Book-keeping
Accounting
Accounting is considered as a system which collects and processes financial information of a business.
American Accounting Association defines accounting as “the process of identifying, measuring and communicating economic information to permit informed judgments and decision by users of the information”.
Accounting Cycle
An accounting cycle is a complete sequence of the accounting process, that begins with the recording of business transactions and ends with the preparation of final accounts.
In short
Accountancy refers to a systematic knowledge of accounting. It explains “why to do” and “how to do” of various aspects of accounting. It tells us why and how to prepare the books of accounts and how to summarize the accounting information and communicate it to the interested parties.
Accounting refers to the actual process of preparing and presenting the accounts. In other words, it is the 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. It is often routine and clerical in nature.
Book-keeping provides the basis for accounting and it is complementary to accounting process. Accounting begins where book-keeping ends. Accountancy includes accounting and book-keeping. The terms Accounting and Accountancy are used synonymously.
Branches of Accounting
Financial Accounting :
It is concerned with the recording of business transactions in the books of accounts in such a way that operating result of a particular period and financial position on a particular date can be known.
Cost Accounting
It relates to the collection, classification, and ascertainment of the cost of production or job undertaken by the firm.
Management Accounting
It relates to the use of accounting data collected with the help of financial accounting and cost accounting for the purpose of policy formulation, planning, control and decision making by the management.
Transactions
Transactions are those activities of a business, which involve the transfer of money or goods or services between two persons or two accounts. For example, purchase of goods, the sale of goods, borrowing from the bank, lending of money, salaries paid, rent paid, the commission received and dividend received. Transactions are of two types, namely, cash and credit transactions.
- Cash Transaction is one where cash receipt or payment is involved in the transaction. For example, When Ram buys goods from Kannan paying the price of goods by cash immediately, it is a cash transaction.
- Credit Transaction is one where cash is not involved immediately but will be paid or received later. In the above example, if Ram, does not pay cash immediately but promises to pay later, it is credit transaction.
A person who owns a business is called its proprietor. He contributes capital to the business with the intention of earning the profit.
Capital
It is the amount invested by the proprietor/s in the business. This amount is increased by the number of profits earned and the amount of additional capital introduced. It is decreased by the number of losses incurred and the amounts are withdrawn.
For example, if Mr.Anand starts a business with Rs.5,00,000, his capital would be Rs.5,00,000.
Assets
Assets are the properties of every description belonging to the business. Cash in hand, plant, and machinery, furniture, and fittings, bank balance, debtors, bills receivable, the stock of goods, investments, Goodwill are examples of assets. Assets can be classified into tangible and intangible.
- Tangible Assets: These assets are those having physical existence. It can be seen and touched. For example, plant & machinery, cash, etc.
- Intangible Assets: Intangible assets are those assets having no physical existence but their possession gives rise to some rights and benefits to the owner. It cannot be seen and touched. Goodwill, patents, trademarks are some of the examples.
Liabilities refer to the financial obligations of a business. These denote the amounts which a business owes to others, e.g., loans from banks or other persons, creditors for goods supplied, bills payable, outstanding expenses, bank overdraft etc.
Drawings
It is the amount of cash or value of goods withdrawn from the business by the proprietor for his personal use. It is deducted from the capital.
Debtors
A person (individual or firm) who receives a benefit without giving money or money’s worth immediately, but liable to pay in future or in due course of time is a debtor. The debtors are shown as an asset on the balance sheet. For example, Mr.Arul bought goods on credit from Mr.Babu for Rs.10,000. Mr.Arul is a debtor to Mr.Babu till he pays the value of the goods.
Creditors
A person who gives a benefit without receiving money or money’s worth immediately but to claim in future is a creditor. The creditors are shown as a liability in the balance sheet. In the above example, Mr.Babu is a creditor to Mr.Arul till he receives the value of the goods.
Purchases
Purchases refer to the number of goods bought by a business for resale or for use in the production. Goods purchased for cash are called cash purchases. If it is purchased on credit, it is called as credit purchases. Total purchases include both cash and credit purchases.
Purchases Return or Return Outward
When goods are returned to the suppliers due to defective quality or not as per the terms of purchase, it is called as purchases return. To find net purchases, purchases return is deducted from the total purchases.
Sales
Sales refer to the number of goods sold that are already bought or manufactured by the business. When goods are sold for cash, they are cash sales but if goods are sold and payment is not received at the time of sale, it is credit sales. Total sales include both cash and credit sales.
Sales Return or Return Inward
When goods are returned from the customers due to defective quality or not as per the terms of sale, it is called sales return or returns inward. To find out net sales, sales return is deducted from total sales.
Stock
Stock includes goods unsold on a particular date. A stock may be opening and closing stock. The term opening stock means goods unsold in the beginning of the accounting period. Whereas the term closing stock includes goods unsold at the end of the accounting period. For example, if 4,000 units purchased @ Rs. 20 per unit remain unsold, the closing stock is Rs.80,000. This will be opening stock of the subsequent year.
Revenue
Revenue means the amount receivable or realized from the sale of goods and earnings from interest, dividend, commission, etc.
Expense
It is the amount spent in order to produce and sell the goods and services. For example, purchase of raw materials, payment of salaries, wages, etc.
Income
Income is the difference between revenue and expense.
Voucher
It is a written document in support of a transaction. It is a proof that a particular transaction has taken place for the value stated in the voucher. It may be in the form of cash receipt, invoice, cash memo, bank pay-in-slip etc. Voucher is necessary to audit the accounts.
Invoice
Invoice is a business document which is prepared when one sell goods to another. The statement is prepared by the seller of goods. It contains the information relating to name and address of the seller and the buyer, the date of sale and the clear description of goods with quantity and price.
Receipt
A receipt is an acknowledgement for cash received. It is issued to the party paying cash. Receipts form the basis for entries in the cash book.
Account
An account is a summary of relevant business transactions at one place relating to a person, asset, expense or revenue named in the heading. An account is a brief history of financial transactions of a particular person or item. An account has two sides called debit side and credit side.
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