Book keeping:

It is mainly concerned with record keeping or maintenance of books of accounts.

The maintenance of books of accounts includes the following four activities:

1. Identifying the transactions of financial nature from amongst the various

transactions.

2. Measuring the identified transactions in terms of money.

3. Recording the identified transactions in the books of PRIME ENTRY.

4. Posting them into ledger.

The book keeping functions is routine and

clerical in nature and can be performed even by persons having limited knowledge
of accounting. Book keeping is the primary nature.

Accounting
Accounting starts where the book keeping ends. It includes the following
activities.

1. Summarizing the classified transactions in the form of profit and loss account
and balance sheets etc.

2. Analyzing and interpreting the summarized result .In other words, drawing the
meaningful information from profit and loss account and balance sheet etc.

3. Commuting the information to the interested parties.

Thus, an accountants work goes beyond that

of a book keeper. However, in actual practice the accounting process includes the
book keeping function also because on the basis of book keeping records, an
accountant draws up such financial statements as profit and loss account and
balance sheets etc. periodically. In a small concern, the accountant performs the
work of bookkeeping also.

ACCOUNTING CONCEPT

1. Business entity concept

2. Going concern concept

3. Accounting year concept

1
4. Money measurement concept

5. Realization concept

6. Dual aspect concept

7. Cost concept

8. Accrual concept

9. Matching concept

1. BUISNESS ENTITY CONCEPT: According to this concept, business is treated as a

unit, separate and distinct from its owners, creditors, managers and others. In
other words, the owner of a business is always considered as distinct and separate
from the business he owns. Business unit should have a completely separate set of
books and we have to record business transactions from firms point of view of the
proprietor/partner .The partner/proprietor is treated as a creditor of the business to
the extent of capital invested by him in the business.

Because of the concept of separate entity, the

proprietors house, his personal investment in securities ,personal income and
expenditure are kept separate from the accounts of the business entity .In the
absence of separate entity ,the net profits and financial position of a business entity
cannot be known .The concept of separate entity is applicable to all forms of
business organization .Though in case of proprietorship firms and partnership
firms ,the liability of the firm is to meet by the personal assets of the proprietor and
therefore there is no separate existence of the firm as legal person . However in
accounts firm and owners are quite distinct to each other. Though proprietorship
firm and its proprietor are having same legal entity but for the purpose of
accounting they are treated separately.

2. GOING CONCERN CONCEPT: As per this concept it is assumed that the business
will continue to exist for a long period in the future. The transactions are recorded in
the books of business on the assumptions that is a continuing enterprise. It is on
this concept that we record fixed assets at their original cost and depreciation is
charged on these assets without reference to their market value. For example, if a
machinery is purchased which would last, say for 10 years the depreciation will be
charged for these ten years at the time of calculating the net profit or loss of each
year. Because of the concept of going concern the full cost of the machine would
not be treated as an expense in the year of its purchase itself. As the benefit of the
acquisition will be available to the organization in the years to come.

2
 It is also because of the going concern
concept that outside parties enter into long term contracts with the enterprise give
loans and purchase the debentures and the shares of the enterprise also. Without
this concept ,the classification of current fixed assets and short and long term
liabilities cannot be made and such classifications would be difficult to justify .At the
time of incorporation of company heavy expenditure is made ,but the same is
deferred for years to come and gradually written off depending on the theory LOAD
WHAT THE TRAFFIC CAN BEAR. There are many concern who are having more than
100 years life e.g. Statesman, Amrit Bazaar Patrika, Tisco etc.

3. ACCOUNTING YEAR CONCEPT: Accounting period is necessary for management,

for making new policies or amending old policies after seeing the performance of
the business during one year. According to going concern concept business has an
indefinite life so it is a difficult task to know the results of the business due to
indefinite period of business. But to see the trend or to have an idea about the
performance and profitability of business, total life of a business is divided into
smaller periods. This short span of time period consists of 12 months period of 12
months is called as an accounting period. It may be 1 st Jan to 31st Dec. or 1st April to
31st March, 14th April to 13th April of succeeding year.

4. MONEY MEASUREMENT CONCEPT: Only those transactions and events are

recorded in account books which are capable of being expressed in terms of money.
An event, even though it may be very important for the business, will not be
recorded in the books of the business unless its effect can be measured in terms of
money with a fair degree of accuracy.

For example, accounting does not record a quarrel

between the production manager and sales manager. These facts or happening
cannot be expressed in money terms and thus are not recorded in the books of
accounts.

5. REALISATION CONCEPT {REVENUE RECOGNITION}: Revenue means the amount

which are added to reserve or capital as a result of business operations. Revenue is
earned by sales of goods or by providing a service. Concept of revenue recognition
determines the times or a particular period in which revenue is realized .Revenue is
deemed to be realized when the title or the ownership of the goods has been
transferred to the purchaser and when he has legally becomes liable to pay the
amount. Preferably, it is taken into consideration with an eye over the extent of
actual realization. For example , if a firm gets an order of goods on 1 st January
,supplies the goods on 20th January and receives the cash on 1 st April ,the revenue
will on deemed to have been earned on the 20 th January ,as the ownership of goods
was transferred on that day.

3
 Revenue in case of income such as rent, interest, commission etc is
recognized on a time basis. For example, rent for the month of March 2015, even if
received in April 2016 will be treated as revenue for the financial year ending march
31,2015.Similarly if commission for April 2015 is received in advance in march 2015
,it will be treated as revenue of the financial year commencing April 2015 .

6. DUAL ASPECT CONCEPT: According to this concept, every business transactions is

recorded as having a dual aspect .In other words ,every transactions affects at least
two accounts .If one account is debited ,any other account must be credited to the
same extent .The system of recording transactions based on this concept is called
as double entry system.

It is because of this principle that two sides of the

balance sheets are always equal and following accounting equations will always
hold good at any good point of time :-

ASSESTS = LIABILITIES + CAPITAL

Whenever a transaction is to be recorded, it has to be recorded in two or more

accounts to balance the equations. Equation must remain balanced whenever a
transaction takes place.

For example, X commences the business with the Rs 5

Lakhs in cash and takes a loan of Rs 1 lakh from the bank and these Rs 6 lakhs are
used in buying in some assets, pay and machinery .The equation will be as follows:

ASSETS =LIABILITIES + CAPITAL ==] Rs 6 lakhs = Rs 1 lakh

+Rs 5 lakh.

7. COST CONCEPT: According to this concept, an asset is ordinarily recorded in the

books of accounts at the price at which it was acquired. This cost becomes the basis
of all subsequent accounting for the assets .Since, the acquisition cost relates to the
past, it is referred also as historical cost. This cost is the basis of valuation of the
assets in the financial statements.

For example, if a business entity purchases a

building for Rs 5, 00, 000 it would be recorded in the books at this figure
.Subsequent increase or decrease in the market value of the building would not be
recorded in the books of accounts. If two years later the market value of the
building shoots up to Rs 10, 00,000, the increased value will not be ordinarily
recorded in the books of accounts.

8. ACCRUAL CONCEPT :- In accounting , accrual basis is used for recording of

transactions .It provides more appropriate information about the performance of
business enterprise as compared to cash basis. Accrual concept ascertains true
profits or loss for an accounting period and to show the true financial position of the
enterprise at the end of the accounting period.

4
For example: - If 10 lakhs are deposited as fixed deposit on 01.07.2013

Rate of interest = 12%

Date of maturity =30.06.2014

Amount of interest = Rs 1, 20,000

By accrual concept: - July to march -) 2013-2014 =) Rs 90,000

April to June -) 2014-2015 =) Rs 30,000.

9. MATCHING CONCEPT:-This concept is very important for correct determination of

net profits. According to this concept, in determining the net profits from business
operations, all costs which are applicable / related to revenue for the period should
be charged against that revenue. Accordingly, for matching costs with revenue, first
revenue should be recognized and then costs incurred for recognized. Hence, by
matching concept, revenue and expenditure should match. Example: If we takes
sales in the march of a year we will take and the a/c entire expenditure related to
the sales up in the march 2015 irrespective of the fact whether it has actually been
paid or not

ACCOUNTING CONVENTION: An accounting conventions may be

defined as a custom or generally accepted practice which is adopted either by
general agreement or common consent among accountant .It may differ from one
individual to the other. Following are the main accounting conventions:-

1. Conservatism

2. Materialism

3. Consistency

4. Disclosure

CONVENTION OF CONSERVATISM OR PRUDENCE :- According to this

convention ,all anticipated losses should be regarded in the books of
accounts ,but all anticipated or unrealized gains should be ignored .Provision
is made for all known liabilities and losses even though the amount cannot be
determined with certainty .
Following are the examples of the
application of the principles of conservatism:-
1. Provision for doubtful debt is created in anticipation of actual bad debts.

5
 2. Provision for a pending law suit against the firm, which may either be
decided in its favor .As per this convention, the stock is valued at market
price or cost price whichever less is.

MATERIALISM :-According to this convention ,items having an insignificant

effect or being left out or merged with other items ,otherwise accounting
statements will be unnecessarily overburdened. Items should be regarded as
material if there is reason to believe that knowledge of it would influence
decision of informed investors. It makes decision making process.
It should be noted that what is material for one concern may be
immaterial for another. For example: - The cost of small tools may be material
for a small repair workshop but the same figure may be immaterial for
escorts limited. One item which is material in a particular year may not be
material in subsequent year. for example: provision for bad doubtful debt
was made in previous year but in current year as the sundry debtors
significantly low and most of them pertain to current year, this provision is
not required to be made in current year .As per COMPANIES ACT
1956,expenditure of 1% of turnover or more should be considered as material
one.

CONSISTENCY: - This convention state that accounting principles and

methods should remain consistent from one year to another .These should
not be changed from year to year. In order to enable the management to
compare the profit and loss account and balance sheet of the different
periods and draw the important conclusions about the working of the
enterprise.
If a firm adopts different accounting
principles in two accounting periods, the profits of current period will not be
comparable with the profits of the preceding period.
But the convention of consistency should not be taken to
mean that it does not allow a firm to change the accounting methods
according to the changed circumstances .Otherwise the accounting will
become non flexible and the improved techniques of accounting will not be
used .Example :- Method of valuation of inventory , method of charging,
depreciation ,provision for bad and doubtful debts .There are three types of
consistency :
Vertical Consistency,
Horizontal Consistency
and third Dimension Consistency.
Vertical contingency stipulates that the policies for preparing P&L A/c. and
Balance sheet should be same.

6
 The Horizontal contingency stipulates that similar policies should be adopted
in an organization from year to year.
Third dimension consistency expects that all organisations dealing with same
products or in same industry should adopt same policies to facilitate inter
firm comparison.
If for any reason this decided to change some policy in a particular period
.The effect of change in profitability should be indicated in the financial
statements as notes on A/Cs. There are three types of consistency viz:
Vertical Consistency, Horizontal Consistency and third Dimension Consistency.

DISCLOSURE: - This principle requires that all significant information relating

to the economic affairs of the enterprise should be completely disclosed. In
other words, there should be a sufficient disclosure of information which is of
material interest to the users of the financial statements. Disclosure of
material facts does not mean leaking out the secrets of the business but
disclosing sufficient information which is of material interest to the users of
the financial statements. Since, the purpose of financial statements is to
provide meaningful information to various parties it is important that
adequate disclosure be made so that they have firm opinion at the time of
taking decisions. All sort of weakness are required to be shown .The strength
may be shown weaker than what it is but the weakness are required to be
indicated. Under this option contingent liability is important ones. A
contingent liability is the likely liabilities of an organization which they take in
future provide a particular incident takes place .Otherwise the things would
remain as it is. E.g. the organization has given guarantee in favor of party at
the time of applying for loan .If that party for legal, valid reasons fails to keep
its promise which results in non-deposit of loan installments then the
company will have to pay the loan along with interest for the guaranteed
amount .This item should be disclosed as a note on A/Cs.

DIFFERENCE BETWEEN CONCEPT AND CONVENTIONS.

CONCEPT CONVENTION
1. BASIS It is based upon It is based upon
assumptions, which general agreement.
form foundation.
2. PRECEDENTS It follows the It is not followed by

7
 conventions. concepts.
3.PERSONAL Personal judgment It plays major roles in
JUDGEMENT does not play any following accounting
role. conventions.
4.INTERNAL It is internally
CONSISTENT It is not consistent consistent.
5.UNIFORMITY IN It is uniformly It is not uniformly
APPLICATION applied in diff. applied.
organizations
6.LEGAL STATUS Concepts are Conventions are
generally established by
established by the common accounting
law principles.

PROCESS OF ACCOUNTING
1. Recording the transactions.
2. Posting the transactions {Including classification}
3. Checking the arithmetical accuracy of posting and balancing by preparing
trial balance.
4. Preparation of profits $ loss A/Cs {receipts payments a/c, income and
expenditure/c}
5. Preparation of financial statements including balance sheets.

APPROACH:-
1. Traditional approach {British system}
2. Modern approach {accounting equation}

SYSTEM OF BOOK KEEPING:-

1. Single entry system
2. Double entry system
3. Triple entry system {or integrated system of accounting}