Book Keeping and Accounting

Meaning & Concept of Book Keeping

Bookkeeping is the recording of financial transactions like sales, purchase, income, receipts and payment by an individual or organization. Bookkeeping is usually performed by a book-keeper. The accountant creates reports from the financial transactions recorded by the book-keeper and files from the government agencies. Single entry book-keeping system and the double-entry book-keeping system are the methods of book-keeping.

A book-keeper, also known as an accounting clerk or accounting technician, is a person who records day to day financial transaction of an organization. A book-keeper usually records the transaction in daybooks. The daybooks consist of purchases, sales, receipts, and payments. The bookkeeper is responsible for ensuring all transactions recorded in the correct day books, suppliers ledger, customer ledger and general ledger.

According to R.N Carter, "Book-keeping is the science and art of correctly recording in books of all those business transactions that result in a transfer of money or money`s worth."

Origin & Evolution of Book Keeping

The origin of book-keeping cannot be exactly traced out. However, it can be said that the book-keeping history is as old as of money. It has been practiced from the ancient period. In ancient period, business are in small scale and book-keeping was not essential to that extent. The increasing demand and needs of human beings, as well as the practice of currency gradually, began to influence the business activities. Scientific book-keeping system was commenced in Italy some 500 years ago. Luca pacific published a book entitled "Sum Made Arithmetical" for the first time which deal with the modern principal of book-keeping . Venetian monk "Luca Pacioli" is known as "The father of modern book-keeping". In that bookkeeping, he included the following provision about the book-keeping.

1. Memorial that is memorandum book.
2. Gestational that is journals book.
3. Quadrant that is ledger account.

Objective function of book-keeping

1. To have a permanent record of each transaction of the business.
2. To show the financial effect on the entity of each transaction recorded.
3. To ascertain the combined effect of all transactions on the financial position on a particular period.
4. To disclose the factors responsible for earning a profit or suffering a loss in a given period.
5. Determine tax liability of the business.
6. Prevention of errors and frauds.

Importance or Functions of Book Keeping

The importances of bookkeeping are as follows:

1. Manage Disputes Between Owners and Managers

Owners and managers are different person in an organization. They both have their own different interest. So, there may occur different disputes between them due to the difference in their interest. So, written records supported by documentary evidence are essential to avoid any mistrust or doubt among the owners and managers.

2. Preparations of financial statements

Business wants to know the profit earned or loss suffered during the year and its financial position at the end of the year. This is disclosed by income statement i.e. trading account, profit and loss account and balance sheet respectively. Book-Keeping records all the necessary data for preparing these statement.

3. Limitation of human memory

The capacity of human beings is limited as how much one can remember and that too for how long? Proper recording of records helps the business with the need of remembering.

4. Need of financial information

Book keeping is very important for the financial information and data are needed for cost ascertainment, planning, budgeting, and forecasting because it is the main source of such information.

5. Need of taxation authorization

Book – keeping records are regarded by the tax authorities as authentic and reliable for determination of tax liability.

Meaning and Concept of Accounting

According to R.N Anthony, " An accounting system is a means of collecting, summarizing, analyzing and reporting in monetary terms to the information of the business."

From the above definition:

• A reporting system that communicates relevant financial information to interested persons which allow them to assess performance, make decisions and control the economic resources in the organization.

• Accounting covers the act of recording transactions in the journal and other related books of accounts and analyzing it.

Objectives or Functions of Accounting

• To keep systematic records

Main objective of accounting is to keep the systematic record of financial transactions. In the absence of accounting, there would have been traffic burden on the human memory which makes the business organization impossible to bear.

• To ascertain the operational profit or loss

Accounting helps in ascertaining the net profit earned or loss suffered by an account while carrying the business. This is done by keeping a proper record of revenues and expenses during a particular period. While preparing profit and loss account, if the amount of revenue is more than the expenditure incurred in earning, then there is said to be a profit. In case if expenditure exceeds the revenue, there is said to be a loss.

• To ascertain the financial position of a business

The profit and loss account gives the amount of profit or loss made by the business during a particular period. However, it is not enough. The businessman must know about his financial position that is where he stands or what he owes and what he owns. This objective is served by the balance sheet or position statement.

• To facilitate rational decision-making

Accounting these days has taken upon itself the task of collection, analysis, and reporting of information at a particular time to the required levels of authority in order to facilitate a rational decision.

• Information system

Accounting functions as an information system for collecting and communicating economic information about the business enterprise. This information helps the management in taking appropriate decisions.

Scope of accounting

The scope of accounting means the areas or field system. In other words, it may be defined as all those sectors where the accounting is applied.

The major scope of accounting can be given below:

1. Government: Government should keep vouchers, forms and book as journal, budget sheet, cash book, statement of expenditure, etc.
2. Non-trading organization: Non-trading organization prepares a financial statement as well as balance sheet to ascertain the financial position and other efficiencies.
3. Trading concerns: Trading concerns are established to generate profit and also ascertain the profit or loss of the firm.
4. Professionals and individual: Professionals can be doctor, engineers, contractors, lawyers, etc. Thus, such different professionals and individuals should keep different books of accounts to find out the profit or loss account.

Importance of accounting

• Helps in Assistance management

Accounting provides information to the management to enable it to do its work properly. Such organizational information helps in planning, decision making and controlling.

• Helps in Comparative study

A systematic record enables a business to compare each year result with those of other years and locate significant factors leading to the change if any.

• Helps to show evidence in court

A systematic record of the transaction is often treated by courts as good evidence.

• Helps in evaluating the performance of business

As acoounting keeps the proper records of financial transactions, the accounting records reflects the results of operations as well as statement of financial position. Also various balance sheet and profit & loss accounts ratios are calculated which help user of financial statements to analyze the performance of an entity. For example debt equity ratio, Current ratio, Turnover ratio etc. Also we can compare previous period accounting data with current period as well as budgeted figures for variance analysis.

• Helps to manage and monitor cash flow –

The working capital and cash requirement of an enterprise can be duly taken care by proper accounting system. It also helps to manage and control the cash flow by properly maintaining the income and expenditures of an organization.

• Helps business to be statutory compliant –

Proper business accounting ensures timely recording of our liabilities which needs to be paid within the prescribed time line. This includes provident fund, pension fund, VAT, sales tax, Income tax. Timely payment of liabilities helps enterprises to be statutory compliant.

• Helps to create budget and future projections -

Accounting data helps an enterprise to prepare budget and forecast for future period. Business trends are projected based on past data produced by accounting system. So, accounting helps to take proper decision of future based on the financial records of past and present data.

• Helps in filing financial statements with regulators, stock exchanges and filing of tax returns –

Enterprises are required to file the financial statements with ROC. In case of listed entities the same is required to be filed with stock exchanges as well. For both indirect and direct tax filing purposes, financial statements and other financial information are required.

References:

Jogindar Goet, Bhesh Raj Banjade, Rajesh Kumar Dutta. (2012). Principal of Accounting. Kalamati, Kathmandu: Dreamland Publication Pvt Ltd

Sharma, Narendra et.al., Principles of Accounting-XI, Bundipuran Prakashan, Kathmandu

Koirala, Yadav Raj et.al., Principles of Accounting-XI, Asmita Books Publication, Kathmandu

Shrestha, Dasharaha et.al., Accountancy-XI, M.K. Prakashan Kathmandu