Introduction

v Definition of Book–Keeping:–

“Book“Keepingis the art of recording business dealings in a set of books““J. R. Batliboi

“Book“Keeping is the science and art of correctly recording in books of account in all
those business transactions that result in the transfer of money or money“s worth“ “ R. N.
Carter

So Book“Keepingis the act of recording a trader“s business dealings in books of account

in such a manner that any subsequent time their nature and effect may be clearly
understood.

v Definition of Accounting:
Accounting is the art of recording, classifying and summarizing in a significant manner
and in terms of money, transactions and events which are in part at least of a financial
character and interpreting the results thereof.

According to American Accounting association "Accounting refers to the

process of identifying, measuring and communicating economic information to
permit informed judgment and decisions by users of the information".

According to Prof. Johnson "Accounting may be defined as the collection,

compilation and systematic recording of business transactions in terms of money,
thee preparation of financial reports, the analysis and interpretation of these reports
and the use of these reports for the information and guidance of management".

Finally we can say "Accounting is a service activity. Its function is to provide quantitative
information, primarily financial in nature, about economic entities that is intended to be
useful in making reasoned choices among alternative course of action".
v Object of Accounting:
The object of accounting can be described as follows:

01. To maintain a permanent and systematic record of business transaction.

 02. To ascertain the amount of profit earned or loss sustained at periodical
intervals.
03. To determine the amount which is owing to the trader (i.e. Accounts Receivable) and by
whom.
04. To find out the amount which is owing to the traders (i.e. Accounts Payable) and to
whom.
05. To ascertain the amount of capital or Deficiency of the trader in the business on any
particular date.
06. To supply the trader with necessary information to formulate policies for the future
courses of action.

v Advantages of Accounting:
The main advantages or benefit may be summarized as follows

01. It enables a trader to maintain a systematic record of all the transaction.

02. It enables the trader to ascertain clearly the result of his trading at any given period
i.e. whether he is trading at a gain or loss.
03. It affords necessary information with the least possible trouble and thus it enables
the trader to keep due control over his business affairs.
04. It helps the traders to ascertain the total amount owing to him and by whom.
05. It enables the trader to ascertain the total amount owing by him and to whom.
06. It helps the trader to ascertain the total assets and liabilities of his concern at any
particular date.
07. It enables the trader to co-ordinate the organization most economically and sound
basis.
08. It enables the trader to detect frauds and errors and prevent the same in due courses.

Nature of accounting information:

The nature/features/characteristics of accounting information can be discussed as

follows:

Relevance: It should be relevance with the present and future activity of the trader.
Timeliness: The accounting information should be send to user with in right time, i.e.
timeliness is the another feature of the accounting information.
Reliability: Accounting information should must be reliable.
Consistency: Accounting information should be consistent between the accounting
period, otherwise it will not helpful for decision making.
Cost benefit: In case of discloser of accounting information, the trader should
consider the cost benefit of the organization.

Users of accounting information:

There are two types of users of accounting information, such as "Internal Users" and
"External Users".

Internal users of accounting information are managers who plan, organize and run a
business. These include Marketing Managers, Production supervisors, Finance
Directors and Company officers.

There are several types of "External users of accounting information. They are as follows:

(i) Investor (owners) use accounting information to make decision to buy, hold or sell
stock.
(ii) Creditors, such as suppliers and bankers use accounting information to evaluate the
risks of granting credit or lending money.
(iii) Taxing Authorities, such as the internal revenue service, want to know whether the
company complies with the tax laws.
(iv) Regulatory agencies, such as Security Exchange Commission want to know whether the
company is operating within prescribed rules.
(v) Customers are interested in whether a company will continue to honor product
warranties and support it product times.
(vi) Labor unions want to know whether the owners can pay increased wages and
benefits.
(vi) Economic planners use accounting information to forecast economic activity.

Communication media of accounting information :

Generally accounting information disclose through the following media :

01. Oral communication.
02. Through phone, Telex, Fax etc mass media.
03. Discloser of accounting information through statements.
04. Through Newspaper.
05. Through periodicals.
06. Through charts, Diagrams, Pictogram.
07. Through confidential notes.

Branches of accounting:
Following are the branches of accounting:

01. General Accounting: The general accounting includes book keeping and also report
preparation including interpretation. General accounting can also be called financial
accounting.
02. Auditing: It involves the verification of records and the reports prepared by the
accountants of an enterprise, In order to check errors and frauds and to authenticate the
financial statements.

03. Cost Accounting: Cost accounting emphasizes the determination of business costs,
especially units costs of production and distribution.

04. Management Accounting: It is based upon the concept of accounting as a method of

management or as a tool by which managerial effectiveness is enhanced.

05. Budgetary Accounting: It refers to a systematic forecasting of business operations in

financial terms. It presents in an account form the transactions planned for the coming
period and summarizes these transactions in accounting statements.

06. Tax Accounting: It refers to the determination of the correct liability for taxes,
especially income taxes and social security taxes and preparation of necessary returns.
07. Industrial Accounting: It refers to the integration of financial accounting and cost
accounting for managerial planning and control of an industry.

08. Government and Municipal Accounting: It specializes in the transactions of political

units such as states and municipalities. It seeks to provide useful accounting information
with regard to the business aspect of public administration.
09. Social Accounting: Social Accounting is to deal with measurement of social and
national income and national wealth.

The need for accounting concepts and principles:

The development of accounting principles has been closely associated with the growth of
business. The business today has become large in size and complex in nature. Unlike in
the past when various need business accounts were largely needed by the proprietor,
today accounting statements parties namely, proprietors, creditors, potential investor's
and many others.

Proprietor's wants to read the well being of the business the present creditors want to
know about the solvency of the business and the prospective investors are interested in
the earning potential of the business.

In view of the utility of accounting statements to various interested parties. It is

necessary to recognize the urgency of a scientific approach to the recording and
reporting of business transactions. In the absence of scientific approach, accountants will
be free to use their own language and what ever they will be writing will not necessarily
be understand in the same sense by other persons concerned.

Thus the uniformity in understanding the accounting records is possible only when some
standard language is used.

With a view to making the accounting language a standard language, certain accounting
principles, concepts and conventions have been developed over a course of period.

Accounting Concepts and Conventions :

There is a difference of opinion as to the meaning and significance of the terms

"Concepts" and "Conventions". The term "Concept" is used to connote accounting
postulates, i.e. necessary assumptions or conditions upon which accounting are based.
Following is the list of accounting concepts agreed to by most of author's:

01. Entity concept: It requires that the activities of the entity be kept separate and
distinct from the activities of its owner.
02. Dual aspect concept: Under this assumption every transaction should have double
sided affairs one is debit and another is credit.

03. Going concern Concept: Under this assumption the business will continue for
unlimited period. On the basis of this concept, assets and liabilities are recorded at purchase
cost.

04. Accounting period concepts: Under this assumption the organizations determined
profit or loss at the end of each financial year.

05. Money measurement concepts: The organization records all those transactions that
are measurable in terms of monetary value.

06. Cost concept: Cost principles states that assets should be recorded at their cost.
Cost is the value something as acquired.
07. Accrual/Matching concept: All incomes and charges relating to the financial year
to which the accounts relate shall be taken into accounts, without regard to the date of
receipt or payment.

08. Objective evidence concept: This concept states that every transaction should have
documentary evidence.

Conventions:
The term "Convention" is used to signify customs or traditions as a guide to the
preparation of accounting statement. Following are the various accounting conventions:

01. Disclosure: Accountants are obliged to transmit all significant financial data
preferable in the body of the financial reports but also explanatory foot notes.

02. Materiality: This convention states that the trader should record the transaction which
is material/relevant with the business and which immaterial should be ignore.

03. Consistency: It required that once a company has decided on one of the methods, it will
treat all subsequent events of same character in the same fashion.

04. Conservatism or prudence: Revenue and profits should not be anticipated but
recognized only when they are realized in cash but liabilities and losses which have arisen
or likely to arise in respect of the financial year must be taken into account.
Generally Accepted Accounting Principles (GAAP):
The accounting profession has developed standards that are generally accepted and
universally practiced. The common set of standards is called GAAP. These standards
indicate how to report economic events. Two organizations are primarily responsibility
for establishing GAAP.

The first is the Financial Accounting Standards Boards (FASB). This private organization
establishes broad reporting standards of general applicability as well as specific
accounting rules.

The second standard setting group is the security exchange commission (SEC) the SEC is
government agency that required companies to file financial report following GAAP.

In general the FASB and SEC work hand in hand to assure that timely and useful
accounting principals are developed.

Capital Expenditure: Capital expenditure consists of all expenditures which result in the
acquisition of permanent assets, employed to run the business for the purpose of earning
revenue, not only in one accounting period, but in several periods. Such as cost of land
and building plant and machinery, tools and fixtures etc.

Revenue Expenditure: Revenue expenditure consists of those expenditures, which

result in the conduct and administration of the business. It also includes the cost of
maintenance of earning capacity including the upkeep of the fixed assets in productive
condition, e.g. office salaries, rent, taxes, insurance and commission etc.

Accounting Cycle :
The order or sequence in which accounting procedures are performed is known as
accounting cycle. As soon as transactions take place they are recorded in journalizing
and conclude in the post closing trial balance.

In brief the accounting cycle can be described as:

01. Recording: Recording the transactions in the journals or book of original entry.
02. Classifying: Transferring the entries from the journals to the ledger.
03. Summarizing: Preparing a trial balance from the debit and credit balances of ledger
accounts.

04. Preparing financial statements: Preparing the trading account, profit and loss
account and the balance sheet also taking into account all adjustments affecting the
period concerned.

05. Interpreting and analyzing those statements: Giving requisite Information to the
interested groups by calculating accounting ratio and by interpreting the performance of
the organization.

Principles of double entry system of Book Keeping :

The system of Book Keeping is originated fundamentally from the fact that in every
transaction there must be two accounts to complete it one account gives the benefit and
another account receives the same.

The account that receives the benefit is called "Debit" and the account gives the benefit
is called "Credit".

Therefore "The system of book keeping which is employed to record two fold aspects
i.e. both Dr. and Cr. of every transaction in money or money's worth in two different
accounts of the same set of Book is called double entry system of book keeping.

Does double entry means double work: Some traders think the double entry system
book keeping means double work. Such impression is absolutely wrong. As a matter of
fact this system does not arise from the quantity of work to the done but arises
fundamentally from the necessity of giving perfect reflection to each and every
transaction which is variable involves two parties or accounts.

In each transaction every debit must have a corresponding credit and vice versa. In order
to consider this double effect of transaction, there must be double entry in the books
of account. Therefore the impression (Double Entry means Double Works) is wrong. It
is called double entry as it gives a perfect reflection to the two-fold aspect of the
business transaction.
 Business Transaction

Transaction is the business dealings of a trader in regard to money or money's worth. A

Businessman in the normal course of his business activities has to perform various
types of dealings. Such as, purchasing, selling, receiving the price of the goods paying
money for rent and advertisement etc. All these business dealings are called business
transactions.

Classification of Accounts :
An account is a summarized form of a group of transactions or a particular class of
transactions. Such as Rahim A/C, Cash A/C, furniture Account. There are three types of
accounts such as:
01. Personal Account. 02. Real Account. 03. Nominal Account.

01. Personal Account: The account which refers to the name of firm or person is
called personal account e.g. Rahim account, Karim account, Sonali bank account,
Rahman and Brothers account.

02. Real Account: The account which refers to the assets or property is called real account
e.g. cash account, plant account, Machinery account, Accounts receivable account.

03. Nominal Account: The account which refers to the income and expenditure is called
Nominal account e.g. Rent Account, Salary account, Interest account, Commission account
etc.

Accounting equation: The relationship of assets liabilities and owner's equity can be
expressed as an equation as follows:

A(Assets) = L (Liabilities) + P (Proprietorship or owners equity).

This relationship is referred as the basic accounting equation.

Under the equation of accounting there are four types of accounts. Such as, 01. Income
account. 02. Expenditure account. 03. Assets account and 04. Liabilities accounts.
Rules for determination of Debit (Dr.) and Credit (Cr. )

Under Traditional method the rules are as follows:

01. Personal account:Receiver of the benefit (Dr.)

Giver of the benefit (Cr.)

02. Nominal account:Expenditure/Loss (Dr.)

Income/Profit/Revenue (Cr.)

03. Real account: What comes in the business (Dr.)

What goes out from the business (Cr.)

Under Modern method/Accounting equation method the rules are as follows:

01. Assets Account:Increase in Assets““Dr.

Decrease in Assets““.Cr.

02. Liabilities Account: Decrease in Liabilities“..Dr.

Increase in Liabilities““Cr.

03. Income Account:Decrease in Income““.Dr.

Increase in Income““Cr.

04. Expenditure Account:Increase in Expenditure“.Dr.

Decrease in Expenditure“Cr.

05. Owner“sEquity/Capital Account:

Decrease in Owner“sEquity“.Dr.
Increase in Owner“sEquity“.Cr.