Finance and Account Book Keeping

7/31/2019 Finance and Account Book Keeping

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Book Keeping

Book-keeping can be defined as the science of

recording transactions in money or moneys worth

in such a manner that,at any subsequent day,thenature 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 keptshow the owner,his true financial position.


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Book-keeping is a must for

Business enterprises-whether owned by smallbusinessmen,partnerships,limited cos,co-operative socities,publicbodies like Life Insurance Corporation of India,Bombay Port

Trust. Public charitable institutuions like educationalinstitutions,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 correctincome for the purpose of incometax,sales for the purpose ofsales tax production for the purpose of excise,other obligationsunder various laws


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Accounting

Accounting is the process ofidentifying,measuring,recording,classifying andcommunicating 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 andP/L a/c 6)Balance sheet

Accounting Information is used by Short-termcreditors,Present Investors,Managements,TaxAuthorities,Government,Long-term creditors,PotentialInvestors,Employees,Customers and Public


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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


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Basic Accounting Terminology

Entity:An entity means an economic unit thatperforms economic activities (e.g RelianceIndustries,Bajaj Auto)

Transaction: A transaction is an exchange in whicheach participant receives value(forexample,purchase of raw materials for cash orcredit).It involves exchange of goods or services oncash or credit basis.

Entry : Entry is the record made in the books ofaccounts in respect of a transaction.An entry is

passed on the basis of vouchers.


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Basic Accounting Terminology

Debit:It is entry on the left hand side of the account.Itrepresents 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 owners funds.

Current Liabilities:It refers to those liabilities which fall due

for payment in a relatively short period(normally a periodnot more than 12 months) for e.g Bills Payable,TradeCreditors,Outstanding Expenses

Long-term liabilities:It refers to those liabilities which donot fall due for payment in a relatively short period.For e.g.

Long term loans,Debentures


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Bills Receivables

Receivables:The term Receivables include both the tradedebtors and Bills Receivable.A bill of exchange is anunconditional order in writing given by the creditor to the

debtor to pay on demand or at a fixed or determinable futuretime,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 personfrom 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 notpaid cash for these good,Arjun is debtor of Krishna.If StateBank of India gives aloan of Rs 10,000 to Anil &Co then

Anil &Co is a debtor of State Bank of India.If Ajayborrows Rs 50 from Vijay,the Ajay is adebtor of Vijay


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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 tohim.As soon as the goods are supplied by

the trader to the customer,the customer no

longer remain a creditor and trader nolonger remains a debtor.


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Assets

Assets refer to tangible or intangible rights of an enterprisewhich carry probable future benefits.An asset is a resourcecontrolled by the enterprise as a result of part events and

from which future economic benefits are expected to flowto the enterprise.

Current assets are those assets which are held in the form ofcash,for conversion into cash and for their consumption inthe production of goods in the course of business.e.g Cash

in Hand,Cash at Bank,Stock of Finished good,Debtors,BillsReceivable,Stock of Raw materials,Stock of Work inProgress etc


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Fixed assets:Fixed assets refer to those assets whichare held for the purpose for providing or producinggoods or Services and those that are not held for resale

in the normal course of Business.Fixed assets may beclassified as follows

Tangible Fixed assets refer to those fixed assets whichcan 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.gPatent,Trade marks,Copy rights etc


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Contingent Liabilities

There are certain transactions for whichpayments are made but may or may not be

paid in future on happening of or nothappening of certain events.This isdependent on certain factors which may ormay not take place.As there is no certainty

of payment,there will not be any entry forpayment or payment to be made.Instead,anote of the foot of balance sheet is made.


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Capital

A trade has his own assets and also hasliabilities to pay.He has properties like

goods,bank balance,cash balance,debtorsetc.These are his assets.Similarly he has topay his creditors.These are hisliabilities.When assets are more than

liabilities,the difference is calledcapital.Capital is the actual amount thatbelongs to the trader himself.


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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 household expenses.The amount withdrawn are

called drawings..Drawings are the amounts

withdrawn from business.


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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 atany time he can pay off his liabilities fully.

A person is considered insolvent when his

liabilities are more than his assets.Hisliabilities exceed his assets.He is not in a

position to pay off all his liabilities fully.


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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 purchasesof goods,payment of salaries to staff, and

other items.


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Concepts

Capital expenditure:Capital expenditure is anexpenditure the benefits from which are notexhausted in the year of spending.The benefits ofsuch 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


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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.


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Deferred Revenue Expenditure

Certain revenue expenditure are heavily incurredand the benefits of which are likely to be availablenext year or couple of years. Heavy advertisementexpense on introducing the product in the market isconsidered deferred revenue expenses.

Depreciation:It indicates the fall in the value of afixed assets.The fall in value can be due to wearand tear passage of time,constant use.Depreciationis an expense which does not involve any outgo ofmoney unlike other expenes.


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Concepts

Purchases

Purchase Return

Sales Sales Returns

Gross sales

Net Sales

Stock

Opening Stock

Closing Stock


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Basic Accounting Concepts

The business entity concept:A business as anaccounting unit is always separate from its owners.Forexample Rajesh is the owner of the business firm

named Reliance Traders.The firm is considered asseparate 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 itI.e at cost.Depreciation is then provided at cost

Goods meant for sale are taken at cost of itsacquisition.


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Realisation Concept:-Profit is considered to havearisen only on sale of goods and supply of services I.ewhen it is actually realised in money or moneys

worth. Costs Attach Concept :Costs are incurred at various

stages e.g buying in bulk,sorting,packing in smallerquantities.All these costs incurred at different times

and paid to different people are pooled or mergedtogether because of this concept.This is done to arriveat the final or total cost.

Periodic matching of costs and revenue.


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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 bycommon consent.

Convention of conservatism:This convention

require that profit should not be taken in account

unless it is actually realised.However all possible orprobable losses must be provided for.


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Convention of Consistency :Thisconvention indicates that a procedure once

selected and adopted should be followedconsistently during the successiveaccounting periods.If the financialstatements of any co or any business unit

are to be made comparable from year toyear,they must be based on accountingprinciples applied consistently.


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Convention of disclosure :This convention meansthat all information of material nature must be fullydisclosed in the financial statements.There should

be adequate disclosures of all accountinginformation in the final accounts to be make themmeaningful.

E.g Contingent liabilities

Accounting methods and accounting policiesemployed by the co.

Events subsequent to the balance sheet date.


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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.


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Convention of materiality : This accountingconvention means that the effect of all

significant or material transactions must bedisclosed or reported in conformity with thegenerally accepted accounting principles.Items that are material in amount and

significance must be treated with fullconsideration of all other accountingconcepts and conventions.


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Principles of Double Entry Book-

Keeping The fundamental principle of double entry book-

keeping is that every transaction has twoaspects.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 havegone out.Goods account gives the benefit.Secondly,cash is received against the sale.Hencethe benefit is received


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Advantages of Double Entry

Both the aspects of transactions are recordedsimultaneously.They are equal in amount.Hencethis system ensures arithmetical accuracy ofaccounts.

Under the system,all business transactions arerecorded,perfectly,completely andsystematically.Hence, chances of frauds and errorsare reduced.

This system enables the accountant to prepare theannual accounts I.e the balance sheet and the profitand loss account.


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Types of Accounts

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

Personal accounts are those accounts which relateto or pertain to any person.The person may be acustomer or a supplier, lender or a borrower,bankeror owner.

Accounts other than personal accounts are knownas impersonal accounts.Impersonal accounts canfurther be divided into two categories : (1) Realaccounts or property accounts, and (2) Nominalaccounts or fictitious accounts.


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Golden Rules of Debit & Credit

Personal Accounts:The personal account

which receive the benefit is debited while

personal account which gives the benefit iscredited.In other words fundamental rule of

debit and credit regarding personal account

is DEBIT THE RECEIVER ANDCREDIT THE GIVER


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Real Accounts : Real accounts deal with

property or real assets like building ,

machinery,furniture,car goods,cash etc.Forthese real accounts the golden rule of debit

and credit is DEBIT WHAT COMES

IN,CREDIT WHAT GOES OUT.


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Nominal Accounts :Nominal accounts relate

to expenses,losses,income and gains.These

accounts are sources of revenue or expensesbut nothing concrete or real remains.The

fundamental rule of debit and credit

regarding nominal account is DEBITEXPENSES AND LOSSES:CREDIT

INCOMES AND GAINS

Finance and Account Book Keeping

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