A) BOOK-KEEPING:Bookkeeping is a process of maintaining systematic records, daily, of the financial transactions of the organizations. Adequate book-keeping is essential as it facilitates the preparation of Financial Statements and decision-making. With proper bookkeeping, companies can track all information on their books to make key operating, investing, and financing decisions. Book-keeping ensures up-to-date recording of transactions which includes purchases, sales, receipts, and payments. Those persons who are involved in bookkeeping activities are known as bookkeepers.
L.C. Cooper defined book-keeping “as the science of recording transactions in money or money’s worth in such a manner that, at any subsequent date, their nature and effect may be clearly understood and that, when required, a combined statement of their result may be prepared.”
Objectives:
1) Recording complete and adequate of all up-to-date financial transactions like purchase, sales, receipts, and payments.
2) Assessing the financial position of the organization by facilitating the preparation of Financial Statements.
3) Identification of the monetary transactions to record those transactions.
4) Facilitates classification and grouping of the financial transactions based on their nature.
5) Evaluate the operating results of the company by facilitating the preparation of a statement of Profit and Loss.
Importance:
1) Helps to record complete and adequate of all up to date financial transactions like purchase, sales, receipts, and payments.
2) Helps to assess the financial position of the organization by facilitating the preparation of Financial Statements.
3) Helps in the identification of the monetary transactions to record those transactions.
4) Helps to Facilitate classification and grouping of the financial transactions based on their nature.
5) Helps to evaluate the operating results of the company by facilitating the preparation of a statement of Profit and Loss.
B) ACCOUNTING:
Accounting is the process of identifying, recording, classifying, summarizing, and reporting the financial transactions of the organization. We can also define accounting as an information system that measures, processes, and communicates the financial information of the entity to the stakeholders. Accounting functions involve the preparation of Operating results and the financial position of the organization. The financial information used in accounting is a brief summary of financial activities or transactions over an accounting period, summarizing a company's operations, financial position, and cash flows. Those people who are involved in accounting functions are known as accountants. The most commonly used method of accounting is the double-entry system of accounting.
According to Smith and Ashburne, “accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions, and events, which are, in part at least, of a financial character and interpreting the result thereof”.
Types:
1) Financial Accounting – used to generate Interim and annual financial statements.
2) Managerial Accounting – encompasses features like budgeting, forecasting, and various financial analysis.
3) Cost Accounting: decisions about cost.
Features:
1) Applicability - accounting principles should be feasible, predictable, and applicable. This should be easy to apply in the accounting system and should be easy enough to be implemented by everyone.
2) Recording transactions and events in monetary terms.
3) Classifying and summarising the recorded financial transactions.
4) Useful to determine and locate the nature of the transaction and to analyze its effect on the overall balance sheet.
5) All of the entries generated by the accountant and even the bookkeeper can be audited and confirmed for their validity.
6) Communication of the results to the stakeholders.
Objectives:
1) Recording complete and adequate of all up-to-date financial transactions like purchase, sales, receipts, and payments.
2) Assessing the financial position of the organization through the preparation of Financial Statements.
3) Identification of the monetary transactions to record those transactions.
4) Classification and grouping of the financial transactions based on their nature.
5) Evaluate the operating results of the company through the preparation of a statement of Profit and Loss.
6) Communication of the financial information to the stakeholders.
Difference between Book-Keeping and Accounting:
C) Double Entry book-keeping system:
A double-entry system of book-keeping is a system of recording financial transactions on two different sides - credit and debit. It emphasizes that every transaction has two aspects where each transaction is recorded in two separate accounts: debit and credit with an equal amount. This system focuses on the reality that there cannot be transactions unless there are two parties who are involved in.
The double entry system of book-keeping was founded by Luca Pacioli.
This is used to satisfy the accounting equation: Assets = Liabilities + Capital.
Lewis and Gillespie define it as, “the specific technique which reflects the concept of duality is known as double-entry book-keeping.”
Features of Double Entry System of Book-Keeping:
1) This system maintains records of all the transactions showing the double effect of each financial transaction
2) Every financial transaction affected on two sides are always equal. In other words, the debit side and credit side of each of the transactions have an equal amount.
3) It has two aspects of each transaction – debit and credit. For every transaction, one aspect is debited and another is credited. Debit is shown on the left side and credit is shown on the right side.
4) It is a universally accepted accounting rule.
5) It is a complete, reliable, and scientific method of accounting.
6) Records transactions of systematic and chronological order.
7) This system helps in analyze and prepare comparative financial statements.
Merits of Double Entry System of Book – Keeping:
1) It is a scientific method of accounting as it has its own set of principles and rules. Under this system, two aspects of every transaction are recorded.
2) It is a system where financial transactions are recorded in a systematic & chronological order with suitable narration.
3) It is a complete system of book-keeping which records not only each and every financial transaction but also each aspect of the transactions.
4) This system is based on a double-entry system of book-keeping hence for every debit amount there is a corresponding credit amount or vice versa. Hence it ensures the arithmetical accuracy of the recording of the financial transactions.
5) It helps in the preparation of Financial Statements including P&L accounts and Balance Sheets.
6) This system provides necessary information for the internal controls.
7) This system provides full details of the information on all kinds of assets and liabilities of the business. Therefore there are minimal chances of fraud and errors in the books of accounts.
De-Merits of Double Entry System of Book – Keeping:
1) Complex System and is hard to understand therefore personal involved in book-keeping find it difficult to follow this system
2) Small organization doesn’t prefer this type of book-keeping system.
3) It doesn’t record those transactions which cannot be measured in money.
4) If the wrong amount is entered in a transaction and such transactions affect both sides, error finding becomes difficult.
5) It is a costly method as it involves a high amount of paperwork and requires skilled manpower.
6) It is time-consuming as each transaction is to be given double impact.
Functions:
- Maintaining records
- Determining operating results
- Disclosing financial position
- Communicating financial information
Scope:
- Trading organization
- Service Sector Organisation
- Professionals
- Governmental
- Non-Profit Organisation
D) TYPE OF ACCOUNTS :
There are 3 types of accounts related to the debit and credit principle of the double-entry system. They are:
a) Personal Account
b) Real Account
c) Nominal Account.
a) Personal Account:
Accounts that involve a person whether natural or artificial are known as personal accounts. It includes debtors, creditors, capital, drawings, Bank, Prepaid Expenses, outstanding expenses, etc.
Golden Rule of personal account is:
- Debit- the receiver
- Credit – the giver.
b) Real Accounts:
All accounts related to the properties, assets, and possessions are real accounts. These properties may be physically existent or non-physical in nature. It includes Building, Plant & machinery, furniture, Cash, Stocks (inventory), Goodwill, patents, etc.
The Golden Rule of real accounts is:
- Debit – what comes in
- Credit – what goes out.
c) Nominal Accounts:
All accounts related to expense and loss and incomes and gains are nominal accounts. It includes salary, wages, rent, electricity, discount received/allowed, commission, etc.
The golden rule of Nominal Accounts:
- Debit – All expenses and losses
- Credit – All incomes and gains
Examples of Types of Accounts
Write the accounts affected and applicable rules in the below-mentioned transactions:
- Goods purchased for cash.
- Cash Sales.
- Sale of fixed assets
- Payment of expenses.
Answer–
1. Debit Purchase account and credit cash account.
Rule Applicable: – Debit increase in expense or an asset. Credit decrease in assets.
2. Debit Cash account and credit sales account.
Rule Applicable: – Debit Increase in assets. Credit Decrease in revenue or assets.
3. Debit Expenses account and credit cash/bank account.
Rule Applicable: -Debit Increase in expense. Credit Decrease in assets.