WHAT IS BOOKKEEPING ALL ABOUT?

Traditionally, bookkeeping is the systematic recording or data capture from source documents of each and every financial transaction of a business into “various books of original entry” known as “subsidiary ledgers” which is then consolidated into the “main book” of account called a “general ledger” using a method called the double-entry system.

Over time, bookkeeping has become more complex compared to several decades ago with the added necessity of bookkeepers being required to have competent knowledge of certain limited areas of tax law, such as Value Added Tax (VAT) and, where the bookkeeper is also responsible for the business’s payroll, Income Tax as it relates to the employer’s taxation of employees amongst several other laws related to payroll.

Not only is it problematic for bookkeepers to stay on top of continuous changes to tax law, it would be unjust to expect this high level of skill from someone unqualified and untrained, only to run the risk of making a significant and hugely costly tax mistake. By appointing an outsourced accountant within the national Business Accounting Network franchise, a smaller and medium business can mitigate against these types of risks.

Here we’ll unwrap some of the detail about how a business’s main financial transactions are recorded in the traditional bookkeeping manner which is still used to this day, including the latest bookkeeping and accounting software programmes.

Subsidiary Ledgers
Most businesses today use software programmes to capture their financial transactions as opposed to yesteryear’s method of manually recording transactions into the subsidiary ledgers. Given that, these software programmes use the traditional bookkeeping method and the double entry system of bookkeeping, meaning that the subsidiary ledgers are all built into the software programme making it difficult for a novice to identify the “separate subsidiary ledgers” as all the transactions automatically feed into the main or general ledger.

There are several important books of original entry or better known as subsidiary ledgers, the most important of those being:

• Cash book
• Sales ledger
• Sales returns ledger
• Debtors’ ledger
• Purchases ledger
• Purchases return ledger
• Creditors ledger
• Inventory ledger
• General journal ledger

Recording transactions
The South African tax system requires that recording of transactions are to be done on the “accrual basis”. This means that sales and other revenues and stock purchases and expenses are recognized when the transaction occurs (even if the cash isn’t in or out of the bank yet) and requires tracking receivables and payables.

For each financial transaction, there must be a “supporting document”. For example, for every sale, there is a sales invoice and perhaps a delivery note too, for every inventory purchase, there is a supplier invoice and month end supplier statement if purchases are made on credit, for every expense payment there is an invoice detailing what the expense is for, such as telephone, advertising and so on, for each sale receipt or purchase payment, there is a bank statement.

These supporting documents are an important part of maintaining accurate bookkeeping records as they provide the audit trail for each transaction recorded in all the ledgers in case of a SARS audit.

Double-entry Bookkeeping System
The double entry system of bookkeeping is based on the recording of two entries for every one transaction. For every credit entry in an account, there must be a corresponding debit entry in another account and visa-versa. By way of example, if there is a credit to sales in the sales ledger, there must be a corresponding debit to the customer in the debtor’s ledger. If there is an expense debit to bank charges in the general ledger, there must be a corresponding credit to the bank account in the general ledger.

General Ledger
The general ledger is the primary ledger providing a total of all the subsidiary ledgers as well as the detail of transactions that fall outside of the subsidiary ledgers, for example, assets and individual expense categories. The total of each of these accounts culminate into a debit and credit trial balance. A trial balance is a financial summary of income, expenses, assets and liabilities where the debit total must agree to the credit total.

Where a trial balance’s debits do not equal its credits or where a debtors list (customer age analysis) total outstanding does not agree to the debtor’s ledger account on the trial balance, there are errors that need to be rectified as they were created by processing single transactions instead of double-entry transactions. If using bookkeeping software, a more serious issue will be recognized in the functionality of the software itself.

Bookkeeping Software
Technological advances have facilitated bookkeeping software resulting in two different data storage options, desktop bookkeeping software where data is stored on hard-drives and on-line bookkeeping software where the accounting records are stored in the Cloud. As with any software, it is entirely dependent on the information that the user processes into the system. If the user of the software does not have knowledge or understanding of the underlying principles of bookkeeping and the relative tax transactions, ultimately an accountant would be required to “fix the mess”. As the old adage goes: “rubbish in, rubbish out”. It is always best to ask your accountant, as rectifying a mess can cost upwards of three to four times more than doing things right the first time!