Book-keeping tells us how to keep a record of business transactions. Only transactions related to business expressible in money terms are recorded. Book-keeping activities include recording in the journal, posting to the ledger and balancing of accounts. But Book-keeping is unable to present clear financial picture of the state of affairs of a business. The information contained in these books needs to be analysed and interpreted to make any judgement about the financial position of the business. Such information can be given by accounting.
Accounting is a system which collects and processes financial information of a business. This information is reported to the users to enable them to make appropriate decisions.
American Accounting Association defines accounting as “the process of identifying, measuring and communicating economic information to permit informed judgements and decision by users of the information”. The process of accounting as per above definition is given below
The process given above may be put into an accounting cycle which is an end-to-end sequence of accounting process, which begins with the recording of business transactions and ends with the preparation of final accounts.
Cost accounting is collection, classification and ascertainment of the cost of production for a job undertaken by the company.
Management accounting is use of accounting data for the purpose of policy formulation, planning, control and decision making by the management.
Transaction is an activity concerned with businesses which involve transfer of money or goods or services between two entities. For example, purchase of goods, salaries paid, etc. Cash transaction involves cash receipt or payment of cash, for example buying goods by paying cash. Credit transaction involves transaction on credit where receipt or payment happens later.
Proprietor owns a business and contributes capital to the business to earn profit.
Asset is a thing of value to the business or significant property belonging to the business. Some examples include Cash, plant and machinery. Tangible Assets have physical existence. It can be seen and touched. For example, plant & machinery, cash, etc. Intangible Assets have no physical existence but their possession gives rights and benefits, to the owner. It cannot be seen and touched. Goodwill, patents, are some of the examples.
Liabilities are financial obligations of a business towards others e.g. loans from bank, creditors for goods supplied.
Drawings are cash or value of goods withdrawn from the business/company by the proprietor for his personal use. It is deducted from the capital. Debtor is a person, individual, or firm which receives benefit but promises to pay in future. Debtors form part of firm’s assets. Creditors give benefit to the company first and claim it in future. Creditors form liability in the balance sheet.
Purchases are goods bought for resale or for use in the process of production. Purchases can be cash purchases or credit purchases. Sometimes these purchases are returned due to poor quality or not as per the terms of purchase, it is called purchases return. Net purchases are equal to Total purchases (cash+credit) minus purchase return.
Sales is the amount of goods sold from already bought goods or manufactured goods Sales can be cash sales or credit sales. Sometimes customer may return goods due to poor quality or not as per terms of sale, it is termed as sales return or return inward. Net sales is equal to Total sales (cash+credit) minus sales return.
In accounting stock includes goods unsold on a particular date. Opening stock means goods unsold in the beginning of the accounting period whereas the term closing stock includes goods unsold at the end of the accounting period.
Revenue includes amount received or receivable from sale of goods and other earnings in the form of interest, dividend, commission, etc.
Expense is all spending in order to produce and sell the goods and services. For example, spending for raw materials, wages, etc.
Income is the difference between revenue and expense.
Voucher is a written document supporting a transaction. It is evidence that a particular transaction has taken place for the value given in the voucher. The voucher may be in different forms, for example, invoice, cash memo, etc.
Invoice is a business document or statement prepared by the seller of goods containing information about seller and buyer, the date of sale and description of goods with quantity and price.
Receipt is an acknowledgement given by seller for cash received. Seller issues it to buyer who pays cash. Cash book entries are based on these receipts.
Account is a summary of business transactions (financial transactions) at one place relating to a person, asset, expense or revenue named in the heading. An account has two sides called debit side and credit side.
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