Join Earl Kay Stice for an in-depth discussion in this video Bookkeeping, part of Accounting Foundations.
Let's start with bookkeeping. All accounting begins with bookkeeping. You've got to get the information down. And then you can start to organize it to make better decisions. So bookkeeping is where it all begins. Let's do a thought experiment. Let's invent, in our minds, a catastrophe movie. The catastrophe movie is this: a space virus comes, infects earth, and destroys all novels that have ever been written. Tom Sawyer, gone. Gone with the Wind is gone with the wind. They're all gone.
Could you, then, function the next morning? Knowing that all novels had disappeared over night? Well, you'd feel horrible. A tragic, cultural loss. But if you went to the bank to get some cash out, okay fine, you've got some cash here. If you went to the store to shop, everything's working fine there. Everything is working perfectly. Everyone's feeling sad because of the cultural loss but society could continue to function, even if all novels ever written disappeared over night. All right, let's roll back the tape and do another thought experiment.
Let's imagine that a space virus comes and destroys all bookkeeping records on earth, over night, everything. All bank records, all records that all companies have of the inventory that they have on the shelves of their stores. All dry cleaning records, everything. All those records are gone. Could we continue to function as a society? Go to the bank and say, "I would like "to Withdraw $100." The bank would then tell you, "But we don't "have any records. We don't know whether "you've got any money here or not, "so we're sorry." Go to the dry cleaners to pick up your dry cleaning.
They'll say, "Well, we've got a bunch of clothes "in the back, they're in a big pile, "but we don't have any records on what "belongs to whom." Society would cease to exist. Societal gridlock. We wouldn't be able to do anything. Is bookkeeping more important than the collection of novels that have been written? No. They serve different functions. But without novels, society can continue to function. Without bookkeeping we're shut down. Bookkeeping underlies modern society. At its heart, bookkeeping is about collecting information, getting things recorded.
Because one events are recorded, then we can organize those events and start making decisions. But you've got to have a system in place to collect that information. That's bookkeeping. For example, Walmart has 10 billion customer visits per year. 10 billion per year. If Walmart doesn't have an organized bookkeeping system in place to keep track of what those customers bought, how much they paid, do they need to order new things, what do they need to do, which stores are running out of which things? Walmart can no longer function as a business with so much activity.
10 billion visits per year. Walmart needs a good bookkeeping system. Coca-Cola. Coca-Cola's proud to proclaim that they sell 650 billion servings of Coca-Cola per year. That's 100 servings of Coca-Cola for every man, woman, and child on the earth. You should ask yourself now, "Did you drink "your share last year?" That's 100. Did you drink 100 servings of Coca-Cola? Well, if Coca-Cola's going to have every man, woman, and child on earth drinking 100 servings of Coca-Cola in a year, they better have a good bookkeeping system to keep track of what people buy, where they buy it, are sales going up, are sales going down, what are their different products around the world? Coca-Cola needs a sophisticated bookkeeping system to collect information.
Because 650 billion servings, you can't keep track of that on the back of an envelope. You've got to have an organized system. Google. Google is the most visited website on the internet. They have between one trillion and two trillion searches per year. How does Google make money? Google makes money by charging advertisers for customer views or customer clicks. Well how can Google make money? How can they charge those advertisers, unless Google has a system in place of keeping track of the number of clicks and what people clicked on? Just think about it.
It's a really daunting task. The Google search engine is awesome. The Google bookkeeping system is equally as awesome. Without bookkeeping Walmart, Coca-Cola, Google could not continue to function. It seems mundane, bookkeeping. Just collecting the information, but that's where it all begins, with bookkeeping. Let's make this more personal. Let's not talk about Google or Coca-Cola or Walmart, let's talk about you. Think about you and your personal budget. Let's focus in on your food budget.
How much did you spend in the past 12 months on food? Now, let's think about this. Would you like to know the answer to that question? Yeah, you would. Because if you're trying to watch costs, budget a little bit better, you'd want to know how much did you spend on food. That's the starting point. The most honest answer for most of us, for me for example, is I'm not sure I know how much I spent on food last year. I could use a better bookkeeping system. If I want to start making decisions and changing my behavior with respect to how much money I'm spending on food, I first have to have a system in place where I keep track of it.
That's the starting point of any kind of budget conscious behavior with respect to food. It starts with routine bookkeeping. Basically, writing things down. Simply stated, bookkeeping is the preservation of a systematic, quantitative record of an activity. And until you have a record of an activity, you really can't make any sophisticated decisions with respect to that activity. You got to get it written down, you got to get it recorded. Once that happens, now we can start to make more sophisticated decisions.
We can use the past to help us make better decisions for the future. But it starts with getting things written down. That's bookkeeping.
- What is accounting?
- Working with balance sheets and income statements
- Determining the costs of products
- Performing break-even analysis
- Determining average and marginal tax rates
- Understanding tax deductions and credits