UNIT

1
What is bookkeeping
 Bookkeeping is the process of recording your company’s
financial transactions into organized accounts on a daily
basis. It can also refer to the different recording
techniques businesses can use. Bookkeeping is an
essential part of your accounting process for a few
reasons. When you keep transaction records updated,
you can generate accurate financial reports that helps to
measure business performance. Detailed records
will also be handy in the event of a tax audit.
 This guide will walk you through the different methods
of bookkeeping, how entries are recorded, and the major
financial statements involved.
Methods of bookkeeping
 Single-entry bookkeeping
Single-entry bookkeeping is a straightforward method where one
entry is made for each transaction in your books. These transactions
are usually maintained in a cash book to track incoming revenue and
outgoing expenses. You do not need formal accounting training for the
single-entry system. The single-entry method will suit small private
companies and sole proprietorships that do not buy or sell on credit,
own little to no physical assets, and hold small amounts of inventory.
 Double-entry bookkeeping
It follows the principle that every transaction affects at least
two accounts, and they are recorded as debits and credits. In the
double-entry system, the total credits must always equal the total
debits. When this happens, your books are “balanced.”
Using the double-entry method for bookkeeping makes more sense if
your business is large, public, or buys and sells on credit. Enterprises
often choose the double-entry system because it leaves less room for
error. In a way, it ‘double-checks’ your books because each transaction
is recorded as two matching but offsetting accounts.
WHAT IS ACCOUNTING
Accounting is an art of recording classifying and summarizing in
term of money transactions and events of financial nature and
interpreting the result . Accounting is the analysis and
interpretation of book keeping records it includes not only the
maintenance of accounting record what also preparation of
financial economical information which involved measurement of
transaction and other event relating to entity.
DEFINATIONS
According to Anthony.R.N
Accounting is a means of collecting summarising analysing and
reporting in monetary term information about the business.
According to Smith and Ashburne
Accounting is the science of recording and classifying business
transaction and event primarily of financial character and the art of
making significance summary is analysis and interpretation of those
transaction and events and communicating the results to person who
must make decisions or form judgement.
Users of accounting information:
We can broadly divide the users of accounting information into two groups – internal
users and external users. Internal users include managers and owners of the business
whereas external users include investors, creditors of funds, suppliers of goods,
government agencies, general public, customers and employees.
Internal users Internal users use a mix of management and financial accounting
information. Some internal users of accounting information and their needs are briefly
discussed below:
1. Management Management uses accounting information for evaluating and analyzing
organization’s financial performance and position, to take important decisions and
appropriate actions to improve the business performance in terms of profitability,
financial position and cash flows. One of the major roles of management is to set
rules and procedures to achieve organizational goals. For this purpose, management
uses information generated by financial as well as managerial accounting system of
the organization.
2. OWNER Owners invest capital to start and run business with the primary objective to
earn profit. They need accurate financial information to know what they have earned or
lost during a particular period of time. On the basis of this information they decide their
future course of actions such as expansion or contraction of business.
External users
External users normally use only financial accounting information. Some external users
of accounting information and their needs are briefly discussed below
1. INVESTOR In corporate form of business, the ownership is often separated from the
management. Normally investors provide capital and management runs the business .The
accounting information is used by both actual and potential investors. Actual investors use this
information to know how their funds are used by the management and what is the expected
performance of business in future in terms of profitability and growth. On the basis of this
information, they decide whether to increase or decrease investment in corporation in future.
2. LENDER Lenders are individuals or financial institutions that normally lend money to businesses
and earn interest income on it. They need accounting information to assess the financial
performance and position and to have a reasonable assurance that the business to whom they are
going to lend money would be able to return the principal amount as well as pay interest there on.
3. SUPPLIER Suppliers are business individuals or organizations that normally sell merchandise or
raw materials to other businesses on credit. They use accounting information to have an idea about
the future creditworthiness of the business and to decide whether or not to continue providing
goods on credit.
4. GOVERNMENT AGENCIES Government agencies use financial information of businesses for
the purpose of imposing taxes and regulations.
5. GENERAL PUBLIC General public also uses accounting information of business organizations.
For example, accounting information is: 1. A source of education for students of accounting and
finance. 2.A source of valuable data for those researching on organizational impacts on individuals
and economy as a whole.3.A source of information for the people looking for job opportunities.
4.A source of information about the future of a particular enterprise.
 6. CUSTOMER Accounting information provides important information to customers about current
position of a business organization and to make a judgment about its future. Customers can be
divided into three groups – manufactures or producers at various stages of production,
wholesalers and retailers and end users or final consumers.Manufacturers or producers at every
stage of processing need assurance that the organization in question will continue providing
inputs such as raw materials, parts, components and support etc. The wholesalers and retailers
must be assured of consistent supply of products. The end users or final consumers are
interested in continuous availability of products and related accessories. Because of these
reasons, the accounting information is of significant importance for all three types of customers.
7. Employees Employees who do not have a hand in core management of the business are
considered external users of accounting information. They are interested in financial information
because their present and future is tied up with the success or failure of the business. The
success and profitability of business ensures job security, better remuneration, job promotion and
retirement benefits.
Branches of accounting
1. Financial Accounting Financial accounting involves recording and classifying business transactions, and
preparing and presenting financial statements to be used by internal and external users. In the preparation of
financial statements, strict compliance with generally accepted accounting principles or GAAP is observed.
Financial accounting is primarily concerned in processing historical data.
2. Managerial Accounting Managerial or management accounting focuses on providing information for use by
internal users, the management. This branch deals with the needs of the management rather than strict
compliance with generally accepted accounting principles. Managerial accounting involves financial analysis,
budgeting and forecasting, cost analysis, evaluation of business decisions, and similar areas.
3. Cost Accounting Sometimes considered as a subset of management accounting, cost accounting refers to the
recording, presentation, and analysis of manufacturing costs. Cost accounting is very useful in manufacturing
businesses since they have the most complicated costing process. Cost accountants also analyze actual and
standard costs to help managers determine future courses of action regarding the company's operations.
 ADVANTAGES OF ACCOUNTING

1.Maintenance of business records

It records all the financial transaction pertaining to the respective year systematically
in the books of accounts. It is not possible for management to remember each and
every transaction for a long time due to their size and complexities.
2.Preparation of financial statements
Financial statements like Trading and profit and loss account, Balance Sheet can be
prepared easily if there is a proper recording of transactions. Proper recording of all the
financial transactions is very important for the preparation of financial statements of
the entity.
3.Comparison of results It facilitates the comparison of the financial results of one
year with another year easily. Also, the management can analyze the systematic
recording of all the financial transactions according to the policies of the entity.
4.Decision making Decision making becomes easier for management if there is a
proper recording of financial transactions. Accounting information enables
management to plan its future activities, make budgets and coordination of various
activities in various departments.
5.Evidence in legal matters The proper and systematic records of the financial
transactions act as evidence in the court of law.
6.Provides information to related parties It makes the financial information of
the organization available to stakeholders like owners, creditors, employees,
customers, government etc. easily.
7.Provides information to related parties
It makes the financial information of the organization available to stakeholders like
owners, creditors, employees, customers, government etc. easily.
8.Helps in taxation matters
Various tax authorities like income tax, indirect taxes depends on the accounts
maintained by the management for settlement of taxation matters.
9.Valuation of business
For proper valuation of an entity’s business accounting information can be utilized.
Thus, it helps in measuring the value of the entity by using the accounting
information in the case of sale of the entity.
10.Replacement of memory
Proper recording of accounting transactions replaces the need to remember
transaction
Limitations of Accounting
1. Measurability One of the biggest limitations of accounting is that it cannot measure things/events that do
not have a monetary value. If a certain factor, no matter how important, cannot be expressed in money it finds no
place in accounting. Some very important qualities like management, loyalty, reputation, etc find no place on the
balance sheet or the income statement.
2. No Future Assessment The financial statements show the financial position of the firm on the date of
preparation. The users of the statement are more interested in the future of the company in the short term and
long term. However, accounting does not make any such estimates. And due to the dynamic nature of the
business environment, a lot can change between such dates. Auditors sometimes do disclose the important
events occurring after the balance sheet date to rectify these limitations of accounting.
3. Historical Costs: Accounting often uses historical costs to measure the values. This fails to take into
consideration factors such as inflation, price changes, etc. This skews the relevance of such accounting records
and information. This is one of the major limitations of accounting.
4. Accounting Policies There is no global standard in accounting policies. In India, we follow the Accounting
Standards. Americans follow the GAAP and then there are the international standards, namely the IFRS. And if a
global company operates in more than one country, there may be confusion. Not all accounting policies follow the
same line of thinking, and conflicts may arise due to this. It has long been said that the whole world must agree on
uniform accounting policies but this has not happened yet.
5. Estimates Sometimes in accounting estimation may be required as it is not possible to establish exact
amounts. But these estimates will depend on the personal judgment of the accountant. And estimates are
extremely subjective in nature. They are basically a person’s guess of future events. In accounting, there are
many cases where such estimates need to be made like provision of doubtful debt, methods of depreciation, etc.
6. Verifiability An audit of the financial statements does not guarantee the correctness of such statements. The
auditor can only assure that the statements are free from error to the best of his judgment.
7. Errors and Frauds Accounting is done by humans, so there will always be the scope of human errors.
There is also the fear of possible manipulation of accounts to cover up a fraud. Since fraud is deliberate, it is that
much harder to spot. This is one of the most dreaded limitations of accounting.
 ACCOUNTING CONCEPTS
1) Entity concept :Entity concept assumes that business Enterprise is separate from its
owners. Accounting transactions should be recorded with this concept only. The main
intention of this concept is to keep the business transactions keep away from the influence
of personal transactions of its owners.
(2) Periodicity Concept :As per going concern concept an entity is assumed to have
indefinite life. If we want to measure the financial performance of an entity then we need
to divide the operations of entity for a specific period, otherwise it’s very difficult to
ascertain the performance of business. Periodicity concept assumes a small but workable
fraction of time period for measuring the business performance. Generally it assumes 1 year
is taken for this purpose.
(3) Money measurement concept :As per this concept transactions which can be
measured in monetary terms only are to be recorded in books of accounts. Any transactions
which can not be converted into monetary terms should not be recorded in books. Since
money is the medium of exchange and unit of measurement for showing the financial
performance , it doesn’t accept the transactions other than monetary to record in books of
accounts.
(4) Accrual concept :As per this concept transactions should be recognized in the books
of accounts only when they occur and not on any cash basis. The main advantage of this
concept is that financial Statements prepared as per this concept inform the users not only
about past events involving payment and receipt of cash but also about obligations to pay
cash in the future and resources that represent cash to be received in the future.
(5) Matching concept :As per this concept all the expenses which can be matched with
the revenue of that period only should be taken into consideration for financial reporting.
This concept is based on Accrual concept as it gives importance to occurrence of an expense
which is spent for generating a revenue. This concept leads to adjustments at the end like
outstanding expenses, income and Prepaid expenses , incomes
(6) Going concern concept :As per this concept financial statements are prepared on
an assumption that enterprise will continue its operations for the foreseeable future. Thus,
it says that enterprise has neither the intention nor the need to liquidate or curtail the scale
of its operations. Valuation of assets of a business entity is dependent on this assumption.
(7) Cost concept :As per this concept valuation of assets should be done at historical
costs/acquisition cost.
(8) Realisation concept :This concept says that any change in value of an asset is to be
recorded only when the business relaises it. This concept highly prefers Realisation of the
value for which we want to give effect in books of accounts.
(9) Dual Aspect concept :This concept is base for double entry Accounting.s of a
transaction. Under the system, aspects of transactions are classified into two main types:
Debit
Credit
Every transaction should have a Debit and credit. Debit is the portion of transaction that
accounts for the increase in assets and expenses, and the decrease in liabilities, equity and
income. And credit is the portion which is a results of decreases the asset, increases the
liability, income, gains, equity.
 ACCOUNTING CONVENTIONS

Accounting conventions are the generally accepted guidelines in preparation

of financials.They arise from customs and practical application.They are not
legally documented policies.
(1) Conservatism :
As per this concept while Accounting one should not anticipate the income but should
provide for all possible losses. When there are many alternative values to account an asset
then we should choose the lesser value. Inventory valuation is done as per this concept only
, as cost or Market value which ever is lower.
(2) Consistency :
As per this concept the accounting policies followed in preparation and presentation of
financial statements should be consistent from one period to another period. A change in
Accounting policy can be made only when it is required by law , or for better presentation
of accounts or change in Accounting standards.
(3) Materiality :
As per this concept items having significant economic effect on the business of the
enterprise should be disclosed in financial statements and any insignificant item which is
not relevant to the users should not be disclosed in financial statements.