Basics of Book Keeping and Accounting

Book Keeping is considered as a part of accounting which deals with systematic

record of transactions. But Accounting, on the other hand is the act of recording
the transactions, classifying them and summarizing the business financial
transactions to know the financial position of the business. Transactions which
include in booking are sales, purchases, receipts and payments including single
and double entry system.

Book Keeping is the work of a Book Keeper. He is the one responsible for
recoding of day-to-day transactions which are termed as “Day Books” and
thereafter accountant creates financial reports from the information recorded by
the Book Keeper.

It mainly refers to record-keeping of transactions aspects of financial accounting

and involves preparing source documents for all transactions, operations, and
other events of a business.

Book Keeping & Accounting may appear to be the same profession to an

untrained eye. Book keeping is a part of accounting. Only financial transactions
which can be recorded in money are recorded.

Book keeping (and accounting) involves the recording of a company's financial

transactions. The transactions will have to be identified, approved, sorted and
stored in a manner so they can be retrieved and presented in the company's
financial and other reports.

Book Keeping is mainly related to identifying, measuring and recording of

financial transactions.

“Book Keeping is an art of recording in books of accounts the monetary aspects

of financial transactions” – North Curt

Accounting is the process of summarizing, interpreting and communicating

financial transactions which are classified in the ledger account.

Accounting is a bookkeeping process that records transactions, keeps financial

records, performs auditing, etc. It is a platform that helps through many
processes, for example, identifying, recording, measuring and provides other
financial information.
Introduction to Financial Accounting
Introduction
Business is an economic activity conducted to earn profits and increase the
wealth of the owner. Business rules are based on general principles of trade
social values and the national or international boundaries legal framework.
While these variables the vary for different companies and regions, the basic
goal is to add value to the product or service in order to satisfy customer
demand

Through reporting all transactions related to the development of monetary

inflows of sales revenue and monetary outflows of operating expenses, a
business accounting system ensures an accountability. The accounting system
provides the financial information needed to assess the efficacy of both current
and past activities. The accounting system also provides the data required to file
reports that show the status of a business entity's borrower liabilities, ownership
equities and asset capital.

1.       Financial accounting meaning and function

Accounting is a business language which elucidates the various kinds of

transactions during the given period of time. Accounting is broadly classified
into three different functions viz. l Recording l Classifying and l Summarizing.

Accounting is treated as the language of business. It records all the transactions

which can be measured in money and have occurred in a particular period.
Accounts of a business provide useful information to its users.

Functions of Accounting

Accounting has a very broad scope and area of operation. Its use is not limited
only to the business world but is distributed throughout all facets of society and
all occupations. Nowadays, financial transactions must take place in any social
institution or professional practice, whether that is income generating or not.
Therefore, the need to record and summarize these transactions as they occur
emerges and there is a need to figure out the net result of the same after the
expiry of a certain fixed period.

 To keep systematic records- Accounting is performed to keep a

systematic record of financial transactions. The primary objective of
accounting is to help collect financial data and to record it
 systematically for the derivation of correct and useful results of
financial statements.
 To ascertain profitability -With the help of accounting, the profits and
losses incurred during a specific accounting period can be evaluated.
With the help of a Trading and Profit& Loss Account, the profit or
loss of a firm can be easily determined.
 To ascertain the financial position of the business - A balance sheet
or a statement indicates the financial position of a company as on a
particular date. A properly drawn balance sheet gives us an indication
of the value of assets, the nature and value of a liability, and also the
capital position of the firm. Thus, the soundness of any business entity
can be easily ascertained.
 To assist in decision-making- To take decisions for the future, there is
a need for accurate financial statements. One of the main objectives of
accounting is to take the right decisions at the right time. Thus,
accounting gives the platform to plan for the future with the help of
past records.
 To fulfil Law compliance- Business entities like organizations, trusts,
and societies are being run and governed according to different
legislative acts. Similarly, different taxation laws (direct-indirect tax)
are also applicable to every business house. It is required to keep and
maintain various types of accounts and records as prescribed by
corresponding laws of the land. Accounting helps in running a
business in compliance with the law.

Role of Accounting in Business

Appropriate and appropriate accounting system plays a vital role in the

successful operation of the enterprise. It also helps in determining production
costs, controlling the enterprise's internal as well as external activities,
forecasting profit, cost and sales, etc. Accounting also helps to locate errors,
to distribute dividends and bonuses to shareholders. Thus, accounting is
being used as a means to achieve the objective of the business. The other
advantages of the accounting are as follows:

 Helps in the determination of financial results and presentation of

financial position: Accounting is very useful in the determination of
the profit and loss of a business and demonstrating the financial
position of the business.

 Helpful to assess the tax liability: A business needs to pay the

corporate tax, VAT and excise duty, etc. Therefore, it is necessary that
 proper accounts should be maintained to compute the tax liability of
the business.

 Helpful in the valuation of business: If the business is shut down and

sold, accounting helps in the determination of the value of business. It
would be possible only in the case when the accounts of the business
are properly maintained.

 Helpful in the valuation of shares and goodwill: If accounts of the

business are properly maintained, it will be convenient to determine
the value of goodwill. Goodwill is very important for the
determination of the value of shares of the company.

 Accounting makes comparative statements possible: Proper and

adequate accounting helps in comparing the income, expenditure,
purchase, sale of the current year with that of the previous years. And
then future plans, policies and forecasting may be possible.

 Fund raising become easy: It helps in raising funds from investors or

financial institutions by promising investors a fixed claim (interest
payments) on the cash flows generated by the assets, with a limited or
no role in the day-to-day running of the business.

 Human memory replacement: As the human’s memory is limited and

short, it is difficult to remember all the transactions of the business.
Therefore, all the financial transactions of the business are recorded in
the books. By this way the businessmen cannot only see the records at
the required time but can also remember them for a long time. Thus,
recording of the transactions is the replacement of human’s memory.

Reference: Comprehensive Financial Accounting class12

NCERT text book class12
B Com semester1