Rajasthan Board RBSE Class 9 Social Science Notes Chapter 19 Book-Keeping: Accountancy
Nature of Book-keeping
- According to Eric Kohler, Book keeping is the process of analyzing, classifying and recording transactions for the purpose of
- providing a means by which an enterprise may be conducted in an orderly fashion
- establishing a basis for recording and reporting the financial affairs of an enterprise and results of its operations.
- Book-Keeping is a science as well as an art of recording financial transactions systematically in a separate set of books. It is a science as it is based on certain rules, principles, postulates and conventions. It is an art because it requires skill and practice to keep the books in order.
- It is a social science because we study human behavior with respect to earning of money and wealth and spending that money and wealth to satisfy human wants.
- Book-keeping calls for application of human skill, knowledge, training and experience, in choosing right and correct principles to be followed. Recording of business transactions in specific style and format requires specific skill knowledge and experience. It records financial information of business in a well-planned specific manner.
Objectives of Book-Keeping
- To maintain permanent records of the business transactions for various purposes.
- To ascertain profit earned or loss suffered in the business or in a particular transaction.
- To know the financial position of the business.
- To know the exact amount payable to creditors and receivables from debtors.
- To ascertain exact amount of taxes to be paid to the government.
- To detect errors and provide business information to related interest groups like investors, shareholders, debtors, creditors, suppliers, government, etc.
- To measure the efficiency and progress of the business.
Characteristics of Book-Keeping:
- It is concerned with recording of financial data relating to business operations in an orderly manner.
- It is a proof in the court of law.
- It is an aid to planning, decision-making and controlling the business.
- It is the lowest phase in the process of accounting.
- Book-keeping involves entry into books of accounts (Journal), recording classification, posting into ledger, trial balance, etc.
- Specific rules and principles are strictly followed to record the entries in the books of accounts.
- The main aim of book-keeping is to ascertain the profit and loss for a specific period and to know the exact financial position of the business at a particular point of time.
- Book-keeping deals with transactions of financial nature only or only those transactions which can be expressed in monetary form.
Historical aspect of Book-Keeping: The art of book keeping existed even in the realm of Babylon. Records shows that accounts were kept in Greece and Rome. The Greeks and Romans had a well developed book keeping system. The first double entry systems of book¬keeping involved during the 13th and 14th centuries. The earliest systematic description of the double entry system was provided by Luca-de-Bargo Pacioli in 1494.
Accounting is an art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least, of a financial character and interpreting the results thereof.
Characteristics of Accounting
- Accounting is reliable and based on verifiable documentary evidence.
- It provides relevant information which may change the results of the business.
- Its information is recorded, classified and interpreted in an understandable manner.
- It is comparable. The results of the current year can easily be compared with the results of the previous years.
- It is based on principles, postulates, concepts and conventions which are universally applicable and recognised.
Advantages of Accounting
- It helps in ascertaining the profit earned or loss suffered in an accounting period.
- It assists in managing the business in planning and exact quick decision making.
- It ascertains the financial position (status) of the business.
- It helps in taxation matters.
- Accounting may act as a proof in the court of law.
- It helps-in remembering all the details of the business transactions.
- Accounting helps in revaluation and valuation of assets at the time of sale of business.
- It provides guidance to the managers to decide, manage and control the business more efficiently.
Limitations of Accounting
- It is not exact as it is based on different estimates made by different people.
- It ignores the price level changes and records all the items at historical value.
- It records only monetary transactions thus ignoring the important non-monetary transactions.
- It may make manipulations in the Balance Sheet. ‘
- It omits qualitative information such as efficiency and capability of management, quality of products etc.
- It is based on rigid concepts and conventions.
- It may be influenced by personal judgement.
- It requires knowledge of English language.
- It needs specific training, knowledge and skill to maintain the books of accounts.
- The layman cannot understand accounting system.
Distinction between Book-keeping and Accounting
|1.||Nature||It is mainly concerned with recording, classifying and summarizing the recorded data.||It is mainly concerned with the recording of financial data relating to business operations in an orderly and systematic manner.|
|2.||Clerical work||It does not require much clerical work.||It involves and requires lot of clerical work.|
|3.||Scope||Its scope is large as it involves the work of book-keeping as well.||Its scope is narrow as it is a part of accounting.|
|4.||Knowledge||It requires high level of knowledge, conceptual under standing and analytical skill.||It requires only elementary knowledge of accounting to carry out the function of Book-Keeping.|
|5.||Financial position||Exact financial position is not shown by Book-Keeping.||Financial position can be known by final accounts.|
Various Methods of Accounting
Single Entry System: Here accounts are not kept on two sides. Every institution adopts it according to its own convenience. Some institutions keep the personal account of their transactions only and pay no heed to the non-personal accounts except cash. Some keep the accounts of other non-personal aspects.
In other words there are no specific rules of accounting of transactions in single entry system. Thus, it is an incomplete entry system rather than single entry system. This system is not appropriate as a legal proof in the court but it is more suitable for small businessmen. Its accuracy cannot be done through the trial system. So there is always a possibility of errors in this system.
- No certain rules and principles
- Only cash book for business and personal entries of cash transactions
- Only personal accounts
- Dependence mainly on original documents
- No trial-balance
- Incomplete accounts, lack of exactness
- Absence of exact financial position
- No authentic proof in court
- Suitable for smaller business
Double Entry System: Here, transaction is done on two accounts. First is debit and second one is credit. At the end of the year, profit or loss account and balance sheet is prepared. Through this, profit or loss in a year and economic status can be drawn. Hence, the chances of misuse can be reduced.
- Two parties-one earns profit, other gives
- A scientific method
- Both affected equally
- Entries for both parties
- Opposite effect on two parties
- Debit side and credit side entries
- Two parties in every transaction
- Same amount is debited and credited in accounts of both the sides
- Ledger – a major account-book
- Trial balance is prepared
- Possible to know earning capacity and fiscal position
- Legal proofs in the court
- Personal, real as well as nominal accounts
Different Stages of Double Entry System
- Original records, i.e. entries just after the transactions in the original books of records. A small business man enters in one book, i.e. Journal, big businessmen in subsidiary books as purchase-book, sales-book, purchase return book, bills receivable book, bills payable book, cash book, journal proper, etc.
- Classification and ledger posting, i.e. the second stage of entries of business transactions. All the dealings are scrutinized and entered in their concerned accounts. This act is called classification and posting in ledger respectively.
- Summary or preparation of final accounts as trading account, profit and loss accounts and Balance sheet.
Mahajani System of Accounting (Indian method)
It is one of the oldest systems of the world. The old businessmen keep their accounts in this system. The accounts are kept in large sized folded books, bound in red color cloth.
Book-Keeping: It is a science as well as an art of recording financial transactions systematically in a separate set of books.
Accounting: It is an art of recording, classifying and summarizing in a significant manner in terms of money, transactions and events.
Mahajani System of Accounting: It is one of the oldest systems of the world where the accounts are kept in large sized folded books, bound in red color cloth.
Single Entry System: It is a type of accounting system where monetary transactions are recorded in a single account.
Double.Entry System: It is a type of accounting system where two accounts are maintained to record the transaction.
Rokar Bahi: Cash Book