INTRODUCTION TO BOOK-KEEPING AND ACCOUNTANCY

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INTRODUCTION TO BOOK-KEEPING AND ACCOUNTANCYSamir K MahajanSamir K Mahajan

Meaning of Book-KeepingBook-keeping is the art of proper and systematic identification, and recording businesstransactions (such as assets, liabilities, capital, revenue and expenses etc.) in appropriate book ofaccounts (such as journal, cash and subsidiary books, ledger, trial balance). It is often routine andclerical in nature. Process of book keeping involves the following stepso Identifying accounting transactions (which may be money or money worth transactions withdocumentary evidence. Credit transactions are money worth transactions).o Records Initial accounting transactions such as journal, cash and subsidiary bookso Preparation of ledger accountso Preparation of trial balanceSamir K Mahajan

The objectives of book-keeping arei. to have permanent record of all the business transactions.ii. to keep records of income and expenses in such a way that the net profit or net loss may becalculated.iii. to keep records of assets and liabilities in such a way that the financial position of the businessmay be ascertained.iv. to know the names of the customers and the amount due from them.v. to know the names of suppliers and the amount due to them.vi. to have important information for legal and tax purposes.Samir K Mahajan

ACCOUNTINGMeaning of Accounting:Book-keeping does not present a clear financial picture of the state of affairs of a business.When one has to make a judgement regarding the finances of the firm, the informationcontained in the books of accounts has to be analysed and interpreted. It is with the purposeof giving such information that accounting came into being. Accounting is considered as asystem which collects and processes financial information of a business. These informationare reported to the users to enable them to make appropriate decisions.American Accounting Association defines accounting as “the process of identifying,measuring and communicating economic information to permit informed judgements anddecision by users of the information”.Samir K Mahajan

ACCOUNTINGMeaning of Accounting contd.All financial transactions which have documentary evidence are identifiedbusiness/accounting transactions. The financial transactions are processed to prepare:o Income statements to ascertain profit or loss of the business during accounting period.o Position statements to asses the value of assets and liabilities of the business.asVarious other statements are prepared, and ratios are calculated to measure the actualperformance of the business. Finally, results of the business transactions are communicated.Samir K Mahajan

ACCOUNTING contd.The main objectives of accounting are:i. to maintain accounting records.ii. to calculate the result of operations i.e. to calculate profit or lossiii. to ascertain the financial position i.e. balance sheetiv. to communicate the information to usersSamir K Mahajan

PROCESS OF nterpretingCommunicatingInformation to usersSamir K Mahajan

PROCESS OF ACCOUNTING contd.The main of accounting is to communicate information to the users . The process of accounting steps or functionsi. Identifying: Identifying the business transactions from the source documents such as vouchers.ii. Recording: Recording all business transactions in a systematic and orderly manner soon after their occurrence in thejournal or subsidiary books.iii. Classifying: Classifying the recorded business transactions such that transactions of similar type are grouped at oneplace. i.e., in ledger accounts. In order to verify the arithmetical accuracy of the accounts, trial balance is prepared.iv. Summarising : Summarising the classified information available in trial balance in order to prepare profit and lossaccount and balance sheet in a manner useful to the users of accounting information.v. Analysing: the financial statements such as profit and loss account and balance sheet are analysed is to identify thefinancial strength and weakness of the business. It provides the basis for interpretation.vi. Interpreting: Interpretation is concerned with explaining the meaning and significance of the relationship soestablished by the analysis. Interpretation should be useful to the users, so as to enable them to take correct decisions.vii. Communicating: The results obtained from the summarised, analysed and interpreted information arecommunicated to the interested parties.Samir K Mahajan

ACCOUNTING CYCLEBalance sheet(Closing)Profit & LossAccountTransactionJournalBalance sheet(Opening)An accounting cycle is acomplete sequence ofaccounting process, thatbegins with the recordingof business transactionsand ends with Trial BalanceSamir K Mahajan

ACCOUNTANCY, ACCOUNTING AND BOOK-KEEPINGAccountancy refers to a systematic knowledge ofaccounting. It tells us why and how to prepare thebooks of accounts and how to summarize theaccounting information and communicate it to theinterested parties.Accounting refers to the actual process of preparingand presenting the accounts. In other words, it is theart of putting the academic knowledge of accountancyinto practice.Book-keeping is a part of accounting and is concernedwith record keeping or maintenance of books ofaccounts.Book-keeping provides the basis for accounting.Accounting begins where book-keeping ends.Accountancy includes accounting and book-keeping.The terms Accounting and Accountancy are usedsynonymously.Samir K Mahajan

USERS OF ACCOUNTING INFORMATIONThe basic objective of accounting is to provide information which is useful for persons and groups inside and outside theorganisation. The users and their need for information are as followUsers Need for InformationUsers Need for InformationInternal Users (individuals or groups whoare within the organisation )i. Ownersi. To know the profitability and financial soundness of the business.ii. ManagementIi To take prompt decisions to manage the business efficiently.iii. Employees and Tradeiii. To form judgement about the earning capacity of the business since theirremuneration and bonus depend on itExternal (individuals or groups who areoutside the organisation)i.Creditors, banks and other lendinginstitutionsii. Present investorsiii. Potential investorsiv. Government and Taxv. Regulatory agenciesvi. Researchersi. To determine whether the principal the interest thereof will be paid in whendue.ii. To know the position, progress and prosperity of the business in order toensure the safety of their investment.iii. To decide whether to invest in the business or not.iv. To know the earnings in order to assess authorities the tax liabilities of thebusiness.v. To evaluate the business operation under the regulatory legislation.vi. To use in their research work.Samir K Mahajan

DISTINCTION BETWEEN BOOK-KEEPING AND ACCOUNTINGBasis ofDistinctionBook-keepingAccountingScopeRecording and maintenance of books ofaccountsIt is not only recording and maintenance of books ofaccounts but also includes analysis, interpreting andcommunicating the information.StagePrimary stage.Secondary stageObjectiveTo maintain systematic records of business To ascertain the net result of the business operationtransactionsNatureOften routine and clerical in nature.Analytical and executive in nature.ResponsibilityBook-keeper is responsible for recordingbusiness transactionsAn accountant is also responsible for the work of abook-keeper.SupervisionThe book-keeper does not supervise andcheck the work of an Accountant.An accountant supervises and checks the work of thebook-keeperStaff involvedWork is done by the junior staff of theorganisation.Senior staff performs the accounting workSamir K Mahajan

BRANCHES OF ACCOUNTINGIncreased scale of business operations has made the management function more complex. This has givenraise to specialised branches in accounting. The main branches of accounting are Financial Accounting,Cost Accounting and Management Accounting.Financial accounting : The purpose of this branch of accounting is to keep a record of all financialtransactions so that:(a) the profit earned or loss sustained by the business during an accounting period can be worked out,(b) the financial position of the business as at the end of the accounting period can be ascertained, and(c) the financial information required by the management and other interested parties can be provided.Cost Accounting : The purpose of cost accounting is to analyse the expenditure so as to ascertain the costof various products manufactured by the firm and fix the prices. It also helps in controlling the costs andproviding necessary costing information to management for decision-making.Samir K Mahajan

BRANCHES OF ACCOUNTING contd.Management Accounting : Management accounting deals with the provision of necessary accountinginformation to people within the organisation to enable them in decision-making, planning and controllingbusiness operations. Management accounting draws the relevant information mainly from financialaccounting and cost accounting which helps the management in budgeting, assessing profitability, takingpricing decisions, capital expenditure decisions and so on. Besides, it generates other information(quantitative and qualitative, financial and non-financial) which relates to the future and is relevant fordecision-making in the organisation.Such information includes: sales forecast, cash flows, purchase requirement, manpower needs, environmentaldata about effects on air, water, land, natural resources, flora, fauna, human health, social responsibilities, etc.Samir K Mahajan

Jul 01, 2017 · art of putting the academic knowledge of accountancy into practice. Book-keeping is a part of accounting and is concerned with record keeping or maintenance of books of accounts. Book-keeping provides the basis for accounting. Accounting begins where book-keeping ends. Accountancy includes accou

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