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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