CHAPTER

Bo ok K ee pi ng and
1 Accounting
1.1 Introduction
1.2 Book Keep ing
1.3 Accounting
1.4 Basic Acco untin g Terms

III INTRODUCTION )
Accounting is one of the fastest grmving professions nol
only in our count1y but also in the
entire world. The accounting system provides relevant and reliab
le financial information to interested
paities.

Accounting is often called as the ' language of business

·: The function oflanguage is to
facilitate communication amon g individuals in the society.
Accmmting helps in·communicating the
financial information of ai1 organization to various parties intere
sted in it.
II) BooK KEE PIN G )
Book-keeping is the branch of knowledge that reveals how
to keep a record of business
transactions. It is often routine and cle1ical in nature. It is impo
rtant to note that only those transaction s
related to business which can be expressed in terms of mone
y are recorded. The basic objective of
book-keeping is to have permanent record ofall the busin
ess transactions. ln specific terms , Book
keeping is defined as

"Book-keeping is the science and ait of correctly recording

in the books of account, all those
business transactions that result in the transfer of money
or money's wo1th". - R.N. ClLrter
 Acco untancy j
l__:_J -
A CCOl NI 11\i( l

,\ ccount111g 1:-, (on~idcrL d as a S),Sll'.m which collccb rnid pro.::csscs fi nancial info1mation of a
businl'::-.:-.. Thi'.- information is reported to the users to crwbk th(:Ill to mak e ~1ppropriate deci sions.
l11e follcm 111~ ddinition :-, ~·,plnin the meani ng nfaccc1umi 11g in a more meaning fi.dl l<mll.

l hr America n Institute of Ce rtified Public Accou ntants (A ICPA) ha s defined the

,\cwuntin g as ··rhe urr <~/ rernrding . cfu.,sff.ring and swnll wri::ing in a sign[ficanr manner in
term, C!f money tramucli ons and e,·enrs 11 ,!Jich in par/. ar least <~la.financiul character und
111/erprering r'1e rl:' , ulL\ !hereof'.

American Acco untingA~sociation (AAA) defines accow1tin g as ..the process ofident[fj:ing,

measuring and communi cahng economic i,?formation to permit info rmed judgment s and
decisiom· by users ofrhe i1?formatio11 ".

OBJ ECTIVES OF ACCOUN TING

!'he mai n obj~cti,·es ofoccou11tingare;

I. To maintain accounting records.

2. To calculate the result ofoperati ons.

3. To ascenain the ii nancial position.

4. To communicate the info1mation to users.

A CCOUNTI NG PROCESS

I he prm:c~s of accoun 1i 11g a~ stated i1 1the Jclin ition is cxpl t1incd ,:i:-, h,.: lu,,·:

Input Proct:ss Output

ldc111 il\ in~

IZccunling
Bu::ii rn::-,s ( ids~il)1ing, Inll)Jm:1t ion

1r:111~1ctiDns ~ Sumn 1wisin~ to

( ,\ Jolll'ld l~ \ ; t\U l' ) / \n,u~·sin~ l ISl'. l'S

lntcqm:ti 11g
( ·urnrrnuuGHinb

I rom the ah1wL· ,iccnunti ng rroccss, the fo ll owing sr cci fic func tions can be Jc1wcd:
 3

1. l,J,'' 11 1trir,~ : ld1..·11 11I: 11 1r . 1lw I 111::i 11v•,s lr,msactions from the source documents.
l\\, , ,,,1i,1t.: · l'll1.· 11·\l l111 \' 'I' 111 1 I . . . ll .
• · ' , l\ 1 :11 -r1 ,unt1 ng is to keep a systematic record of al Jusmcss
11,111,, 11.' tll)lh \\ 111·•·1, ' Ill' 1(1.
0

1 ·1u' I '111 :111 oreIer1y manner. soon alter

1 111·1 . . occu1Tence m
' tl1eu . t11e
·• ' ·
,,,u111,1I 11r ~uli ~idiw) bn(,k ::.
3. t. ·1.i" (l.i·ing: I hi s is r ll1H:vrn cd \\'ilh the classification of the recorded business
11- 11 ,~,h.'t i1 'llS :-so :1s ll' g 1\) 1q) I lil' lwnsac tions of similar type at one place, i.e., in ledger (a
h ' 1' h. ,1 f :1 1.'1...\ 1unt s ) by t' \ 1r :11.·1 i 11 g. the balances/totals ofacconnts.

4. ,'1rmmu1ri:iug: It is llll' !)1\lC l'Ss o rlinding the totals ofbalanccs of all accounts so as to
1'r--·p,ll\.' t n :11 h,1b 11c1...·.

S. l:\q1<Jr'fir1g: lh: cbssilicd information available from the trial balance is used to prepare

f'i\'tit ,md luss accoun t and balance sheet in a manner useful to the users ofaccounting
n 1i..,1m:1Lil"1n.

6. --t11a(i·!:ii11g: 11 establi shes the relationship between the itemsoftheprofitand loss account
JnJ 1.h~' lx1bncc sheet. The purpose ofanalysing is to identify the financial strength and
\, cJh.J1e~s oftbe business. It provides the basis for interpretation.
interp reting : It is concerned with explaining the meaning and significance of the
~ .::aiionshi p so establi shed by.the analysis. Interpretation should be·useful to the users,
~ 1 :is w enable them to take coITect decisions.

AccoL '\TJ., c CYCLE

:\n ~ccoun1ing cycle i c:; a complete sequence of accounting process that begins with the

recording, d bu'>inc~s Lnmsc1ctio ns and ends with the preparation offinal accounts.
Tru:-:1..: ind udc Joumal , Ledger,· 1·ric1l Balance and financial statements such as, Trading account,

Pro fit and Ir,·:, accou nt Halc1nce Sheet.

The w,.v1unting cycle is <.Jc.;rictcd in the f~_llowing diagran1:

~ ournal

/'
/2i,:, u1r:In~l Accounting
(stnlo tll01l/ 1
Cycle

r I

Trial
( balance
(
~ 4 }, ________ ______:_~------ - - - - ,~
\ -A~~~
~

Accountancy, Accounting and Book-keeping

Accountancy refers to a systematic knowledge of accounting which covers rules, regulations,

principles. concepts and conventions. and standards tha t govern the accounti ng process.

Accounting refers to the actual process of preparing and presenting the acco unting
infomrntion. In other words, it is an art of putting the academic knowledge of accountancy into
practice.

Book-keeping is a part of accounting and is concerned with record keeping or maintenance

of books of accounts. It 1s
· otten
- ro utme
. and clerical
. .111 nature.

Difference between Book-keeping and Accounti ng

Basis of
Distinction Book Keeping Accounting

Scope lt is concerned \•:ith R,.:cording The scope of accounting is not only

of Business Transaction only concerned with recording of transactions
but also, classifying, analyzing and
interpreting the results of the business

O~jective To maintain systematic records To ascertain profitability and financial

of the business perfonnance of the business enterpr;_se

Nature Often routine and clerical in Analytical and executive in nature

nature
A book keeper is responsible for An accountant is responsibl e for
Responsibility reco rding of bu sin ess finalization of accounts and revealing the
transactions only. net results of the business enterp1ise
Supervision The bo ok keeper do es not An accountant checks and supervises the
supervise and check the work work of book keeper
of an accountant
Book keeping is done by the Senior staff or Accountants pe1f01ms the
Staff Involved junior level staff in accounting accow1ting work
department

ADVANTAGES OF Acc OllNTING

The fui iowing are the main advantages ofAccounting:

1. Permanent and Rel iable Record: Accounting provides pcnrnncnt record for all business
transadions and pro\ ides reliable information to di fferent interested parties thus, replacing
the m~rnorv \Vhi ch fails to remember evcrvthino0 .
J -
lBoo A /\ cc11i,,R nnrf 1,, ,,1,111i111.;

2.
\d Hr,ull of B1t , iiH ' ' <) p('t itt 111n, · \( <1\ n tm pr,h 1d,, In~ lm,11 r" ,HI! 1 I I di ,..
1
I p,..,)11 1 h11 .., 111e,..,lrn ,t}'I\ 111, 11ndnf 11

\ , (' (' I tninnu·nl n f l i11.1n, 1,d l•'rn-11 11 ,11 11,

I I ·· r I ht
thl r'IP j'lll 11,1 il ljllill ,1 lul l p1111m::nfl 1 111

-' · l•,i..: ilit, or ( OIH J llll ,111\ ( "-lu,h :

1hc,.111, 111 """l1 u1 11' 1l,l h,1 11,t

\ 1..\ 11 .111d lit Ip· 1l1l h11 llll I I\) 111 • q

5. ( oulrolo , t·r \ ,,,·t~: l11tl11.:(1 r I'

huild111 !-! 111.i, li11111,.1u11111 ir1.. 1.:lt
r '
LIMITATION\ 01· A << 0 1"'J'I ( 1\1(.

1"11c follm,vmg are tile. l1 1111lallf11 r~of Acu,u111m"-

l. Rtconh on l~ mon<'la~ t nrn,a <h<m~ \u..-" mtm u,1 ad f'i •nnn t r. ; r .. ,

non,nonct~,,~ 11:111 -,;itlJClJ1 ..,l tl\ (._q11,11lh 1lf mt.'1Hn,ullur urnt l(pro.JK.t 1
:m: ignored in accrn n11 mp
2. Bistoric:J l in nahm.': \,, 01111111 t t)n,tdl~f'>linh tu hlfl\. .al tr u\ ...1C11or ... 1, tra: ,,,.JI..•

h~i, l' lK' Cl \lTCd rn 1hL p:1 -..1 nnl~ r'l· l t,rJeJ tn JI.\.I t,nllfle' t'""''l
cs11 111J tHm:-.:\11LI !nn:.' t'. t:-1 :- ,llt ntHu •1,1de1cJ ll.JLlOUnlmg

3. Prirt' k\'cl d,:m gl'~ :trc no1 ro n~id ert'd : \\.l unlm~ Ji.~
whil h llU) lK' l'Ur 1}·om 11mt' 10 ll tnt'. 1.h u, ,l J\.~,r:1 rt"l la.:L'> the \.U.'lt'.ni f' ;n

4. Dor~ not providt' realb,tk information :\\ rule pft1)J.fl!l~ the tx.lt L.') 1 tAl.t~

0 1 th e' :J Lrnununt m :i) m1lut"ncc> tlw 1in:1I 1c-~1.1 b \. t !nc bu~1nr , c..'nl~x" t tru\nuf.

f'hL· unJc-1~lw 1d111i; l,I 1h1.:· it,! kl\\ lllr! 1um, \IJ .h. , \ lUHUl~ , ·, '1~' R'\! ·,..q'-, \,. Ull..' .\'1. ..... 1 . ~
proccS!'.> . S,,lll1: ol tllL·r1 1rn<:e,pl 11111L·d bl'1 11 \\

l. Atto unt : A lnn11 :tl rn ·u1d \ 11 .1 1•,uthul.u t)r, ,•t tr.11t:, .t..,:1 .. 1 n .,·\p!i°"'~...l U\
I1HJJ11:> ur utlii.: t un11 lil 1m·,1',i1 1vm1.:1n ,U\\.i kl:"1'-1111 .1 kdt.:, t..-.~ •tl .."'f
1 I l!h.1th,'11.Hhlh, \ ... '-·l.,urU
i "> :1 •~un, rn,ff) o l , ck, dill hu, me,, lt. u 1--.,1~ 11,111, .u llllt' pLu. '- rl"Lllllll t.J .t (X.-f -..Jtl .t....,~l ...-,~ictt '!t:
rtvenu1: 11 ,1, 11 i:d rn til t: h t:.1d111g .• \ 11 ,1~ n>u1111.., ,t b1 t1..·11t1,tun . . ► t li1t,u1" 1.tl t1 .m-..11.. t1 ... 1n, . .,r ~l
particu lar pe1~on or i!L'm, "lrn:ll ha, t\\\ ) \ldn r.,lkd 1.kb1t -.i.k ,uh.I 1..1 1.:dn ,1d,•
 () ) -~- - - -- - - -
-{ Accountancy J
• l

2. \ (' (1Ht t1 tln1 1 l 11 ft, \ 11 , 11 1d \l l 111 1111H·11 1l l1 :111sucti on 1n the books of accounts. like,
11111111111 I 1,l,hH,k1 ·\1 '

-~· 'lhlu,m·flm.-., • l u111s111,'IH111s :Ill' llloi:v ll('li vilie::. lll'U husiness, which involvetransferofmoney
l 11 t' 1'l'd' 1" ,c i' ll' l'S lw1wc1.: n lwo pr1:,(1 11!; ur two accounts. For example, pnrchase of
f ,,, ,d, , ,1k ,,1 f' 11 11d:-.. b(11Towi 11 )t, lr11111 lw11 k. lending of money, salaries paid , rent paid,
1• 1111 u111 "- 111 11 1\'vch 1.'d ,111d di vidrnd t\:cviw d. Tnmsacl.ions are of two types, namely, cash and
l t\·d 11 \I ,ln,h \ 1u11 ~

4. \ ,·tountit,µ. l\Tiod : l hl' period n!' 1i111c, rm whi ch an operating statement is prepared.
='· Prop1·1l'to1: \ j'll' l'!--1111 who owns ~1 business is called as a proprietor. He contributes capital
1n ti ll' h11',1m•,~ \\ 11h an in tention or earning profit.

6. ( ·~,pita I: lt 1~ the ~m, nunt invested in the business. This amount is increased by the amount of
pt()lit, camcd and the amount of additional capital introduced. It is decreased by the amount
(l l lns:-.l'~llKUrred ~nd the amounts withdrawn.
7. A ~)\d, : \ :--.-;d:--. arc the properties of every description belonging to the business. Cash in

lund . rbnt ..u,d mJ-:hinc.ry, furniture and fittings , bank balance, debtors, bills receivable,
-;t<)ck of good~. in\'estments, goodwill are some examples for assets. Assets can be classified
1111t, l~ngihk and intangible.
Tangible Assets: These are the assets having physical existence, which can be seen
V and touched Fo r example. plant & 111achine1y. cash, etc.

Jma11gible Assets: 7hese are the assets haring iw physical existence, but theirpossession
g n e., r,.\ e tr, ,rim e nghts and bcne.fits tu the owner ft cannot he ser.;n and touched.
(J uod111// JJutenf.\ , trademarks are .,·0111(' cf th <! examples.
&. Liabilitkb: I 1ctbil il1es refer to 01e linnncial ubligationsofa business. These denote the amounts
"" lrn:h u l>u ~,int.:·,-i <,wcs to others. l'.)~.. lu:111s from banks or other persons, creditors for
good"> ",uppl tl:d, hi Ils payable, oulstundi11 t.), c,pcnses, bank overdrafa etc.

9. Orawi ng1,: It 1·, llH.: a111ount orc.isli m v:1111~ uf goods withdrawn from the business by the
111(,p, il'l' ,, 1, ,1 I II' , I Jl•f'!->(11Htl use. II is dcd11rlnl l'rurn the capital.

IO. Dcht,,r-s: A I w, ·,1i11 ( i11di v1d 11ctl or lir111 ). wlH1 rece ives a benefit without giving money or
nHH1t:y° 1, w, ' f II 1 11 ,1111l'didll' ly, lrnl 11 ulilc lu I'll)' in l'uturc or in due course of time is a debtor.
I liL: dthlc1f ,, ,1 1, . ,l 11 ,v, 11 ii ') ,111 ilS~d it, lit\.' I \1i\ 1111n· Sheet.
 II t l't' thto i -. : "lt 1 1 F" 'c~: :1 benefit withou t receiv ing money or monei s worth
\ l' l'l :- 1" '

1\ 1111 h ',li.n ,' h ht1t ,·l,111 11 111 !1 1t 11 w . 1s u credito r. The credito rs are shown as a liabil ity
in the

It ,11.llh'•' ~11,,~-1

I~ f"m •di :h,\~: l '111\·I1: 1-.: , · -.: 1(· tc-1 I11 lit e :u11 ount o f goods ho ught by
a busine ss forres ale or for

:· ,\.· 111 th,· I'''\ 'dt1~·t 1, ' ll purr! wsecl for cash a.re cal led cash purchases. If it is purchased
( ; l 1, 1ds
credit
,'1' ,'t\.\. li1. it is ,-. tlbf :i :-- l'1Tdi• purch ases . Total purc ha ses includ e both cash and

manuf acture d by
U. ~t k ~. ~:,k:- rc li..-r to thL· :111Hn111t ol' goocls sold that are alread y bough t or
are sold and
h1 s111css . \\ lil'n g tn)Lls ~11\: sold lor cash, they are cash sales, but if goods
1.'· ....•
includ e both cash
.-, i: rncnt i~ 1h 11 rl'cl'i ,wl ~11 the time of sale, it is credit ·sales. Total sales

openin g and closing

l -t Stock: Sr(lL'l-- i11c ludes goods w1sold on a particular date. Stock may be
accounting period.
~'-"-"-..__· ll1e 1em1 opening stock means goods unsold in the beginning of the
accoun ting period.
\\~:ere.as. the term cl osing stock includes goods unsold at the end of the
and earnings
J 5. R e\ en ue: Re\'enue means the amount receivable orrealised from sale of goods
rrom .merest. di\·ide nd, comm ission etc.
and servic es. For
I 6. £)._pen se: fr is the amoun t spent in order to produc e and sell the goods
t-:-_amplt. p urchase of raw materials, payment of salaries, wages etc.

J- . fo cume: Incom e is the differe nce between revenue and expens e.

J~ - \'.<:i uch er : ft j,., a w ritten c..locum ent in surpor t ofa transac tion.
It is a proof that a particu lar

w1n--,aew,n ha'., wkc n rl ~tc<.: for the value stated in the voucher. It may be in the fonn of
cash
the accoun ts.
rw.::i pt. 1r1voiu:., cash mernc >, h,mk pay-in-slip etc. Voucher is necessaiy to audit

J ,, . R bCt ip( : Keu.:ipt j ,; un ;ickrw wlec..lge ment for cash received. It is issued to the party paying

,.,it ti Ji (;'.,(,;,C 1pl~, for1111 /te h;1:-;is for entri es in cash book.

( St 'Vl o/lA H'l j

ing the
; ,.u )1J , d 11 ,1, 1,,c
;d lt·d W ! 1I w ' /rtrJf!. l(ltge r4 business'. Accou nting helps in comm unicat
;,wJ p111 lies int eres ted in it. Book- keepin g is the branch of knowledge
f,,,,,, , 1 i:,J 11 ,J, , 1111 , ,i 1, 11 , 111 v ,1 r 1
ve of book-keeping is•to
lh,,t ,._ , 1 Jfl',, .1111 ·d v111I 11 , •1 (I I ii 111 µ_,ii h11siness transactions. The basic objecti
t,, 1 11 I" 111M11, 111 ,,·r,11 d , ,1 idl 1111 ' l,11s inc-'is trnn sactions.