BOOK-KEEPINGAccording to R.N.Carter, “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.”

It helps to keep a complete record of business transactions in a systematic manner by which the financial position of a business for a certain period may be ascertained.

Introduction of AccountingAccounting is the systematic recorded presentation of the financial activity of business/Enterprise. Human activities may be classified as economic and non-economic activities. Non-economic activities have service motive. These activities are performed to honour our social, cultural, emotional, religious and patriotic commitments and Satisfaction. Cooking by mother for their families, rendering services by wives to their husbands, nursing ailing husband by the nurse, teaching his own children by the teachers are some examples of non-economic activities.

Economic activities aim at generating remuneration as wages, salaries, fee, commission, brokerage or other receipt in cash or kind. Our accounting is concern with the economic activities of the business. Trade is purchase and sale of goods are profit motive. The businessman work very hard to earn the maximum profit, so he can accelerate the pace of growth of his business.

Cont…. The trader is also very keen know the result of his business

activities. For this, it is essential that he should keep in his memory the entire business transactions. It is impossible for the businessman to keep in his memory entire various, varied and complex transaction of the business. Memory is not enough. There is must documentary evidence of every business transaction. It required systematic and scientific record of all the transactions of financial nature.

Financial transactions have an effect on the assets, liabilities and capital of the business. For example, commencement of business, purchase of goods, machinery and furniture, sale of goods, payment of wages, rent, salaries, repair and maintenance etc.

We can ascertain the result of business in terms of profit and loss and value of assets and liabilities, if maintain systematic, proper, orderly and scientific record of the business transactions. In other words, it requires proper accounting.

Cont…..

Identifying business transaction is the first steep of accounting. These transaction are recorded in the subsidiary books and journal proper. With the help of these books we prepare ledger accounts. The balance shown by ledger accounts are used for preparing trial Balance, which serves as bases of the preparation of Financial statement. Financial statement are classified as Income statement and position statement. Income statement consists of trading account which shown Gross profit/loss and profit and loss account showing Net profit or loss of the business. Finally position statement (Balance Sheet) is prepared, which reflect the true position of assets and liabilities of the business.

Definition of AccountingThe American Institute of Certified Public Accountants has defined the financial accounting as, “the art of recording, classifying, and summarizing in the significant manner & in term of money, transaction and events which are,in part, at least of a financial character and interpreting the result thereof”.

American accounting association defines accounting as, “the process of identifying, measuring and communicating economic information to permit informed judgment and by user of the information”.

Thus account may be defined as the process of recording, classifying, summarizing, analyzing and interpreting the financial transactionand communicating the result thereof to the persons interested in such information

An analysis of the definition bring out the following functions of accounting;

Recording:-

This is the basic function of accounting. It is essentially concerned with not only insuring that all business transaction of financial character are in fact recorded but also that they are recorded in the orderly manner. Recording is done in the book ‘Journal’.

Classifying:- Classification is concerned with the systematic analysis of the

recorded data, with a view to group transaction or entries of one nature at one place. The work of classification is done in the book of ‘Ledger’. This book contains on different pages individual account heads under which all financial transaction of similar nature are collected. For example, all expenses under these heads for Travelling expenses, printing and stationary, Advertising, etc.

Summarizing:-This involves presenting the financial data in a manner which is understandable and useful to the internal as well as external end-users of accounting statements. This process leads to the preparation of the following statement;

(i) Trial Balance, (ii) Income statement and (iii) Balance Sheet.

Dealing with financial transaction:- Accounting records only those transactions and events in term of money which are of a financial character. Transaction which are not a financial character are not recorded in the book of account. For example, Company has got a team of dedicated and trusted employees, it is of great use to the business but since it is not of a financial character and not capable of being expressed in term of money, it will not be recorded in the book of account.

Analyzing and interpreting:-This is the final function of accounting. The recorded financial data is analyzed and interpreted in a manner that the end-users can make a meaningful judgment about the financial condition and profitability of the business operations.

Communicating:-

The accounting information after being meaningfully analyzed and interpreted has to be communicated in a proper form and manner to the proper person. This is done through preparation and distribution of accounting report, which include beside the usual Income Statement and the Balance Sheet.

Importance of Accounting

1) To keep systematic records.2) To protect business properties.3) To ascertain the operational profit or loss.4) To ascertain the financial position of business.5) To facilitate rational decision making.

Limitations of Accounting

The main limitations of accounting are as follows:1. It does not disclose the present value of all

assets.2. Non – monetary factors are not considered.3. Impact of inflation is not properly assessed.4. Sometimes it is influenced by personal

judgments.5. Alternative treatments may be made for some

transactions and as a result it will influence the profit or loss of the business.

Basic Accounting Terms

Every subject has got its own terminology. Account also, as a subject has got its own terms. These terms have their specific meaning in accounting and use to express financial nature of the business.

Special feature of Business transaction are :-

Business transaction must be financial in nature. Business transaction must be supported by documentary

evidence Business transaction must be presented in numerical

monetary terms. Business transaction must cause an effect on assets,

liabilities, capital, revenue and expenses.

(1) AssetsThe valuable things owned by the business are known as assets.

Classifi cation of Assets

Fixed Asset

s

CurrentAssets

Fictitious Assets

Tangible

Assets

Intangible

Assets

Wasting Assets

Liquid Assets

Fixed AssetsThese assets are acquired for long term use of the business. They are not meant for sale. These assets increase the profit earning capacity of the business.

Expenditure on these assets is not regular in nature.Examples of Fixed assetsLand and building,

Plant and machinery,

Vehicles,

Furniture etc.

Current assetsThese assets, also known as circulating, fluctuating or floating assets change their value constantly. In the other words current assets are those assets, which are converted in to cash with in year. For Example:- cash in hand, cash at bank, debtors, stock etc. Suppose in business, cash in hand change so many times during the day. Opening balance in the morning was Rs. 2000, cash sale of Rs.6000, will make it Rs. 2000+6000=8000. Payment of salaries Rs.4000 will ,make it 8000-4000=4000. In this way cash balance will change with every cash transaction. There is always regular transaction regarding floating assets.

It should be noted that certain assets, which properly known

as Fixed may Proved to be current by virtue of their specific use

a. Land will be current assets in the hand of land developers and property dealers.

b. Building with the builders and property dealers.

c. Plant and Machinery with the manufacturers and dealers of plant and machinery.

d. Furniture with the furniture dealers.

e. Shares and Debentures with the dealers in security.

Fictitious Assets

Fictitious assets are those assets, which do not have physical form. They do not have any real value. They are not the real assets but they are called assets on legal and technical ground.Example of the assets are loss on issue of shares, advertising expenses and preliminary expenses

Tangible assetsAssets having physical existence

which can be seen and touched are known as tangible assets.

These assets are land, building, plant, equipment, furniture, stock and cash etc.

Intangible assets

These are the assets which are not normally purchase and sold in open market such as goodwill and patents. It does not means that these assets are never purchase and sold. They may be purchase and sold in special circumstances.

Wasting assets

Assets, whose value goes on declining with the passage of time are known as wasting assets. Assets taken on lease are its example.

Liquid assets are those assets, which are converted in to cash at short notice.Liquid assets = Current assets-(stock + prepaid expenses)

Liquid Assets

(2) Capital

It is the part of wealth which is used of further production and thus capital consists all current and fixed assets. Capital should need not necessarily be in cash, it may be in kind also.

Classification of Capital

Fixed capital Floating capital Working capital

Fixed Capital

The amount investing in acquiring Fixed assets is called fixed capital. The money is blocked in in fixed assets and not available to meet the current liabilities. Plant and Machinery, Land and Building, Furniture and vehicle etc. are some of the example of fixed capital.

Floating CapitalAssets purchase with the intention of sale, such as stock and investment are termed as floating capital.

Working CapitalThe part of capital is available with the firm for day to day working of the business is known as working capital.

Working capital = Current assets – Current liabilities.

(3) Equity or Liability

Liability are the obligations or debts payable by the enterprise in future in the form of money or goods. It is proprietors and creditors claim against the assets of the business.

Classification of Equity or Liability

Liability to owners or Owners Equity

Creditors for Expenses

Liability to Creditors or Creditors Equity

Creditors for Goods Creditors for Loan

(A)Liability to owners or Owners equityIt is the owners claim against the assets of the business, generally known as capital. It is technically known as internal equity or share holders funds. it is also expressed as :-

Owners equity or internal equity = Capital + Profit earned + Undistributed (Share holders Fund) profit + Interest on capital – Expenses.

(B) Liability to creditors or Creditors equityIt is creditors claim against the assets of the business. These creditors are:-

a) Creditors for goods. Business has to purchase goods on credit, so the suppliers of goods of the business on credit are known as creditors for goods. They may be called as creditors or bills payable.

b) Creditors for loan. These Creditors are the parties, bank and other financial institutions. The liability is named as Bank loan, Bank overdraft.

c) Creditors for Expenses. Certain expenses may concern the accounting period but may remain unpaid. These expenses may be outstanding salaries, rent due, wages unpaid. It is the current liability of the business.

(4) Financial statementStatement prepared by enterprise at end of accounting year to assess the status of income and assets is termed as financial statement. It is categorized as income and position statement, traditionally known as Profit and Loss Account and Balance sheet.

(5) Accounting EquationAccounting rotates around three basic terms. These terms are Assets, Liabilities and Capital. The true inter-relationship between these terms is represented as Accounting Equation.

Assets = Liabilities + Capital

(6) StockThe goods available with the business for sale on a particular date is termed as stock. In the case of manufacturing enterprises stock is classified as :-

i. Stock of raw material. Raw material required for manufacturing of product in which the business deals is known as stock of raw material. Cotton in the case of cotton mill is its example.

ii. Stock of work in progress. It is the stock of partly finished and partly manufactured goods just as price of thread and unfinished cloth in the case of cotton mill.

iii. Stock of finished goods. Manufactured and ready goods for sale are known as finished goods. Finished cloth is its example.

(7) Debtors

The term ‘debtors’ represents the persons or parties who have purchased goods on credit from us and have not paid for the goods sold to them. They still owe to the business. For example, if goods worth Rs. 20,000 have been sold to Mahesh, he will continue to remain the debtors of the business so for he does not make the full payment. In case, he makes a payment of Rs. 16,000, he will remain to be debtor for Rs. 20,000- 16,000 = 4,000.

(8) CreditorsIn addition to cash purchases the firm has to make credit purchase also. The seller of goods on credit to the firm are known as its creditors for goods. Creditors for liability of the business. They will continue to remain the creditors of the firm so for the full payment is not made to them. Liability to creditors will reduce with the payment made to them.

Thank you…..

INDU GUPTAB-Com, M.B.A,