Bookkeeping definition meaning importances process objectives

Bookkeeping-Definition, meaning, Importances, Process, Objectives accountingrevenue.com/bookkeeping-definition-meaning.html Sanjoy19

July 21, 2020

Bookkeeping can as such be defined� as an art and science of recording business transactions in a systematic and chronological order.� Book-keeping is art and science both.

Learning Objectives : Book-keeping After studying this unit,you will be able to:

Meaning Of Bookkeeping: Bookkeeping is that branch of knowledge that tells us how to keep a record of the financial transaction. Book-keeping is a part of accounting that is concerned with the recording of financial transactions and events in the books of accounts.

It is a process by which a record of financial transactions is maintained. Thus, bookkeeping is concerned with:

i. Identifying financial transactions and events,

ii. Measuring them in terms of money,

iii. Recording the financial transactions and events as identified in the books of accounts, and iv. Classifying recorded transactions and events or posting them into Ledger Accounts.

The need for recording such transaction arise because: i. The financial information is required for the purposes of costing, budgeting, forecasting and planning, and ii Book-keeping records are submitted to various government agencies like Income tax, value-added tax, and other taxing authorities for taxation purposes.

Most of us do maintain some kind of written record of our income and expenditure. The essential idea behind maintaining such a record is to show the correct position regarding income and expenditure.

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such a record should be clear and systematic so that it can be easily understood. It should show that to whom, when, and what for a payment has been made. The need for maintaining a record of income and expenditure in a clear and systematic manner has given rise to the subject to book-keeping.

Definitions of Bookkeeping: Like any other subject, book-keeping has been defined by various authors as follows :

J.R.Batliboi : “Bookkeeping is the art of recording business dealings in a set of books”.

L.C.Cropper: “Book-keeping is the science of recording transactions in money or money’s worth in such a manner that at any subsequent day the nature and effect of each transaction, and the combined effect of all the transactions, may be clearly understood so that the accounts prepared at any time from the records thus kept may show the owner of the book his true financial position.”

R.N.Carter: “Book-keeping is the science and art of recording correctly in the books of accounts all those business transactions that in the transfer on money or money’s worth”

C. northcote : “Book-keeping is the art of recording in a book of accounts the monetary aspect of the commercial or financial transaction.”

A.H. Rosen Kampf: “Book-keeping is the recording of financial transactions of a business in a methodical manner so that information on any point in relation to them may be quickly obtained.”

Characteristics of Book-keeping: After analysing the aforesaid definitions of book-keeping the following, characteristics emerge : i. Book-keeping is a fundamental accounting activity for recording business transactions in the prescribed books. This system prescribes the types of books to be used.

Depending on the individual needs of the enterprise, some variations may be adopted.

However, the general pattern of books remains the same.

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ii. Every transaction is properly analysed before recording. iii. The transactions recorded relate to the transfer of money or money’s worth (also referred to as pecuniary transactions).

Thus, events that are non-pecuniary, like giving a gift to a friend on his appointment as a new director of a company will not be recorded irrespective of their importance to the recorded. iv. Book-keeping is a systematic method of recording. Haphazard recording depending on the whims and fancies of individuals does not constitute book-keeping.

The system of recording must be universal i.e, any person must be able to comprehend and interpret another person’s recording. v. It is both a science as well as an art. vi. It provides enough information about the position of various accounts.

Objective of Bookkeeping : Some objectives are same of accounting and bookkeeping. i. To have a permanent record of each transaction of business (i.e. the entry) ii. To show the financial effect of each recorded transaction on the entry. iii. To ascertain the combined effect of all the transactions (during an accounting period) on the financial position of the business on a particular date. iv. To disclose factors responsible for earning profit or suffering loss on a given period.

V. To know the amount receivable by the business from other (sundry debtors) and payable to others (sundry creditors) vi. To determine the tax liability of the business. vii. To prevent errors and frauds. viii. To provide rotection of assets of the entry. ix. To exercise a system of control.

The importance of Bookkeeping : Importance of book-keeping can be depicted in the following chart as:

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book-keeping importance

Importance of Book-keeping are details discussed.

I.Plan for Major Expenses: a. You won’t miss opportunities and can plan when expenses can not be avoided.b. b.Understand seasonal operation’s peaks and plan accordingly.

II.Track Expenses: Bookkeeping is important because it shows your business profitability. You aren’t bookkeeping if you aren’t tracking where you spend money. Be consistent with spending money.

For Example, if you are not tracking your business income statement on a regular basis, it is impossible to know how well ( or not so well ) your business is doing.

III. Keep track of invoice dates and amounts: Know how much an invoice payment is and when it payment is scheduled. Assign someone to track invoices and follow up to companies who are yet to pay.

IV. Tax Preparation: 4/9

Every year your business has to file a tax return. And every year, millions of business owners are scrambling for missing receipts or invoices.

If you are not accurately recording your business transactios, this can affect your business and personal tax returns, causing you to miss out on certain credits and deductions.

V. Cash Flow: Good bookkeeping strategies help to improve cash flow in your business. However, if you are not properly recording your receivables, expenses, liabilities, and revenue, you may not have a holistic view of how cash flows within your business and this can cause late payments with vendors or outstanding customer invoices.

VI. Leave an Audit Trail: a. Audits are failed because of poor management of cash flow and lack of understanding billing cycles. b.Track billing efficiently by having multiple fail-safes for the company to provide information clearly and transparently.

Example : Wave Accounting updated and matches intact statements.

VII. Educate Yourself : a. Practice bookkeeping hands-on. b. Understand you will make mistakes. c. Emphasize the importance of bookkeeping being ongoing and rigorous, Utilize old receipts to make mock statements to ensure proper knowledge of bookkeeping.

VIII. Know when to get external help : Opportunity to have someone who doesn’t see the big picture attempt to, which allows you to see where your company has gaps in bookkeeping.

Example: Utilize knowledge and experience of the Board of Advisors of LC to answer questions relating to proper financial management.

IX. Think About Your project plan and Make Assessments: What is your business in the project of doing? Does bookkeeping reflect that? Rethink your plan and bookkeeping if they don’t match. Book-keeping is reality, while budgeting is guesswork until proven.

Example: Internally audit and review all practices in future decision-making.

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Advantages of Bookkeeping: The main advantages of bookkeeping are given below :

1.Performance and position: The final accounts reveal how much profit has been gained or loss suffered during the period. The balance sheet shows, the exact financial position of a business by showing assets and liabilities on a particular date. Balance is also known as a position statement.

2.Preparation of financial statement: Businessman wants to know the profit earned or loss suffered by the business during the accounting year. He also wants to show the financial position and closing stock of the business at the end of the accounting year.

This disclosed by income statement. Income statement includes trading account, profit and loss account and balance sheet. Book-keeping provides necessary data for preparing these statements.

Process of Bookkeeping : The process of Book-keeping contains following steps :

A brief explanation of the process of book-keeping is described below : 6/9

1.Identification of transactions/events: All transactions and events which are financial in nature, relate to the entry and have documentary evidence are to be identified for recording, non-financial functions are to be ignored.

The purchase of machinery for cash or on credit is a business transaction but received a price list from Sehgal is not a business transaction.

2.Measuring the identified transactions and events: A business enterprise may have five machines and two buildings. It is not the number of machines and building but their values in monetary terms is measured.

For example, In India, as the monetary unit is the rupee, we measure their values in terms of rupees.

3.Recording at the first stage: Financial transactions and events identified are recorded in the books of original entry I .e.journal or sud-journal is a book where all the transactions are first is recorded.

4.Posting in the ledger: All transactions recorded in the books of original entry relating to person, property, expense, income, loss, or gain are posted in the respective accounts maintained in the ledger (book of principal record). Ledger accounts provide the latest information ar a glance.

5.Balancing of ledger accounts: At the periodic interval, accounts maintained in the ledger are balanced. Account is balanced by finding out the difference between the totals of ‘debit’ (left-hand side) and ‘credit’ (right-hand side) of the account. Different is entered on the lesser side and the same is shown as balance brought down on the opposite side.

6.Preparing the schedule of sundry debtors and sundry creditors: The balances of the accounts of debtors are pooled at one place to find out the total amount due to the debtors at the end of the year. A statement (also called as schedule) of debtors is prepared for this under which the names of the debtors and the amount due from them is written.

It is then totaled and called as Total Debtors or Sundry Debtors. Similarly, a statement (or schedule) of creditors is prepared to find out the total creditors. These total debtors and total creditors are written in trial balance instead of written the individual debtors and individual creditors.

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7.Preparation of trial balance: The balances of all ledger accounts are placed on a separate list with debit and credit columns. This list of balances is known as Trial Balance. It is prepared to check the arithmetical accuracy of the books. If the trial balance does not tally, it indicates the existence of errors which are located and rectified.

It is the art of recording business transactions in a set of books systematically.

Bookkeeping Recording system : The two recording systems in book-keeping are: book-keeping System can be depicted in the following chart as:

bookkeeping recording system

i.Single entry system of book-keeping and,

ii.The double-entry system of book-keeping The set of books are i. Journal 8/9

ii.Subsidiary books iii. Ledger iv. Trial Balance and v. Final Accounting.

A. single-entry bookkeeping system : A single-entry system of recording transactions in the books of accounts, may be defined to be an incomplete Doule Entry system.

An accounting system that does not record two aspects of a transaction is called a single entry.

ii.Double-entry bookkeeping system : A double-entry system refers to a system by which every debit entry is balances by an equal credit entry. It recognizes that every transaction which can be recorded in terms of money involves the receiving of value by one or more persons and the giving of value by another or others.

Quick Revision Book-keeping is art the recording business transaction in the book of the accounts. It is mainly concern with the primary books of accounts and the ledger.

Book-keeping includes tasks such as posting business transactions in the journal and the ledger, totaling them and obtaining the balances. Such a work is usually done by journal clerks as a doing it does not require in-depth knowledge of accountancy. i.Book-keeping helps to decision make. ii.It is helps to tax preparation. iii. It is helps to make cash flow. iv. Book-keeping helps to make plans.

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