Book keeping is an art of keeping systematic and permanent record of day to day financial transaction of business firm performed by them in a set of books in chronological order. It is a science of keeping systematic and regular records of business transactions so that they can be located whenever required.

Definition of book keeping by R.N Charter, “Book keeping is a science and art of correctly recording in the books of accounts, all those business transactions that result in the transfer of money and money’s worth”.

Objectives or functions of book keeping

1. To identify financial transaction

Business firm performs various financial and non-financial transactions during the course of business operation. Book keeping helps in identifying the financial transaction in order to keep their records.

2. To keep permanent record

Book keeping keeps the permanent records of financial transactions that take place in the business during an accounting period in a systematic manner.

3. To classify transactions

Book keeping records all the identified transactions in journal entries simultaneously it classifies them into personal account, real account and nominal account through ledger.

4. To prepare statement

The motive of establishing the business organization is to earn profit. Thus, the main objective of book keeping is to find out the result i.e. Profit and Loss.

The meaning of accounting is broader than of book keeping. The book keeping is the first step of accounting. So, accounting hold book keeping in its fold. Accounting is the process of identifying, measuring, recording, classifying, summarizing, analyzing, interpreting the financial transaction and lastly, communicating to obtained result to is staffs.

Objectives or Functions of Accounting

1. Maintenance of record of business transactions

The maintenance of systematic record of all financial transaction in the book of account is the primary objective of accounting. Even the most brilliant manager or executive cannot remember all the various transaction carried out in the business firm such as purchases, sales, receipts etc. thus, the complete and systematic record is maintained.

2. Calculation of profit and loss

The owners of the business are keen to have some idea about the profit and loss of their organization. Thus, the accounting helps to find out profit and loss of business firm by calculating total income and deduction it with total expenses of the accounting year which is the net profit of that year if income is higher than expenses.

3. Providing accounting information to its users

The accounting information is generated by the accounting process which is communicated in the form of report, statement, graph, and chart to the users who need it for decision making purpose.

Basic concepts of accounting

Accounting concept refers to the basic assumptions and rules and principles which work as the basis of recording of business transactions and preparing accounts. There are eight basic concepts in accounting.

1. Business entity Concept

This concept assumes that, for accounting purposes, the business enterprise and its owners are two separate independent entities. Thus, the business and personal transactions of its owner are separate. For example, when the owner invests money in the business, it is recorded as liability of the business to the owner. Similarly, when the owner withdraws cash/goods from the business for his/her personal use, it is not treated as business expense. Thus, the accounting records are made in the books of accounts from the point of view of the business unit and not the person owning the business. This concept is the very basis of accounting.

2. Going Concern Concept

This concept states that a business firm will continue to carry on its activities for an indefinite period of time. Simply stated, it means that every business entity has continuity of life. Thus, it will not be dissolved in the near future. This is an important assumption of accounting,

3. Money measurement Concept

Money measurement concept states that only fibnalcial transaction are recorded in the books of accounts of the business firm which can be expressed in the form of monetary terms such as rupees, dollar, yen etc.

4. Accounting period Concept

All the transactions are recorded in the books of accounts on the assumption that profits on these transactions are to be ascertained for a specified period. Further, this concept assumes that, indefinite life of business is divided into parts. These parts are known as Accounting Period. It may be of one year, six months, three months, one month, etc.

5. Realization concept

This concept states that revenue from any business transaction should be included in the accounting records only when it is realized. Revenue is said to have been realized when cash has been received or right to receive cash on the sale of goods or services or both has been created.

6. Matching Concept

The matching concept states that the revenue and the expenses incurred to earn the revenues must belong to the same accounting period. So once the revenue is realized, the next step is to allocate it to the relevant accounting period.

7. Cost Concept

Cost concept states that all assets are recorded in the books of accounts at their purchase price, which includes cost of acquisition, transportation and installation and not at its market price. It means that fixed assets like building, plant and machinery, furniture, etc are recorded in the books of accounts at a price paid for them.

8. Dual concept

Dual aspect is the foundation or basic principle of accounting. It provides the very basis of recording business transactions in the books of accounts. This concept assumes that every transaction has a dual effect, i.e. it affects two accounts in their respective opposite sides. Therefore, the transaction should be recorded at two places. It means, both the aspects of the transaction must be recorded in the books of accounts. Thus, the duality concept is commonly expressed in terms of fundamental accounting equation:

Assets = Liabilities + Capital

Scopes of accounting

1. Business

Accounting is widely applicable in the business sector. Today, in the modern world, most of the people are engaged in business sector and all businessmen follow Generally Accepted Accounting Principle (GAAP) to find out profit, loss and financial position of business firm.

2. Government organizations

Though, Government organizations do not follow Generally Accepted Accounting Principle (GAAP), its keep systematic records of all transactions in order to find the position of public fund.

3. Non-Government organizations

Non-government and service organizations such as NGOS, INGOs, Red Cross Society, SOS etc which plays a vital role in the development of nation also uses accounting. The accounting system used in these organizations are called fund accounting.

4. Individuals

Individuals also perform economic activities to earn their livelihood. They also perform some form of accounting tos draw financial information for making personal economic decision.

Account terminologies

While maintaining the records of different accounting terms which are frequently used in practice. Those terms are known as accounting terminologies. Some of the terminologies are given below:

Transactions:

Transaction means the exchange of money to money's worth from one account to another account. Events like purchase and sale of goods, receipt and payment of cash for services or on a personal account, loss of profit in dealings, etc. are the transactions. The cash transaction is one where cash receipt or payment is involved in the process of the exchange of goods.

Credit transaction, on the other hand, will not have cash " either received or paid ", for something given or receipt respectively, but gives rise to the debtor and creditor relationship. Non–cash transaction is the process or a situation where the question of receipt or payment of cash does not arise at all. For example, depreciation, a return of goods, etc.

Debtor: A person who owes money to the firm, mostly on the account of credit sales of goods is called a debtor. For an example, when the products or goods are sold to a person on credit that person pays the price in the future, he is called a debtor because he owes the amount of firm.

Creditor: A person whom money owes by the firm is called creditor. For example, if Maya purchases goods in credit from a shopkeeper, then Maya is a creditor of a shopkeeper.

Capital:Capital is the amount which the proprietor has invested in the firm or can claim from the firm. It is an amount which an investor invest for long term basis. In other words, capital is the sum of money which is used for the formation of any business organization.

Liabilities: Liability is the amount which the firm owes to outsiders. In the words of Finny and Miller, "Liabilities are debts; they are the amount owed to the creditors; thus, the claims of those who are not the owner are called liabilities".

Assets: Assets are that expenditure which results is acquiring of some property or benefits of a long lasting nature. Any physical things that have money value are known as assets.

Goods: It is a simple or general term which is used for the articles in which the business deals, that is only those articles which are brought for resale for profit are known as goods.

Revenue: Revenue is generally incomes from sales, receipt, interest, commission, brokerage, etc. It inflow of assets which results in an increment of owner's equity.

Expenses: The word "expenses" is regarded to the amount that is incurred in the process of earning revenue. If the benefit of an expenditure is limited to one year, it is treated as an expense (also known as a revenue expenditure) such as payment of salaries and rent.

Expenditure: Expenditure takes place when an assets service is required. The purchase of goods,cost of goods, an asset acquired during the year, etc. are some examples of expenditure.

Purchase: Buying of the goods by the trader for selling them to the customers is known as purchases. Purchases can be either cash purchases or credit purchases. If the cash is paid immediately for the purchase, it is said cash purchases and if the payment is postponed, it is credit purchase.

Sales: When the goods purchased are sold out, it is known as sales. Sales can be either cash sales or credit sales. If the sale is for immediate cash payment, it is cash sales and if the payment for sales is postponed, it is credit sales.

Stock: If the commodities or goods purchases for selling are not sold out completely, it is kept with the trade until sold out, it is which is said stock. If there is stock at the end of the year, it is called closing stock.

Drawing: It is the amount of money or the value of goods which proprietor takes for his domestic personnel use. It is usually subtracted from the capital.

Loses: The loss really means something against which the firms receives no benefit. It represents money given up without any return.

Account: It is the statement of various dealings which occurs between the customer and the firm . It can also be expressed as a clear concise record of the transaction relating to a person or a firm or a property or expenses or an income.

Invoice: While making a sale, the seller makes or prepares a statement giving a particular such as a quantity price per unit, the total amount payable, any decisions made and shows the net amount payable by the buyer, such a statement is called invoice.

Voucher: A voucher is a written document in support of the transaction which has taken place for the value stated in a voucher.

Proprietor: The person who makes the investment and bears all the risks connected with the business is known as proprietor.

Discount: When the customer are allowed any type of deduction in the pieces of goods by the businessman that is called a discount.

Solvent: If assets are more than the realizable value of liabilities, then it is said to be solvent.

Insolvent: If liabilities are more than the realizable values of assets, then it is said to be insolvent.

Book Keepint

Bookkeeping is the recording of financial transactions like sales, purchase, income, receipts and payment by an individual or organization. Bookkeeping is usually performed by a book-keeper. The accountant creates reports from the financial transactions recorded by the book-keeper and files from the government agencies. Single entry book-keeping system and the double-entry book-keeping system are the methods of book-keeping.

A book-keeper, also known as an accounting clerk or accounting technician, is a person who records day to day financial transaction of an organization. A book-keeper usually records the transaction in daybooks. The daybooks consist of purchases, sales, receipts, and payments. The bookkeeper is responsible for ensuring all transactions recorded in the correct day books, suppliers ledger, customer ledger and general ledger.

According to R.N Carter, "Book-keeping is the science and art of correctly recording in books of all those business transactions that result in a transfer of money or money`s worth."

Origin & Evolution of Book Keeping

The origin of book-keeping cannot be exactly traced out. However, it can be said that the book-keeping history is as old as of money. It has been practiced from the ancient period. In ancient period, business are in small scale and book-keeping was not essential to that extent. The increasing demand and needs of human beings, as well as the practice of currency gradually, began to influence the business activities. Scientific book-keeping system was commenced in Italy some 500 years ago. Luca pacific published a book entitled "Sum Made Arithmetical" for the first time which deal with the modern principal of book-keeping . Venetian monk "Luca Pacioli" is known as "The father of modern book-keeping". In that bookkeeping, he included the following provision about the book-keeping.

Memorial that is memorandum book.
Gestational that is journals book.
Quadrant that is ledger account.

Objective function of book-keeping

To have a permanent record of each transaction of the business.
To show the financial effect on the entity of each transaction recorded.
To ascertain the combined effect of all transactions on the financial position on a particular period.
To disclose the factors responsible for earning a profit or suffering a loss in a given period.
Determine tax liability of the business.
Prevention of errors and frauds.

Importance or Functions of Book Keeping

The importances of bookkeeping are as follows:

Manage Disputes Between Owners and Managers

Owners and managers are different person in an organization. They both have their own different interest. So, there may occur different disputes between them due to the difference in their interest. So, written records supported by documentary evidence are essential to avoid any mistrust or doubt among the owners and managers.

Preparations of financial statements

Business wants to know the profit earned or loss suffered during the year and its financial position at the end of the year. This is disclosed by income statement i.e. trading account, profit and loss account and balance sheet respectively. Book-Keeping records all the necessary data for preparing these statement.

Limitation of human memory

The capacity of human beings is limited as how much one can remember and that too for how long? Proper recording of records helps the business with the need of remembering.

Need of financial information

Book keeping is very important for the financial information and data are needed for cost ascertainment, planning, budgeting, and forecasting because it is the main source of such information.

Need of taxation authorization

Book – keeping records are regarded by the tax authorities as authentic and reliable for determination of tax liability.

Meaning and Concept of Accounting

Accounting is the process of recording, analyzing, controlling, summarizing, interpreting and communicating the financial transactions. It is also the systematic and comprehensive recording of financial transactions related to an organization. Accounting provides information on the resources available to a firm, the means employed to finance those resources and the results achieved through their use.

The person who handles the accounting is known as an accountant. Accounting allows a company to analyze the financial performance of the business.

According to R.N Anthony, " An accounting system is a means of collecting, summarizing, analyzing and reporting in monetary terms to the information of the business."

From the above definition:

A reporting system that communicates relevant financial information to interested persons which allow them to assess performance, make decisions and control the economic resources in the organization.

Accounting covers the act of recording transactions in the journal and other related books of accounts and analyzing it.

Objectives or Functions of Accounting

To keep systematic records

Main objective of accounting is to keep the systematic record of financial transactions. In the absence of accounting, there would have been traffic burden on the human memory which makes the business organization impossible to bear.

To ascertain the operational profit or loss

Accounting helps in ascertaining the net profit earned or loss suffered by an account while carrying the business. This is done by keeping a proper record of revenues and expenses during a particular period. While preparing profit and loss account, if the amount of revenue is more than the expenditure incurred in earning, then there is said to be a profit. In case if expenditure exceeds the revenue, there is said to be a loss.

To ascertain the financial position of a business

The profit and loss account gives the amount of profit or loss made by the business during a particular period. However, it is not enough. The businessman must know about his financial position that is where he stands or what he owes and what he owns. This objective is served by the balance sheet or position statement.

To facilitate rational decision-making

Accounting these days has taken upon itself the task of collection, analysis, and reporting of information at a particular time to the required levels of authority in order to facilitate a rational decision.

Information system

Accounting functions as an information system for collecting and communicating economic information about the business enterprise. This information helps the management in taking appropriate decisions.

Scope of accounting

The scope of accounting means the areas or field system. In other words, it may be defined as all those sectors where the accounting is applied.

The major scope of accounting can be given below:

Government: Government should keep vouchers, forms and book as journal, budget sheet, cash book, statement of expenditure, etc.
Non-trading organization: Non-trading organization prepares a financial statement as well as balance sheet to ascertain the financial position and other efficiencies.
Trading concerns: Trading concerns are established to generate profit and also ascertain the profit or loss of the firm.
Professionals and individual: Professionals can be doctor, engineers, contractors, lawyers, etc. Thus, such different professionals and individuals should keep different books of accounts to find out the profit or loss account.

Importance of accounting

Helps in Assistance management

Accounting provides information to the management to enable it to do its work properly. Such organizational information helps in planning, decision making and controlling.

Helps in Comparative study

A systematic record enables a business to compare each year result with those of other years and locate significant factors leading to the change if any.

Helps to show evidence in court

A systematic record of the transaction is often treated by courts as good evidence.

Helps in evaluating the performance of business

As acoounting keeps the proper records of financial transactions, the accounting records reflects the results of operations as well as statement of financial position. Also various balance sheet and profit & loss accounts ratios are calculated which help user of financial statements to analyze the performance of an entity. For example debt equity ratio, Current ratio, Turnover ratio etc. Also we can compare previous period accounting data with current period as well as budgeted figures for variance analysis.

Helps to manage and monitor cash flow –

The working capital and cash requirement of an enterprise can be duly taken care by proper accounting system. It also helps to manage and control the cash flow by properly maintaining the income and expenditures of an organization.

Helps business to be statutory compliant –

Proper business accounting ensures timely recording of our liabilities which needs to be paid within the prescribed time line. This includes provident fund, pension fund, VAT, sales tax, Income tax. Timely payment of liabilities helps enterprises to be statutory compliant.

Helps to create budget and future projections -

Accounting data helps an enterprise to prepare budget and forecast for future period. Business trends are projected based on past data produced by accounting system. So, accounting helps to take proper decision of future based on the financial records of past and present data.

Helps in filing financial statements with regulators, stock exchanges and filing of tax returns –

Enterprises are required to file the financial statements with ROC. In case of listed entities the same is required to be filed with stock exchanges as well. For both indirect and direct tax filing purposes, financial statements and other financial information are required.

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Account Notes || XI || HSEB