Meaning 20Characteristics 20Objects 20and 20Necessity 20of 20Book keeping

Meaning, Characteristics, Objects and Necessity of Bookkeeping

 

Bookkeeping Meaning – Definition of Bookingkeeping

 Book-keeping is that branch of knowledge which tells us how to keep a record of financial transactions. The need for recording such transactions arise because:

1.       agriculture (i) it is difficult to remember the various financial payments and receipts taking place relative value during a period of time

2.       In modern forms of business organizations, the control of business rests with different mentions persons and the results are to be reported to the ;

3.       The financial information is required for the purposes of costing, budgeting, forecasting, and planning ; and

4.       book-keeping records are submitted to various government agencies like Income tax, accounts and 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 importance essential idea behind maintaining such a record is to show the correct position regarding income and expenditure. 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 of book-keeping. Book-keeping can as such be defined “as an art and science of recording business transactions in a systematic and chronological order.”

Like any other subject, book-keeping has been defined by various authors as follows: “Book-keeping is the art of recording business dealings in a set of books.”                                                     J.R. Batliboi

“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.”                                    L.C. Cropper

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

“Book-keeping is an art of recording in books of accounts the monetary aspect of commercial or financial transactions.”                                                                                                                                                  Northcot

“Book-keeping is the art of recording business transactions in a systematic manner”.                                                                                                                                                                        A.H. Rosenkan

“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.”                                           A.J.Favell

Characteristics of Book-keeping

After analysing the aforesaid definitions of book keeping, the following characteristics emerge.

1. Book-keeping is a fundamental accounting activity for recording business transaction in the prescribed books. It means the system prescribes the types of books to be use. Depending on the individual needs of the enterprise, some variations may be adopted. However, the general pattern of books remains the same.

2. Every transaction is properly analysed before recording.

3. The transactions recorded relate to transfer of money or money’s worth (also referred pecuniary transactions). Thus, events which are non-pecuniary, like giving a gift of the friend on his appointment as a new director of a company will not be record ed irrespective of their importance to the company. On the other hand, pecuniary transactions even if petty shall be recorded.

4. 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 the recording must be universal i.e., any person must be able to comprehend and interpreted another person’s recording.

5. It is both a science as well as an art.

6. It provides enough information about the position of various accounts.

Book-keeping Process

The process of book-keeping contains the following steps:

bookkeeping process

 

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

1. Identification of transaction/event

All transactions and events which are financial in nature relate to the entity and have documentary evidence are to be identified for recording. Non-financial activities are to be ignored.

2. Recording of first stage

Financial transactions and events identified at step number one are recorded in the books of original entry i.e. Journal or sub-journal.

3. Posting in the Ledge

All transactions recorded in the books of original entry relating to person, property, expense, income, losss or gain are posted in the respective accounts maintained in the ledger (book of principle remecord). Ledger accounts provide latest information at a glance.

1.       Ledge account balancing

At 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. Difference is entered on the shorter side and the same is shown as balance brought down on the opposite side.

2.       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 arithmetical accuracy of the books. If trial balance does not tally, it indicates existence of error(s) which are located and rectified.

Objects of Book-keeping

         i.            Objects of book-keeping may be stated as follows:

       ii.            to have a permanent record of each transaction of the business (i.e. the entity).

      iii.            to show the financial effect of each transaction recorded on the entity.

     iv.            to ascertain the combined effect of all the transactions (during an accounting period) on the financial position of the business on a particular date.

       v.            to disclose factors responsible for earning profit or suffering loss in a given period.

     vi.            to know the amount recoverable by the business from others (sundry debtors) and payable to others (sundry creditors).

    vii.            Determination of tax-liability of the business.

  viii.            Prevention of errors and frauds.

     ix.            Protection of assets.

       x.            Measure of exercising a system of control.

Necessity of Book-keeping

The utility or importance of book-keeping can be judged from the following points:

a) Limitation of human memory: Capacity of human beings is limited as to how much one can remember and that too for how long? Proper accounting records do away with the need of remembering.

(b) Owners and managers being different persons: In case of company form of organization, ownership is with shareholders and management is in the hands of board of directors. Written records supported by documentary evidence are essential to avoid any mistrust or doubt among owners and managers.

(c) Determination of amounts recoverable and payable by the business.This information also helps in realising debts and paying off the liabilities.

(d) Preparation of financial statements. Business wants to know the profit earned or loss suffered during the year and its financial position at the end of the year. This is disclosed by income statement (Trading and Profit and Loss Account) and Position Statement (Balance Sheet) respectively. Book-keeping records provide necessary data for preparing these statements.

(e) Need for financial information. Financial information and data are needed for cost ascertainment, planning, budgeting and forecasting. Records maintained by book-keeping are the source of such information.

(f) Requirement of exercising control. Size of business, these days has grown and become complex. For exercising effective control, the managements institute different controls, which require periodic reports. Source data for preparing such reports is supplied by book-keeping records.

(g) Information needs of various users. Different users of accounting information like owners, investors, bankers, creditors, etc. are interested in the affairs of the business. Bookkeeping records provide relevant information to meet the requirement of various users.

(h) Need of taxation authorities. Book-keeping records are regarded by the taxing authorities as authentic and reliable for determining tax liability.

(i) Prevention of frauds. Book-keeping system is so outlined as to incorporate a system of internal check and control which minimizes the possibility of frauds taking place.

(j) Provides evidence. Since book-keeping records are backed by documentary evidence, therefore, the same are admitted by the courts as authentic evidence admissible in court cases.

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