Book-keeping, Accounting & Accountancy

Book-keeping: - It is a simplest form of accounting, or we can say, it is the record-making

phase of accounting. It records the financial data relating to the business operations in a
significant and orderly manner. It covers the following:
 Identifying the transactions and events;
 Measure them;
 Record them in proper books of accounts; and
 Classify them in proper Ledger.

Accounting: - Accounting is that language of business through which a business house

communicates with the outside world. It is the process of recording financial transactions in
a proper format. The main objective of accounting is to reflect the true and fair picture of
profitability and financial position which helps management to take corrective actions and
future decisions. In addition to the functions of book-keeping, accounting covers the
following:
 Summarizing the classified transactions in the form of income statements and position
statements;
 Analyzing and interpreting the summarized results; and
 Communicating the interpreted information to the interested parties.
Thus we can say, accounting is a service-based and measurement discipline.

Accountancy: - It refers to a systematic knowledge of accounting. It explains the reasons and

the processes of accounting.
 Book-keeping
(Record keeping phase of accounting)

Accounting
(Refers to the actual process of preparing accounts)

Accountancy
(Refers to a systematic knowledge of Accounting)
 Golden Rule Of Accounts
Keeping in view the previous classification of Accounts, the rules of DEBIT and
CREDIT are summarized below :-

Types of Personal Real Nominal

Accounts Accounts Accounts Accounts
DEBIT The What All
Receiver comes in expenses
and loses
CREDIT The giver What goes All incomes
out and gains
Useful Fundamental Equations of Accounting :-

• Increase in asset-- debit, decrease in asset-- credit

• Increase in asset-- debit, decrease in liability– credit

• Decrease in asset-- credit, increase in asset– debit

• Increase in liability-- credit, decrease in liability--

debit
 Recording of Transaction
The recording of transactions in the books of accounts
may be represented as follows :-

Recording of Transaction

Cash Transaction Non-Cash Transaction

Recorded in Cashbook Recorded in Journal

Ledger
(Classified summary of all Transaction)
Journal
A journal records all daily transactions of a business in the order of
their occurrence. A journal may, therefore, be defined as a book
containing a chronological record of transactions. It is a book in which
transactions are recorded first of all under the double entry
system. Thus, journal is a book of the original records. A journal does
not replace but precedes the ledger. The process of recording
transactions on the basis of rules of double entry system in a journal
is termed as “journalizing.” The record of a business transaction in
journal is called journal entry.

The proforma of a journal is as follows:

In the books of………………
Journal entries for the month / period of ………
Date Particulars L/F Dr (Rs) Cr (Rs)
Advantages of Journal

The recording of business transactions in journal book on the

basis of double entry system has following advantages:

1. Complete Information about the Business

The journal gives complete information about business
transactions in a chronological order. Accounts to be debited and
credited are recorded at once in one place.

2. Explanation of the Transaction

An entry in the journal book includes a brief explanation of the
transaction called narration.

3. Minimum Errors
Double entry system used for recording is clearly visible in journal as
both debit and credit aspects are recorded at one place. It also makes
posting into ledger accounts easier. This ultimately reduces possibility
of errors.
 Ledger
Ledger contains a classified summary of all transactions recorded
in cashbook and journal. It is the main book of account. Ledger
can also be called Principal book as final information pertaining to
the financial position of a business emerges only from the
account.

Steps in ledger posing :-

 Enter the date of the transaction in the left-hand side of the A/c
 Particulars column records the title of the other account affected
 Journal folio (J/F) column records the page number of the journal from
which the posting to the ledger has taken place
 Amount column records the amount mentioned in the journal against
title of the account under consideration

For posting of the account to be credited, above mentioned steps

are followed but with one difference. Name of the a/c in particulars
column on the debit and credit side are preceded by the words
‘To’ and ‘By’ respectively.
Cash received from Geet & Co. of Rs.1000/- on
7/1/2008
Date Particulars L/F Dr (Rs) Cr (Rs)
7/1/08 Cash A/c Dr 1000
To Geet & Co A/c 1000
(being cash received from Geet & Co)

Cash A/c
Dr
Cr
Date Particular J/F Amount Date Particular J/F Amount

7/1/08 To Geet & Co 1000 31/1 By balance c/d 1000

Geet & Co A/c

Dr
Date Particular J/F Amount Date Particulars J/F Amount
Cr
31/1 To balance c/d 1000 7/1/08 By Cash A/c 1000
 Trial Balance
A Trial Balance is a statement compiled at the end of a specific
accounting period. It is a summary of all the General Ledger
Balances outstanding as a particular date. All the debit balances from
the ledger are shown on one side and all the credit balances are shown on
the other side.

A Trial Balance is a five-column schedule listing the names and balances of all
the ledger a/cs. The different columns of the Trial Balance are: -
 Serial number
 Heads of Accounts
 Ledger Folio
 Debit balance, and
 Credit balance.

A debit balance in a general ledger account indicates an excess of debit side

over the credit side of the ledger. Similarly, a credit balance in a general
ledger account indicates an excess of credit side over the debit side.
 Errors Disclosed by a Trial Balance
The disagreement of a Trial Balance indicates the presence of one or more of the
following errors in the books of accounts.
 Omission to post an Amount in the Ledger :- If a cash receipts of Rs.500 from
Mr.X has been properly recorded in Cash Book, but has not been posted in X’s
a/c, the Trial Balance will fall short by Rs.500.

 Debit or Credit Entries are not posted at all or Posted Twice :- If stationery
purchased on credit from Mr.Y for Rs.300 has been properly recorded in the
stationery a/c but not in the account of Y, the Trial Balance will fail to agree.
Similarly, if Y’s a/c is correctly credited but stationery a/c has been wrongly
debited twice, the trial balance will not agree.

 Debits are wrongly Posted as Credits and Vice-Versa :- If a cash receipts of

Rs.1000 as interest is properly debited in the cash book but has been recorded
on the debit side of the interest a/c by mistake, then credit side of the Trial
Balance will fall short by Rs.2000.

 Wrong Totaling of Subsidiary Books :- If the total of nay subsidiary books has
been cast wrongly, it will cause a disagreement in the trial balance.
 Difference in Amount between the Entries :- If different values of an item are
posted in two different accounts, the Trial Balance will not agree.

 Errors in the Computation of an Account Balance :- If the balance of an account

is not correctly computed, the balance of the ledger will not show the true
position and will cause disagreement of the Trial Balance.

 Omission of Account Balance :- If the balance an account is not listed in the

Trial Balance at all, it will fail to agree.

 Balance of an Account Wrongly Recorded in the Trial Balance :- If the balance

of an account is wrongly recoded in the Trial Balance, it will not agree. If the
balance of purchase a/c of Rs.1000 has been wrongly posted as Rs.100 in the
Trial Balance, the debit side of Trial Balance will fall short by Rs.900.

 Errors in Extraction of the Trial Balance :- The Trial Balance will not tally if any
or both the columns are wrongly totaled.
 Errors Not Disclosed by a Trial Balance
 Errors in Omission :- If a particular transaction is omitted altogether from the
journals, it will not disturb the agreement of the Trial Balance.

 Errors of Principle :- This type of error arise because of an incorrect application of

the principles of accounting.

 Compensating Errors :- These are a group of errors, the total effect of which is not
reflected in the Trial Balance. One error is compensated by another error or by
errors of an opposite nature.

 Recording Wrong Amount in Journal :- If a transaction is wrongly recorded in the

books of original entry and is subsequently carried through the ledgers. It will not
cause any disagreement in the Trial Balance.

 Errors in Recording a Transaction on the Correct Side of a Wrong A/c :- If a

transaction is recorded on the correct side of a wrong a/c, it will not cause a
disagreement in the Trial Balance.