Introduction to Book Keeping and

Accounting

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Book-keeping

A society requires different types of organizations.

These organizations are established to achieve specific objectives. In order to achieve the stated
objectives, an organization requires utilizing its human, financial and other resources in the best
possible manner. For the proper utilization and control of such human, financial and other
resources, the organization requires accurate and reliable financial information. Books of account
and financial statement are the main sources of financial transaction. These books of accounts
and financial statement record summarize and report the financial transactions in a systematic
way. Such systematic record of financial transactions helps to supply accurate and reliable
financial information to all concerned parties of the business for making appropriate financial
decisions.
Meaning and Definition:
A business organization performs a large number of financial transactions on a regular basis.
These financial transactions relate to buying, paying expenses, receiving incomes, acquiring
assets, meeting liabilities and collecting dues. The accountant or owner of the business cannot
keep in memory all these transactions. So, such financial transactions are recorded systematically
in a set of the book for future reference.

The following are some of the main definitions of book-keeping:

"Book- keeping is the art of recording business dealings in a set of books." -J. R. Batliboi
"Book- keeping is the art of recording transactions in a systematic manner." -Rosenkamp
"Book-keeping is the science and art of correctly recording in books of accounts, all those
business transactions that result in the transfer of money or money worth." -R.N. Carter
Objectives:
1. To keep permanent records of all the financial transaction of a business.
2. To help to assess the correct amount of tax.
3. To supply information to the concerned parties whenever required.
4. To help disclose the true financial position of the business on a given date.
5. To help to determine correct profit or loss.
6. To classify transactions into real, personal and nominal account.
Accounting
Accounting is broader than book keeping. Book-keeping is a part of accounting. Book-keeping is
concerned only with the systematic record of financial transactions, but accounting is concerned
with the act of recording, classifying and summarizing the financial transactions of a business to
know its profit or loss and financial position. It is also concerned with the act of communicating
the operating results and financial position to all concerned parties of the business. The following
are some of the main definitions of accounting:
"An accounting system is a means of collecting, summarizing, analyzing and reporting in
monetary terms, information about the business." -R. N. Anthony
"Accounting may be seen as consisting of recording, classification, presentation and
interpretation of financial information." -Lewis and Gillespie

Objectives:
1. To maintain permanent records of the financial transactions.
2. To ascertain the amount of profit or loss of the business during a period.
3. To provide information to the tax authorities for determining the amount of tax liability.
4. To disclose the true financial position of the business on a particular date.
5. To communicate the information relating to operating results and financial position of the
business to all concerned parties.
Branches of Accounting
The following are the branches of accounting:
1. Financial Accounting: Financial accounting is that branch of accounting which is
concerned with recording the financial transaction in a systematic manner. It further
involves in classifying, summarizing and presenting financial information in a suitable
form. It also communicates the financial information to the internal users like
departments and management and external users like shareholders, creditors, suppliers,
customers, government, etc. It is maintained compulsorily by all types of business.
2. Cost Accounting: Cost accounting is that branch of accounting which is concerned with
collecting and recording the information relating to the costs. Such costs are incurred in
producing products or reading services during a given period of time. It is further
concerned with classifying summarizing and analyzing the cost information with a view
to determine products cost accurately. It not only determines the total cost of a product
but also identifies the different elements of cost like material, labor and overhead. Cost
accounting regarded as an effective tool for managerial planning and decision making.
3. Management Accounting: Management accounting is that branch of accounting which
is concerned with presenting the accounting information to the management for the daily
activities of a business. It helps the management to achieve the departmental and

organizational objectives. It assists management in carrying out its functions like

planning, decision making and controlling effectively.

Basic Accounting Concepts or Principles

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Accounting is related with the recording, classifying and

summarizing the financial transactions to know the profitability and financial positions of a
business. To know the profitability and financial position of a business, different types of
financial statements are to be prepared. These financial statements are to be prepared on the basis
of certain assumptions, concepts and principles which are known as basic accounting concepts or
principles. The fundamental concepts and principles of accounting are known as Generally
Accepted Accounting Principles (GAAP). The following are the main concepts or principles:
Business Entity Concept
This concept states that the business and its owners are two separate and distinct entities. For
accounting purpose, every business enterprises are treated as a separate entity which is distinct
from its owner. The financial transactions are to be recorded from the view point of the business
and not from the view point of its owner. Such distinction is essential to ascertain the true
financial picture of the business.
This concept states that the business is established to continue its transactions over a long period
of time. All the business makes capital expenditures such as the purchase of building, land and

machinery which are recorded in the books assuming that these assets will be used over a long a
period of time.
Money Measurement Concept
Money measurement concept states that only those transaction which can be measured and
expressed in term of money are recorded in the books of accounts. This concept assumes that
only those transaction which can be measured and expressed in term of monetary value i.e.
Rupee, Dollar, etc.have to be taken into account.Under this concept, all the business transactions
relating to goods, assets and liabilities are to be recorded in their monetary value.
Accounting period Concept
Accounting period concept implies that the total life of the business is divided into different
imaginary time interval and such time interval contain 12 months for the purpose of recording
and reporting the financial performance to the concerned parties. Each time travel interval
contains normally one year which is known as accounting period. In Nepal, accounting period
begins on 1st Shawan of every year and ends on the last day of Ashadh of the next year. At the
end of accounting period, financial statements are prepared to determine the profit or loss and
financial position of the business.
Realisation Concept
This concept states that revenue is assumed to be earned when goods are sold or services
rendered to the customers either on cash or credit. It is not compulsory that revenue must realize
in cash at the time of selling goods and rendering services. At the end of the year, there may be
outstanding expenses and accrued incomes. Such expenses and incomes should be considered
while preparing financial statements.
Cost concept
This concept implies that when the fixed assets are purchased they are to be recorded in the
books of accounts at their cost price. The valuation of the assets is not made on its market price.
The balance sheet always shows the value of fixed assets after deducting the amount of
depreciation from their cost price.
Matching Concept
This concept is a guideline for determining the profit or loss of a business. According to this
concept, the revenue earned has to be compared with the expenses incurred in the same period to
determine the true profit or loss of the business. If the amount of revenue is more than expenses,
the result is net profit but if the amount of revenue is less than expenses, the result is a net loss.
Dual Concept

This concept states that every business transaction has two-fold effects. When the transaction is
performed, its effect is made on two different accounts. If one account is debited; another
account must be credited with the equal amount. This concept of duality in transactions always
equalizes the assets and liabilities in the balance sheet

Accounting System (Single Entry System)

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The practice of book-keeping with the invention of money in Lydia, Greece during 700 B.C.
Different types of recording system were used for recording the financial transactions at that
period. Due to increase in the volume of the financial transaction, the traditional type of
accounting system became unable to fulfill the purpose of accounting. The new and modern
accounting system gradually developed to maintain a systematic record of the financial
transaction. The accounting system can be classified as below:
Single Entry system
Single entry system is that type of accounting system which has no fixed set of rules and
principles for recording the financial transaction. It does not follow the basic principles of
accounting. It does not consider the dual effect of all the transaction. This system only maintains
cash and personal accounts but ignores real and nominal accounts. It prepares cash book and
personal account of debtors and creditors. It has no any specific rules and principles for
preparing the accounts. It is also known as accounting for incomplete records.The following are
the main definitions of single entry system: Single entry system is a system of book- keeping in
which, as a rule, the records of only cash and personal accounts are maintained. It is always
incomplete double- entry system varying with circumstances.Single- entry system is a method

employed for recording transactions, which ignores the two-fold aspects and consequently, fails
to provide the business man with information necessary for him to be able to ascertain the
position.
Features
1. Single entry system has no fixed set of rules for recording the transactions.
2. It has no fixed principles and rules for recording the transactions; therefore, there is a
variation on its application from one another.
3. It maintains a personal account of all debtors and creditors.
4. It maintains cash book for recording cash receipts and payments.
5. It is incomplete because it does not record the transactions.
Advantages:
1. Single entry system is simple to understand and easy to maintain. Under it, no fixed rules
and principles are followed to record the financial transactions.
2. It is economical. It does not require highly skilled manpower to maintain the accounts.
3. It is suitable to the small business organization having a limited number of financial
transactions.
4. It determines the amount of profit easily. It makes a comparison between opening and
closing capital to determine the amount of profit.
Disadvantages:
1. Single entry is an unscientific and unsystematic system because it does not follow any
accounting rules and principles.
2. It does not help to check the arithmetical accuracy of the books of accounts.
3. It is an incomplete record which is not acceptable for the purpose of tax assessments.
4. It does not ascertain true profit or loss and financial position of the business.
5. It is an incomplete system of book-keeping. It does not consider the two aspects of all the
financial transactions.

Double Entry System

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Book-keeping is an act of keeping permanent records of financial transactions of a business in a

systematic way. It helps to determine true profit or loss and financial position of a business.
Modern organization maintains the record of financial transactions under double entry system.
Double Entry system is referred to such accounting system under which every financial
transaction is recorded into two separate accounts with an equal amount to determine the true
profit or loss and financial position of the business.Double entry system emphasizes that every
financial transaction has two aspects. Each transaction is recorded in two separate accounts with
an equal amount. It records both aspects of transactions into debit and credit. The profit and loss
account and balance sheet are prepared to know the profitability and financial position of the
business. Thus, double entry system is more systematic, scientific and complete system of bookkeeping. The following are the definitions of double entry system of book-keeping:
"The specific technique which reflects the concept of duality is known as double entry bookkeeping." -Lewis and Gillespie
"Double entry system is the system under which each transaction is regarded to have two fold
aspects and both the aspects are recorded to obtain a complete record of dealings." -Juneja,
Chawla, and Saksena
Objectives:
1. To maintain the systematic record of financial transactions.
2. To solve the problems arises on financial matters.
3. To provide financial information to the management for making financial plans and
decisions.
4. To determine the financial position of a business on a particular date.
5. To determine the amount of profit or loss of a business during a period of time.
Features:
The following are the main features of double entry system of book keeping:

1. Double effect:
The double entry system maintains records showing the double effect of each financial
transactions. It makes a record of each financial transaction into two different accounts on
two opposite sides.
2. Equal effect:
Every financial transaction affects in two different accounts with an equal amount. The
debit side, as well as credit side of two different accounts, is affected by an equal amount.
3. Debit and Credit:
The double entry system provides two aspects of each transaction with the names 'Debit'
and 'Credit'. The one aspect of the transaction is debited and another is credited in the
books of accounts.
4. Scientific:
The double entry system is a scientific system of book-keeping. It has own rules and
principles for recording financial transactions and preparing financial statements.
5. Complete record:
The double entry book-keeping system maintains records in all personal and impersonal
accounts. Such complete record of financial transactions helps to identify the actual
financial position of a business organization.
Advantages:
1. It helps the record of a financial transaction in a systematic and scientific manner.
2. It helps to prepare trail balance to check arithmetical accuracy of books of accounts.
3. It facilitates for making an audit of the books of accounts.
4. It helps to ascertain the financial position of the business by preparing trading and profit/
loss account and balance sheet.
5. It provides the financial information to the management for making plans, policies, and
decisions.
Disadvantages:
1. It is an expensive system because a number of books are required to maintain.
2. It is not suitable for small business having a limited number of transactions.
3. It consumes more time for recording the financial transactions and preparing different
statements.

4. It requires a trained and qualified person for making the record of the financial
transactions.
Differences between Single and Double Entry System
S.N Single Entry System
1 It is not based on the concept of duality.
It maintain the cash book and personal account of debtors
2
and creditors.
It does not maintain nominal account so it cannot help to
3
ascertain true profit or loss of the business.
4 It cannot help to prepare a trial balance.
5 It is suitable for small businesses.
6 It is not acceptable for tax purpose.

Accounting Terms

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Capital

Double Entry System

It is based on the concept of duality.
It maintains personal, real and
nominal accounts.
It can help to ascertain true profit or
loss of the business.
It can help to prepare a trial balance.
It is suitable for large businesses.
It is acceptable for tax purpose.

The amount of money invested by an owner in the beginning or during the life of the business is
known as capital. The owner may invest cash or stock or any other own properties to establish
and operate the business.
Liabilities
The amount of money payable by the business to outsiders on a specific point of time is known
as liabilities. These are the financial obligations of the business. The liabilities are classified into
two types:
1. Long-term liabilities: The amount of money payable by the business to the outsiders
normally after a period of one year is called long-term liabilities. Debentures, mortgage
loans, long term loans, loans taken from the bank and financial institutions are some of
the examples of long-term liabilities.
2. Short-term liabilities: The amount of money payable by the business to the outsiders
normally within a period of one year is called short term liabilities. Bills payable,
creditors, bank overdraft, expenses are some of the examples of short-term or current
liabilities.
Assets
The office resources which are purchased for generating income or revenue is called assets. Such
assets include the material; properties and amount due from others. Such assets are classified into
two types:
1. Fixed assets: The assets which are purchased for generating income for a long period of
time is called fixed assets. Land building, plant and machinery, furniture are some of the
examples.
2. Current assets: The assets which can be used or converted into cash within a period of
time is called current assets. Cash in hand, cash at bank, bills receivable, debtors,
marketable securities and stock are some of the examples of current assets.
Closing stock
The materials or goods which remain unsold at the end of an accounting year are known as
closing stock. It may be the stock of raw materials, work in progress and finished goods. The
closing stock of the current year is treated as opening stock in the next year.
Debtors:
Debtors are the buyers of goods. The amount receivable from the customers against the good
sold on credit is called debtors.
Creditors:

Creditors are the suppliers of goods. The amount payable to the suppliers against the goods
purchased on credit is called creditors.
Bills receivable:
The amount of a bill relating to credit sale drawn by the business and accepted by the debtor for
paying the amount of goods purchased on credit on a certain date is called bills receivable.
Bills payable:
The amount of bill drawn by the creditor accepted by the business promising in writing for
paying the amount of goods purchased on credit on a certain date is called bills payable.
Debit and Credit:
Debit and credit are the terms used for recording the financial transactions. When a financial
transaction takes a place, its one is debited and another one is credited. The following are the
rules applied for making debit and credit:
1. Personal account: Account of a person of organization or debtor or creditor. The rule of
journalism under personal account are:

Debit - the receiver

Credit - the giver

2. Real account: It is an account of a real things or property. The rule of journalism under real
account are:

What comes in - Debit

What goes out - Credit

3. Nominal account: It is an account of expense, loss, income and profit. The rule of journalism
under nominal account are:

All expenses and losses - Debit

All income and profit - Credit

Cash in hand:
The amount of cash remains in the business on any given point of time is called cash in hand. It
includes the amount of petty cash fund and UN deposited amount of cheque.

Cash at bank:
The amount of bank balance is called cash at the bank. The excess of deposit over withdrawal is
considered as cash at the bank.
Advanced incomes:
The incomes, which are not earned but received in advance, are advanced incomes. Advance
incomes are current liabilities of the business.
Prepaid expenses:
Expenses paid in advance are called prepaid expenses. Prepaid expenses are current assets of the
business.
Accrued incomes:
Incomes earned but not yet received are called accrued incomes. Accrued incomes are current
assets of the business.
Interest:
Interest is an extra amount paid to a money lender against the use of his money for a given
period. The rate of interest depends upon the agreement made between the lender and receiver.
Loan:
The amount borrowed from the individual and financial institution is known as a loan. Interest
should be paid to person or institution on the loan borrowed.
Bank:
Bank is a financial institution, which accepts deposits from the public in different accounts and
grants loans to individuals and corporations against their securities. The bank is classified into
the central bank, commercial bank and development.
Cheque:
Bank is a financial institution, which accepts deposits from the public in different accounts and
grants loans to individuals and corporations against their securities. It is the direction given to the
bank to pay a certain sum of money a certain sum of money to a certain person or bearer of the
instrument. It is an unconditional order drawn upon a specified banker signed by the maker.
Financial transactions:

Bank is a financial institution, which accepts deposits from the public in different accounts and
grants loans to individuals and corporations against their securities. Buying and selling goods,
taking and giving loans, paying salary, rent, stationery and electricity are some of the examples
of financial transactions.
Profit:
The excess amount of incomes over expenditure is known as profit.
Loss:
The excess amount of expenditures over incomes is known as a loss.