Meaning & Concept of Book-Keeping
Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business. Transactions include purchases, sales, receipts, and payments by an individual person or an organization/corporation. There are several standard methods of bookkeeping, including the single-entry and double-entry bookkeeping systems. While these may be viewed as “real” bookkeeping, any process for recording financial transactions is a bookkeeping process.
Objectives or Functions of Book-Keeping
The following are the main objectives or functions of book keeping:
1) To Identify Financial Transactions: Book keeping identifies financial transactions from a large number of business transactions to keep their record.
2) To Keep Permanent Record: It keeps permanent records of financial transactions as and when they arise in systematic order. It keeps permanent record of all the transaction of business for future reference.
3) To classify the transactions: Book keeping not only records all the identified transactions but also classifies them mainly into three types; personal, real and nominal account as per their nature and records them accordingly in permanent book.
4) To prepare statements: Book keeping helps to prepare different statements to summarize, present and interpret the final information contained in the routine records.
Need for Book-Keeping
One of the main reasons for bookkeeping is so records can be maintained to show the financial position of each and every head/account of income and expenditure. Through book-keeping, detailed information about each expense or income could be obtained instantaneously.
Say for example a company makes sales in both cash and credit. Each of these sale transactions will be recorded. When a credit sale is made, the creditor’s account will be recorded. So at any time, the management of the company can determine which creditors owe them how much money by just looking at the records/accounts.
Also, the maintenance of books of accounts and financial statements is a legal requirement in many cases. In the case of companies or banks or insurance companies, there are acts that require such firms to keep and maintain financial records. In such a case, book-keeping becomes mandatory.
Activities of Book-Keeping
Book-keeping comprises of a lot of functions and activities bundled together. Some such activities are
- Recording all financial transactions
- Posting debit and credits in the respective ledgers
- Producing and organizing all source documents such as invoices
- Payroll accounting and upkeep may also be clubbed in with book-keeping
Features of Book Keeping
The main features of book keeping are as follows:
1) Maintaining permanent records: Book keeping maintains permanent records of all financial transactions that take place in business. So, it can provide financial information and data to various users.
2) Helpful in ascertaining profit or loss: Book keeping keeps complete records of business transactions. Thus, profit or loss of business transaction can be easily ascertained.
3) Knowledge of financial position: Book keeping keeps the books of different business assets and liabilities in systematic manner. So, owners can always know about the financial position of business concern.
4) Helpful in detection and prevention of errors and frauds: Book keeping records all the business transactions scientifically and systematically which enable to detect errors and frauds that have already taken place. It also helps to take steps to prevent their recurrence.
Origin and Evolution of Book-Keeping
The exact date of origin of book-keeping is not yet known. Book-keeping in accounting sense is thought to have begun about 4000 BC.( It is that the practice of book-keeping begun with the invention of money in Lydia, Greece during 700 BC.) . The modern system of book keeping evolved in Italy during the 13th and 14th centuries. It is become well known to the world, when Luca De Pacioli published his book “SUMMA DE ATRIHMETICA, GEOMETRIC PROPORTION ET PROPOTIONALITE” in Venice Italy in 1494 AD. This book was the primary book of mathematics. The book contained a chapter titled ‘PARTICULARIS DE COMPUTIS ET SCRIPTURIS’, on which the principle of double entry system of book keeping was stated. In this book he introduced the following provision about the book-keeping:
- Memorials i.e. the Memorandum Book
- Geornal i.e. The Journal Book
- Quardimo i.e. Ledger Account
The first English translation of this book was published by Hugh Old Castle in 1543 AD, which popularized double entry book keeping system all over the word. Many improvements were made thereafter from time to time to the original form of double entry system as described by Luca Pacioli. A decade later, James Pule published his work how to keep a perfect account of debtor and creditor. Edward Jones, introduced the format of Journal with two column in 1795.
Today, the double entry system of book keeping has been established as the most scientific and systematic system of book-keeping and universally applied in all forms of entities. Therefore, Luca De Pacioli is regarded as the father of modern book keeping.
Meaning & Concept of Accounting
Accounting or accountancy is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the “language of business”, measures the results of an organization’s economic activities and conveys this information to a variety of users, including investors, creditors, management, and regulators. Practitioners of accounting are known as accountants. The terms “accounting” and “financial reporting” are often used as synonyms.
Objectives of Accounting
Main objectives of accounting are:
- To maintain a systematic record of business transactions
- Accounting is used to maintain a systematic record of all the financial transactions in a book of accounts.
- For this, all the transactions are recorded in chronological order in Journal and then posted to principle book i.e. Ledger.
2. To ascertain profit and loss
- Every businessman is keen to know the net results of business operations periodically.
- To check whether the business has earned profits or incurred losses, we prepare a “Profit & Loss Account”.
3. To determine the financial position
- Another important objective is to determine the financial position of the business to check the value of assets and liabilities.
- For this purpose, we prepare a “Balance Sheet”.
4. To provide information to various users
- Providing information to the various interested parties or stakeholders is one of the most important objectives of accounting.
- It helps them in making good financial decisions.
5. To assist the management
- By analysing financial data and providing interpretations in the form of reports, accounting assists management in handling business operations effectively.
Functions of Accounting
The main functions of accounting are to keep an accurate record of financial transactions, to create a journal of expenditure, and to prepare this information for statements that are often required by law. The most basic function is to record the data.
Scope of Accounting
Accounting is widely applicable in the business sector. Today, in the modern world, most of the people are engaged in business sector and all businessmen follow Generally Accepted Accounting Principle (GAAP) to find out profit, loss and financial position of business firm.
- Government organizations
Though, Government organizations do not follow Generally Accepted Accounting Principle (GAAP), its keep systematic records of all transactions in order to find the position of public fund.
- Non-Government organizations
Non-government and service organizations such as NGOS, INGOs, Red Cross Society, SOS etc which plays a vital role in the development of nation also uses accounting. The accounting system used in these organizations are called fund accounting.
Individuals also perform economic activities to earn their livelihood. They also perform some form of accounting to draw financial information for making personal economic decision.
Difference between Book-Keeping & Accounting
|Book-keeping consists of recording financial transactions in a logical fashion||Accounting concerns itself with summarizing of such recorded financial transactions|
|It is the basis of the process of accounting||Accounting is the basis for the Business Language|
|Financial statements are not a part of the bookkeeping||Preparing financial statements is the ultimate aim of accounting|
|Managers do not take decisions on the basis of bookkeeping records||Accounting records are used to assist managers in making decisions|
|Bookkeeping does not have any branches||Accounting has branches such as Cost Accounting, Management Accounting, etc|
|It is done by bookkeepers, who do not require any special skill or knowledge||Accountants, on the other hand, require special accounting knowledge and skills|
- Business entity concept: A business and its owner should be treated separately as far as their financial transactions are concerned.
- Money measurement concept: Only business transactions that can be expressed in terms of money are recorded in accounting, though records of other types of transactions may be kept separately.
- Dual aspect concept: For every credit, a corresponding debit is made. The recording of a transaction is complete only with this dual aspect.
- Going concern concept: In accounting, a business is expected to continue for a fairly long time and carry out its commitments and obligations. This assumes that the business will not be forced to stop functioning and liquidate its assets at “fire-sale” prices.
- Cost concept: The fixed assets of a business are recorded on the basis of their original cost in the first year of accounting. Subsequently, these assets are recorded minus depreciation. No rise or fall in market price is taken into account. The concept applies only to fixed assets.
- Accounting year concept: Each business chooses a specific time period to complete a cycle of the accounting process—for example, monthly, quarterly, or annually—as per a fiscal or a calendar year.
- Matching concept: This principle dictates that for every entry of revenue recorded in a given accounting period, an equal expense entry has to be recorded for correctly calculating profit or loss in a given period.
- Realisation concept: According to this concept, profit is recognised only when it is earned. An advance or fee paid is not considered a profit until the goods or services have been delivered to the buyer.