What is Bookkeeping: Basics, Methods & Importance in Financial Records

Key Takeaways

1. Bookkeeping records every business transaction. It keeps the accounting in control and helps during tax filings. 
    
2. Two main methods are single-entry for very small cash businesses and double-entry for big financial statements and loans.
    
3. Proper books make it easier to access GST, Income Tax and loans. This decreases mistakes while auditing for MSMEs.
    

Bookkeeping means recording all the financial transactions of a business on a daily or regular basis. It ensures proper and accurate financial records. It is an important part of the overall accounting process.

For example, a small bakery earns ₹5,000 in sales and spends ₹2,000 on ingredients. If they record these details daily (as shown in the table given below), then that is called bookkeeping. 
 

If you keep consistent bookkeeping, you can track how your business is growing. The control over expenses and other financial decisions will be in your hands. It sounds so smart, but you know what is even smarter? Learning more about bookkeeping, from its working to its importance, in this blog.

Why is Everyone Bookkeeping?

Research shows that a large share of Indian entrepreneurs maintain accounts (often via an accountant). Keeping proper books is required by Indian tax laws for many businesses and professionals. It also makes GST and income-tax filing simple and error-free. That is why everyone is accustomed to bookkeeping.

Many MSME studies state a lack of proper financial records as a major barrier to credit and growth. Better records help businesses access loans and show banks a clear repayment plan.

Methods of Bookkeeping

Every business has to record daily transactions. There are two main ways to do this — single-entry and double-entry. The method you choose depends on how big your business is and how detailed you want your records.

1. Single-Entry Bookkeeping

This is the simplest method, where each transaction is recorded only once — money in or money out. Let’s take the case of Sita, a tailor in Jaipur, who runs a small home shop. She only wants to know how much profit she made in a month.

The table shows how she bookkept her records.
 

Sita quickly finds her profit is ₹32,000. But with single-entry, she cannot prepare a balance sheet or know exactly how much she owes her suppliers.

2. Double-Entry Bookkeeping

This method records every transaction twice, once as a debit and once as a credit. It gives a full picture of assets, liabilities, and equity. For example, Amit, who runs an online clothing store in Mumbai, uses double-entry to manage stock, payments, and GST filing. The table below summarises his bookkeeping.
 

Amit gets both profit and a proper balance sheet. His ₹25,000 profit also appears as equity, making his records trustworthy for banks and investors.

Use single-entry if your business is very small and cash-based. Switch to double-entry as soon as you need reliable statements, GST filing, or credit from banks.

How Can You Use Bookkeeping?

Bookkeeping is more than just writing numbers. It follows a flow, that is, from collecting documents to preparing ledgers and finally building financial statements. Let’s look at the key steps.

1. Source Documents & Journals

Every transaction starts with proof, an invoice, a bill or a receipt. These are first recorded in journals (daybooks like sales journal, purchase journal) to keep things orderly and trackable. In India, maintaining these documents is mandatory for businesses under GST and the Income Tax Act. 

For example, Ramesh sells a mobile phone and gives the customer a receipt. He also records purchase bills from suppliers. These documents are entered into a Sales Journal and a Purchase Journal.
 

Journals help Ramesh track sales and purchases daily. Without them, he might miss recording a bill or receipt.

2. Ledgers & Trial Balance

From journals, entries are transferred to ledgers, which group transactions into accounts like Sales, Purchases, or Rent. Later, a trial balance checks if total debits = total credits.

Let’s create Ledger Posting from Ramesh’s example.
 

Here, debits = credits (₹15,000 each). The trial balance confirms the books are accurate.

3. General Ledger

The general ledger is the master book. It has all accounts, assets, liabilities, income, and expenses. It’s the final source for preparing financial statements.

Here is what Ramesh’s General Ledger will look like. 
 

Ramesh’s general ledger gives him a complete view of his shop’s financial health. It ensures he can prepare a balance sheet and profit & loss statement.

From source documents to journals, ledgers, trial balance, and finally the general ledger, each step builds structure and accuracy. Together, they become really important for reliable financial records.

Why Bookkeeping Is Important

Bookkeeping is useful for a small tailor shop owner to a big clothes manufacturer company. In this section, let’s answer what makes it so important.

1. Mandatory for GST Compliance

Bookkeeping isn’t optional if you’re registered under GST; it’s the law. Businesses must maintain invoices, receipts, and stock records for at least six years, making accurate records a legal necessity. Do you know that as of April 2025, India has over 1.51 crore active GST registrations? 

2. Required by the Companies Act

Every registered company in India must keep books of accounts at its registered office. This ensures accountability, transparency, and accuracy in financial statements, making it easier for regulators and investors to trust the business. You would be shocked to know that India has 28.97 lakh registered companies, with 18.9 lakh active as of May 2025. 

3. Supports Tax Audit Decisions

Accurate bookkeeping helps determine whether your business needs a tax audit. For small businesses, this is critical because audit requirements can increase compliance costs significantly. Keeping proper records ensures you don’t face unnecessary scrutiny.
Under Section 44AB, businesses with a turnover below ₹10 crore and cash transactions ≤5% may not require an audit. 

4. Helps Access Formal Credit

Banks and NBFCs rely on financial records before approving loans. Without clean books, businesses find it difficult to get working capital or expansion funds. Proper bookkeeping strengthens your credibility with lenders.
India’s MSME sector has a credit gap of ₹25 lakh crore, with only 20% of demand met through formal sources. 

5. Simplifies GST and Income Tax Filing

Filing accurate returns depends on well-kept records. Bookkeeping makes calculating GST input credits, reconciling digital payments, and filing income tax returns much faster and stress-free. It also reduces the chances of receiving notices or penalties.
Old data suggests that on March 31st, 2021, 37.42 Lakh e-Invoices were generated under the e-invoicing system. This showed how record-keeping is directly tied to compliance. 

6. Facilitates Financial Planning

Clear books give owners visibility into cash flow and profitability, helping them prepare budgets and forecasts. This allows small businesses to manage seasonal fluctuations and expand with confidence.
India’s MSME sector has 6.4 crore enterprises, many of which depend on accurate records for financial planning and long-term sustainability. 

7. Access to Government Credit Schemes

Government-backed loan schemes like CGTMSE rely on verified financial statements for approval. With accurate books, small firms can access collateral-free loans, supporting business survival and growth. As per the annual report of 2023-2024, 6.29 lakh crore, with approximately one-third of this secured just in the previous year alone.

Bookkeeping may seem like a chore, but it is a duty of the owner to know where the money is going and how to regulate it.

Conclusion

When you maintain records of the daily expenses in your business, you are doing bookkeeping. It gives the power of finances to the owners. They can evaluate how much expense to allocate in which month and control overexpenditure. Bookkeeping also helps with tax filings and gives credibility for loans. It also gives businesses the clarity needed for sustainable growth. If the numbers are clear, so will be the company’s work.

Frequently Asked Questions

Which inventory valuation method should I use, and how does it affect books?
Choose FIFO or weighted-average (LIFO is generally disallowed under Indian GAAP). Valuation affects cost of goods sold and profit timing, so pick one and apply consistently.
 

Is outsourcing bookkeeping a good idea and how much does it cost?
Outsourcing is efficient for many MSMEs. Monthly costs vary widely from low-cost freelancers to ₹3,000–₹15,000+ for agency services, depending on volume and services included.

What is computerised bookkeeping?
Computerised bookkeeping uses software like Tally, Zoho Books, or QuickBooks. It replaces manual ledgers, automates calculations, reduces human errors, and makes generating reports faster, easier, and more reliable for businesses.

What skills are required to be a bookkeeper?
A bookkeeper should understand debit and credit rules, GST compliance basics, and invoice management. Knowledge of software like Tally or Excel improves efficiency and ensures accurate financial records for businesses.

How do bank feeds and auto-reconciliation work in practice?
Connect your bank to the bookkeeping app via a secure feed or CSV import. The software auto-matches transactions to invoices and rules, and then you review and confirm exceptions.
 

What are best practices for backing up books and securing financial data?
Keep encrypted backups, enable two-factor authentication, restrict user roles, and store backups offsite or in a trusted cloud with versioning and audit logs.
 

How is bookkeeping handled for multi-branch or multi-entity businesses?
Use multi-entity support in accounting software or separate ledgers consolidated into a group-level reporting system. Maintain inter-company transaction records and a uniform chart of accounts.

 

Apply for Loans Fast and Hassle-Free

Apply Now

About the Author

LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?