INTRODUCTION

In all activities (whether business activities or non-business activities) and in

all organizations (whether business organizations like a manufacturing entity or
trading entity or non-business organizations like schools, colleges, hospitals, libraries,
clubs, temples, political parties) which require money and other economic resources,
accounting is required to account for these resources. In other words, wherever money
is involved, accounting is required to account for it. Accounting is often called the
language of business. The basic function of any language is to serve as a means of
communication. Accounting also serves this function.

MEANING AND DEFINITION OF BOOK- KEEPING

Book- keeping includes recording of journal, posting in ledgers and balancing
of accounts. All the records before the preparation of trail balance is the whole subject
matter of book- keeping. Thus, book- keeping many 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 that the true state of businessman’s affairs can be
correctly ascertained. Here it is important to note that only those transactions related
to business are recorded which can be expressed in terms of money.

Definition
“Book- keeping is the art of recording business transactions in a systematic
manner”. A.H.Rosenkamph.
“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

 Book- keeping provides a permanent record of each transactions.
 Soundness of a firm can be assessed from the records of assets and abilities
on a particular date.
 Entries related to incomes and expenditures of a concern facilitate to know
the profit and loss for a given period.
 It enables to prepare a list of customers and suppliers to ascertain the
amount to be received or paid.
 It is a method gives opportunities to review the business policies in the
light of the past records.
 Amendment of business laws, provision of licenses, assessment of taxes
etc., are based on records.
ACCOUNTING
Meaning of Accounting
Accounting, as an information system is the process of identifying, measuring
and communicating the economic information of an organization to its users who need
the information for decision making. It identifies transactions and events of a specific
entity. A transaction is an exchange in which each participant receives or sacrifices
value (e.g. purchase of raw material). An event (whether internal or external) is a
happening of consequence to an entity (e.g. use of raw material for production). An
entity means an economic unit that performs economic activities.

Definition of Accounting
American Institute of Certified Public Accountants (AICPA) which defines
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 a
financial character and interpreting the results thereof”.
Objective of Accounting
Objective of accounting may differ from business to business depending upon
their specific requirements. However, the following are the general objectives of
accounting.
 Keeping systematic record: It is very difficult to remember all the
business transactions that take place. Accounting serves this purpose of record
keeping by promptly recording all the business transactions in the books of
account.
 To ascertain the results of the operation: Accounting helps in
ascertaining result i.e., profit earned or loss suffered in business during a
particular period. For this purpose, a business entity prepares either a Trading
and Profit and Loss account or an Income and Expenditure account which
shows the profit or loss of the business by matching the items of revenue and
expenditure of the same period.
 To ascertain the financial position of the business: In addition to profit,
a businessman must know his financial position i.e., availability of cash,
position of assets and liabilities etc. This helps the businessman to know his
financial strength. Financial statements are barometers of health of a business
entity.
 To portray the liquidity position: Financial reporting should provide
information about how an enterprise obtains and spends cash, about its
borrowing and repayment of borrowing, about its capital transactions, cash
dividends and other distributions of resources by the enterprise to owners and
about other factors that may affect an enterprise’s liquidity and solvency.
 To protect business properties: Accounting provides up to date
information about the various assets that the firm possesses and the liabilities
the firm owes, so that nobody can claim a payment which is not due to him.
 To facilitate rational decision – making: Accounting records and
financial statements provide financial information which help the business in
making rational decisions about the steps to be taken in respect of various
aspects of business.
 To satisfy the requirements of law: Entities such as companies, societies,
public trusts are compulsorily required to maintain accounts as per the law
governing their operations such as the Companies Act, Societies Act, and
Public Trust Act etc. Maintenance of accounts is also compulsory under the
Sales Tax Act and Income Tax Act.

Users of financial information and their requirements

 Owners: The owners provide funds or capital for the organization. They
possess curiosity in knowing whether the business is being conducted on
sound lines or not and whether the capital is being employed properly or not.
Owners, being businessmen, always keep an eye on the returns from the
investment. Comparing the accounts of various years helps in getting good
pieces of information.
 Management: The management of the business is greatly interested in
knowing the position of the firm. The accounts are the basis, the
management can study the merits and demerits of the business activity.
Thus, the management is interested in financial accounting to find whether
the business carried on is profitable or not. The financial accounting is the
“eyes and ears of management and facilitates in drawing future course of
action, further expansion etc.”
 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. The progress and
prosperity of the firm, two which credits are extended, are largely watched
by creditors from the point of view of security and further credit. Profit and
Loss Account and Balance Sheet arenerve centres to know the soundness of
the firm.
 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 the bread. The demand for wage rise, bonus, better working conditions
etc. depend upon the profitability of the firm and in turn depends upon
financial position. For these reasons, this group is interested in accounting.
 Investors: The prospective investors, who want to invest their money in a
firm, of course 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. For this, this group is eager to go
through the accounting which enables them to know the safety of
investment.
  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. To
compile national accounting is essential.
 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 less price to
be paid by the consumers. Researchers are also interested in accounting for
interpretation.
 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. To make a study into the financial operations of a particular
firm, the research scholar needs detailed accounting information relating to
purchases, sales, expenses, cost of materials used, current assets, current
liabilities, fixed assets, long-term liabilities and share-holders funds which is
available in the accounting record maintained by the firm.
Functions of Accounting
 Record Keeping Function: The primary function of accounting relates to
recording, classification and summary of financial transactions-journalization,
posting, and preparation of final statements. These facilitate to know operating
results and financial positions. The purpose of this function is to report
regularly to the interested parties by means of financial statements. Thus
accounting performs historical function i.e., attention on the past performance
of a business; and this facilitates decision making programme for future
activities.
 Managerial Function: Decision making programme is greatly assisted by
accounting. The managerial function and decision making programmes,
without accounting, may mislead. The day-to-day operations are compared
with some predetermined standard. The variations of actual operations with
pre-determined standards and their analysis is possible only with the help of
accounting.
 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. Accounting is a base
and with its help various returns, documents, statements etc., are prepared.
 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.
The accounting shows a real and true position of the firm or the business.
Advantages of accounting
The following are the advantages of accounting to a business:
 It helps in having complete record of business transactions.
 It gives information about the profit or loss made by the business at the close of
a year and its financial conditions. The basic function of accounting is to
supply meaningful information about the financial activities of the business to
the owners and the managers.
 It provides useful information form making economic decisions,
 It facilitates comparative study of current year’s profit, sales, expenses etc.,
with those of the previous years.
 It supplies information useful in judging the management’s ability to utilise
enterprise resources effectively in achieving primary enterprise goals.
 It provides users with factual and interpretive information about transactions
and other events which are useful for predicting, comparing and evaluation the
enterprise’s earning power.
 It helps in complying with certain legal formalities like filing of incometax and
sales-tax returns. If the accounts are properly maintained, the assessment of
taxes is greatly facilitated.

Limitations of Accounting
 Accounting is historical in nature: It does not reflect the current financial
position or worth of a business. Transactions of non-monetary mature do not
find place in accounting.
 Accounting is limited to monetary transactions only. It excludes qualitative
elements like management, reputation, employee morale, labour strike etc.
 Facts recorded in financial statements are greatly influenced by
accounting conventions and personal judgements of the Accountant or
Management. Valuation of inventory, provision for doubtful debts and
assumption about useful life of an asset may, therefore, differ from one
business house to another.
 Accounting principles are not static or unchanging-alternative accounting
procedures are often equally acceptable. Therefore, accounting statements do
not always present comparable data
 Cost concept is found in accounting. Price changes are not considered. Money
value is bound to change often from time to time. This is a strong limitation of
accounting.
 Accounting statements do not show the impact of inflation.
 The accounting statements do not reflect those increase in net asset values that
are not considered realized.
Methods of Accounting
Business transactions are recorded in two different ways.
1.4.1 Single Entry
1.4.2 Double Entry
1.4.1. Single Entry: It is incomplete system of recording business transactions. The
business organization maintains only cash book and personal accounts of debtors and
creditors. So the complete recording of transactions cannot be made and trail balance
cannot be prepared.
1.4.2 Double Entry: It this system every business transaction is having a two fold
effect of benefits giving and benefit receiving aspects. The recording is made on the
basis of both these aspects. Double Entry is an accounting system that records the
effects of transactions and other events in atleast two accounts with equal debits and
credits.
1.4.3 Steps involved in Double entry system
(a) Preparation of Journal: Journal is called the book of original entry. It
records the effect of all transactions for the first time. Here the job of recording takes
place.
(b) Preparation of Ledger: Ledger is the collection of all accounts used by a
business. Here the grouping of accounts is performed. Journal is posted to ledger.
(c) Trial Balance preparation: Summarizing. It is a summary of ledge
balances prepared in the form of a list.
(d) Preparation of Final Account: At the end of the accounting period to
know the achievements of the organization and its financial state of affairs, the final
accounts are prepared.
1.4.4 Advantages of Double Entry System
i) Scientific system: This system is the only scientific system of recording
business transactions in a set of accounting records. It helps to attain the objectives of
accounting.
ii) Complete record of transactions: This system maintains a complete
record of all business transactions.
iii) A check on the accuracy of accounts: By use of this system the accuracy
of accounting book can be established through the device called a Trail balance.
iv) Ascertainment of profit or loss: The profit earned or loss suffered during
a period can be ascertained together with details by the preparation of Profit and Loss
Account.
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v) Knowledge of the financial position of the business: The financial
position of the firm can be ascertained at the end of each period, through the
preparation of balance sheet.
vi) Full details for purposes of control: This system permits accounts to be
prepared or kept in as much detail as necessary and, therefore, affords significant
information for purposes of control etc.
vii) Comparative study is possible: Results of one year may be compared
with those of the precious year and reasons for the change may be ascertained.
viii) Helps management in decision making: The management may be also
to obtain good information for its work, specially for making decisions.
ix) No scope for fraud: The firm is saved from frauds and misappropriations
since full information about all assets and liabilities will be available.
1.5 Meaning of Debit and Credit
The term ‘debit’ is supposed to have derived from ‘debit’ and the term ‘credit’ from
‘creditable’. For convenience ‘Dr’ is used for debit and ‘Cr’ is used for credit.
Recording of transactions require a thorough understanding of the rules of debit and
credit relating to accounts. Both debit and credit may represent either increase or
decrease, depending upon the nature of account.
1.6 Types of Accounting
Types of Accounts
The object of book-keeping is to keep a complete record of all the transactions
that place in the business. To achieve this object, business transactions have been
classified into three categories:
(i) Transactions relating to persons.
(ii) Transactions relating to properties and assets
(iii) Transactions relating to incomes and expenses.
The accounts falling under the first heading are known as ‘personal Accounts’.
The accounts falling under the second heading are known as ‘Real Accounts’, The
accounts falling under the third heading are called ‘Nominal Accounts’. The accounts
can also be classified as personal and impersonal. The following chart will show the
various types of accounts:
Accounts
Personal
Accounts
nal
Impersonal
Natural Groups/
Representative
Real Nominal
Tangible Intangible
Revenue,
and Gain
Expense
d loss
Artificial
or Legal
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1.6.1 Personal Accounts: Accounts recording transactions with a person or group of
persons are known as personal accounts. These accounts are necessary, in particular,
to record credit transactions. Personal accounts are of the following types:
(a) Natural persons: An account recording transactions with an individual
human being is termed as a natural persons’ personal account. eg., Kamal’s account,
Mala’s account, Sharma’s accounts. Both males and females are included in it
(b) Artificial or legal persons: An account recording financial transactions
with an artificial person created by law or otherwise is termed as an artificial person,
personal account, e.g. Firms’ accounts, limited companies’ accounts, educational
institutions’ accounts, Co-operative society account.
(c) Groups/Representative personal Accounts: An account indirectly
representing a person or persons is known as representative personal account. When
accounts are of a similar nature and their number is large, it is better tot group them
under one head and open a representative personal accounts. e.g., prepaid insurance,
outstanding salaries, rent, wages etc.
When a person starts a business, he is known as proprietor. This proprietor is
represented by capital account for all that he invests in business and by drawings
accounts for all that which he withdraws from business. So, capital accounts and
drawings account are also personal accounts.
The rule for personal accounts is: Debit the receiver
Credit the giver
1.6.2 Real Accounts
Accounts relating to properties or assets are known as ‘Real Accounts’, A
separate account is maintained for each asset e.g., Cash Machinery, Building, etc.,
Real accounts can be further classified into tangible and intangible.
(a) Tangible Real Accounts: These accounts represent assets and properties
which can be seen, touched, felt, measured, purchased and sold. e.g. Machinery
account Cash account, Furniture account, stock account etc.
(b) Intangible Real Accounts: These accounts represent assets and properties
which cannot be seen, touched or felt but they can be measured in terms of money.
e.g., Goodwill accounts, patents account, Trademarks account, Copyrights account,
etc.
The rule for Real accounts is: Debit what comes in
Credit what goes out
1.6.3 Nominal Accounts
Accounts relating to income, revenue, gain expenses and losses are termed as
nominal accounts. These accounts are also known as fictitious accounts as they do not
represent any tangible asset. A separate account is maintained for each head or