Monday, February 4, 2013

Unit One: Book-Keeping and Accounting Concept, Grade: XI



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




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