Book Keeping and Accounting (class 11)
BOOK – KEEPING
Recordkeeping/Bookkeeping—is a recording of transactions and events, either manually or electronically of an organization’s day-to-day activities. Recordkeeping is only ONE part of accounting.
Objectives or Functions of Book Keeping
- To Identify the Financial Transaction: Book-keeping is only concerned with financial transactions. It, therefore, identifies the transactions, which can be measured in monetary terms, and ignores those which are non-financial in nature.
- To Classify Financial Transaction: Book-keeping classifies financial transactions into three types – personal, real, and nominal transactions. After classifying transactions, it keeps records of these transactions accordingly.
- To Keep Permanent Records: Book-keeping keeps the permanent records of financial transactions in a systematic manner in various books such as journals, ledgers, and subsidiary books.
Accounting: -
Accounting is the art of recording, classifying, summarizing, and analyzing financial transactions of an organization to provide economic and financial information for managers and other internal users. Accounting is the language of business and it is called the business of language because all organizations set up an accounting information system to communicate data to help people make better decisions.
Objectives of Accounting:
As an information system, the basic objective of accounting is to provide useful information to the interested group of users, both external and internal. The necessary information, particularly in the case of external users, is provided in the form of financial statements, profit and loss accounts, and balance sheets. Besides these, the management is provided with additional information from time to time from the accounting records of the business. Thus, the primary objectives of accounting include the following:
- Maintenance of Records of Business Transactions: Accounting is used for the maintenance of a systematic record of all financial transactions in the book of accounts. As a human memory is limited, it is difficult for a person to accurately remember all the transaction such as purchases, sales, receipts, payments, etc. that takes place in business every day. Hence, proper and complete records of all business transactions are kept regularly. Moreover, the recorded information enables verifiability and acts as evidence.
- Calculation of Profit and Loss: The owners of a business are keen to have an idea about the net results of their business operations periodically, i.e. whether the business has earned profits or incurred losses. Thus, 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 a record of incomes and expenses relating to the business by preparing a profit or loss account for the period. Profit represents the excess of revenue (income), over expenses.
- To show 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 a business organization (Assets) and claims against such resources (Liabilities) facilitates the preparation of a statement known as a balance sheet position statement.
- Providing Accounting Information to its Users: The accounting information generated by the accounting process is communicated in the form of reports, statements, graphs, and charts to the users who need it in different decision situations. As already stated, there are two main user groups, viz. internal users, mainly management, who need timely information on cost of sales, profitability, etc. for planning, controlling, and decision-making, and external users who have limited authority, ability, and resources to obtain the necessary information and have to rely on financial statements (Balance Sheet, Profit, and Loss account).
Functions / Importance of Accounting:
- To record financial transactions: A business entity performs various transactions. A businessperson cannot remember all details of transactions for a long time. Therefore, these transactions are recorded in a set of books. This part of accounting is called the recording function.
- To determine profit or Loss: Determining the profit or loss of a business concern is another important function of the accounting discipline. The recorded data are classified and summarized, and a statement like a profit and loss account is prepared.
- To ascertain the financial position of the business: A business entity also wants to know about its financial position, meaning the position of assets and liabilities during a certain period. Accounting discipline also serves the business organization in this regard by preparing a balance sheet at the end of a certain period.
- To communicate the financial information to the users: The accounting functions do not complete only by recording, classifying, and summarizing the financial transactions. The accountants should also communicate interpreted data to those who have to use them i.e., managers, owners, creditors, etc. Thus, communicating is also one of the most important functions of accounting, which is done through an annual report.
Process of Accounting:
- Documenting the Transactions: The recording process of accounting starts only when it is confirmed that the transaction has occurred. Business documentation is factual documents. The business can use a cash register, purchase invoice, and time card as the source documents.
- Analyzing the Transactions: For each transaction, it is essential to analyze its effect on the accounting equation. In other words, the accounts involved in each transaction should be analyzed in terms of the amount to be recorded and their effect on the accounting equation.
- Recording the Transaction: Recording transactions is documenting permanently the financial transactions in a set of books of account. The day-to-day financial transactions made by business concerns should be recorded primarily in the books of journals. The book is further subdivided into various subsidiary books such as cashbook, purchase book, purchase return book, and sales return book. Manual, mechanical, or electronic methods are employed for recording business transactions.
- Summarizing the Transactions: Once transactions have been analyzed and recorded in the journal, it is necessary to classify and group all similar items. The posting of all journal entries to appropriate accounts is essential for summarizing the effect of transactions. Posting is no more than sorting all journal entry amounts by account and copying those amounts to the appropriate ledger account. After posting into the appropriate ledger account, the balance obtained from each ledger account is transferred to the trial balance. The trial balance obtained from each ledger account is transferred to the trial balance.
- Preparation of Financial Statements: After summarization of the effects of financial transactions, the next in the accounting process is to present the effects in good form of financial statements. The trading account, profit, and loss account, and the balance sheet are prepared to determine the profit and loss situation, and the financial position respectively.
- Reporting the Financial statements: In the final step, the financial statements are to be reported in a good form to the users of accounting information. The users interpret the results obtained from financial statements to analyze the present scenario of the business concern and forecast its future. The manager and owner of a business firm identify in what position they are in and what necessary actions should be taken for future betterment.
Branches of Accounting / Types of Accounting:
Financial accounting:
Financial accounting is charged with the primary responsibility of external reporting. The users of the information generated by financial accounting, like bankers, financial institutions, regulatory authorities, government, investors, etc. want the accounting information to be consistent so as to facilitate comparison. Therefore, financial accounting is based on certain concepts and conventions which include a separate business entity, going concern concept, money measurement concept, cost concept, dual aspect concept, accounting period concept, matching concept, realization concept, and conventions of conservatism, disclosure, consistency, etc. All such concepts and conventions would be dealt with in detail in subsequent lessons
Management Accounting:
Management accounting facilitates the management by providing accounting information in such a way that it is conducive to policymaking and running the day-to-day operations of the business. Its basic purpose is to communicate the facts according to the specific needs of decision-makers by presenting the information in a systematic and meaningful manner. Management accounting, therefore, specifically helps in planning and control. It helps in setting standards and in case of variances between planned and actual performances, it helps in deciding the corrective action.
Cost Accounting:
One important variant of management accounting is cost analysis. Cost accounting makes elaborate cost records regarding various products, operations, and functions. It is the process of determining and accumulating the cost of a particular product or activity. Any product, function, job, or process for which costs are determined and accumulated, are called cost centers. The basic purpose of cost accounting is to provide a detailed breakup of costs of different departments, processes, jobs, products, sales territories, etc. so that effective cost control can be exercised.
Difference Between Book-Keeping and Accounting
Book-Keeping | Accounting |
It is an act of recording financial transactions of a business concern in various books such as journals, ledgers, and subsidiary books. | It is an act of summarizing, analyzing, and interpreting transactions recorded in the books of accounts and interpreting financial information to the different users. |
It is routine and clerical in nature. The financial transactions are recorded often repetitively. | It is judgmental or analytical in nature. |
The main purpose of book-keeping is to keep permanent records of financial transactions. | The purpose of accounting is to determine the profit or loss of a business concern and access its financial position at the end of a certain period. |
It is a part of accounting. | It includes book-keeping in itself |
The person who is responsible to maintain book-keeping is called a “book-keeper”. | The person who is responsible for handling the accounting of an organization is called an “accountant”. |
The bookkeeper does not require specialized knowledge to record the financial transaction. Simple knowledge about and posting the transactions into the ledger is enough for the recording process. | The accounting process requires specialized knowledge and analytical skill. |