Book
keeping
The
word ‘Book-Keeping’ is the
combination of two words; ‘Book’ and
‘Keeping’. Book means book of accounts which business transactions are
recorded and Keeping means recording
of such collected business transactions in proper manner in the book of
account. Therefore, book-keeping is
an art of making routine records of day to day financial transactions of
business in a prescribed form and according to set of rules. It is concerned
only with recording of financial transaction not with the interpretation of
result of financial transaction. It is the recording phase of accounting and
involves journalizing of business transactions.
Book keeping is a branch of
knowledge, which is concerned with recording of financial transaction of
business in a set of books systematically in chronological order as and when
they take place with a view of preparing further statements.
Accounting
Meaning
of accounting is boarder than book keeping. Accounting includes not only book
keeping but also other activities. It records,
classifies, and summarizes the financial transaction of business with a
view to ascertain its profit or loss for the period and its financial position
at the end of period. Beside this it interprets and communicates information
about the financial position of the business. Therefore, accounting can be defined as a process of identifying, recording,
classifying and summarizing financial transactions of a business in such manner
that the result of its operation and financial position can be ascertained at
the end of given period and interprets and communicate them to the various
users who are interested (such as owners, managers, creditors, governments,
trade unions etc)
Objectives or
Functions of Book Keeping
The
following are the main objectives or functions of book keeping:
1) To
Identify Financial Transactions:
Book keeping identifies financial transactions from a large number of business
transactions to keep their record.
2) To
Keep Permanent Record:
It keeps permanent records of financial transactions as and when they arise in
systematic order. It keeps permanent record of all the transaction of business
for future reference.
3) To
classify the transactions:
Book keeping not only records all the identified transactions but also
classifies them mainly into three types; personal, real and nominal account as
per their nature and records them accordingly in permanent book.
4) To
prepare statements:
Book keeping helps to prepare different statements to summarize, present and
interpret the final information contained in the routine records.
The
following are the main objectives or functions of book keeping:
v To
Identify Financial Transactions
v To
Keep Permanent Record
v To
classify the transactions
v To
prepare statements
Importance or
Advantages of Book Keeping
The
importance or advantages of book keeping are as follows:
1)
Maintaining permanent records: Book
keeping maintains permanent records of all financial transactions that take
place in business. So, it can provide financial information and data to various
users.
2) Helpful
in ascertaining profit or loss:
Book keeping keeps complete records of business transactions. Thus, profit or
loss of business transaction can be easily ascertained.
3) Knowledge
of financial position:
Book keeping keeps the books of
different business assets and liabilities in systematic manner. So, owners can
always know about the financial position of business concern.
4) Helpful
in detection and prevention of errors and frauds:
Book keeping records all the business transactions scientifically and
systematically which enable to detect errors and frauds that have already taken
place. It also helps to take steps to prevent their recurrence.
The
importance or advantages of book keeping are as follows:
v Maintaining
permanent records
v Helpful
in ascertaining profit or loss
v Knowledge
of financial position
v Helpful
in detection and prevention of errors and frauds
Essential of
maintaining books of account in business
A business is profit taking
concern. It performs number of financial transactions for the purpose of making
profit. It buys and sells goods and services for cash and on credit. It acquires
different types of asses for generating revenue and disposes them when they
became useless. It borrows and provides different kinds of loans. It makes
several types of expenses and earns revenue from different sources. At the end
of the period, it needs to know the
result of business operation i.e. profit or loss and financial position i.e. assets and liabilities. Similarly, it needs to know the amount of payable to
other and receivable from other and when they are due. Business needs all
these kinds of information for taking several decision and actions. Book keeping and accounting provides such
information for that purpose. That is
why maintaining the book of account is essential in business.
The books of account in a business are essential due
to the following reasons:
1)
Short human memory: Since human memory is short, it essential to keep book of account as
permanent record of financial transaction for future reference.
2)
Debtors and creditors: Since the book of accounts are maintain in classified manner, they
provide clear information about the amount owed by creditors and owed from
debtors and when they are due.
3)
Assets and liabilities: Books of account also provides the information bout business assets and
liabilities, which helps to know the clear picture of financial position of
business for the stakeholders.
4)
Evidence: The book of accounts properly maintained in the business can be
presented in court of law if there is any dispute about transactions.
Features or
Characteristics of Accounting
The
following are the main features or characteristics of accounting:
1. Financial
character:
Accounting deals only those transactions which have financial character. It
does not include non-financial or qualitative transactions. Any information,
which is not expressed in monetary terms, is not considered in accounting.
2. Process: Accounting is a process of
systematic recording, classifying and summarizing the financial transaction and
interpreting and communicating the financial information to the users.
3. Analysis
and Interpretation:
Accounting also involves analysis
and interpretation of result of the business.
4. Historical
in Nature: Accounting
involves recording of past transaction only.
5. Based
on Principles:
Accounting based on certain principles that guide how transactions should be
recorded and reported.
6. Function: Accounting is a function. It
therefore identifies and gathers financial transaction, classifies and summarizes
them, interprets and reports their result to the users.
7. Science
and Art: Accounting
is a science as well as art. It is science because it presents systematic body
of knowledge based on the set of principles. It is also an art because it
involves practical work in which one can fully exercise judgments.
The
following are the main features or characteristics of accounting:
v
Financial character
v
Process
v Analysis
and Interpretation
v
Historical in Nature
v
Based on Principles
v
Function
v
Science and Art
Objectives
of Accounting
The
main objectives of accounting are as follows:
1. To
maintain records:
Human memory is limited; it is very difficult for a person to remember all
financial transaction that business performs. Therefore, Accounting maintains permanent
records of all financial transactions of business in the book (and computer
based on set of rules)
of account permanently.
2. To
ascertain Profit or Loss:
A business has prime motive of earning profit. Therefore, it ascertains whether
the business has earned profit or suffered loss by preparing profit and loss
account at the end of accounting period.
3.
To show the financial position: Accounting shows the financial
position of the business by preparing a statement called balance sheet. Balance
sheet is the statement of capital, assets and liabilities of the business.
4. To
communicate information:
Financial information is essential to its users for taking financial decision. Accounting
communicates the information of operating result and financial position of
business to different users for their decision making purpose.
5. To
determine tax amount: Every
business has to pay tax of different kinds to the government. Therefore,
accounting provides financial information to the tax office, which helps in
determining the amount of tax liability.
The main objectives of accounting
are as follows:
v
To maintain records
v
To ascertain Profit or Loss
v
To show the financial position
v
To communicate information
v
To determine tax amount
Functions
of Accounting
The
main functions of accounting are as follows:
1.
Maintaining complete and
systematic record: The
first function of accounting is to maintain permanent, complete and systematic
records of all financial transaction of business. Such records are maintained
in the book and electronic devices by using given set of rules.
2. Find
out the result of business operations: Another function of accounting is to find out the
result of business operation and financial position. Such result of business operations are
obtained by preparing profit and loss account and balance sheet.
ü Ascertain
profit or loss: A business has
prime motive of earning profit. Therefore, it ascertains whether the business
has earned profit or suffered loss by preparing profit and loss account at the
end of accounting period.
ü Show
the financial position of the business: Accounting
shows the financial position of the business by preparing a statement called
balance sheet. Balance sheet is the statement of capital, assets and
liabilities of the business.
3. Communicate
the accounting information: Communicating
information to the users is also another important function of accounting.
There are different types of users of accounting information such as owners,
managers, creditors, employees, customers and government. They need such
information for their own purposes. Accounting communicates the information
through annual accounting reports.
Therefore, Accounting communicates the
information of operating result and financial position of business to different
users for their decision making purpose.
4. Help
in determination of tax liability: Every
business has to pay tax of different kinds to the government. Therefore,
accounting provides financial information to the tax office, which helps in
determining the amount of tax liability.
5.
Analyze and interpret the
financial information: Accounting
also involves analysis and interpretation of result of the business. Therefore,
one of the important functions of accounting is to analyze and interpret the
result of business operation.
6. Complying
with legal requirement: Some
business such as joint stock companies are required to submit their accounting
reports prepared under double entry system considering Generally Accepted
Accounting Principle (GAAP). Therefore, an important function of accounting is
to comply with such legal requirement.
7. Protecting
business properties:
A business uses different kinds of assets and properties for its purpose and
they need protection from misuse. Therefore, one important function of
accounting is to protect the assets and properties by dividing such records and
procedures that easily locate the assets and person who use them.
The
main functions of accounting are as follows:
v Maintaining complete and systematic record.
v
Find
out the result of business operations.
v
Show
the financial position of the business.
v
Communicate
the accounting information.
v
Help
in determination of tax liability.
v Analyze and interpret the financial information.
v
Complying
with legal requirement:
v
Protecting
business properties:
Importance
or Advantages of Accounting
The
importance or advantages of accounting are as follows;
1. Complete
record:
Accounting maintains permanent, complete and systematic record of financial
transactions of business for future reference.
2. Determine
business operation:
It shows the result of business operation and financial position of the
business.
3. Communicate
accounting information:
It communicates the information through annual accounting report to different
users.
4. Protect
business properties:
It protects the assets and properties by maintaining such records and
procedures that easily locate and assets and person who use them.
5. Reduction
in errors: It
facilitates to record all the business transactions scientifically and
systematically, which enable to detect errors and frauds that have already
taken place and also take steps to prevent their recurrence.
6. Helpful
in decision making:
Accounting facilitates the users to take decision by communicating accounting
information to them.
The
importance or advantages of accounting are as follows;
v
Complete record
v
Determine business operation
v
Communicate accounting
information
v
Protect business properties
v
Reduction in errors
v
Helpful in decision making
Scope of
Accounting
The scope indicates field or area
where the accounting is used or which accounting covered. The scope of
accounting is very wide. It is applicable not only to business organization,
but also to non-business organizations, government and non-governmental
organization, various professionals and individuals. The scope of accounting is
composed of following:
1.
Business: Business is the largest field of
accounting activities. Accounting is used in all types of business irrespective
of heir nature, kind and size.
2.
Government: Government is another field of
accounting activities. Accounting is used all government offices such as the
central level offices and operating level office. The branch of accounting is
used in government organization is called government accounting.
3.
Non-Government organizations: Like government organizations,
non-profit organizations and non-government organizations (NGOs) plays an
important role in development of nation. Accounting is invariably used in these
organizations. The system of accounting used in these organizations is called
fund accounting.
4.
Profession: A profession is a human
economic activity that needs specialized knowledge and skills. Examples of
professions are teaching, medical, accounting, legal engineering
professions. Profession also comprises
an important field of accounting. Professionals need accounting to measure
their accounting activities and for tax purpose.
5.
Individuals: Individuals also perform
economic activities to earn their livelihood. Accounting is useful to the
individual to draw the financial information for taking some personal financial
decision.
The scope of accounting is
composed of following:
v
Business
v
Government
v
Non-Government organizations
v
Profession
v
Individuals
Differences
between Book-Keeping Accounting
The differences between book
keeping and accounting are as follows;
Basis of Difference
|
Book –Keeping
|
Accounting
|
1.
Meaning
|
It
is an act of making routine records of financial transactions.
|
T
is an act of summarizing, presenting and interpreting the financial
information contain in the routine records.
|
2.
Nature
|
It
is routine in nature as recording of financial transaction is performed
repetitively.
|
It
is creative in nature as it needs judgment to present and interpret financial
transactions.
|
3.
Purpose
|
Its
main purpose is to make permanent records of financial transactions of a
business.
|
Its
main purpose is to ascertain the profit or loss and financial position of the
business.
|
4.
Scope
|
It
has limited scope. It involves identifying, measurement and recording of
financial transactions. It is part of accounting and is include in it.
|
It
scope is wider. It involves not only recording but also classifying, analyzing,
summarizing interpreting and communicating the financial activities. It is
whole in itself and includes book keeping in its fold.
|
5.
Stage
|
It
provides the preliminary or initial records; therefore, it is the first
stage.
|
It
is the next step. It starts when book keeping ends.
|
6.
Knowledge
and skill
|
It
needs little knowledge and skill to perform it.
|
It
needs specialized knowledge and skills to perform it.
|
7.
Maintain
|
It
is maintained by a clerk called a book keeper.
|
It
is maintained by a qualified person called an accountant.
|
Origin and
Evolution of Book-Keeping
The
exact date of origin of book-keeping is not yet known. Book-keeping in
accounting sense is thought to have begun about 4000 BC.( It is that the practice of book-keeping begun with the invention of
money in Lydia, Greece during 700 BC.) . The modern system of book keeping
evolved in Italy during the 13th and 14th centuries. It
is become well known to the world, when Luca De Pacioli published his book “SUMMA
DE ATRIHMETICA, GEOMETRIC PROPORTION ET PROPOTIONALITE” in Venice Italy
in 1494 AD. This book was the primary book of mathematics. The book contained a
chapter titled ‘PARTICULARIS DE COMPUTIS ET SCRIPTURIS’, on which the principle
of double entry system of book keeping was stated. In this book he introduced
the following provision about the book-keeping:
a.
Memorials i.e. the Memorandum Book.
b.
Geornal i.e. The Journal Book
c.
Quardimo i.e. Ledger Account
The
first English translation of this book was published by Hugh Old Castle in 1543
AD, which popularized double entry book keeping system all over the word. Many
improvements were made thereafter from time to time to the original form of
double entry system as described by Luca Pacioli. A decade later, James
Pule published his work how to
keep a perfect account of debtor and creditor. Edward Jones, introduced
the format of Journal with two column in 1795.
Today,
the double entry system of book keeping has been established as the most scientific
and systematic system of book-keeping and universally applied in all forms of
entities. Therefore, Luca De Pacioli is
regarded as the father of modern book keeping.
Ø The modern system of book keeping evolved when Luca
De Pacioli published his book “SUMMA DE ATRIHMETICA …” in Venice
Italy in 1494 AD. The book contained a chapter titled ‘PARTICULARIS DE COMPUTIS ET
SCRIPTURIS’, on which the principle of double entry system of book
keeping was stated. In this book he introduced Memorials, Geornal and Quardimo
Ø The first English translation of this book was
published by Hugh Old Castle in 1543 AD, which popularized double entry book
keeping system all over the word.
Ø A decade later, James Pule published his work how to keep a perfect account of debtor and
creditor.
Ø Edward Jones,
introduced the format of Journal with two columns in 1795.
Today, the double entry system of book
keeping has been established as the most scientific and systematic system of
book-keeping and universally applied in all forms of entities. Therefore, Luca
De Pacioli is regarded as the father of modern book keeping.
Double Entry
System of Book-Keeping
Double entry system of
book-keeping is modern and scientific system of recording the financial
transaction. It was published by Luca De Pacioli in 1494. This system
recognized that every financial transaction has two aspects. It then records
two aspects of transactions simultaneously in two separate accounts with equal
amounts. It provides the aspects of transactions with their name of debit and
credit. Therefore, with the help of ledger account profit and loss account and
balance sheet are prepared to ascertain the profit or loss and financial
position of the business. Thus double entry system is the most scientific and
complete system of book keeping and is used in all types of business entities.
The system of
book-keeping that recognized two aspects
of a transaction and records them giving their name of debit and credit in two separate accounts with equal amount is called double
entry system of book-keeping. As a result, the total of all debits
equal the total of all credits or
vice versa. Double entry system is the most
scientific and complete system of
book keeping and is used in all types of business entities.
Features or
Characteristics of Double Entry System of Book-Keeping
The following are the main
features or characteristic of double entry system of book-keeping:
1.
Two aspects: Double
entry book-keeping system recognizes that every financial transaction has two
aspects.
2.
Debit and credit: It provides two aspects of
transaction with the name debit and credit respectively. For each transaction
one aspect is debited and another aspect is credit.
3. Two
fold/ double effect:
It records two fold or makes double effect of every transaction. Two aspects of
transaction are recorded in two opposite side of two separate accounts. So, it
has the feature of duality in accounting system.
4.
Equal effect: It shows the equal effect of
each two aspects of transaction. The amount of one aspect of transaction is
always equal to the amount of other aspect.
5.
Arithmetical accuracy: It helps to check the
arithmetical accuracy of recorded
financial transaction by preparing trial balance.
6.
Complete record: It is a complete record of
financial transaction.
7.
Scientific system: it is scientific system of
recording financial transaction in systematic manner.
The
following are the main features or characteristics of double entry system of
book-keeping:
v
Two aspects
v
Debit and credit
v
Two fold/ double effect
v
Equal effect
v
Arithmetical accuracy
v Complete
record
v Scientific
system
Objectives of
Double Entry System of Book-Keeping
The following are the main
objectives of double entry system of book-keeping:
1.
To
keep complete record of every financial transactions systematically and
scientifically.
2.
To
ascertain profit or loss of business organization.
3.
To
provide the real picture about the financial position of organization.
4.
To
provide appropriate data for comparison
5.
To
facilitate the rational decision making by providing appropriate financial data
at appropriate time.
6.
To
provide the financial information of the business.
7.
To
check the arithmetically accuracy of recording financial transaction.
Importance or Advantages
of Double Entry System of Book-Keeping
The following are the main importance
or advantages of double entry system of book-keeping:
1.
Keeps complete records of each
transaction: it
is complete system of book-keeping. It records not only each and every
transaction but also each aspect of the financial transaction.
2.
Ascertain the result of business
operation: This system helps to ascertain the true
profit or loss of a business by preparing profit and loss account for the given
period.
3.
Present financial position: This system help to prepare
balance sheet by providing details of assets and liabilities of the business,
which helps to present the financial position of business.
4.
Check arithmetical accuracy: It helps to check the arithmetical
accuracy of recorded financial transaction by preparing a summary report called
trial balance
5.
Facilitate comparison: Under this system, separate
recording is made for each year’s transaction. It facilitates comparison of one
item of one year with the similar item of previous year and help to know its
progress from year to year.
6.
Reduce errors and other
irregularities: In this system, a transaction is recorded in
two accounts. Therefore, it reduces the possibility of frauds, errors and
manipulation of account.
7.
Decision making: This system provides necessary
information of business operation to the various users such as managers and
creditors for their decision making purpose.
8.
Scientific system: This system is scientific
system of book-keeping. It has its own set of principles and rules. Under those
principles and rules, two aspects of every financial transaction are recorded.
9.
Systematic system: A systematic technique is
followed in recording financial transaction in double entry system of book keeping.
It record financial transaction in systematic and chronological order with
suitable narration of financial transaction.
10. Reliability: Under this system, transactions
are recorded in a scientific and systematic manner. Therefore, it provides an
authentic record of all he transactions of business, which is accepted by the
court, tax authority etc. as an authentic documents.
The
following are the main importance or advantages of double entry system of
book-keeping:
v
Keeps complete records of each
transaction
v
Ascertain the result of business
operation
v
Present financial position
v
Check arithmetical accuracy
v
Facilitate comparison
v
Reduce errors and other
irregularities
v
Decision making
v
Scientific system
v
Systematic system
v
Reliability
Limitations or Disadvantages
of Double Entry System of Book-Keeping
The
following are the main limitations or disadvantages of double entry system of
book-keeping:
1. No
record of all business activities:
Under this system, all the business
activities cannot be recorded. It records only the financial transactions and
ignores non financial and qualitative activities of business.
2. Difficulties
in corrective actions:
Under this system, financial
statements are prepared after the expiry of the accounting period. Therefore,
it is difficult to use corrective measures within the accounting period.
3. Expensive:
This system involves
the maintenance of number of account books. So, it is quite expenses.
4. Complicated: This
system requires strict adherence to the principles or the rule of accounting.
Therefore, accounts cannot be maintained without adequate knowledge and
training under this system.
5. Failure
to disclose same errors:
In this system, only arithmetic accuracy of the account is checked by preparing
a trial balance. But there are some errors which cannot be disclosed under this
system. For examples, complete omission of a transaction, recording of wrong
amount etc.
The
following are the main limitations or disadvantages of double entry system of
book-keeping:
v
No record of all business
activities
v
Difficulties in corrective
actions
v
Expensive
v
Complicated
v
Failure to disclose same errors
0 comments:
Post a Comment
Thank you for comment