Introduction to book-keeping & Accountancy

Introduction to Book keeping and Accountancy

1. BOOK-KEEPING & ACCOUNTANCY KP'S Group Tuition 1

2. What Is Book-Keeping Book-keeping Is Recording, The Financial Transactions And Information Pertaining To A Business In A Systematic Chronological Order. It Is Concerned With Ensuring That Records Of Those Individual Financial Transactions Are Accurate, Up-to-date And Comprehensive. A Person Who Records The Same Is Called As An Accountant . KP'S Group Tuition 2

3. J.R.Batliboi : “Book-Keeping Is An Art Of Recording Dealings In Set Of Books.” R.N.Carter : “Book-Keeping Is Science And Art Of Correctly Recording In The Books Of Accounts, All Those Business Transaction That Result In Transfer Of Money Or Money’s Worth”. Definitions of Book-Keeping KP'S Group Tuition 3

4. IMPORTANCE OF BOOK -KEEPING Record Financial Information Decision Making Controling Evidence Comparison Tax Liability KP'S Group Tuition 4

5. UTILITY OF BOOK -KEEPING Owner Management Government Investors Customers Lenders KP'S Group Tuition 5

6. Accounting Has Wider Scope Than Book-Keeping. Accounting Includes Book-Keep Classifying, Summarizing, Analyzing And Reporting These Transactions. Accountancy Starts Where Book-keeping Ends. Accounting Gives Details Of Entire Year. Accountancy KP'S Group Tuition 6

7. Kohler: “Accountancy Refers To Entire Body Of The Theory And Process Of Accountancy.” “An Art Of Recording, Classifying And Summarising The Business Transactions, Balancing Of Accounts, Drawing Conclusions And Interpreting The Results Thereof”. Definitions Of Accountancy KP'S Group Tuition 7

8. BASIS OF ACCOUNTING Cash Basis Accounting  Under The Cash Basis Accounting, Revenues And Expenses Are Recognized As Follows: Revenue Recognition : Revenue Is Recognized When Cash Is Received. Expense Recognition : Expense Is Recognized When Cash Is Paid. KP'S Group Tuition 8

9. 2. Accrual Basis Accounting  :  Under This, Revenues And Expenses Are Recognized As Follows:   Revenue Recognition : Revenue Is Recognized When Both Of The Following Conditions Are Met: A. Revenue Is Earned.   B. Revenue Is Realized Or Realizable.   Expense Recognition : Expense Is Recognized In The Period In Which Related Revenue Is Recognized. KP'S Group Tuition 9

10. Basic Accounting Terminologies KP'S Group Tuition 10

11. Transaction Exchange Of Goods And Services For Money Or Money’s Worth Between Two Or More Persons Or Parties Is Known As Transaction. There Are Two Types Of Transaction Cash Transaction : When Goods Are Exchanged For Cash It Is Known As Cash Transaction E.G.: A Purchased Goods From B And Paid Cash Credit Transaction: When Cash Is Not Paid Or Received For Exchange Of Goods And Services It Is Known As Credit Transaction. Payment Will Be Made On A Later Date. E.G.: A Purchased Goods From B On Two Months Credit. KP'S Group Tuition 11

12. Entry & Narration Entry: Recording Of Transaction In The Proper Form Or Method In The Books Of Accounts Is Called An Entry. It Is A First Record Of Any Business Transaction In The Books Of Accounts. Narration: A Brief Explanation Of The Business Transaction For Which An Entry Is Passed Is Called As A Narration. It Is Always Given In A Bracket Just Below The Entry And Its Starts With A Word ‘Being’. KP'S Group Tuition 12

13. Goods All The Commodities Or Articles In Which A Businessman Deals Are Called Goods. This Are Purchased Or Manufactured For The Purpose Of Sale And To Earn Profit. E.G.: Cloth Will Be Goods For Cloth Merchant. Gold Will Be Goods For Goldsmith. KP'S Group Tuition 13

14. Profit & Loss Profit Is The Excess Of Revenue Or Income Over The Expenditure Or Expenses. I.E Income- Expenses E.G.: Mr. X’s Total Business Income Is ` 4,00,000 For The Year Ending On 31/3/2012. His Total Business Expense Is ` 3,50,000 For The Same Year. Hence For The Year 2012, Mr. X’s Profit Is ` 50,000. Loss Is The Excess Of Expenditure Or Expenses Over The Revenue Or Income. I.E. Expenses – Income E.G.: Mr. A/S Total Business Income Is ` 4,00,000 And Total Expenses Is ` 4,25,000. Hence He Has A Loss Of ` 25000 KP'S Group Tuition 14

15. Assets All Properties Held By A Businessman for Use Without Any Intention Of Gaining A Profit Are Called Assets. Assets are further classified into: Fixed Assets Current Assets Tangible Assets Intangible Assets KP'S Group Tuition 15

16. Fixed Assets Assets Which Are Purchased And Held For Long Period Of Time In Business Are Called As Fixed Assets. E.G. Plant & Machinery, Vehicles, Land & Building Etc KP'S Group Tuition 16

17. Current Assets The Assets Which Are Changing From One Form To Another Frequently Are Called Assets. E.G. Cash In Hand, Debtors, Bill Receivable, Goods Etc. KP'S Group Tuition 17

18. Tangible Assets: The Assets That Can Be Seen, Touched And Felt Are Called Tangible Assets. E.G. Motor Car, Furniture, Cash Etc KP'S Group Tuition 18

19. Intangible Assets The Assets Which Have No Physical Existence But Help A Business Earn Profits Are Called Intangible Assets. E.G. Goodwill, Copyright, Patent Rights Etc. KP'S Group Tuition 19

20. Liabilities The Amount Payables By Business Firm To Outsiders Are Known As Liabilities. They Are Further Classified Into A) Fixed Liabilities: Owings Of Business Of Permanent Nature Are Called Fixed Liabilities. E.G. Capital, Debentures B) Current Liabilities: Owings Of Business Towards Outsiders For Short Terms Duration Are Called Current Liabilities. KP'S Group Tuition 20

21. Contingent liabilities These Are Liabilities Which May Arise On Happening Or Non-happening Of A Specific Event In Future. These Liabilities Are Not Recorded In The Books Of Accounts Until They Arise E.G. A Pending Suit In A Court Filed By Customer Demanding Compensation For Adverse Effects Of Product After Use. KP'S Group Tuition 21

22. Capital & Drawings Capital Means Total Amount Invested In Business By The Owner, In The Form Of Cash And Other Assets. In The Accounting Sense, Capital Is The Excess Of Assets Over Liabilities. Capital = Assets – Liabilities. E.g. Rakesh’s Total Assets In The Business Are Rs 25, 00,000 And Total Liabilities Amounted Rs 1, 50,000. Thus, His Capital Is Rs 1,00,000 (i.e. Rs 2, 50,000 – Rs 1, 50,000 = Rs 1,00,000) Drawings: Anything withdrawn by proprietor from business for his/ her personal use is called Drawings. It reduces the capital. KP'S Group Tuition 22

23. Debtors & Creditor Debtors: Debtor Is A Person Who Owes Something To Others. In Other Words A Person Who Has To Pay To Others Is Known As Debtor. E.G. Mr. A Sold Goods Worth Rs 5,000 To Mrs. P On Credit. Here Mrs. P Has To Pay To Mr. A. Hence Mrs. P Is Debtor Of Mr. A Creditor: A Person To Whom Other Owe A Debt Is Known As Creditor. In Other Words A Person To Whom Amount Is Payable Is Called Creditor. In The Above Example, Mr. A Is Creditor To Mrs. P KP'S Group Tuition 23

24. Capital Expenditure Cost Incurred In Acquiring An Asset Is Called Capital Expenditure. All Capital Expenditure, To Repeat, Is Treated As Asset And Shown In The Balance Sheet. Expenses Paid For Customs Duty, Freight & Insurance Are Capital Expenditure. These Are Non - Recurring In Nature. E.G. A Machinery Costing Rs 2, 00,000 Was Imported On Which Custom Duty, Freight & Insurance RS 20,000 Is Incurred. KP'S Group Tuition 24

25. Revenue Expenditure Expenses Incurred For Acquiring Or Producing Goods For Resale Is Called Revenue Expenditure. In Other Words, Expenses Incurred For Carrying Employee. This Is Recurring In Nature And Generally Has To Be Paid Regularly. KP'S Group Tuition 25

26. Deferred Revenue Expenditure An Expenditure Is Of A Revenue Nature But The Benefit Of The Expenditure Is Available For Following Two Or More Years. Such Expenses Are Called Deferred Revenue Expenses. E.G. Advertising Expenses: Normal Annual Advertising, Expenses Are Written Off To Profit And Loss Account Annually. Suppose A Heavy Advertisement Campaign Is Carried Out. The Benefit Of This Will Be Available For Next Two Or Three Years. Then So Much Of Such Expenditure As Benefits In The Current Year May Be Considered ‘Revenue’ And Written Off To Profit & Loss Account. The Balance Is Carried Forward As ‘Deferred Revenue Expenditure’ And Appears In Balance Sheet On Asset Side KP'S Group Tuition 26

27. Discount It Is An Allowance Or Concession Allowed Or Received For Carrying Business Transaction. There Are Two Types Of Discount: Cash Discount: Discount Allowed For Spot Payment Is Known As Cash Discount. It Is Generally Allowed By The Creditor To His Debtor For Immediate Payment Of Amount Due. This Appears In The Books Of Accounts Trade Discount : The Discount Or Concession Allowed For Trading Purpose Is Known As Trade Discount. It Is Usually Allowed For Trading Purpose Is Known As Trade Discount. It Is Usually Allowed By Manufacturer To A Wholesaler Or By A Wholesaler To A Retailer When Goods Are Bought In Bulk. It Is Allowed As A Deduction From Invoice Price Or Catalogue Price. This Discount Is Not Recorded In The Books Of Account. KP'S Group Tuition 27

28. Solvent & Insolvent Solvent: When A Person’s Assets Are More Than His Liabilities, He Is Known As Solvent. In Other Words When A Person Is In A Position To Pay Off His Liabilities He Is Called Solvent. Insolvent: A Person Who Is Not In A Position To Pay Off His Total Debts From His Total Assets Is Called As Insolvent Person. Such Person’s Liabilities Is More Than His Assets. KP'S Group Tuition 28

29. Accounting year It Is The Period Of 12 Months For Which Accounts Are Kept And Closed By The Proprietor. Accounting Year Starts From 1 st April And Ends On 31 st March. At The End Of Accounting Year A Proprietor Has To Prepare Trading Account, Profit And Loss Account And Balance Sheet To Find Financial Position. KP'S Group Tuition 29

30. Trading Concern & Not For Profit Concern Trading Concern: The Organization Which Is Engaged In Trading Activities Is Known As A Trading Concern. Aim Of Such Organizations Is To Earn Profit. Not For Profit Concern Or Non – Trading Concern: The Organisations Which Are Not Engaged In Trading Activities Are Called Non Trading Concerns. Such Concerns Render Social Service Such As Promotion Of Literature, Culture, Art, Sports, Education Etc. Aim Of Such As Organisations Is Not To Earn But To Give Services. KP'S Group Tuition 30

31. Goodwill Goodwill Is The Value Of Reputation Of A Firm In Respect Of Profits Expected In Future Over And Above The Normal Rate Of Profit. It Is An Intangible Asset. E.G. If A Firm Employs A Capital Of Rs 5 Lakhs, The Rate Of Profit By The Firm Earned By Firm Generally Is 10%. If The Firm Earns Rs 50,000 Or Less There Will Be No Goodwill, But If The Profit Is Rs 60,000 Then Goodwill Attached To The Extra Amount Will Be Rs 10,000 (i.e. 60,000 – 50,000) KP'S Group Tuition 31