What is Recordkeeping?

Steps to Recordkeeping Method

  • Identifying the transactionsRecording in the journalClassifying the nature of the transactionPosting to ledgerPosting To LedgerLedger in accounting records and processes a firm’s financial data, taken from journal entries. This becomes an important financial record for future reference. It is used for creating financial statements. It is also known as the second book of entry.read moreBalancing of accountsPreparing a financial statementFinancial StatementFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read moreInterpreting the financial statementsCommunicating it to stakeholders

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Recordkeeping Examples

Example #1

ABC Limited is a sole proprietor firm operating small shops in Atlanta. It is trading in clothes and has its main inflow and outflow as follows:

  • Inflows: Sale proceeds from CustomerOutflows: Material Purchase from vendors and payment of related expenses

For recordkeeping purposes, ABC Limited will have to maintain daily cash books for maintaining the petty cashPetty CashPetty cash means the small amount that is allocated for the purpose of day to day operations. It is unreasonable to issue a check for such small expenses and for managing the same custodians are appointed by the company.read more and bank balances. At the end of the year, they have to prepare a profit and loss account and Balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more to verify the profitability during the year. It is one of the simplest ways of maintaining business transaction records.

Example #2

This is one of the most complex examples of maintaining the records of the business.

Both examples have their own merits and demerits but hold good in their ways.

Advantages of Recordkeeping

  • Permanent and Reliable Record – It helps maintain the permanent record of all the transactions, which will help ensure the reliability of data.Arithmetical Accuracy of the Accounts – Continuous recording of transactions will assist in identifying any arithmetical inaccuracies that might have occurred—for example, excess payment to suppliers or double treatment of any transactions.Net Result of Business Operations – The profit earned during the given period will be based on ongoing business operations.Ascertainment of Financial Positions – It helps identify the business’s financial position.Calculation of Dues – All the outstanding liabilities and dues at a given time can be calculated based on the accurate financial statements prepared.Control Over Assets and Borrowings – It features better control over assets, and borrowings can be undertaken; this will help manage the funds and various positions of business.Identifying Dos and Don’ts – Financial statements help find things that went south and need to be rectified to ensure better operations in the future.Taxation – It is highly recommended and needed by tax authorities. To complete their assessments, business people have to appropriately maintain the records, which will help determine the tax liability over them.Management Decision Making – Management is highly dependent on the financial records to plan the business operationsBusiness OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company’s goals like profit generation.read more. Moreover, they also need continuous reporting by the middle level about the progress made in finance termsFinance TermsFinance terms refer to terminologies used in the financial world. The glossary of finance terms is vast and never-ending, but at the same time, it is important to know the most basic finance terms to achieve financial fluency and to deal with business functions.read more. The financials maintained by the organization governs all the strategic decisions.Legal Requirements – There is a massive requirement of statutes, local GAAPs, IFRSs, etc., to maintain the proper books of account and ensure transparency.

Disadvantages of Recordkeeping

  • Clerical – Recordkeeping is a highly tedious and perpetual job for large organizations. It becomes tough for them to maintain the same.Manual and Monotonous – It is a highly manual job. The same work needs to be carried out every time the transaction occurs. This makes it a highly monotonous job.Subjective needs to be Checked before Analysed – Various accounting aspects like depreciation, stock valuation, etc., require assumptions that make the accounting highly subjective. The viability of such assumptions needs to be verified before analyzing the financial statements.

Limitations

  • Only Monetary Transactions can be Recorded – In business, both monetary and non-monetary aspects are essential. However, record-keeping covers only financial transactions. Non-monetary virtues like trained staff cannot be recorded in the books of accounts.Effects of Price Level Changes are not Considered – Inflation is a phenomenon that needs to be considered while recording the assets. However, in accounting, inflation cannot be factored-for while recording the transactions.Historical-based Accounting – All the assets are to be recorded as historical costs. This concept will not help identify the present worth of the asset in the market.

Important Points

Any changes in the method of record-keeping can be allowed only if:

  • Substance over form is to be considered.For better disclosure requirementsNeeded by accounting standards

Conclusion

Recordkeeping is the art of recording and disclosing financial transactions. It requires expertise and tactics to help maintain the organization’s image and help obtain funding and bid the tenders of business. In amplifying the accuracy of the transactions, recordkeeping gives a big push and helps maintain the image of the business as an ethical organization in the market.

This article has been a guide to What is Recordkeeping and its definition. Here we discuss the recordkeeping method and examples, advantages, and disadvantages. You can learn more about excel modeling from the following articles –

  • Ethical Investing DefinitionBasic Accounting Books for BeginnersExamples of BookkeepingPetty Cash Book