 Book keeping:

It is mainly concerned with record keeping or maintenance of books of accounts. The maintenance of
books of accounts includes the following four activities:

1. Identifying the transactions of financial nature from amongst the various transactions.

2. Measuring the identified transactions in terms of money.

3. Recording the identified transactions in the books of PRIME ENTRY.

4. Posting them into ledger.

The book keeping functions is routine and clerical in nature and can be
performed even by persons having limited knowledge of accounting. Book keeping is the primary nature.

 Accounting
Accounting starts where the book keeping ends. It includes the following activities.

1. Summarizing the classified transactions in the form of profit and loss account and balance sheets etc.

2. Analyzing and interpreting the summarized result .In other words, drawing the meaningful information
from profit and loss account and balance sheet etc.

3. Commuting the information to the interested parties.

Thus, an accountant’s work goes beyond that of a book keeper.

However, in actual practice the accounting process includes the book keeping function also because on
the basis of book keeping records, an accountant draws up such financial statements as profit and loss
account and balance sheets etc. periodically. In a small concern, the accountant performs the work of
bookkeeping also.

 ACCOUNTING CONCEPT

1. Business entity concept

2. Going concern concept

3. Accounting year concept

4. Money measurement concept

5. Realization concept

6. Dual aspect concept

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7. Cost concept

8. Accrual concept

9. Matching concept

1. BUISNESS ENTITY CONCEPT: According to this concept, business is treated as a unit, separate and
distinct from its owners, creditors, managers and others. In other words, the owner of a business is always
considered as distinct and separate from the business he owns. Business unit should have a completely
separate set of books and we have to record business transactions from firm’s point of view of the
proprietor/partner .The partner/proprietor is treated as a creditor of the business to the extent of capital
invested by him in the business.

Because of the concept of separate entity, the proprietor‘s house, his

personal investment in securities ,personal income and expenditure are kept separate from the accounts
of the business entity .In the absence of separate entity ,the net profits and financial position of a business
entity cannot be known .The concept of separate entity is applicable to all forms of business organization
.Though in case of proprietorship firms and partnership firms ,the liability of the firm is to meet by the
personal assets of the proprietor and therefore there is no separate existence of the firm as legal person
. However in accounts firm and owners are quite distinct to each other. Though proprietorship firm and
its proprietor are having same legal entity but for the purpose of accounting they are treated separately.

2. GOING CONCERN CONCEPT: As per this concept it is assumed that the business will continue to exist
for a long period in the future. The transactions are recorded in the books of business on the assumptions
that is a continuing enterprise. It is on this concept that we record fixed assets at their original cost and
depreciation is charged on these assets without reference to their market value. For example, if a
machinery is purchased which would last, say for 10 years the depreciation will be charged for these ten
years at the time of calculating the net profit or loss of each year. Because of the concept of going concern
the full cost of the machine would not be treated as an expense in the year of its purchase itself. As the
benefit of the acquisition will be available to the organization in the years to come.

It is also because of the going concern concept that outside parties

enter into long term contracts with the enterprise give loans and purchase the debentures and the shares
of the enterprise also. Without this concept ,the classification of current fixed assets and short and long
term liabilities cannot be made and such classifications would be difficult to justify .At the time of
incorporation of company heavy expenditure is made ,but the same is deferred for years to come and
gradually written off depending on the theory ‘LOAD WHAT THE TRAFFIC CAN BEAR’. There are many
concern who are having more than 100 year’s life e.g. Statesman, Amrit Bazaar Patrika, Tisco etc.

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3. ACCOUNTING YEAR CONCEPT: Accounting period is necessary for management, for making new policies
or amending old policies after seeing the performance of the business during one year. According to going
concern concept business has an indefinite life so it is a difficult task to know the results of the business
due to indefinite period of business. But to see the trend or to have an idea about the performance and
profitability of business, total life of a business is divided into smaller periods. This short span of time
period consists of 12 months period of 12 months is called as an accounting period. It may be 1st Jan to
31st Dec. or 1st April to 31st March, 14th April to 13th April of succeeding year.

4. MONEY MEASUREMENT CONCEPT: Only those transactions and events are recorded in account books
which are capable of being expressed in terms of money. An event, even though it may be very important
for the business, will not be recorded in the books of the business unless its effect can be measured in
terms of money with a fair degree of accuracy.

For example, accounting does not record a quarrel between the production
manager and sales manager. These facts or happening cannot be expressed in money terms and thus are
not recorded in the books of accounts.

5. REALISATION CONCEPT {REVENUE RECOGNITION}: Revenue means the amount which are added to
reserve or capital as a result of business operations. Revenue is earned by sales of goods or by providing
a service. Concept of revenue recognition determines the times or a particular period in which revenue is
realized .Revenue is deemed to be realized when the title or the ownership of the goods has been
transferred to the purchaser and when he has legally becomes liable to pay the amount. Preferably, it is
taken into consideration with an eye over the extent of actual realization. For example , if a firm gets an
order of goods on 1st January ,supplies the goods on 20th January and receives the cash on 1st April ,the
revenue will on deemed to have been earned on the 20th January ,as the ownership of goods was
transferred on that day.

Revenue in case of income such as rent, interest, commission etc is recognized on a time basis.
For example, rent for the month of March 2015, even if received in April 2016 will be treated as revenue
for the financial year ending march 31,2015.Similarly if commission for April 2015 is received in advance
in march 2015 ,it will be treated as revenue of the financial year commencing April 2015 .

6. DUAL ASPECT CONCEPT: According to this concept, every business transactions is recorded as having a
dual aspect .In other words ,every transactions affects at least two accounts .If one account is debited
,any other account must be credited to the same extent .The system of recording transactions based on
this concept is called as ‘double entry system’.

It is because of this principle that two sides of the balance sheets are always
equal and following accounting equations will always hold good at any good point of time :-

ASSESTS = LIABILITIES + CAPITAL

Whenever a transaction is to be recorded, it has to be recorded in two or more accounts to balance the
equations. Equation must remain balanced whenever a transaction takes place.

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 For example, X commences the business with the Rs 5 Lakhs in cash and takes a
loan of Rs 1 lakh from the bank and these Rs 6 lakhs are used in buying in some assets, pay and machinery
.The equation will be as follows:

ASSETS =LIABILITIES + CAPITAL ==] Rs 6 lakhs = Rs 1 lakh +Rs 5 lakh.

7. COST CONCEPT: According to this concept, an asset is ordinarily recorded in the books of accounts at
the price at which it was acquired. This cost becomes the basis of all subsequent accounting for the assets
.Since, the acquisition cost relates to the past, it is referred also as historical cost. This cost is the basis of
valuation of the assets in the financial statements.

For example, if a business entity purchases a building for Rs 5, 00, 000 it

would be recorded in the books at this figure .Subsequent increase or decrease in the market value of the
building would not be recorded in the books of accounts. If two years later the market value of the building
shoots up to Rs 10, 00,000, the increased value will not be ordinarily recorded in the books of accounts.

8. ACCRUAL CONCEPT :- In accounting , accrual basis is used for recording of transactions .It provides
more appropriate information about the performance of business enterprise as compared to cash basis.
Accrual concept ascertains true profits or loss for an accounting period and to show the true financial
position of the enterprise at the end of the accounting period.

For example: - If 10 lakhs are deposited as fixed deposit on 01.07.2013

Rate of interest = 12%

Date of maturity =30.06.2014

Amount of interest = Rs 1, 20,000

By accrual concept: - July to march -) 2013-2014 =) Rs 90,000

April to June -) 2014-2015 =) Rs 30,000.

9. MATCHING CONCEPT:-This concept is very important for correct determination of net profits. According
to this concept, in determining the net profits from business operations, all costs which are applicable /
related to revenue for the period should be charged against that revenue. Accordingly, for matching costs
with revenue, first revenue should be recognized and then costs incurred for recognized. Hence, by
matching concept, revenue and expenditure should match. Example: If we takes sales in the march of a
year we will take and the a/c entire expenditure related to the sales up in the march 2015 irrespective of
the fact whether it has actually been paid or not

ACCOUNTING CONVENTION: An accounting conventions may be defined as a custom or

generally accepted practice which is adopted either by general agreement or common consent among

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accountant .It may differ from one individual to the other. Following are the main accounting
conventions:-

1. Conservatism

2. Materialism

3. Consistency

4. Disclosure

 CONVENTION OF CONSERVATISM OR PRUDENCE :- According to this convention ,all anticipated

losses should be regarded in the books of accounts ,but all anticipated or unrealized gains should
be ignored .Provision is made for all known liabilities and losses even though the amount cannot
be determined with certainty .
Following are the examples of the application of the principles of
conservatism:-
1. Provision for doubtful debt is created in anticipation of actual bad debts.
2. Provision for a pending law suit against the firm, which may either be decided in its favor .As
per this convention, the stock is valued at market price or cost price whichever less is.

 MATERIALISM :-According to this convention ,items having an insignificant effect or being left out
or merged with other items ,otherwise accounting statements will be unnecessarily
overburdened. “Items should be regarded as material if there is reason to believe that knowledge
of it would influence decision of informed investors”. It makes decision making process.
It should be noted that what is material for one concern may be immaterial for another.
For example: - The cost of small tools may be material for a small repair workshop but the same
figure may be immaterial for escorts limited. One item which is material in a particular year may
not be material in subsequent year. for example: provision for bad doubtful debt was made in
previous year but in current year as the sundry debtors significantly low and most of them pertain
to current year, this provision is not required to be made in current year .As per COMPANIES ACT
1956,expenditure of 1% of turnover or more should be considered as material one.

 CONSISTENCY: - This convention state that accounting principles and methods should remain
consistent from one year to another .These should not be changed from year to year. In order to
enable the management to compare the profit and loss account and balance sheet of the different
periods and draw the important conclusions about the working of the enterprise.

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 If a firm adopts different accounting principles in two accounting
periods, the profits of current period will not be comparable with the profits of the preceding
period.
But the convention of consistency should not be taken to mean that it does not
allow a firm to change the accounting methods according to the changed circumstances
.Otherwise the accounting will become non flexible and the improved techniques of accounting
will not be used .Example :- Method of valuation of inventory , method of charging, depreciation
,provision for bad and doubtful debts .There are three types of consistency : Vertical Consistency,
Horizontal Consistency and third Dimension Consistency. Vertical contingency stipulates that the
policies for preparing P&L A/c. and Balance sheet should be same. The Horizontal contingency
stipulates that similar policies should be adopted in an organization from year to year. Third
dimension consistency expects that all organisations dealing with same products or in same
industry should adopt same policies to facilitate inter firm comparison.
If for any reason this decided to change some policy in a particular period .The effect of change
in profitability should be indicated in the financial statements as notes on A/Cs. There are three
types of consistency viz: Vertical Consistency, Horizontal Consistency and third Dimension
Consistency.

DISCLOSURE: - This principle requires that all significant information relating to the economic
affairs of the enterprise should be completely disclosed. In other words, there should be a
sufficient disclosure of information which is of material interest to the users of the financial
statements. Disclosure of material facts does not mean leaking out the secrets of the business but
disclosing sufficient information which is of material interest to the users of the financial
statements. Since, the purpose of financial statements is to provide meaningful information to
various parties it is important that adequate disclosure be made so that they have firm opinion at
the time of taking decisions. All sort of weakness are required to be shown .The strength may be
shown weaker than what it is but the weakness are required to be indicated. Under this option
contingent liability is important ones. A contingent liability is the likely liabilities of an organization
which they take in future provide a particular incident takes place .Otherwise the things would
remain as it is. E.g. the organization has given guarantee in favor of party at the time of applying
for loan .If that party for legal, valid reasons fails to keep its promise which results in non-deposit
of loan installments then the company will have to pay the loan along with interest for the
guaranteed amount .This item should be disclosed as a note on A/Cs.

 DIFFERENCE BETWEEN CONCEPT AND CONVENTIONS.

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  CONCEPT  CONVENTION
1. BASIS It is based upon It is based upon general
assumptions, which agreement.
form foundation.
2. PRECEDENTS It follows the
It is not followed by
conventions. concepts.
3.PERSONAL Personal judgmentIt plays major roles in
JUDGEMENT does not play any role.
following accounting
conventions.
4.INTERNAL It is not consistent It is internally
CONSISTENT consistent.
5.UNIFORMITY IN It is uniformly applied It is not uniformly
APPLICATION in diff. organizations applied.
6.LEGAL STATUS Concepts are generally Conventions are
established by the law established by common
accounting principles.

PROCESS OF ACCOUNTING
1. Recording the transactions.
2. Posting the transactions {Including classification}
3. Checking the arithmetical accuracy of posting and balancing by preparing trial balance.
4. Preparation of profits $ loss A/Cs {receipts payments a/c, income and expenditure/c}
5. Preparation of financial statements including balance sheets.

APPROACH:-
1. Traditional approach {British system}
2. Modern approach {accounting equation}

SYSTEM OF BOOK KEEPING:-

1. Single entry system
2. Double entry system
3. Triple entry system {or integrated system of accounting}