The Meaning of Book Keeping
Define book keeping
Book-keeping is an art of recording financial business transaction in a set of books in terms of money or money worth.
Bookkeeping involves the recording, storing and retrieving of financial transactions for a company,nonprofit organization, individual, etc.
Common financial transactions and tasks that are involved in bookkeeping include:
Billing for goods sold or services provided to clients.
Recording receipts from customers.
Verifying and recording invoices from suppliers.
Paying suppliers.
Processing employees’ pay and the related governmental reports.
Monitoring individualaccounts receivable.
Recordingdepreciationand other adjusting entries.
Providingfinancial reports.
Double-entry bookkeeping
transaction has two parts and that this will therefore affect two ledger
accounts.
transaction involves a debit entry in one account and a credit entry in
another account. This serves as a kind of error-detection system: if,
at any point, the sum of debits does not equal the corresponding sum of
credits, then an error has occurred. Business transactions are events
that have a monetary impact on the financial statements of an
organization.
accounting for these transactions, we record numbers in two accounts,
where the debit column is on the left and the credit column is on the
right.
- Adebitis
an accounting entry that either increases an asset or expense account,
or decreases a liability or equity account. It is positioned to the left
in an accounting entry. - Acreditis an accounting entry
that either increases a liability or equity account, or decreases an
asset or expense account. It is positioned to the right in an accounting
entry.
There
are various objectives of bookkeeping and accounting to different
parties i.e the owners, managers, creditors, government, customers etc.
The common important objectives of book keeping are:
Ascertainment of result of operation:
Bookkeeping is intended to the ascertainment of the result of operation
i.e the profit/loss of a firm or company by recoding all the revenue
income and gains and expenses and losses of a certain period and by
comparing them. It is ascertained by preparing the income statement or
profit and loss account at the end of each fiscal year.
Ascertainment of the financial position:
It helps to ascertain the financial position of a firm or company by
recording the appropriate values of different types of assets, specially
in its net cost, and the capital and liabilities up to the date. It is
found by preparing the balance sheet at the close of the fiscal year.
Maintaining control over the assets and budget:
Book keeping maintains control on the assets, income and expenses of
all types by making their complete records. It helps one to see how
efficiently the assets are utilized and the budget is disposed off.
Thus, it establishes financial discipline by controlling frauds on
budget and its expenditure.
Prediction of the volume of cash for future:
Bookkeeping helps the future forecast of cast by verifying the receipt
and payments of an organization and the proposed expansion programmes.
Specially, it is important to those whole financial system is based upon
cash budget
Assessment of tax liabilities
them audited. Book keeping involves the income statement and balance
sheet at the last of the fiscal year. It gives the details about the
financial affairs of an organization, including the sales and net income
on the basis of which tax liabilities i.e sales tax, income tax etc.
can be easily assessed.
Importance and advantages of Bookkeeping
Importance to the professional and other individuals:
Book keeping is important to the professionals like doctors, engineer,
mechanics, lawyer, auditor etc. for recording their incomes and expenses
and profits and losses etc. regularly and systematically for
controlling expenses and gaining income. Similarly, it is important to
the general people for making a proper balance of their income and
expenses for their personal house hold affairs.
Important to business organizations:
Book keeping is essentially important to a business organization for
keeping the complete records of the transactions. It is important,
specially to determine the result of operation, financial position,
controlling assets and other resources, establishing financial
discipline, assessing tax liabilities etc.
Importance to the government:
Book keeping is important to the government to evaluate the progress of
the government projects, to collect necessary statements, data and
information for the preparation of government budget, to control over
the leakage, misuse and misappropriation of budget etc. of the
government property and resources.
Important to other parties:
Book keeping is equally important to the financial analysts and other
interested parties like investors, creditors, banks, customers etc. to
study and analyze the different financial statements of a certain firm
or company. It is also important to the job seekers for better
opportunity for getting employment.
The Concept of Double Entry
Every transaction has two effects. For example, if someone transacts a
and in return, he gets a bottle of dink. This simple transaction has two
effects from the perspective of both, the buyer as well as the seller.
The buyer’s cash balance would decrease by the amount of the cost of
purchase while on the other hand he will acquire a bottle of drink.
Conversely, the seller will be one drink short though his cash balance
would increase by the price of the drink.
attempts to record both effects of a transaction or event on the
entity’s financial statements. This is the application of double entry
concept. Without applying double entry concept, accounting records would
only reflect a partial view of the company’s affairs. Imagine if an
entity purchased a machine during a year, but the accounting records do
not show whether the machine was purchased for cash or on credit.
Perhaps the machine was bought in exchange of another machine. Such
information can only be gained from accounting records if both effects
of a transaction are accounted for.
Traditionally,
the two effects of an accounting entry are known as Debit (Dr) and
Credit (Cr). Accounting system is based on the principal that for every
Debit entry, there will always be an equal Credit entry. This is known
as the Duality Principal.
Debit entries are ones that account for the following effects:
- Increase in assets
- Increase in expense
- Decrease in liability
- Decrease in equity
- Decrease in income
Credit entries are ones that account for the following effects:
- Decrease in assets
- Decrease in expense
- Increase in liability
- Increase in equity
- Increase in income
increase in expense (Dr) will be offset by a decrease in assets (Cr) or
increase in liability or equity (Cr) and vice-versa. Hence, the
accounting equation will still be in equilibrium.
A general ledger is a complete record of financial transactions over the life of a company. The ledger holds account information that is needed to prepare financial statements, and includes accounts for assets, liabilities, owners’ equity, revenues and expenses.
into the general ledger. Posting only transfers the total balance in a
sub ledger into the general ledger, not the individual transactions in
the sub ledger. An accounting manager may elect to engage in posting
relatively infrequently, such as once a month, or perhaps as frequently
as once a day
ACCOUNT: is a record in the general ledger that is used to collect and
store debit and credit amounts. For example, a company will have a Cash
account in which every transaction involving cash is recorded. If the
company sells merchandise for cash, the Cash account will be debited and
the Sales account will be credited. <!– [if
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definition of an account is a record of a customer relationship. For
example, if a company sells merchandise to a customer on credit, there
seller will have an account receivable and the purchaser will have an
account payable. <!– [if !supportLineBreakNewLine]–>
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An account has two sides:
DEBIT SIDE-is the left side of an account
CREDIT SIDE-is the rightside of an account.
