What is Bookkeeping? Definition, How It Works, & Examples

To me, bookkeeping is an art — one that I’m especially fascinated about because of how useful it is day-to-day. 

Businesses depend so much on the work that bookkeepers do, which is why I’ve grown a deep appreciation for this profession!

If you’ve never dealt with business finances, you might ask: what is bookkeeping exactly, and what does it mean? Is it a good career fit for me?

Not to worry, because you’ve come to the right place! In this article, I’ll give you a rundown of all the important things to know about bookkeeping, such as:

• What bookkeeping is, where it started, and why it’s important
• The two major types of bookkeeping
• Career paths for those who are interested in bookkeeping
• All the requirements you need to start a career as a bookkeeper.

Key Takeaways

• Since it was invented thousands of years ago, bookkeeping has remained an effective way of managing finances to this day.
• There are two main types of bookkeeping:
  • Single-entry bookkeeping: simpler and more straightforward
  • double-entry bookkeeping: more complex, but offers a more holistic view of one’s financial health
• Bookkeeping can be an immensely rewarding career path.
• For a business, bookkeeping is indispensable for maintaining its financial health and for cultivating an environment that makes business growth possible.

Understanding Bookkeeping: Definition and Fundamentals

Bookkeeping is the process of organizing and maintaining business (or individual) financial records. 

It’s a delicate process that won’t tolerate any errors, so many detail-oriented people find themselves right at home in this line of work.

These people are called bookkeepers. Today, you’ll find them documenting transactions, payments, and expenses. 

Throughout history, bookkeeping has largely been unchanged – which I think is a particularly impressive feat knowing that many other careers have gone through major shifts in utility.

Bookkeeping creates a sound financial system that allows anyone to review their finances regularly. 

It also provides useful insights into a business’s financial health and helps significantly when making enlightened financial decision-making.

Everyone will have their own opinions about what matters the most in a business. But for me, bookkeepers are the rockstars who make sure everything runs smoothly!

Related: Bookkeeping for Small Businesses for Beginners

History of Bookkeeping

Financial records etched onto clay tablets date as far back as 2500 BCE, with patches of similar evidence scattered throughout history.

However, the most revolutionary milestone may have occurred in the 1400s when an Italian mathematician named Luca Pacioli published on the topic of double-entry bookkeeping. 

The method took the world by storm, and it’s still the most widely used form of recording transactions today!

Nowadays, 1.7 million people are active bookkeepers in the US – a clear sign that bookkeeping is still a highly important practice. 

And if you possess the skills to readily provide people and businesses with useful, actionable, and profitable insights?

It’s not a stretch to say that the profession is here to stay!

Types of Bookkeeping

Criteria	Single-entry	Double-entry
Number of entries	Only one per transaction	Two for each transaction: one for debit and another for credit
Number of accounts	Concerned with only two — income and expenses	Deals with five interrelated accounts — assets, liabilities, equity, income, and expenses
Insights	Very limited and can’t paint the whole picture of a business’s finances	Comprehensive and provides a wealth of insights
Complexity	Simple and straightforward	Complex
Best for	Manual computations or simple transactions	Automated computations using dedicated software

What Types of Careers Are Available in Bookkeeping?

Are you interested in bookkeeping, but not quite sure what career paths are available? I have good news for you: there’s plenty out there!

Bookkeeper

What’s a list of career types in bookkeeping without bookkeepers? 

Bookkeepers maintain the financial records of a business by categorizing and keeping track of transactions and accounts payable.

As I’ve asserted earlier, they’re at the heart of a business’s success.

Accounting Clerk

Accounting clerks are similar to bookkeepers, but they mostly perform the clerical duties associated with bookkeeping for a business.

Payroll Specialist

As you might’ve guessed from the name, payroll specialists are responsible for managing the payroll of a company, especially in a larger one with many employees and complicated payroll needs.

Accounts Receivable Clerk

Accounts receivable clerks manage the client invoices of a business and track outstanding payments, often by communicating with clients.

Accounts Payable Clerk

Accounts payable clerks, on the other hand, manage the vendor invoices of a business and ensure that the company is paying all bills in a timely manner. 

I like to think of accounts receivable and accounts payable clerks as complements of each other!

Financial Analyst

Financial analysts review the financial data of a company (such as revenue, cost to operate, payroll, and so on) and determine the financial status of the company using statistical analysis.

Tax Preparer

Tax preparers complete the tax forms for a business, assess tax liabilities, and ensure a business remains tax compliant. They also assist with the auditing process.

Auditor

Auditors review the financial and tax information of a business to determine if the business is running in a legitimate way.

Budget Analyst

Budget analysts review the expenses and revenues of a business and determine if the monetary allocations of a business are aligned with its goals. 

They also keep an eye on and remove unnecessary financial commitments from a business to save money.

Bookkeeper Requirements

Are you intrigued by the prospect of a bookkeeping career? Here are some of the important requirements and attributes you need to have:

High school diploma or equivalent

At the minimum, you must have graduated from high school or obtained an equivalent certificate (such as a GED).

Associate’s degree in accounting or related field (Optional)

This isn’t a hard requirement, but obtaining an associate degree can provide you with credibility among clients, as well as a depth of knowledge in the field that comes with completing college-level coursework.

Relevant certification (e.g., Certified Bookkeeper)

Bookkeepers can become certified with national organizations such as the National Association of Certified Bookkeepers (NACPB) of the US.

Being certified can put potential employers at ease as they’re confident you have the necessary skills and knowledge for the position.

Proficiency in bookkeeping software (e.g., QuickBooks)

There are many different bookkeeping softwares out there, but choosing one to become proficient at is an important aspect of bookkeeping.

Being skilled on at least on platform will look great on your resume and can make it easier for potential employers to choose you over others.

Mathematical and analytical skills

This is one of the most important requirements that bookkeepers need to have. Fortunately, many universities offer free courses for brushing up on mathematical, statistical, and other analytical skills if you’re feeling a little rusty.

Knowledge of financial regulations and laws

Financial literacy and legal knowledge is essential for bookkeepers. These regulations and laws can vary depending on the state or country of residence, and you should always stay as up to date with them as possible.

Understanding of basic accounting principles:

Accounting is one of the main aspects of bookkeeping, so referencing trusted sources for accounting information is crucial. 

Experience with data entry and record keeping

I know it’s not easy to have prior experience when you’re out there looking for your first job! However, taking a job in data entry may just provide you with the skills needed to graduate to bookkeeping.

Familiarity with spreadsheets and office software

Microsoft Office (Word, Excel, etc.) is widely used in office settings. Having a thorough understanding of all office software, especially Excel, is invaluable to any bookkeeper.

Continuous learning to stay updated on industry changes

Being informed about the changing information in any field that you work in is the best way to stay relevant and at peak performance.

Here’s a top tip: Many universities offer free lectures and courses on subjects like accounting!

Bookkeeping Example (real world)

It may be easier to understand bookkeeping when it’s supported by a real-world example. 

Let’s say you’re running a small retail business that sells guitars. You may have a supplier for guitars and guitar accessories, and see reliable revenue every month.

The store bookkeeper will oversee supplier invoices (if there isn’t a dedicated accounts payable team), record the number of guitars sold and overhead costs (such as rent and utilities), process the payroll, and so much more.

The bookkeeper will record all these within a bookkeeping method or software, and at the end of each month they will collate all financial information into a report. 

This way, as the business owner, you can quickly see detailed metrics and make decisions that will allow the business to grow even further.

Key Benefits of Bookkeeping

Learn the most important benefits when it comes to bookkeeping.

Financial clarity and organization

There are a lot of moving parts in any business, so organizing finances properly can put a business owner’s mind at ease knowing that nothing is slipping through the cracks.

Accurate tax filings

Taxes involve an extremely complicated system which bookkeepers are uniquely equipped to deal with in terms of skills and knowledge.

Bookkeepers are absolutely indispensable during tax filing season due to the quantity of detailed financial records that need to be organized!

Informed decision-making

Bookkeeping unearths detailed records, which can subsequently be used for making effective and profitable business decisions.

Effective cash flow management

Cash is rapidly exchanged in a business, and if you don’t pay attention you could quickly burn through funds or have more than you think (which could leave money lying around unused!).

Bookkeepers always keep an eye on cash flow to avoid either of those scenarios.

Compliance with regulations

Regulations vary depending on the business and location, and bookkeepers are helpful for keeping you compliant.

Business performance evaluation

Bookkeepers can alert business owners when they notice that performance is dipping. This is possible entirely because of just how well-acquainted bookkeepers are with financial data.

Detection of financial errors

Bookkeepers can manually (or through software) detect any errors in calculations or financial statements – helping a business to sidestep costly errors.

Efficient budgeting and planning

It’s incredibly difficult to formulate a budget without a organized record of transactions that inform where common expenses lie.

A bookkeeper can help pinpoint areas of major spending to help a company make their operations more efficient.

Reliable financial reporting

A reliable financial picture is worth a thousand words, and I like to think of bookkeeping as the camera that makes this possible. 

Accountants rely on the highly accurate and error-free data that bookkeepers prepare to produce best possible financial statements and reports, which are critical for effective decision-making!

Get Started in Bookkeeping

By now, you should have a deep appreciation for bookkeeping – and maybe you’re even considering it as a career choice! 

Remember that bookkeepers are a vital aspect of any successful business; entire operations will literally halt to a grind without their presence. 

Working as a bookkeeper is immensely satisfying, especially with the number of potential paths out there. 

And with everything we’ve explored together in this article, you’re now more than ready to kickstart your bookkeeping journey!

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