Is bookkeeping even necessary nowadays? How does it affect our income? Should we use accounting while bookkeeping? You must be wondering these things. In this blog, you will know the importance of bookkeeping to track your income. You can even calculate your in-hand salary through proper bookkeeping.
What is Bookkeeping?
Before getting started, we must know what exactly is bookkeeping? Bookkeeping means recording day-to-day financial transactions in the books of accounts to keep track of your income and expenses. Moreover, it gives an insight into your finances. Example- You have purchased raw materials from a supplier for Rupees 40,000. You transformed raw material into finished goods and sold it for Rupees 80,000. The production or labor charges were 20,000. The net income or profit actually earned is Rupees 20,000 (Sales- Purchases- Direct expenses).
If you record the transactions daily, you will estimate an accurate income at the year-end. If you fail to maintain records, you are most likely to mess up things. This would lead to paying an extra amount of taxes.
How can You Maintain Books?
- Real account
- Personal Account
- Nominal Account
This is a general ledger account that includes assets and liabilities other than people accounts. Example: assets like fixed assets, tangible assets, intangible assets, inventory and bank accounts, etc. Liabilities such as loans, equity, reserves, short-term borrowings, outstanding expenses, etc.
This is a general ledger account that is connected to persons, firms, and associations, etc. Example: Creditors, Debtors, etc.
This is a general ledger account that includes all gains, losses, incomes, and expenses. Example: Sales, purchase, and interest, etc.
Golden Rules of Accounting
There are three golden rules of accounting:
|Types of accounts||Rules|
|Real account||Debit- what comes inCredit- what goes out|
|Personal account||Debit- the receiverCredit- the giver|
|Nominal account||Debit- all expenses, lossesCredit- all incomes, gains|
If proper bookkeeping is done as per these golden rules, you are definitely going to keep track of all the income and expenses. Let’s say – You have purchased an asset of rs. 2,00,000. You will record an entry by debiting the asset account and crediting the bank account. Sales made of Rupees 10,00,000 and expenses made of rupees 4,00,000.
This way, you will be creating proper books of accounts and will be able to calculate your taxable income after deducting all the expenses and losses.
If you are maintaining books of accounts from the year beginning, you will know how much you are getting salary in-hand after deducting all the expenses like payment towards:
- Employee Provident fund
- Professional Tax
- Income tax
What is the in-hand salary?
You get the net salary or income after charging all the year’s statutory obligations towards PF, gratuity, taxes, etc. If maintaining the record of all the statutory obligations, you will be able to compute the exact in-hand salary.
You spend thousands and lakhs of rupees on different things in a year. How will you calculate all the expenses made? Here comes the importance of bookkeeping. Bookkeeping allows you to keep track of expenses and losses regularly. This is how you can calculate your taxable income and in-hand salary.