Saturday 3 November 2018

CBSE Class 11 - Accountancy - Theory Base of Accounting - Introduction to Book Keeping (#cbsenotes)(#eduvictors)

Introduction to Book‐Keeping

(Chapter 2: Theory Base of Accounting)

CBSE Class 11 - Accountancy - Theory Base of Accounting - Introduction to Book Keeping (#cbsenotes)(#eduvictors)

Accounting can be defined as an information system that provides reports to users about the economic activities and condition of a business.   In earlier times, the Barter system was followed.  Goods were exchanged for goods.    Gradually,  the need was felt to have a common medium of exchange for goods and services and thus, the evolution of money took place.   All the activities performed involved money.  Business activities came into existence.  It was very difficult for businessmen to remember each and every transaction of the business and therefore, recording all the transactions became necessary. As a result, accounting systems are designed to show the increases and decreases in each accounting equation element as a separate record. This record is called an account. This process of recording all the transactions in a systematic manner is known as Book‐Keeping.

What is Book-Keeping?

Book‐Keeping is a systematic manner of recording transactions related to business in the books of accounts. In Book‐Keeping, transactions are recorded in the order of the dates. An Accountant is a person who records the transactions in the books of the business and is expected to show the financial results of a business for every financial year. A financial year in India is followed from 1st  April to 31st  March.

According to J. R. Batliboi
"Book‐Keeping is an art of recording business dealings in a set of books." 
According to R.N  Carter:
"Book‐Keeping  is  an  art  of  recording  in  the  books  of  accounts,  all  those  business  transactions  that  result in transfer of money’s worth" 

Features of Book‐Keeping

To record business transactions.
Records only monetary transactions.
Transactions are recorded in a given set of Books of Accounts.
Transactions recorded for a specific period are presented for future reference.
Records business transactions in a scientific manner.

All business transactions can be stated in terms of changes in the elements of the accounting equation.

Objectives of Book‐Keeping

Permanent, Datewise and Account wise record of all the business transactions.

To ascertain the Profit / Loss of the business during a specific period.

Keep a record of the Capital Investment in the business.

Business keeps a record of Total Assets and Liabilities.

It keeps a record of the amount a business owes to others and the amount receivable by the business from others.

It facilitates the comparison of the financial performance of a business with previous year’s performance or with the performance of other businesses in the same line of business.

It is useful to ascertain the Tax liabilities and meet the Legal Requirements of a business.

Importance of Book‐Keeping

i. Record:  
Book‐Keeping is recording transactions in a systematic manner.  It may not be realistic for a  businessman to remember all the transactions over a period of time. Thus Book‐Keeping ensures that the record of all the transactions is kept on a permanent basis.

ii.  Financial Information: 
Book‐Keeping records the financial activities of a business. This financial record helps in generating financial information of the business regarding the  Assets,  Liabilities,  Profit,  Loss, Stock Investment etc.

iii.  Decision  Making:  
All the information provided by Book‐Keeping helps the company, business or businessman to make decisions for successful business operations.

iv.  Controlling:  
Management uses the financial records of business to manage and control the business operations in a smooth manner. Such financial records are available from Book‐Keeping.

v.  Evidence: 
Book‐Keeping records can be used as legal evidence in Courts as all the recorded transactions of a business are recorded from source documents which act as evidence in case of any disputes.

vi.  Comparison: 
Record of transactions in the books of accounts helps businesses to compare their financial positions year after year and with other business units.

vii.  Tax  Liability:  
Book‐Keeping helps the businessman in ascertaining the amount payable for  Sales  Tax, Property Tax, Income Tax etc.

Utility of Book‐Keeping
Book‐Keeping is vital for the below parties:

i. Owner:
Book‐Keeping helps to ascertain the financial information and position of the business at any time. Financial information includes Profits, Losses, Assets, Liabilities etc.

ii.  Management:
The various Management functions such as Planning, Organising, Directing and Controlling can be performed effectively and efficiently by the management based on the records and reports available through Book‐Keeping.

iii.  Government: 
The various sources of information available through Book‐Keeping facilitate the Government and the Tax Authorities to ascertain the tax liabilities of the business.

iv.  Investors: 
Investors are interested in the financial statements of a business before investments are made. It provides them with assurance about the safety of their investments.

v.  Customers:
Customers are assured about the financial capacity of the business as well as the quality and quantity of goods supplied by the business,  based on the information available through  Book‐Keeping.

vi.  Lenders: 
Book‐Keeping provides financial information to the lenders enabling them to judge the credit worthiness of the business thus, ensuring uninterrupted supply of funds.

☛See also:
Chapter 1: Basic Terms
Accountancy Sample Question Paper (2016-17)
Accountancy (Syllabus) - 2017-18
Chapter 2 - Systems and Basis of Accounting (Revision Notes)