Monday, October 22, 2012

book keeping and Accounting


BOOK- KEEPING
Meaning: Book- keeping includes recording of journal, posting in ledgers and balancing of accounts. All the records before the preparation of trail balance is the subject matter of book- keeping. Book- keeping may be defined as the science and art of recording transactions in money or money’s worth so accurately and systematically, in a certain set of books, regularly so that the true state of businessman’s affairs can be correctly ascertained.
Definition
“Book- keeping is the art of recording business transactions in a systematic manner”. A. H. Rosenkampff.
“Book- keeping is the science and art of correctly recording in books of account all those business transactions that result in the transfer of money or money’s worth”. R. N. Carter
Objectives of Book- keeping: A businessman record the transaction in a set of book in order to ascertain the following objects:-
a.      To have a permanent records of each transaction of the business.
b.      To show the financial effect on the entity of each transaction recorded.
c.       To know the financial position of the business on a particular data.
d.      To disclose factors responsible for earning profit or suffering loss in a given period.
e.       Determination of the tax liability of the business.
f.        For prevention of frauds and errors.
g.      Protection of assets.             

ACCOUNTING
Meaning: Accounting is the analysis and interpretation of book-keeping records. It includes not only maintains of accounting records but also the preparation of financial and economic information which involves the measurement of transaction and other events pertaining to a business.
Definition
According to the American institute of certified public accounts” The arts of recordings, classifying and summarizing in a significant manner and in terms of money transaction and events which in parts, at least of a financial charter and interpreting the result there of”.
Objectives of accounting are as follow:-
a.      To keep systematic and authentic records: - The accounting provides as authentic and permanent records of all the financial transaction of a business.
b.      To protect business properties:- It keep a full records of all assets and liabilities and provides information to the proprietor as regards the utilization and preservation of funds.
c.       To determine tax liability: - Accounting supplies some important and relevant information on the basis of which tax liability can be discharged.
d.      To ascertain the apparitional profit or loss: - Accounting helps in ascertaining the net profit or loss sufferecl on account of carrying the business.
e.       To ascertain the financial position of business: - the profit and loss account gives the amount of profit or loss made by the business during a particular period.

The main advantages of accounting are mentioned below:
a.      Accounting information is used by the management in taking various menageries at decision.
b.      It shows the financial position of business on a particular data.
c.       Accounting data are accepted by the tax authorities as authentic and reliable. Hence they can be used as the basis for discharging tax liabilities.
d.      Accounting supplies financial data which are accepted by the insurance company as reliable figure for settlement of insurance claim.

Following are the limitations of accounting:
a.      Records transaction measurable in monitory term:-  According to records only those transaction which can be measured in monetary terms. There may be certain important non-monitory transaction but are not recorded.
b.      Permits alternative treatment: - The similar treated with different alternative approach or method and as a consequent correct result may not be attained.
c.       Effect of price level changes not considered: - Accounting transaction is recorded at cash in the book .The effect of price level changes is not brought into the book .It lead to the difficulties in.
d.      Personal bias of accountant affect the accounting statement:- Accounting statement are influenced by the personal judgment of the accountant. He may select any methods of depreciation, valuation of stock etc. Such judgment it based on antiquity and compliancy of the accountant with definitely affects the preparation of accounting statement.

Functions of accounting:
a.      Record Keeping Function: The primary function of accounting relates to recording, classification and summary of financial transactions-journalisation, posting, and preparation of final statements. These facilitate to know operating results and financial positions.
b.      Managerial Function: Decision making programme is greatly assisted by accounting. The managerial function and decision making programmes, without accounting, may mislead.
c.       Legal Requirement function: Auditing is compulsory in case of registered firms. Auditing is not possible without accounting. Thus accounting becomes compulsory to comply with legal requirements.
d.      Language of Business: Accounting is the language of business. Various transactions are communicated through accounting. There are many parties-owners, creditors, government, employees etc., who are interested in knowing the results of the firm and this can be communicated only through accounting.

Parties interested in accounting information:
a.      Owners: The owners provide funds or capital for the organization. Owners, being businessmen, always keep an eye on the returns from the investment.
b.      Management: The management of the business is greatly interested in knowing the position of the firm. The accounts are the basis with the help of which the management can study the merits and demerits of the business activity.
c.       Creditors: Creditors are the persons who supply goods on credit, or bankers or lenders of money. It is usual that these groups are interested to know the financial soundness before granting credit.
d.      Employees: Payment of bonus depends upon the size of profit earned by the firm. The more important point is that the workers expect regular income for living. The increase in wages, Bonus, better working conditions etc. depend upon the profitability of the firm.
e.       Investors: The prospective investors, who want to invest their money in a firm, wish to see the progress and prosperity of the firm, before investing their amount, by going through the financial statements of the firm. This is to safeguard the investment.
f.        Government: Government keeps a close watch on the firms which yield good amount of profits. The state and central Governments are interested in the financial statements to know the earnings for the purpose of taxation.
g.      Consumers: These groups are interested in getting the goods at reduced price. Therefore, they wish to know the establishment of a proper accounting control, which in turn will reduce to cost of production, in turn fewer prices to be paid by the consumers.
h.      Research Scholars: Accounting information, being a mirror of the financial performance of a business organization, is of immense value to the research scholar who wants to make a study into the financial operations of a particular firm.

BRANCHES OF ACCOUNTING:
i) Financial accounting;
ii) Cost accounting; and
iii) Management accounting.
i)        Financial Accounting: It is the original form of accounting. It is mainly concerned with the preparation of financial statements for the use of outsiders like creditors, debenture holders, investors and financial institutions. The financial statements i.e., the profit and loss account and the balance sheet, show them the operating results and financial position of the business.
ii)      Cost Accounting: It is that branch of accounting which is concerned with the accumulation and assignment of historical costs to units of product and department, primarily for the purpose of valuation of stock and measurement of profits. Cost accounting seeks to ascertain the cost of unit produced and sold or the services rendered by the business unit with a view to exercising control over these costs to assess profitability and efficiency of the enterprise.
iii)    Management Accounting: It is an accounting for the management i.e., accounting which provides necessary information to the management for discharging its functions.

Difference between Book – keeping and accounting summarized below:-
a.      Objective: - The objectives of book –keeping is too limited up to recording of business transaction. Where as the object of accounting are not only maintaining business records but also analysing income, depiction of financial position and communication of business result.
b.      Function: - The function of book – keeping is to record business transaction. The function of accounting is the recording, classifying, summarizing, interpreting business transaction and communicating result.
c.       Basis: - Business transaction vouchers and other supporting documents are the basis of book – keeping for recording. Where as book - keeping serves as the basic for accounting information.
d.      Nature: - Book – keeping is mostly of selective nature. Accounting is comprehensive in nature and requires specialized knowledge.
e.       Usefulness: - Book keeping is not of much help to the management for their decision making. Accounting helps management in forming and executing management policy.

ACCOUNTING TERMINOLOGY: It is necessary to understand some basic accounting terms which are daily in business world. These terms are called accounting terminology.
 Transaction: Transaction means the exchange of money or 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 personal accounts, loss or profit in dealings etc., are the transactions”. Transactions are of three types: (a) Cash (b) Credit and (c) non cash transaction.
Cash transaction is one where cash receipt or payment is involved.
 Credit transaction, on the other hand, will not have ‘cash’ either received or paid, but gives rise to debtor and creditor relationship.
 Non-cash transaction is one where the question of receipt or payment of cash does not arise at all, e.g. Depreciation, return of goods etc.,

Debtor: A person who owes money to the firm mostly on account of credit sales of goods is called a debtor. For example, when goods are sold to a person on credit that person pays the price in future, he is called a debtor because he owes the amount to the firm.
Creditor:  A person to whom money owes by the firm is called creditor. For example, Madan is a creditor of the firm when goods are purchased on credit from him
 Capital: It means the amount (in terms of money or assets having money value) which the proprietor has invested in the firm or can claim from the firm. It is also known as owner’s equity, Proprietor’s claim  or net worth. Owner’s equity means owner’s claim against the assets. It will always be equal to assets less liabilities,
 say: Capital = Assets - Liabilities.
Liability: It means the amount which the firm owes to outsiders except the proprietors. In the words of Finny and Miller, “Liabilities are debts; they are amounts owed to creditors; thus the claims of those who ate not owners are called liabilities”. In simple terms, debts repayable to outsiders by the business are known as liabilities.
Asset: Any physical thing or right owned that has a money value is an asset. In other words, an asset is that expenditure which results in acquiring of some property or benefits of a lasting nature.
 Goods: It is a general term used for the articles in which the business deals; that is, only those articles which are bought for resale for profit are known as Goods.
 Revenue: It is defined as the inflow of assets form business operations which result in an increase in the owner’s equity. It includes all incomes like sales receipts, interest, commission, brokerage etc.  However, receipts of capital nature like additional capital, sale of assets etc., are not a part of revenue.
Expense: The terms ‘expense’ refers to the amount 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 know is as revenue expenditure) such as payment of salaries and rent.
Expenditure: Expenditure takes place when an asset or service is acquired. The purchase of goods is expenditure, where as cost of goods sold is an expense. Similarly, if an asset is acquired during the year, it is expenditure, if it is consumed during the same year; it is also an expense of the year.
Revenue Expenditure or Expenses: When the benefit of an expense is not likely to be available for one year or less, it is treated as revenue. For example, salaries, wages, power and fuel, maintenance expenses of assets etc.
Capital Expenditure:  When the benefit of an expenditure is not exhausted in the year in which it was incurred but is available over a number of years, it is considered as Capital Expenditure. An example is the expenditure incurred for purchase of fixed assets.
Deferred Revenue Expense:  When the benefit of a revenue expenditure continues for more than one year, it is treated as Deferred Revenue Expense. Such expenditure is not written off in one year but over a period of 2 or 3 years.
For example, expenditure incurred on heavy advertisement.
Revenue Expenditure is a Nominal Account, since it is a current expenditure. Whereas capital expenditure is a Real Account, since it is used for buying fixed assets.

Purchases: Buying of goods by the trader for selling them to his customers is known as purchases. Purchases can be of two types. viz, cash purchases and credit purchases. If cash is paid immediately for the purchase, it is cash purchases, If the payment is postponed, it is credit purchases.
Sales: When the goods purchased are sold out, it is known as sales. Here, the possession and the ownership right over the goods are transferred to the buyer. It is known as. 'Business Turnover’ or sales proceeds. It can be of two types, viz.,, cash sales and credit sales. If the sale is for immediate cash payment, it is cash sales. If payment for sales is postponed, it is credit sales.
Stock: The goods purchased are for selling, if the goods are not sold out fully, the remaining unsold part said to be a stock. If there is stock at the end of the accounting year, it is said to be a closing stock. This closing stock at the end of the year will be the opening stock for the next year.
Drawings:  It is the amount of money or the value of goods which the proprietor takes for his domestic or personal use. It is usually subtracted from capital.
Losses: Loss really means something against which the firm receives no benefit. It represents money given up without any return. It may be noted that expense leads to revenue but losses do not. (e.g.) loss due to fire, theft and damages payable to others,
Account: It is a statement of the various dealings which occur between a customer and the firm. It can also be expressed as a clear and concise record of the transaction relating to a person or a firm or a property (or assets) or a liability or an expense or an income.
Invoice: While making a sale, the seller prepares a statement giving the particulars such as the quantity, price per unit, the total amount payable, any deductions made and shows the net amount payable by the buyer. Such a statement is called an invoice.
Voucher: A voucher is a written document in support of a transaction. It is a proof that a particular transaction has taken place for the value stated in the voucher. Voucher is necessary to audit the accounts.
Proprietor: The person who makes the investment and bears all the risks connected with the business is known as proprietor.
Discount: When customers are allowed any type of deduction in the prices of goods by the businessman that is called discount. When some discount is allowed in prices of goods on the basis of sales of the items, that is termed as trade discount, but when debtors are allowed some discount in prices of the goods for quick payment, that is termed as cash discount.
Solvent: A person who has assets with realizable values which exceeds his liabilities is insolvent.
Insolvent: A person whose liabilities are more than the realizable values of his assets is called an insolvent.

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