BOOK-KEEPING

According 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 Accounting
Accounting is the systematic recorded presentation of the
financial activity of business/Enterprise. Human activities
may be classified as economic and non-economic activities. Noneconomic 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 Accounting
The 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 transaction
and 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 endusers 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)
2)
3)
4)
5)

To
To
To
To
To

keep systematic records.

protect business properties.
ascertain the operational profit or loss.
ascertain the financial position of business.
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) Assets
The valuable things owned by the business are known
as assets.
Classifi cation of Assets

Fixed
Asset
s

Current
Assets

Fictitiou
s Assets

Tangibl
e
Assets

Intangib
le
Assets

Wasting
Assets

Liquid
Assets

Fixed Assets
These 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 assets

Land and building,
Plant and machinery,
Vehicles,
Furniture etc.

Current assets
These 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 assets
Assets

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

Liquid assets are those assets, which are

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

(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 Capital
Assets purchase with the intention of sale, such as stock
and investment are termed as floating capital.

Working Capital
The 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 Goods

Creditors for Loan

Liability to Creditors or
Creditors Equity

Creditors for
Expenses

(A)Liability to owners or Owners equity

It 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 equity

It 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 statement

Statement 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 Equation

Accounting 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) Stock

i.

ii.

iii.

The 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 :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.
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.
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) Creditors
In 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 GUPTA
B-Com, M.B.A,