Hseb Notes of Account- Book – Keeping and Accounting

Class 11 Accounting - Book Keeping

The word Book – Keeping has the combination of two words i.e. Book and Keeping. The word book means set of financial record and Keeping means the process of maintaining the records of  financial transaction in a systematic manner.

            Book-Keeping is a branch of knowledge, which is concerned with the recording of financial transaction of a business in a set of books systematically in a chronological order.

Objectives of Book – Keeping:

            The following are the important objective of book – keeping:

• To identify financial transaction:

Book – keeping identifies financial transactions from a large number of business transactions to keep their record.

• To keep permanent records:

It keeps permanent records of financial transaction as and when they arise in a systematic order.

• To classify transaction:

It classifies all financial transaction according to nature into three types personal, real & nominal and records them accordingly in a permanent books.

• To prepare statements:

It helps to prepare different statement to summarize, present & interpret the financial information contained in the routine records.

Origin and Evolution of Book – keeping

The exact date of the origin of book – keeping is not at known. It is said book – keeping is said to have originated with the invention of money in Lydia, Greece, during 700 BC. The modern double entry book – keeping system evolved in Italy during the 13^th & 14^th centuries. But, the world knew about it only after 1494 when Luca pacioli’s published the book intitled ‘Summa De Arithmetica Geometrica Proportione et Proportionalita’ that contained headed particulars de computis et Scripturis which describe the principals & procedure of double entry book – keeping. So, Luca is regarded as the father of modern book – keeping. Today, double entry system has been established as the most systematic and scientific system of book – keeping and is universally applied in all forms of entities.

Accounting:

Accounting can be defined as the process of recording, classifying and summarizing financial transaction of a business firm in such a manner that the results of its operations and financial position can be ascertained at the end of a given period, interpreting and communicating them to the users.

Features of Accounting:

The following are the features of accounting:

• Science and Art:

Accounting is a science as well as an art. It is a science that because it represents systematic body of knowledge based on a set of principle. It is also an art because it involves practical work in which one can fully exercise judgement.

• Process:

Accounting is a process of systematic recording, classifying, summarizing financial transaction and interpreting financial information to the user.

• Financial information:

Accounting deals only with financial information. Any information which is not expressed in monetary terms, is not considered in accounting.

• Information system:

Accounting is an information system because it uses financial transaction as inputs, processes them and provides financial information as it outputs to the decision maker.

• Functions:

Accounting is a function. So, it identifies and gathers financial transaction, classifies and summarizes them, interprets and reports their results to the users.

• Historical in nature:

Accounting involves recording of past transaction only so it is historical in nature.

• Based on principles:

Accounting is based on certain principles that guide how transaction should be recorded and reported.

Functions of accounting:

The main functions of accounting are as follows:

• Maintaining complete & systematic record:

The first function of accounting is to maintain permanent, complete and systematic records of all financial transaction of a business.

• Finding out the operating result & financial position:

Accounting helps to find out the result of business operation and financial position. They are obtained by preparing a Profit & Loss account & the balance sheet.

• Communicating accounting information:

Accounting communicates the information through various accounting reports to the users. They are owners, managers, creditors, employees, consumers and the government.

• Complying with legal requirements:

Some large-scale business are required to submit their accounting reports prepared under the double entry system by considering the Generally Accepted Accounting Principles (GAAP). So, important functions of accounting is to comply with such legal requirements.

• Protecting business properties:

A business uses different kinds of assets and properties for its purposes and they need protection from misuse and misappropriation. So, accounting helps to protect the assets by maintaining the record.

Scope of Accounting:

• Business:

Business is the largest field of accounting activity. Accounting is used in all business irrespective of their nature, kind and size. It is useful for determining profit or loss and financial structure in a business.

• Government:

The government is another important field of accounting activity. It is used in all government offices such as the center and operating level offices under government accounting.

• Non – Governmental organization:

Accounting is used in non-governmental organization and non-profit organization which are established to provide services to the general public. Hospitals, Red Cross Society, Scouts, etc. are non – profit organization and they have to record their incomes and expenditure during the year.

• Professionals and Individuals:

Accounting is useful to the professionals & individual to record their income and expenditure. After recording their financial transaction, they can find out their fund, position for making expenditures.

Difference between Book – keeping & Accounting:

Book – keeping	Accounting
It is an act of recording financial transaction.	It is an act of summarizing, presenting and interpreting the financial transaction.
It is routine in nature as the recording of financial transaction.	It is creative in nature as it needs judgement to present & interpret financial information.
It involves only record keeping part of accounting.	It involves the entire accounting process.
It is the primary stage.	It is the secondary stage.
Its main purpose is to make permanent records of financial transactions of a business.	Its main purpose is to determine the profit or loss and the financial position of a business.
It is maintained by a Clerk called a book – keeper.	It is maintained by a qualified person called an accountant.
It needs little knowledge and skill to perform it.	It needs specialized knowledge & skills to perform it.

Basic Accounting Concept:

• Business Entity Concept:

According to this concept, the business and the honour are set to have distinct identities and they should be treated as separate legal entities. This makes possible to record only the transaction of the business.

• Going Concern Concept:

While recording transactions in the books of account, it should be assumed that business will be carried on indefinitely & it exists for long period of time. All business transaction are recorded from this point of view. The long term expenditure such as the purchase of land, building & machinery that the business are recorded in books of account assuming that it will exist & run for a long period of time.

• Money Measurement Concept:

According to this concept, accounting should record only those facts which can be expressed in terms of money. This concept imposes a several limitation on the scope of accounting report. For Eg: Accounting doesn’t record the fact that a competitor has introduced a better product in the market.

• Accounting Period Concept:

The accounting period concept implies that for the purpose of recording financial information, the whole life of the business is divided into imaginary time intervals. Usually a period of 365 days is considered as the accounting period to ascertain the profit or loss and the financial position of a business and they are reported to their user such as owners, managers, creditors, etc.

• Cost Concept:

This concept implies that the cost of anything such as service or an assets is recognized when it is incurred & not when cash is paid for it. According to the concept, the cost is assumed to be incurred when the service or the asset is used to generate revenue.

• Revenue or Realization Concept:

The concept states that revenue is assumed to be earned when it is realized. According to the concept, revenue is realized when goods are transferred to the buyers and services are provided to the clients for cash, or for assets or anticipation of realizing the value of sales on a future date.

• Matching Concept:

This concept involves around the determination of the point of time when revenue is earned. A business firm invests money to purchase manufacture goods for resale. To earn profit, sales have to be made. There can be no profit without realization of proceeds. This concept is important in ascertaining the exact profit earned during a period in a business concern.