Concept and Meaning
Book keeping is that branch of knowledge which tells us how to keep
a record of financial transaction. The need for recording such transactions
arises because it is difficult to remember the various financial payments and
receipt taking place during a period of time. There are two systems of book.
Keeping i.e., single entry and double entry system. Under single entry, only an
account or effect of each transaction relating to a supplier or a customer or
cash is recorded. It ignores two aspect of a transaction.
Double entry system, system is modern and scientific system of
recording the financial transaction. It was publicized by Luca Pacioli
in 1495. This system recognizes that every financial transaction has two aspects.
Both of these aspect, i.e. one is debit and another is credit must be recorded
in this system of book-keeping. The rules of double entry system are that every
debit there is a corresponding credit of the same amount. In other words there
are two parties in every transaction, one is given another is receiver. The
following definition further more clear the meaning of the double entry book
keeping.
William Pickles "Double entry system seeks to records
every transaction in money or money's worth in its double aspects. The receipt
of a benefit by one account and the surrender of a benefit by another account,
the former entry are being to the debit of the account receiving and the later
to the credit of that account surrendering."
In summary double entry system is that method of book keeping which
recognize the fact that every financial transaction has two aspects. For example, KHALID sold goods toTARIQ of Rs. 5000 in cash. In this case, KHALID is given and TARIQ is receiver of goods on the other hand, KHALID receives cash from TARIQ
Thinks to Remember
Double entry system of book keeping is a scientific system of
book-keeping as recording. Keeping under this system is made with cause and
effect. The rule for double entry is that every debit should have a credit and
every credit should have a debit.
Features of Double Entry System of Book-keeping
The following are some features or characteristics of double-entry
book-keeping.
1. Double effecting: It follows the principle of double aspect
by debiting and crediting the transaction.
2. Equal effect: It assumes that debit must be equal to credit
mount i.e. It considers the effect of equal amount.
3. Debit and credit: It has two sides i.e. debit and credit.
For example, the benefit receive is given the name debit and the benefit giver
is given credit.
4. Account: It maintains the records of personal, real as well
as nominal accounts.
5. Arithmetical accuracy: Another features of double entry
system of book keeping to check arithmetical accuracy by preparing trial
balance.
Importance or Advantage of Double Entry Book-Keeping System
The following are the advantages of double-entry book-keeping.
1. Complete records of each transaction: Double entry system
presents a complete record of transaction. Because it records both the aspect
of every transaction, which relates to personal or impersonal.
2. Checking of arithmetical accuracy: Arithmetical accuracy
can be checked by preparing trial balance from all ledgers concerned.
3. Profit or loss: Profit and loss account can easily be
prepared. The exact reason for profit and loss can be ascertain.
4. Financial position: It provides full particulars of various
assets and liabilities of the business, so financial position can be known by
preparing balance sheet. A comparative study of the balance sheet for various
years shows a firm's progress.
5. Frauds and errors: It prevents frauds and errors and makes
their detection easier.
6. Accepted by court and tax authorities: This system keeps a
complete record of financial transaction therefore, it is accepted by court,
tax authorities and banking institutions.
7. Scientific and systematic: Double entry system of
book-keeping is scientific and systematic records of financial transaction.
Disadvantage of Double Entry Book Keeping System
1. Expensive: It is an expansive system of book-keeping which
is not favorable for small business.
2. Complicated: It is complicated system where certain rules
and regulations are to be followed.
3. Fails: It fails to disclose the error of omission, error of
principles, errors of commission, and compensating errors.
Accounting Process or Cycle
Accounting process is a complete sequence of accounting activities
that are started with the primary entry of transaction in to journal and ends
with the preparation of final accounts. It includes identifying, recording,
classifying, summarizing and communicating financial transaction. These
business transactions are recorded in a set of rules books, such as journal,
ledger, cash book etc. Unless these transactions are recorded properly, he will
not be in a position to know where actually he stands. Accounting process is a
continuous process in the life of business organization. Following is the
complete cycle of accounting.
ledger a/c---Preparation of trial
balance---Preparation of final a/c---Interpretation and
evaluation
1. Identification of
financial transaction: A business may perform several transaction of which
only financial transactions are recorded in accounts.
2. Journalizing and recording in subsidiary books: In the second
step of accounting process, they are recorded in journal vouchers. Some special
transactions are divided in to subsidiary book as like sales books, purchases
books, sales return books, cash book etc.
3. Posting into ledger account: It is the process of posting
into the various ledger accounts like purchases, sales debtors, creditors,
income account, expenditure account etc. from the subsidiary books.
4. Preparation of trial balance: After preparing ledger a/c,
all the balance of ledger accounts are transferred to trial balance. It is
prepared to check the arithmetical accuracy of financial records.
5. Preparation of
final account: After preparing trial balance, the final accounts are
prepared. Final account shows the profit or loss and the position of assets and
liabilities of the organization.
6. Interpretation and evaluation of financial statement: It is
the last step of accounting cycle. It helps to know about real position of the
organization like liquidity, profitability, owners capital borrowed capital.
Interpretation and evaluation of final accounts and other books of account
provide the information to the owner, manager and other intuition.
Basic Terminologies
1. Capital: The amount with which the trader starts his
business or the amount which is actually invested in the business at any given
time is known as capital.
2. Liabilities: Capital of the proprietor and the debt which
are due by the firm to other parties are collectively known as liability. The
liabilities are two types: Long term liabilities and short term liabilities.
(a) Long term
liabilities: Liabilities those are repaid after a long period is known as
long-term liabilities. Those are debenture mortgages, bank loan, capital etc.
(b) Short term
liabilities: Liabilities is also know as current liabilities, which are
paid within short period or accounting year, those are creditors, bills
payable, outstanding expenses bank overdraft.
3. Drawing: Drawing are the withdraws by money (cash) or
money's worth (goods) by the proprietor from the business for his personal use.
4. Creditor: It denotes the providers of goods or service to
the business on credit.
5. Debtors: Debtors are the customers who purchases good or
services from the business on credit.
6. Ledger: Ledger is a main book of account. It contains all
the account of the business in a well arranged form.
7. Assets: Assets are economic resources which are owned by a
business and are expected to benefit future operation.
Assets = Capital and
liabilities
Assets are divided as following:
(i) Current assets: Assets which can be converted in to cash
within short period or within a year is known as current year. Those are stock,
prepaid expenses, debtors account receivable bills receivable.
(ii) Fixed assets: Fixed assets are those assets which are
acquired only for use and not for resale. Land and building, plant and machine,
furniture, equipment etc. are example of fixed assets.
(iii) Intangible assets: Intangible assets cannot be seen and touch
but exist only in their financial value. Goodwill trade marks, copyright,
patent, etc. are example of intangible assets.
8. Sales: Sales of goods or service for money or moneys worth
is known as sales. The transfer of other assets than goods is not regarded as
sales.
9. Purchases: Purchase refers to acquiring of raw materials by
a manufacturing concern for the purpose of conversion into finished product. In
case of a trading concern, purchases means acquiring by it of goods for the
purpose of sale.
10. Goods: Commodities bought for the purpose of resale are
termed as goods. That is, things (or service) which a businessman sells are
called goods. Thus a cloth merchant deals in cloth, a rice merchant deals in
rice, cloth and rice are goods.
11. Transaction: A business transaction involves exchange of value
or benefit between two person. A exchange means giving and receiving of equal
value. Transaction has two aspect-giving and receiving. The types of
transactions are:
(a) Cash
transaction: Cash transaction involves immediate payment and receipts of cash.
(b) Credit
transaction: Credit transaction is different from cash transaction, because
there is no immediate receipt and payment. They do not involve receipt or
payment of money.
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