Book Keeping

• Book-keeping can be defined as “ the science of recording transactions in money or money’s worth in such a manner that,at any subsequent day,the nature and effect of each transaction and the combined effect of all transactions,may be clearly understood.This is necessary so that the accounts prepared at any time from the record thus kept show the owner,his true financial position”.

Book-keeping is a must for

• Business enterprises-whether owned by small businessmen,partnerships,limited co’s,co-operative socities,public bodies like Life Insurance Corporation of India,Bombay Port Trust.

• Public charitable institutuions like educational institutions,hospitals,libraries,rotary clubs,lion clubs.

• Investors having diversified investments• Governments,municipalities,zilla parishads,gram panchayats• Maintenance of books of accounts will help in determinig

correct income for the purpose of incometax,sales for the purpose of sales tax production for the purpose of excise,other obligations under various laws

Accounting

• Accounting is the process of identifying,measuring,recording,classifying and communicating the economic information to the users who need it for decision making.

• The accounting cycle can be seen as 1)Journalising 2)Posting 3)Balancing 4)Trial Balance 5)Trading and P/L a/c 6)Balance sheet

• Accounting Information is used by Short-term creditors,Present Investors,Managements,Tax Authorities,Government,Long-term creditors,Potential Investors,Employees,Customers and Public

Advantages of Accounting

• Assists the Management.• Users to take Decisions• Ascertaining net result of operations• Facilitates to replace memory• Ascertainment of value of business• Acts as legal evidence• Helping in raising loans• Settlement of tax liability• Legal requirements• Ascertaining financial position• Comparative study• Control over assets

Basic Accounting Terminology

• Entity:An entity means an economic unit that performs economic activities (e.g Reliance Industries,Bajaj Auto)

• Transaction: A transaction is an exchange in which each participant receives value(for example,purchase of raw materials for cash or credit).It involves exchange of goods or services on cash or credit basis.

• Entry : Entry is the record made in the books of accounts in respect of a transaction.An entry is passed on the basis of vouchers.

Basic Accounting Terminology

• Debit:It is entry on the left hand side of the account.It represents the value received by an account.

• Credit:It is entry on the right hand side of the account.It represents the value paid by the account.

• Liabilities:It refer to the financial obligations of an enterprise other than owner’s funds.

• Current Liabilities:It refers to those liabilities which fall due for payment in a relatively short period(normally a period not more than 12 months) for e.g Bills Payable,Trade Creditors,Outstanding Expenses

• Long-term liabilities:It refers to those liabilities which do not fall due for payment in a relatively short period.For e.g. Long term loans,Debentures

Bill’s Receivables

• Receivables:The term ‘Receivables’ include both the trade debtors and Bills Receivable.A bill of exchange is an unconditional order in writing given by the creditor to the debtor to pay on demand or at a fixed or determinable future time,a certain sum of money to or to the order of a specified person or to the bearer.

• Trade Debtors:The term Trade debtor refers to the person from whom the amounts are due for goods sold or services rendered on credit basis.

e.g. Krishna sells good worth 1000 to Arjun.If arjun has not paid cash for these good,Arjun is debtor of Krishna.If State Bank of India gives aloan of Rs 10,000 to Anil &Co then Anil &Co is a debtor of State Bank of India.If Ajay borrows Rs 50 from Vijay,the Ajay is adebtor of Vijay

Creditor

• A customer,who has paid money in advance to a trader against purchases,is a creditor of that trader till the goods are supplied to him.As soon as the goods are supplied by the trader to the customer,the customer no longer remain a creditor and trader no longer remains a debtor.

Assets

• Assets refer to tangible or intangible rights of an enterprise which carry probable future benefits.An asset is a resource controlled by the enterprise as a result of part events and from which future economic benefits are expected to flow to the enterprise.

• Current assets are those assets which are held in the form of cash,for conversion into cash and for their consumption in the production of goods in the course of business.e.g Cash in Hand,Cash at Bank,Stock of Finished good,Debtors,Bills Receivable,Stock of Raw materials,Stock of Work in Progress etc

• Fixed assets:Fixed assets refer to those assets which are held for the purpose for providing or producing goods or Services and those that are not held for resale in the normal course of Business.Fixed assets may be classified as follows

• Tangible Fixed assets refer to those fixed assets which can be seen and touched For e.g. Land & Bldg Plant & Machinery and Furnitures and Fixtures

• Intangible Fixed assets refer to those fixed assets which cannot be seen and touched.For e.g Patent,Trade marks,Copy rights etc

Contingent Liabilities

• There are certain transactions for which payments are made but may or may not be paid in future on happening of or not happening of certain events.This is dependent on certain factors which may or may not take place.As there is no certainty of payment,there will not be any entry for payment or payment to be made.Instead,a note of the foot of balance sheet is made.

Capital

• A trade has his own assets and also has liabilities to pay.He has properties like goods,bank balance,cash balance,debtors etc.These are his assets.Similarly he has to pay his creditors.These are his liabilities.When assets are more than liabilities,the difference is called capital.Capital is the actual amount that belongs to the trader himself.

Drawings

• The trader who is the owner of the business withdraws some amounts from his business in cash.He may with draw this for his house hold expenses.The amount withdrawn are called drawings..Drawings are the amounts withdrawn from business.

Solvent & Insolvent

• An individual is considered to be solvent when his assets are more than his liabilities or at least equal to his liabilities, so that at any time he can pay off his liabilities fully.

• A person is considered insolvent when his liabilities are more than his assets.His liabilities exceed his assets.He is not in a position to pay off all his liabilities fully.

Concepts

• Revenue is the amount of earnings of an enterprise.When an enterprise sells goods or its products its receipts are income.

• Expenditure is the mount of money spent by an enterprise to earn the revenue or income.The money spent can be purchases of goods,payment of salaries to staff, and other items.

Concepts

• Capital expenditure:Capital expenditure is an expenditure the benefits from which are not exhausted in the year of spending.The benefits of such expenditures available over a number of years.

• Purchase or acquisition of fixed assets.• Expenditure incurred on construction of bldg or

erection of machinery• Purchase of tangible assets• Legal expenditure incurred for any of the above

Revenue Expenditure

• Revenue expenditure are not incurred for purchase of a capital assets but are incurred running the day to day business activities.

• Repair and maintenance of fixed assets

• Depreciation of fixed assets

• Purchase of goods materials,stores,etc

• Other day to day expenses.

Deferred Revenue Expenditure

• Certain revenue expenditure are heavily incurred and the benefits of which are likely to be available next year or couple of years. Heavy advertisement expense on introducing the product in the market is considered deferred revenue expenses.

• Depreciation:It indicates the fall in the value of a fixed assets.The fall in value can be due to wear and tear passage of time,constant use.Depreciation is an expense which does not involve any outgo of money unlike other expenes.

Concepts

• Purchases• Purchase Return• Sales• Sales Returns• Gross sales• Net Sales• Stock• Opening Stock• Closing Stock

Basic Accounting Concepts

• The business entity concept:A business as an accounting unit is always separate from its owners.For example Rajesh is the owner of the business firm named “Reliance Traders”.The firm is considered as separate entity from Rajesh.

• Concept of going Concern• Cost Concept:Accounting is based on cost.• A fixed asset is recorded at the price paid to acquire it

I.e at cost.Depreciation is then provided at cost• Goods meant for sale are taken at cost of its acquisition.

• Realisation Concept:-Profit is considered to have arisen only on sale of goods and supply of services I.e when it is actually realised in money or money’s worth.

• “Costs Attach” Concept :Costs are incurred at various stages – e.g buying in bulk,sorting,packing in smaller quantities.All these costs incurred at different times and paid to different people are “pooled or merged” together because of this concept.This is done to arrive at the final or total cost.

• Periodic matching of costs and revenue.

Accounting Convention

• Accounting convention is the rule or statement of practice which adopted as an accepted method or procedure either by a general agreement or by common consent.

• Convention of conservatism:This convention require that profit should not be taken in account unless it is actually realised.However all possible or probable losses must be provided for.

• Convention of Consistency :This convention indicates that a procedure once selected and adopted should be followed consistently during the successive accounting periods.If the financial statements of any co or any business unit are to be made comparable from year to year,they must be based on accounting principles applied consistently.

• Convention of disclosure :This convention means that all information of material nature must be fully disclosed in the financial statements.There should be adequate disclosures of all accounting information in the final accounts to be make them meaningful.

• E.g Contingent liabilities• Accounting methods and accounting policies

employed by the co.• Events subsequent to the balance sheet date.

• Convention of objective disclosure :Each accounting transaction must be supported by verifiable objective evidence or data. Since the amount of most assets, liabilities , income and expenses is evidenced by a transaction with some outsider,the amount itself is objectively determined and can be verified.However,sometimes it becomes necessary to make an estimate.This estimate ,to be dependable , must also be objectively determined as far as possible e.g. depreciation , provision bad and doubtful debts.

• Convention of materiality : This accounting convention means that the effect of all significant or material transactions must be disclosed or reported in conformity with the generally accepted accounting principles. Items that are material in amount and significance must be treated with full consideration of all other accounting concepts and conventions.

Principles of Double Entry Book-Keeping

• The fundamental principle of double entry book-keeping is that every transaction has two aspects.They are

• (1) Receiving the benefit,and• (2) Giving the benefit• A trader sells goods for Rs 1,000 in cash.This

transaction has two aspects.Firstly the goods have gone out.Goods account gives the benefit. Secondly,cash is received against the sale.Hence the benefit is received

Advantages of Double Entry

• Both the aspects of transactions are recorded simultaneously.They are equal in amount.Hence this system ensures arithmetical accuracy of accounts.

• Under the system,all business transactions are recorded,perfectly,completely and systematically.Hence, chances of frauds and errors are reduced.

• This system enables the accountant to prepare the annual accounts I.e the balance sheet and the profit and loss account.

Types of Accounts

• The accounts are of two types: (1) Personal accounts and (2) Impersonal accounts.

• Personal accounts are those accounts which relate to or pertain to any person.The person may be a customer or a supplier, lender or a borrower,banker or owner.

• Accounts other than personal accounts are known as impersonal accounts.Impersonal accounts can further be divided into two categories : (1) Real accounts or property accounts, and (2) Nominal accounts or fictitious accounts.

Golden Rules of Debit & Credit

• Personal Accounts:The personal account which receive the benefit is debited while personal account which gives the benefit is credited.In other words fundamental rule of debit and credit regarding personal account is “DEBIT THE RECEIVER AND CREDIT THE GIVER”

• Real Accounts : Real accounts deal with property or real assets like building , machinery,furniture,car goods,cash etc.For these real accounts the golden rule of debit and credit is “DEBIT WHAT COMES IN,CREDIT WHAT GOES OUT”.

• Nominal Accounts :Nominal accounts relate to expenses,losses,income and gains.These accounts are sources of revenue or expenses but nothing concrete or real remains.The fundamental rule of debit and credit regarding nominal account is “DEBIT EXPENSES AND LOSSES:CREDIT INCOMES AND GAINS”