What is Book keeping? Definition,Objectives,Accounting Mechanics,Accounting Postulates,Terminology of Financial Accounting,Book keeping and Accounting Process

What is Book keeping?

The process of recording financial transactions in the books of accounts is called as bookkeeping. These transactions include sales, purchases, income and payments by an individual or organisation.

Bookkeeping is just recording of transactions. Bookkeeping is the base of accounting. Normally business organisations are using two types of bookkeeping systems: single entry system and the double-entry system of bookkeeping.

Table of Content

1 What is Book keeping?
2 Definition of Book keeping
3 Objectives of Book keeping
4 Accounting Mechanics
- 4.1 Double Entry System
5 Terminology of Financial Accounting
6 Accounting Documents
7 The other types of documents used in business are:
8 Accountant’s Responsibility
9 Accounting Measurement
10 Accounting Principles
11 Accounting Postulates
12 Book keeping and Accounting Process
13 FAQ
- 13.1 What is Book keeping?

Definition of Book keeping

The art of recording mercantile transactions in a regular and systematic manner, the art of keeping accounts in such a manner that a man may know the true state of his business and property by an inspection of his books.

“Book-Keeping is a science and art of maintaining transactions of money transfers entered in the books of accounts.

Objectives of Book keeping

The object of bookkeeping may be stated as under:

To have a permanent record of each transaction of the business and to show its financial effect to the business.
To find the collective effect of all the transactions made during an accounting period (usually a year) upon the financial position of the business.
To meet the legal requirements.
One of the main objectives of bookkeeping is to determine the sales, find the actual position of stock estimate the cash position of the business at a given point of time or for a particular period.

Accounting Mechanics

Generally, a business entity has multiple transactions every day during an accounting period and unless and until these transactions are analysed and recorded individually, it is very tough to determine the result of each transaction in the above two basic statements.

The business transactions may be recorded in various ways. However, the double entry system is the most suitable for this purpose.

Double Entry System

Under this system of double-entry bookkeeping, each and every transaction is split into two aspects and both these aspects are recorded without any exception, whatsoever, any change in the concern. Whenever there is any action, there must be opposite and equal reaction.

Each and every transaction is entered in the documents providing all the required information of the transaction. The most regular documents that are used are as under:

Payment Voucher

This is usually on a printed standard form and it is a record of payment. Whenever we pay for an expense, then mostly a bill is prepared which records full particulars of the claim by the person receiving payment. The accounts department prepares a voucher for every payment to be made.

Money Receipt

Money receipt is a document, which is issued whenever cash / cheque are received. This document is an evidence that a sum of money has been received from a person or organisation.

Journal Voucher

The journal voucher records all other residuary transactions. Any internal transaction or a transactions not involving any cash payment or cash receipt is posted in the journal voucher. Now payment and receipt are done through NEFT and RTGS, i.e. internet banking also.

Terminology of Financial Accounting

Event

It a process or part of process that occurs at a particular moment and has a definite place of occurrence. Events are the cause of external transactions.

Transaction

It refers to any act of the business that changes the financial position of the business unit.

Debit

It is the aspect of a financial transaction where we receive benefit.

Credit

It is the aspect of a financial transaction where we give benefit.

Entry

It is the process where we record the transaction in the books of accounts.

Assets

Anything of value owned by a business is known as,asset .

Liability

Anything owed, a debt, a claim of an outsider against the business is called a ‘liability’.

Accounts

An account is a summarised record and systematic arrangement of transactions for a period affecting a person, entity, expense, income, asset and liability.Accounts: An account is a summarised record and systematic arrangement of transactions for a period affecting a person, entity, expense, income, asset and liability.

Turnover

The total sales during a period, cash sales as well credit sales is called turnover.

Business

Any economic activity, which is legal and done with the intention of earning profit, is called business.

Capital

Capital represents the amount of funds invested by the owner in the business. It may be in the form of cash, goods or any other asset. Capital is always equal to the difference between total assets and liabilities.

Accounting Documents

The various types of documents which have been put to use for recording the occurrence of various business transactions are as under:

Official Receipts

These receipts are received whenever any payment is made over the counter to the cashier.

Cash Bills

This is proof of cash transaction which can be receipt or payment.

Bills

These documents are received and issued when payment is made or payment is received by a specified date. As for illustration: electricity, water, rent and assessment services, cash sales etc.

Invoices

These documents are issued when physical goods are purchased. It functions same as bills and the recipients have to pay dues within the dates mentioned. Invoice can be for sales also.

Delivery Orders

This refers to the quantity of goods that has been ordered. The order concerns the quantity and description of the goods that are ordered and is different from invoice These are the two documents that are received while purchasing goods or services. These documents are also issued to the clients during sale transactions.

Purchase invoice and „Supplier invoice are documents that clients receive. The company that supplies the goods prepares the Sales invoice.

The other types of documents used in business are:

Purchase Orders

To place orders for raw material or any assets as per specifications and quantity through proper documentation is called Purchase Order.

Clients Orders

Order received from clients is called Clients orders.

Credit Notes

These are documents issued to clients mentioning the credits incurred by the client, the reason for crediting from the account is also mentioned generally it is issued for sales return.

Debit Notes

These are documents issued to clients mentioning the debits incurred by the client, the reason for debiting from the account is also mentioned. It is issued for purchase return.

Payment Vouchers

It is document of payments made, maintained in a chronological manner.

Petty Cash Vouchers

It is a record of payments made, maintained in a chronological manner in daily cash transactions.

Goods Received Notes

Is a record of receipts of goods purchased. A logbook is maintained regarding goods received.

Stock Cards and Stock Ledger

Physical movement of stocks is maintained through Stock Cards and Stock Ledger. They are maintained by storekeepers. Quantities of stocks, stock codes and description of stocks are made. Here unit price is not mentioned. Updating according to stock in and stock out is done.

Accountant’s Responsibility

The primary responsibility of the accountant is to present the financial information to the owners at the end of financial year. The role and responsibility is multi fold due to the introduction and practice of cost accounting, management accounting and financial management.

The modern function of accounting has grown enormously and they can be grouped under the following broad categories:

Finance Function

Finance is the major requirement in front of any business and many of the business also face the problem of raising and using funds. A finance accountants major responsibility is to ensure:-

Obtaining hassle free funds at low cost.
To make maximum use of funds and derive maximum benefit. The problems faced by accountants are as follows:-

What type of expenses the firm should undertake i.e. in which type of projects the firm should invest the funds. What is the amount of funds which should be allocated towards that every project. What sources should be used to raise the funds for a particular project. How to attain maximum funds What should be the repayment terms and duration of borrowed funds. The decision on all issues is taken as per the policy and objectives of the enterprise.

Control Function

Here the accountant has the responsibility to communicate the management’s goals to individuals in respective fields.

To assist managers and unit/department heads to achieve their goals efficiently.
To optimize results, the accountant has to coordinate the activities across the organization.
Based on the goals set for each center they have to measure the performance of the unit or department head. This helps to assess the efficiency.
Identify problem areas and take decision to find a solution to enhance the efficiency and performance.

Planning Function

Planning function which is the next function involves long term decision and short term actions. In the short term decision has the following are to be done:

Making the best choice out of selected alternatives.
Should priority be given to maximizing profit or minimizing loss to address the problems encountered in planning function the accountant has to take an overall view such as accounting information and outside information. Planning for continuity and development of the firm comes under long term planning.

Accounting Measurement

Quantification of accounting information in the form of money or other units. Transactions are recorded in the accounts in terms of money (e.g. dollar, rupee yen etc.) based on historical cost. Some accounting measurements have to be expressed in volume such as direct labor hours used to apply overhead in a cost accounting system.

The accountant should check the correctness of accounting policies which has been employed by the management. Detailed description of the company’s accounting policies should be presented to their users in a separate section preceding the footnotes to the financial statements or as the first footnote.

The disclosure of accounting policies should always include Accounting Principles and should also include the methods of application that involve.

Selection from generally accepted alternatives.
Peculiar to the industry.
Unusual or different applications of Generally Accepted Accounting Principles (GAAP) for example depreciation method and inventory pricing. Disclosure of accounting policies helps readers in better interpreting a company’s financial statements. Thus, it results in fair presentation of the financial statement.

Accounting Principles

Accounting principles are in general decision rules derived from accounting concepts. According to AICPA (US), a principle means “a general law or rule adopted or professed as guide to action: a settled ground or basis of conduct or practice.

Accounting principles are man made. Accounting principles do not suggest exactly how each transaction will be recorded. This is the reason that accounting practice differs from enterprise to another.

There are various principles of accounting according to GAAP (US.

Historical Cost principle

Says that companies should record and report the cost of assets on the basis of cost incurred in it rather than fair market value of assets and liabilities. This principle states that the information that is reliable (removing opportunity to provide subjective and potentially biased market values) but not very relevant.

Revenue principle

As per this principle the companies should record the revenue when either has been (1) realised or is realisable or when (2) it is earned and not when cash is received. This method of accounting is also known as „accrual basis accounting.

Matching principle

As per this principle the expenses have to be matched with revenues so long it is logical to do so. Expenses should be identified not when the work has been done or when a product is produced but when the work or the product actually makes its part to revenue.

Disclosure principle

In short this principle is based on the principle that each and every such information should be disclosed to the users of such information which may affect their willingness to continue their relationship with the company, as per this principle the quantum and kinds of information to be disclosed should be based on trade-off analysis as a larger amount of information costs more to prepare and use. While also keeping costs reasonable.

Objectivity principle

The financial statements that have been prepared by the accountant of the company should be based on objective evidence. Discloser or information should have quality of objectivity.

Materiality principle

As per this principle all information on materials should be disclosed to its users. The importance of an item should be considered when it is reported. Information is considered important when it may affect the willingness and decision of a reasonable individual.

Consistency principle

It means that the company should use the same accounting rules and principles and methods over the year. 8. Prudence principle: As per this principle there are two alternatives before us, where one will be least likely to overstate assets and income should be chosen.

Accounting Postulates

Accounting postulates are basic assumptions which are generally accepted as self-evident truth in accounting. Postulates are established or general truth which do not require any evidence to prove them. They are the propositions taken for granted these postulates are as follows.

Entity postulates

The entity postulates assumes that the financial statements and other accounting information are for the specific business enterprise which distincts from its owners. In brief from accounting theory business and owners of business are separate entity.

Going concern postulates

According to this postulates, time period of business units is not is not predetermined an business entity is viewed as continuing in operation in the absence of evidence to the contrary. Because of the relative permance of enterprise, financial accounting is formulated assuming that the business will continue to operate for an indefinitely long period in the future.

Accounting period postulates

The creation or happening of this postulates is due to going concern postulates. This postulate is developed for measurement of economic activities of the business. The time period is identified in the financial statements. The time periods are usually of tweleve months. This is useful for comparative performance evaluation.

Money Measurement Postulates

A unit of exchange and measurement is necessary to account for the transactions of business enterprises in a uniform manner. The common denominator chosen in accounting is the monetary unit. Money is the common denominator in the terms of goods and services including labour, natural resources and capital are measured.

Money measurement concepts holds that accounting is a measurement and communication process of the activities of the firm that are measurable in monetary terms.

Book keeping and Accounting Process

The bookkeeping process refers primarily to recording the financial effects of financial transactions only into accounts. The difference between manual and any electronic accounting system is the time delay between the recording of the financial transaction and posting it in the concerned account. This delay is absent in electronic accounting systems due to instantaneous posting into relevant accounts, is not replicated in manual systems.

Generally in a business, a document has to be produced each time a transaction occurs. Similarly in case sales and purchases they have invoices or receipts. In the same way deposit slips are produced whenever deposits are made in a bank account. The bookkeeping involves recording the details of all such source documents into multi-column journals. As for illustration, all credit sales are recorded in the sales journal; all cash payments are recorded in the cash payments journal.

By using the rules of double entry system, the journal entries posted into the journal there after they are transferred to their respective accounts in the ledger, or book of accounts and this process of transferring summaries or individual transactions to the ledger is called posting. Once we are finished with the posting process we go for balancing, which is simply a process to arrive at the balance of the account.

FAQ