1.1 Meaning and Definition:
In simple words, the ‘Book-keeping’ means recording of the business transactions in the books of accounts in a systematic way. All the monetary transactions are recorded datewise for accurate business results from such records at the end of accounting year.
Book-keeping is an art or science of systematic recording, classifying and summarising the financial transactions of business for a particular period, generally one year.
Definition of Book-Keeping
Richard E. Strahelm : “The art of analyzing and recording business transactions, reporting results of business operations through periodic statements and interpreting such results for purposes of effective control of future operations.”
J. R. Batliboi : “Book-keeping is an art of recording business dealings in a set of books.”
Nocth Cott: “Book-keeping is an art of recording in the books of accounts the monetary aspects of commercial or financial transactions.”
R.N. Carter : “Book-keeping is the science and art of correctly recording in the books of accounts, all those business transactions that results in transfer or money or money’s worth.”
Features of Book-keeping:
1) It is the method of recording day to day business transactions.
2) Only financial transactions are recorded.
3) All records are prepared for a specific period which are useful for future references.
4) Records of transactions are based on rules and regulations.
5) It is an art of recording business transactions scientifically.
Objectives of Book-keeping:
1) The main objective of book-keeping is to keep a complete and accurate record of all the financial transactions in a systematic, orderly and logical manner.
2) All the business transactions are to be recorded date wise and account wise.
3) Book-keeping serves as a permanent record of the monetary transacitons of an enterprise business and it can be produced as an evidence, whenever and wherever required.
4) To know the profit or loss of the business during the financial year.
5) To know the total assets and liabilities of the enterprise.
6) To know what the businessman owes to others and what others owe to him.
7) Businessman comes to know the current year’s progress over previous year and compares its financial results with other business enterprise in similar line.
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1.2 Importance of Book-keeping:
The importance of Book-keeping is as follows:
1) Record : It is not possible for anyone to remember all transactions. But Book-keeping maintains records of all the transactions permanently and systematically in the books of accounts.
2) Financial Information: Book-keeping is useful to get information related to Profit, Loss,Assets, Liabilities, Investments and Stock, etc, at any given time.
3) Decision Making: Book-keeping provides financial information to the businessman for decision making.
4) Controlling: Book-keeping enables the executives of the business to control the activities of the business.
5) Evidence: Businessman needs financial evidence to be produced in the Court of law in case of any disputes.
6) Tax Liability: Book-keeping is useful to find out the tax liabilities e.g. : Income Tax, Property Tax, GST, etc.
Utility of Book-keeping:
1) Owner: The businessman can find out Profit, Losses, Assets and Liabilities of an enterprise at any time.
2) Management: Management of an enterprise can plan, take decisions and control overall business activities.
3) Investors: Investors can take proper decisions whether to invest or not.
4) Customer: Customer can easily understand financial position of the business. He can be assured about supply of goods.
5) Government: Government can easily find out different types of taxes due from various sources.
6) Lenders: Money Lenders can find financial standing of the enterprise for decision to lend money or not.
7) Development: Business enterprise can achieve the business growth with the help of accounting.
Meaning and Definition of Accountancy:
Book-keeping is a part of Accounting. It is the primary stage in accounting. It is the process of recording transactions in the books of accounts. Accounting is part of Accountancy. Accountancy is the practice of recording, classifying, and reporting of business transactions for a business. Accounting principles are the basic norms and assumptions developed and established as the basis for accounting system. These principles are adopted by the accountants universally.
Definitions:
1) “Accountancy refers to the entire body of the theory and process of accounting.” By Kohler.
2) Prof. Robert N. Anthony has defined accounting as “Nearly every business enterprise has an accounting system. It is a means of collecting,summarizing, analyzing and reporting in monetary terms information about the business transactions.”
Basis (Methods) of Accounting System
Basis of Accounting:
There are mainly three basis or methods of accounting in common usage, namely
(i)Cash basis
(ii)Accrual or Mercantile basis
(iii) Mixed or Hybrid basis.
(i) Cash basis :
Under the cash basis of accounting, actual cash receipts and actual cash payments are recorded.In this basis, revenue is recognised when cash is received and expenses are recognised when cash is paid. e.g. (i) Any income received, (ii)Any expense paid. Such a method of accounting is usually followed by professionals such as Doctors, Lawyers, Chartered Accountant (CA) and Not for Profit Organisations.
(ii)Accrual or Mercantile basis
Under accrual basis of accounting, the revenue whether received or not, but has been earned or accrued during the accounting period and expenses incurred whether paid or not are recorded. In other
words, revenue is recognised when it is earned or accrued and expenses are recognised when these are incurred. e.g. (i) Any income earned whether received or not, (ii) Any expense incurred whether paid
or not.
(iii) Mixed or Hybrid basis
It is a combination of cash basis and accrual basis of accounting. Under mixed basis of accounting,both cash basis and accrual basis are followed. Revenues and assets are generally recorded on cash basis whereas expenses are generally taken on accrual basis. The laws in India prohibits the use of this method.
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Qualitative characteristics of accounting information
Accounting means the numerical qualitative presentation of business transactions of financial nature. While recording accounting information in the books of accounts, we must observe the following qualitative characteristics of accounting.
1.Reliability of the Accounting Information:
Reliability is described as one of the two primary qualities (relevance and reliability) that make accounting information useful for decision-making : Reliable information is required to form judgements about the earning potential and financial position of a business firm. Reliability differs from item to item.
Some items of information presented in an annual report may be more reliable than others.For example, information regarding plant and machinery may be less reliable than certain information about current assets because of differences in uncertainty of realization.
2. Relevance of the Accounting Information :
Relevant accounting information must be capable of making a difference in a decision by helping users to form predictions about the outcomes of past, present and future events or to confirm or correct expectations. The accounting information related by the books of accounts and financial reports must be relevant. Accounting information should not include unnecessary and irrelevant information. All the information is said to be relevant which would have changed the outcomes of the business if disclosed i.e. All useful and related information must find a place in the books of accounts and the information must have timelessness, dedicative and feedback value.
3. Understandability of the Accounting Information:
Understandability is the quality of information that enables users to perceive its significance. The benefits of information may be increased by making it more understandable and hence useful to a wider circle of users.Thus, understandable financial accounting information presents data that can be understood by users of the information and is expressed in a form and with terminology adapted to the user's range of understanding.
4. Comparability of the Accounting Information:
In making decision, the decision-maker will make comparisons among alternatives, which is facilitated by financial information.Comparability implies to have like things reported in a similar fashion and unlike things reported differently.
Information, if comparable, will assist the decision-maker to determine relative financial strengths and weaknesses and prospects for the future, between two or more firms or between periods in a single firm.
Basic Accounting Terminologies
In order to have better understanding of accounting, it is necessary to know the meanings of certain basic terms used in accounting. Accounting is a versatile system which serves a large number of purposes in the modern business world. Hence, the following terminologies need to be understood.
Transactions
Exchange of goods and services between two persons or parties for money or money's worth is known as Transactions.
(a) Monetary Transactions:
The transaction which involves an exchange of money or money’s worth directly or indirectly is called monetary transactions. Only monetary transactions are recorded in the books of accounts.
1) Cash Transactions : A business transaction in which cash is paid or received immediately is known as cash transaction.
e.g i) Purchase of goods for cash at ` 15,000/-
ii) Payment of salary at ` 5,000/-
2) Credit Transactions: A credit transaction is one in which cash is not paid or received
immediately at the time of a transaction but it is paid or received at a later date.
e.g i) Goods sold on credit to Mr. Aman at ` 8,000/-
ii) Sold machinery to Mr. Amarsingh on credit at ` 20,000/-
(b) Non-Monetary Transactions:
The transaction which does not involve an exchange of money or money’s worth directly or indirectly are called Non-monetary transactions. An exchange of one thing against another thing is called as Barter transactions.
1) Entry: Recording of a business transaction in the proper form or method in the books of accounts is called an entry.
2) Narration: A brief explanation of the business transaction for which an entry is passed is called as a narration. It is always given in a bracket below the journal entry and it usually starts with the word "Being" or "For".
3) Goods: The term ‘goods’ refers to merchandise, commodities, articles or things in which a trader trades. These are purchased or manufactured for the purpose of sale and to earn profit.
e.g i) Medicines are goods for the chemist.
ii) Vegetables are goods for the vegetable vendor.
iii) Parts like tyres, engine gearbox, cables are produced by a vehicle manufacturer like Bajaj Auto, Hero Motors.
Capital and Drawings:
a) Capital : The total amount invested into the business by the owner is called capital. Excess of assets over the liabilities is also called as capital. The equation for this is :
Capital = Assets – Liabilities
Capital is a liability of the business as this amount is payable by the business enterprise to the owner at the time of closure of the business.
b) Drawings : The amount of cash or value of goods, assets, etc., withdrawn from the business by the owner for personal use called as drawings.
E.g. : A proprietor pays colleges fees of his son, or pays for his medical expenses, mobile bills etc, from the business.
debtors and creditors:
a)debtor : a person who has to pay to the business for getting goods and services on credit is known as debtor. a debtor is a person who owes money to the business.
b) creditor: a person to whom business has to pay for getting goods or services on credit is known as creditor. a creditor is a person to whom business owes money.
c) bad debts : an irrecoverable amount from a debtor is known as "bad debts". it is a revenue to loss to the business.
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