in a business. The transactions include receipts, sales, and payments of an individual or organization.
The main importance of book-keeping is to identify financial transactions and keep permanent records of the business. Examples of accounts include sales account, rent, wages, salaries, cash and loans payable. Each account has a separate entry.
Pros of Book-Keeping
- Accountability and transparency
The business can account for all the activities taking place in the business through following up the records that are made and this makes the business to be transparent whereby anyone new in the business can access the records.
- Legal obligation
The government requires businesses to keep records of all the financial transactions taking place in the business so that it may be able to know the amount of tax the business is to pay.ss
- For comparison purpose
The business can compare its operation with other business and this information may be used to decide on which area needs to be improved.
- Helps in payment of debtors and collection of creditors
Through bookkeeping, the business may be able to know the strategy to put in place for it to collect its debts and how to pay the creditors.
- Tells the financial position of the business
The business will be able to tell the financial position of the business as it will be in a position to tell its debtors and creditors.
- Helps in future planning
The business can use the information to plan for the future whereby it can use the profit to invest in other fields or expand the business to another level.
- Pool of insolvency
The business will be in a position to tell if it is unable to pay its debts and this may give the debtors information about the state of the business hence giving them time to settle the debts.
- Documentary proof
The information kept is used to prove the financial status of the business and this may be used in case the business defaults to pay its debts.
Cons of Book-Keeping
It requires a lot of time for the owner of the business to keep a record of all the transactions taking place in the business.
- Can easily distract the owner from the main purpose of the business
The owner of the business can easily be distracted in that he or she may dwell on the keeping of the records forgetting the main purpose of the business.
- In case of a mess, it affects everything
If the owner of the business enters the transaction in a wrong entry, then the whole business may be distracted as the financial status of the business will be wrongly calculated.
- Discourages the owner of the business
When the business has a lot of debts to pay it discourages the owner of the business as he or she will be only working to pay the debts hence no profit being realized from the business.
- It requires professionals
If the business owner does not know how to make the entries, then he or she incurs an extra cost of employing someone who will have to make the entries for him or her.
Book-keeping is very necessary for the businesses as one will be able to know the amount of money that is gained by the end of the year which will also be used to plan for the following year. It will also tell the financial position of the business and the owner can use the information to compare with other businesses and know if he or she on the right track.