commerce classes

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Accounting and Book-keeping.

2020-07-24T23:03:00.000-07:00

Accounting and Book-keeping

Ø Book-keeping is a systematic recording of business transaction in the books of accounts
Ø Book-keeping is the basis of accounting.
Ø It is the art and science of recording day-to-day business transaction in books of accounts.
Ø The process of book-keeping: identification -> Recording -> Preparing ledger -> Trial Balance.
Ø Accounting starts where book-keeping ends.
Ø Bookkeeping is the recording of financial transactions and it is a part of the process of
Ø Accounting in every organization.
Ø Book keeping is the basic activity of the accounting system.
Ø Accounting may be defined as the art of recording, classifying, summarizing and communicating the required information relating to the economic events of an organisation to the interested users of Information.

Basis of Difference	Book-keeping	Accounting
Objective	It is a process of recording of business transaction.	It is a process of recording and reporting business transaction.
Books of accounts	Journal and Ledgers	Journal, Ledgers, Statement of financial position, Income statement, Statement of changes in equity and Cash Flow Statement
Decision Making	On the basisi of book-keeping decisions cannot be made.	Decision can be made.

Basis of Accounting

On the basis of recognition of revenue and cost there can be two of accounting:

1. Cash Basis.

2. Accrual Basis.

1. Cash Basis: under cash basis of accounting revenue and cost is recognised only when cash is actually received or paid not when it become due.

For example:

(a). Goods purchased in 2020 and cash is paid on 2021. So the journal entry will be passed in 2021 when cash will be received.

(b) Goods purchased in march 2020 and cash is immediately paid. The transaction will be recorded on the same day because it involves cash.

2. Accrual basis: under this system of accounting revenue and cost is recognised when it occur not when it is received or paid.

For example:

(a) Goods purchased on march 2020 and cash is received in 2021. The journal entry will be passed immediately on happening of event not on receipt of cash.

Conclusion:

The cash basis of accounting takes into account only cash transaction but accrual bassis of accounting takes into account both cash as well as credit basis of accounting.

Meaning and Concept of Accounting

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Meaning and Concept of Accounting

Introduction

The Process of accounting starts with the establishment of a business unit. The propriter (owner) is interested in earning profit and accouinting helps the propriter to find out whether the business has earned the profit or loss. But all this is not possible without proper recording of affairs of the business. Here accounting serves as an information system, it records the business transaction and communicates economic information about the business to a wide variety of users including propriter. The modern system of accounting based on the principles of double entry system owes it origin to Luca Pacioli who first published the principles of Double Entry System in 1494 at Venice in Italy. In his book, he used the present day popular terms of accounting Debit (Dr.) and Credit (Cr.).Debit comes from the Italian debito which comes from the Latin debita and debeo which means owed to the proprietor.Credit comes from the Italian credito which comes from the Latin ‘credo’ which means trust or belief (in the proprietor or owed by the proprietor. In explaining double entry system, Pacioli wrote that ‘All entries… have to be double entries, that is if you make one creditor, you must make some debtor’.

Meaning of Accounting:

The American Institute of Certified Public Accountants (AICPA) had defined accounting as 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 financial character, and interpreting the results thereof.

The American Accounting Association (AAA) defined accounting as ‘the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of information’.

Accounting can therefore be defined as the process of identifying, measuring, recording and communicating the required information relating to the economic events of an organisation to the interested users of Information.

From the above the following attributes of accounting emerge:

Identification: It means determining what transactions to record, i.e., to identity events which are to be recorded. It involves observing activities and selecting those events that are of considered financial character and relate to the organisation.

Measurement: It means quantification (including estimates) of business transactions into financial terms by using monetary unit, viz. rupees and paise as a measuring unit. If an event cannot be quantified in monetary terms, it is not considered for recording in financial accounts.

Recording: Once the economic events are identified and measured in financial terms, these are recorded in books of account in monetary terms and in a chronological order.

Classifying: It Is concerned with the systematic analysis of the recorded data so as to accumulate the transactions of similar type at one place. This function is performed by maintaining the ledger in which different accounts are opened to which related transactions are posted.

(iii) Summarizing: It is concerned with the preparation and presentation of the classified data in a manner useful to the users. This function involves the preparation of financial statements such as:

(a)Income Statement

(b)Balance Sheet

(c)Statement of Changes in Financial Position

(d)Statement of Cash Flow etc.

(e)Comparative statement

Communication: The economic events are identified, measured and recorded in order that the pertinent information is generated and communicated in a certain form to management and other internal and external users. The information is regularly communicated through accounting reports.

Interpreting: The accountants interpret the statements in a manner useful to the users. The accountant should explain not only what has happened but also (a) why it happened, and (b) what is likely to happen.

Economic Events: Business organisations involves economic events. An economic event is known as a happening of consequence to a business organisation which consists of transactions and which are measurable in monetary terms. For example, purchase of Plant & Machinery.

Organisation : Organisation refers to a business enterprise, whether for profit or not-for profit motive. Depending upon the size of activities and level of business operation, it can be a sole-proprietor concern, partnership firm, cooperative society, company, local authority, municipal corporation or any other association of persons.

Interested Users of Information: Many users need financial information in order to make important decisions. These users can be divided into two broad categories:

Internal users and External users.

Internal users includes-Chief Executive, Financial Officer,Vice President,Business Unit Managers,Plant Managers, Store Managers, Line Supervisors, etc

External users includes-present and potential Investors (shareholders), Creditors (Banks and other Financial Institutions, Debentureholders and other Lenders,Tax Authorities, Regulatory Agencies, Securities Exchange Board of India, Labour Unions, Trade Associations.

Why do the Users Want Accounting Information?

• The shareholders use them to see if they are getting a satisfactory return on their investment.

• The managers use the information to evaluate the performance and financial analysis of their company with the industry.

• The creditors (lenders) want to know liquidity and ability of the company to pay its debts.

• The prospective investors use them to assess whether or not to invest their money in the company.

• The government and regulatory agencies require the information for the payment of various taxes such as Value Added Tax (VAT), Income Tax (IT), Customs and Excise duties.

Qualitative Characteristics of Accounting Information:

Qualitative characteristics are the attributes of accounting information which tend to enh

ance its understandability and usefulness. it must possess the following attributes:

Reliability: The reliability of accounting information is determined by the degree of correspondence between what the information conveys about the transactions or events that have occurred, measured and displayed. A reliable information should be free from error and bias and faithfully represents what it is meant to represent.

Relevance: To be relevant, information must be available in time, must help in prediction and feedback, and must influence the decisions of users by -prediction ,past evaluations.

Understandability: Understandability means decision-makers must interpret accounting information in the same sense as it is prepared and conveyed to them..

Comparability: The financial reports are able to compare various aspects of an entity over different time period and with other entities. Accounting reports must belong to a common period and use common unit of measurement and format of reporting.

Branches of Accounting: Due to the rapid economic development and technological advancements, there has been an increase in the scale of operations and the advent of the company form of business organisation. This gave rise to special branches of accounting. These are briefly discussed below :

Financial accounting : The purpose of this branch of accounting is to keep a record of all financial transactions so that:

(a) The profit earned or loss can ascertained

(b) The financial position of the business as at the end of the accounting period can be ascertained

Cost Accounting : The purpose of cost accounting is to analyse the expenditure so as to ascertain the cost of various products manufactured by the firm and fix the prices. It also helps in controlling the costs and providing necessary costing information to management for decision-making.

Management Accounting : The purpose of management accounting is to assist the management in taking rational policy decisions and to evaluate the impact of its decisons and actions.

Objectives of Accounting:

The primary objectives of accounting include the following:

1 Maintenance of Records of Business Transactions: Accounting is used for the maintenance of a systematic record of all financial transactions in book of accounts. such as purchases, sales, receipts, payments, etc. that takes place in business everyday. Hence, a proper and complete records of all business transactions are kept regularly.

Profit = Revenue - Expenses

2 Calculation of Profit and Loss: The another objective of accounting is to ascertain the profit earned or loss sustained by a business during an accounting period which can be easily workout with help of record of incomes and expenses relating to the business by preparing a profit or loss account for the period. Profit represents excess of revenue (income), over expenses. If however, the total expenses exceed the total revenue, the difference reflects the loss.

Depiction of Financial Position: Accounting also aims at ascertaining the financial position of the business concern in the form of its assets and liabilities at the end of every accounting period. A proper record of resources owned by business organization (Assets) and claims against such resources (Liabilities) facilitates the preparation of a statement known as balance sheet or position statement.

Basic Terms in Accounting

Entity: Entity means a reality that has a definite individual existence. Business entity means a specifically identifiable business enterprise like Reliance Pvt. Ltd., ITC Limited, etc.

Transaction: A transaction is a event that has a monetary impact on an entity's financial statements and is recorded as an entry in its accounting records. It can be a purchase of goods, receipt of money, payment to a creditor, incurring expenses, etc. It can be a cash transaction or a credit transaction.

Assets: Assets are economic resources of an enterprise that can be usefully expressed in monetary terms. Assets can be broadly classified into two types: current and Non-current

Classification of Assets

Liabilities: Liabilities are obligations or debts that an enterprise has to pay at some time in the future. Liabilities are classified as current and non-current

Classification of Liabilities

Capital: Amount invested by the owner in the firm is known as capital. It may be brought in the form of cash or assets by the owner for the business entity. Capital is an obligation and a claim on the assets of business. It is, therefore, shown as capital on the liabilities side of the balance sheet.

Sales: Total revenues generated from sale of goods or services is called sale. Sales may be cash sales or credit.

Revenues:These are the amounts of the business earned by selling its products or providing services to customers, called sales revenue..

Expenses :Costs incurred by a business in the process of earning revenue are known as expenses. Eg: depreciation, rent, wages, salaries, interest, , light and water, telephone, etc.

Expenditure: Spending money or incurring a liability for some benefit, service or property received is called expenditure. Purchase of goods, purchase of machinery, purchase of furniture, etc. are examples of expenditure. Expenditure can be classified as:

Revenue Expenditure:If the benefit of expenditure is exhausted within a year, it is called revenue expenditure.

Capital Expenditure:If the benefit of an expenditure lasts for more than a year, it is called capital expenditure.

Eg: as purchase of machinery, furniture, etc.

Profit: The excess of revenues of a period over its related expenses during an accounting year is profit. It increases the owner’s equity.

Gain: A profit that arises from events or transactions which are incidental to business such as sale of fixed assets, winning a court case, appreciation in the value of an asset.

Loss: The excess of expenses of a period over its related revenues its termed as loss. It decreases in owner’s equity.

Discount: Discount is the deduction in the price of the goods sold. Two types of discount:

(1) Trade Discount: deduction of agreed percentage of list price at the time selling goods

(2) Cash Discount. This type of discount is given when goods are sold on credit and the debtors make the payment within the stipulated period or earlier.

Voucher: The documentary evidence in support of a transaction is known as voucher. For example, when we buy goods we get a receipt.

Goods : It refers to the products in which the business unit is dealing, i.e. in terms of which it is buying and selling or producting and selling.

Drawings: Withdrawal of money and/or goods by the owner from the business for personal use is known as drawings. Drawings reduce the investment of the owners.

Purchases: Purchases are total amount of goods procured by a business on credit and on cash, for use or sale.

Stock : Stock (inventory) is a measure of something on hand-goods, spares and other items in a business.

Closing Stock: is the amount of goods which are lying unsold as at the end of an accounting period is called closing stock (ending inventory).

Opening stock :(beginning inventory) is the amount of stock at the beginning of the accounting period.

Debtors: Debtors are persons who owe to an enterprise an amount for buying goods and services on credit. It is shown in the balance sheet as sundry debtors on the asset side.

Creditors: Creditors are persons and/or other entities who have to be paid by an enterprise an amount for providing the enterprise goods and services on credit. It is shown in the Balance Sheet as sundry creditors on the liabilities side.

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