Bookkeeping in a business firm is an important, but preliminary, function to the actual accounting function. A bookkeeper collects the documentation for each financial transaction, records the transactions in the accounting journal, classifies each transaction as one or more debits and one or more credits, and organizes the transactions according to the firm’s chart of account.

The financial transactions are all recorded, but they have to be summarized at the end of specific time periods. Some firms require quarterly reports. Other smaller firms may require reports only at the end of the year in preparation for doing taxes.

Effective bookkeeping requires an understanding of the firm’s basic accounts. These accounts and their sub-accounts make up the company’s chart of accounts. Assets, liabilities, and equity make up the accounts that compose the company’s balance sheet

Assets are what the company owns such as its inventory and accounts receivables. Assets also include fixed assets which are generally the plant, equipment, and land. If you look you look at the format of a balance sheet, you will see the asset accounts listed in the order of their liquidity. Asset accounts start with the cash account since cash is perfectly liquid. After the cash account, there is the inventory, receivables, and fixed assets accounts. Those are tangible assets. You can touch them. Firms also have intangible assets such as customer goodwill that may be listed on the balance sheet.

Liabilities are what the company owes like what they owe to their suppliers, bank and business loans, mortgages, and any other debt on the books. The liability accounts on a balance sheet include both current and long-term liabilities. Current liabilities are usually accounts payable and accruals. Accounts payable are usually what the business owes to its suppliers, credit cards, and bank loans. Accruals will consist of taxes owed including sales tax owed and federal, state, social security, and Medicare tax on the employees which are generally paid quarterly. Long-term liabilities have a maturity of greater than one year and include items like mortgage loans.

Equity is the investment a business owner, and any other investors, have in the firm. The equity accounts include all the claims the owners have against the company. The business owner has an investment, and it may be the only investment in the firm. If the firm has taken on other investors, that is reflected here.