Accounting and Book Keeping
Every enterprise irrespective of whether it is large or small, public or private, sole or partnership has financial concern and wish to make profits. It is humanly impossible to remember all the transactions. So there is a need to record them. Accounting is said to be the language of business as it communicates or reports the results of business operations. Accounting is described as the art of recording, classifying and summarising in a significant manner and in terms of money, transactions and events which are in part of financial character and interpreting the results thereof.
The scope of accounting comprises of the following heads :
Data Creation and Collection
Every transaction related to some financial activity is noted and recorded into books. This may be done in manual, mechanical or electronic way. Years back it was done manual and books or physical files were maintained. But in the recent years computers are used and electronic files are maintained. Important files are locked with suitable password.
Data Evaluation controls the activities of business, evaluating the performance of the business and analysing the accounting information for decision making purposes. This activity helps the company to start new product production or modify the existing product.
Data Reporting consists of two parts namely external and internal reporting. External reporting is the communication of financial information to the outside portion. Eg. : Shareholders and government agencies. Internal reporting is concerned with the communication of results of financial analysis to the management for decision making purposes.
Accounting is carried out in four steps or stages namely recording the transactions, classifying the transactions, summarizing the transactions and interpreting the transactions.
Recording the Transactions
All business transactions are first recorded in the book of original entry with the help of cash memos, cash receipts and invoices. This book is known as “The Journal”. All the business transactions are entered in a chronological order. Books of primary entry are Journal and subsidiary books and books of final entry is the “ledger”.
Classifying the Transactions
Transactions of similar native are grouped together and posted into another book called “The Ledger”. The purpose of classifying the transactions of similar nature is to understand their combined effect. For this purpose all such ledger accounts are balanced for a particular period of time.
Summarising the Transactions
Summarising the Transaction is the preparation of the year end summary known as “Final Accounts”. Before preparing final accounts, a list of all ledger balances are prepared in the form of a statement known as “Trial Balance”. Final accounts consist of trading and profit and loss, Account and Balance Sheet”. Trading, profit and loss account reveals the net result of the business. The balance sheet depicts the financial position of the business.
Interpreting the Results
The final stage is to analyse and interpret the results as per the final accounts. This includes computation of various accounting ratios to assess the liquidity, solvency and profitability of the business. This helps the entrepreneur understand all the activities of the company, financial status and plan for the future of the company.
The accounting system has two stages namely book-keeping and accounting. Book Keeping is a process of maintaining routine records in prescribed form and according to set rules, of all events which affect the financial state of the organisation. Accounting is the summarisation from time to time of the information contained in the records, its presentation in a significant form to interested parties, and its interpretation as an aid to decision making by these parties.
It is a statement containing the balances of all ledger accounts as on given date. It is prepared to check the arithmetical accuracy of the ledger postings.
The purpose of financial accounting is to keep records of all the financial transactions so that profit earned or loss incurred can be worked out. Financial position of the business can be ascertained and the financial information required can be provided. The financial statements primarily include trading and profit and loss account balance sheet and Generally Accepted Accounting Principles (GAAP) state that a complete set of financial statements must include:
· Profit and Loss Account or Income Statement,
· Statement of Retained Earnings,
· Balance Sheet, and
· Statement of changes in Financial Position.
It is an important analytical tool in hands of the management useful for analysing the past and planning for the future. It is useful in following and many more aspects;
· It serves as a control device
· It helps in proper allocation of resources
· It helps in the management to formulate financial policies
· It communicates valuable information regarding concerns financial position to outside world It enables the investors and creditors in assessing the degree of risk involved in granting credit or associating with the business.