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Recording of transactions (Bookkeeping)

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Recording of transactions (Bookkeeping)
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  Recording of transactions (Bookkeeping) This involves recording of financial transactions with the main purpose of creating records. Financial transactions include but are not limited to, sales, revenues, taxes paid, interest earned, salaries, investments, debts and other operational expenses. Bookkeeping supports the interpretation and analysis of financial transactions to help generate reports.  The steps of bookkeeping are all anchored upon the source documents ; Source documents are the physical basis upon which business transactions are recorded.Sourcedocuments are typically retained for use as evidence when auditors later review a company's financial statements, and need to verify that transactions have, in fact, occurred. These documents can be receipts, invoices, purchase orders, debit notes, credit notes, payment vouchers etc.There are two methods by which and entity can record its financial transactions: • Single entry • Double entry  SINGLE ENTRY SYSTEM Single Entry System of Bookkeeping is the oldest method of maintaining financial records in which an entry is made for every financial transaction. In this system, the corresponding opposite entry is not made because the transactions are recorded only once. Full record keeping of transactions is not done due to a single entry of every transaction. It mainly keeps track of the transactions relating to cash receipts and disbursements.Due to some drawbacks like one sided entry, reconciliation of accounts is not possible; the possibility of frauds and errors is high. That is why it does not coincide with Generally Accepted Accounting Principles (GAAP). Moreover, accounting records maintained under this systemare not suitable for tax purposes.  DOUBLE ENTRY SYSTEM Except for some very small companies, the standard method for recording transactions is double-entry. This system is based on the principal of duality. i.eevery transaction has a dual aspect. This means that every transaction will involve at least two accounts. • TransactionDebitCredit • Company borrows moneycashloans payable • Sale of merchandise on creditSalesaccounts receivable • Purchase of goods on creditinventory accounts payable • Receive money from customer cashaccounts receivablewho purchased goods on credit  The two sides of this double entry system are called the debit {entry on the left side} and the credit{entry on the right side}.The debit and credit rule in double-entry bookkeeping can be stated as • For each and every transaction, the total of the debit amounts must be equal to the total of the credit amounts.Due to two-fold effect, the system possesses completeness, accuracy as well as it matches with the Generally Accepted Accounting Principles (GAAP). Tax laws recommend this system because there are fewer chances of fraud and embezzlement in this system; errors can easily be detected and the accounts can be reconciled Acomplete procedure is there for recording every transaction.
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