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LEARNING OBJECTIVES

After studying this chapter you should be able to:

• Define book-keeping, accounting and accountancy.
• Know various stages involved in evolution of accounting.
• Judge meaning of accounting cycle.
• Know the need of accounting.
• Know accounting as a store-house of information.
• Know accounting as Language of business.
• Explain the role of Accounting.
• Explain relationship between Book-keeping, Accounting and Accountancy.
• Know whether accounting is a Science or an Art.
• Know various users of accounting information.
• Know various qualitative characteristics of accounting information.

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Introduction

The development of trade, industry and commerce over the world has necessitated the recording of all business transactions clearly and systematically. During the past few decades, business has witnessed a sea-change from small units to big business houses and from manual operations to highly mechanised ones.

The necessity of recording all the transactions clearly and systematically cannot be over-emphasised. However strong one’s memory may be, one cannot hope to remember all the details regarding all the transactions. As such, proper maintenance of books of accounts is indispensable for a businessman. It helps him to know at any point of time:

• What is the profit earned or loss suffered during a particular period?
• What is the value of assets?
• How much is the amount of liabilities?
• How much amount is receivable from various customers (Debtors) and payable to various suppliers (Creditors)?

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Evolution of Accounting

The development in accounting took place slowly over centuries in order to cater the changing socio-economic needs of the society.

1. Ancient Times: Civilization in its early stages used crude methods of accounting. In India, Kautilya (4th century BC) in his book Arthasastra described the importance of accounting and its maintenance.
2. Medieval Period: During this period, the development of trade and commerce necessitated a more systematic approach.
3. Modern Accounting: Luca Pacioli (1445–1517), a great philosopher of Italy, wrote the first printed book on the double-entry system in 1494. He is widely regarded as the Father of Modern Accounting.

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Need for Accounting

Accounting is regarded as a hub of information as it is a definite process of interlinked activities starting from identification of transactions to reporting. It provides valuable information to various investors and creditors for evaluating the success of the business unit.

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Meaning and Definitions of Book-Keeping

Book-keeping is that branch of knowledge which tells us how to keep a record of financial transactions. It is often described as the "art of recording transactions".

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Features of Book-keeping

• It is an art as well as a science.
• It records only those transactions that are financial in nature.
• Transactions are recorded in a set of books.
• It is the primary stage of the accounting process.

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Objectives of Book-keeping

• To keep a permanent and systematic record of transactions.
• To know the profit or loss of the business.
• To ascertain the financial position (Assets and Liabilities).
• To know the amount due from debtors and due to creditors.

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The Book-Keeping Process: A Step-by-Step Guide

Bookkeeping is a highly structured, logical process. Think of it as a pipeline where raw financial data goes in, and organized financial insights come out.

Here is the complete 7-step flowchart of the bookkeeping process:

1. Identifying: Selecting only financial transactions.
2. Measuring: Assigning a monetary value.
3. Recording: Writing transactions in the Journal.
4. Posting: Transferring entries to the Ledger.
5. Balancing: Determining the difference between debit and credit sides.
6. Preparing Schedules: Listing balances for debtors and creditors.
7. Trial Balance: Verification of arithmetical accuracy.

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Distinction between Book-keeping and Accounting

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The 11 Fundamental Objectives of Accounting

1. Maintenance of Records: Taking the burden off human memory.
2. Calculation of Profit/Loss: Knowing the economic result of activities.
3. Depiction of Financial Position: Showing what the business owns and owes.
4. Communication to Users: Providing data for decision-making.
5. Evidence in Court: Serving as legal proof.
6. Prevention of Frauds: Systematic recording discourages dishonesty.
7. Assessment of Tax Liability: Crucial for Income Tax and GST.
8. Comparative Study: Comparing performance over years.
9. Decision Making: Helping management plan future actions.
10. Information to Stakeholders: Meeting the needs of investors and creditors.
11. Storehouse of Information: A permanent record of business history.

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1.10 The Process and Functions of Accounting

Think of accounting as a seamless information processing machine:

• 📥 INPUTS: Business transactions and events (financial terms).
• ⚙️ PROCESS: Recording ➔ Classifying ➔ Summarising ➔ Analysing & Interpreting.
• 📤 OUTPUT: Communicating to both Internal (Management) and External (Investors, Govt) end users.

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1.11 The 4 Main Branches of Accountancy

1. Financial Accounting: Deals with recording transactions and preparing final accounts (Historical).
2. Cost Accounting: Focuses on cost ascertainment and cost control.
3. Management Accounting: Provides information to management for planning and decision-making.
4. Social Responsibility Accounting: Accounts for the business's contribution to society.

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1.23 The Accounting Cycle

The accounting cycle is a continuous sequence that begins with the recording of transactions and ends with the preparation of final accounts.

1. Opening Entry: Bringing forward last year's balances.
2. Recording in Journal: The first step for current transactions.
3. Posting to Ledger: Sorting transactions into accounts.
4. Preparing Trial Balance: Checking accuracy.
5. Adjustment Entries: Handling outstanding or prepaid items.
6. Closing Entries: Closing nominal accounts at year-end.
7. Preparation of Final Accounts: Trading A/c, P&L A/c, and Balance Sheet.

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