All businesses need to maintain records of their financial transactions for various purposes. Financial aspects of the business operations are captured and recorded in physical or digital form which is known as book keeping. Book keeping is the first stage of accounting process. Bookeeping is done for the following reasons:
1. Maintaining the records of transactions in a systematic manner
The foremost objective of Accounting is to record the transactions in a systematic manner. It is only this recording that enables classifying and summarizing the transactions, which help to achieve further objectives of accounting.
2. Ascertainment of operating results
An important objective of a business organization is to earn profits. Shareholders and other stakeholders of a business viz., Managers, Taxation authorities, lenders etc., are all interested in knowing the profits or losses of the business. Hence, periodically one needs to measure the profits of a business. Accounting enables to ascertain and measure the profits and losses of the business.
3. To ascertain the Financial position
Similar to ascertainment of profits or losses, ascertainment of financial position viz., assets and liabilities of a business is an important activity. Ascertainment of the financial position helps the business to measure the financial strength of the business. 4. Enabling decision making
An organization needs the active involvement of various parties in deciding on appropriate course of action among the alternative courses of action. Decisions such as fixing the price of products, choosing among alternative investment opportunities etc are the common decisions taken by the Managers and the Board of Directors. Provision of such information is an important objective of Accounting.
5. Enabling Assessment of Tax liability of the organization
Assessment of correct amount of Taxes is possible only if factual information is furnished to the Tax authority, viz., Income Tax, Sales Tax, service Tax, Value Added Tax departments. Such factual information can be made available only if robust and effective accounts are prepared.
6. Enabling Effective allocation of economic resources
Investors and lenders take decisions on their investments based on the operating results and financial position of various business organizations. If accounts are prepared and presented in an as is where is condition, the investors and lenders would be able to make their decisions of investment based on genuine information. If we provide such genuine information, it ultimately results in effective allocation of economic resources.
Books of accounts
Every organization needs to maintain books of accounts to meet the objectives of accounting and of the business. Different organizations may maintain different books of accounts depending upon the legal requirements, GAAP, Industry practices etc., However, basically, there are two types of books of accounts maintained in any organization. They are Subsidiary Books and Ledger. Subsidiary books are also known as books of Original entry, because the transactions are first recorded in these books. Subsidiary books are like registers and basically contain detailed information about a specific group of transactions. Ledger refers to the books of accounts in which accounts of individual assets, liabilities, income and expenses are maintained. Ledger may again be classified into Subsidiary Ledger and General Ledger. A ledger consists of two sides. The left hand side is known as ‘Debit' side and right hand side is known as ‘Credit' side. Debit is shortly denoted as ‘Dr' and credit is shortly denoted as ‘Cr'. We will discuss the books of accounts in detail.
Any trading or manufacturing organization (or any company) would be maintaining the following basic subsidiary books.
1.Purchases Book- Credit purchase of raw materials, finished goods, consumable stores etc., which are used for the purpose of manufacturing or for resale to the customers on a regular basis are entered in the purchases day book.
2. Sales Book- This is just opposite to that of Purchases Book. Whatever is applicable to purchases book is applicable to the sales book as well excepting that in sales book we enter the sales of goods which are sold on credit.
3. Cash Book- All transactions which involve receipt and payment of cash are entered in the cash book. Cash Book can be a simple cash book where in only cash receipts and payments will be entered. It can consist of both cash and bank receipts and payments
4. Bank Book- All transactions involving a bank are entered in a Bank book. Transactions which are recorded in a Bank Book are Bank Deposits, Withdrawals, Bank Transfers, Bank Charges, Bank interest etc.,
5. Purchases returns book (Outward return book) - We may sometimes find that the goods which are supplied by our suppliers may not be as per our specification, or of different quality or in excess. We maintain Purchases returns book for entering the goods which are returned to our suppliers.
6.Sales returns book (Inward return book)- This is just opposite of Purchases returns book
7. Debit note book- We prepare debit note when the customers have charged in excess
8. Credit note book- We may prepare a credit note when we had charged excess price to our customer or when there is an omission by our supplier to raise an invoice for certain items
9. Bills receivable Book- Records payments to be received for goods or services sold on credit
10. Bills payable book- Records payments to be made for goods or services received on credit
Ledger refers to ‘books of secondary entry'. It consists of accounts of all items namely Assets, Liabilities, Income and Expenses.
Once books of accounts and ledger postings are done, one also needs to perform bank reconciliation. Bank reconciliation statement is prepared periodically, at least once in a month in order to reconcile the balances in the bank accounts as per the bank statement and as per bank a/c in our books
Once all accounting is done, one needs to prepare financial statement in a business. According to the Preface of the International Financial Reporting Standards, the following are considered to be a part of the financial statements.
1.Income statement (Profit and Loss account)- It shows the results of operations of the business for a particular year. This shows the net profit earned or net loss suffered by a business. When we say ‘Net Profit', it takes into account all the expenses and incomes spent and received by a business including the taxes on incomes payable by a business. However, appropriation of profit to the shareholders in the form of dividend, or towards reserves and surplus need to be shown separately from the profit after taxes. The income statement can be broken into various sections, showing profits at various levels such as Gross profit, Net profit, Profit after Tax, Retained profit etc.,
2.Balance Sheet- A Balance sheet shows the assets and liabilities of the business as of a particular date. Specifically, it helps to
i. To know the total Assets invested in business
ii. To know the Position of owner's equity
iii. To know the liabilities of business.
3. Cash Flow Statement - This is a snapshot of the cash movement in an organization classified into different activities of the business.
Once all these accounts are prepared, all limited and public limited companies must send their accounts to the Registrar.
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