There is some confusion over the difference between bookkeeping and accounting. This is due to the fact that two are related and there is no universal accepted line of demarcation between them.
In general bookkeeping is the recording of business data in the prescribed manner, this is the first phase. Much of the work of bookkeeper is of the clerical in nature. The sphere of accounting starts where the sphere of bookkeeping ends. accounting is primarily concerned with the design of the system of records, the preparation of reports and the interpretation of reports. Accountants often direct and review the work of bookkeepers.
Monday, 30 May 2011
Systems of Accounting:
There are basically two systems of accounting:
Cash System of Accounting.
Accrual System of Accounting.
Cash system of accounting:
Definition and Explanation:
It is a system in which accounting entries are made only when cash is received or paid. No entry is made when a payment or receipt is merely due. For example, the rent for December 2009 has not been paid till January 10the 2010. Under cash basis, rent expense for the month of December will not be recorded as payment has not been made. Government system of accounting is mostly on the cash system.
Accrual System of Accounting:
Definition and Explanation:
It is a system in which accounting entries are made on the basis of amount having become due for payment or receipt. This system recognizes the fact that if a transaction or an event occurred, its consequences cannot be avoided and therefore, should be brought into book in order to present a meaningful picture of profit earned or loss suffered.
Cash System of Accounting.
Accrual System of Accounting.
Cash system of accounting:
Definition and Explanation:
It is a system in which accounting entries are made only when cash is received or paid. No entry is made when a payment or receipt is merely due. For example, the rent for December 2009 has not been paid till January 10the 2010. Under cash basis, rent expense for the month of December will not be recorded as payment has not been made. Government system of accounting is mostly on the cash system.
Accrual System of Accounting:
Definition and Explanation:
It is a system in which accounting entries are made on the basis of amount having become due for payment or receipt. This system recognizes the fact that if a transaction or an event occurred, its consequences cannot be avoided and therefore, should be brought into book in order to present a meaningful picture of profit earned or loss suffered.
Branches of Accounting:
Accounting has three main forms of branches, viz, financial accounting, cost accounting, and management accounting. These forms of accounting have been developed to serve different types of objectives.
Financial Accounting:
It is the original form of accounting. It is mainly confined to the preparation of financial statements for the use of outsiders like creditors, banks and financial institutions etc. The chief purpose of financial accounting is to calculate profit or loss made by the business during the year and exhibit financial position of the business as on a particular date.
Cost Accounting:
Function of cost accounting is to ascertain the cost of the product and to help the management in the control of cost.
Management Accounting or Managerial Accounting:
It is accounting for management. i.e., accounting which provides necessary information to the management for discharging its functions. It is the reproduction of financial accounts in such a way as will enable the management to take decisions and to control various business activities.
Financial Accounting:
It is the original form of accounting. It is mainly confined to the preparation of financial statements for the use of outsiders like creditors, banks and financial institutions etc. The chief purpose of financial accounting is to calculate profit or loss made by the business during the year and exhibit financial position of the business as on a particular date.
Cost Accounting:
Function of cost accounting is to ascertain the cost of the product and to help the management in the control of cost.
Management Accounting or Managerial Accounting:
It is accounting for management. i.e., accounting which provides necessary information to the management for discharging its functions. It is the reproduction of financial accounts in such a way as will enable the management to take decisions and to control various business activities.
Double Entry System of Bookkeeping:
The double entry system of bookkeeping owes its origin to an Italian merchant named Lucas Pacioli who wrote the first book on double entry bookkeeping entitled "Decomputis et Scripturis". It was published in Venice in 1544. All modern methods of accounting are simply adaptation of the system invented by that ancient pioneer.
Definition and Explanation:
The double entry theory of bookkeeping can be defined as the system of recording transactions having two fundamental aspects - one involving the receiving of a benefit and the other to giving the benefit - in the same set of books.
In this theory, as the two fold aspects of each transaction are recorded, the name "double entry" has been given to this system.
Every transaction involves two fold aspects e.g., an aspect of receiving and an aspect of giving. One who receives is a debtor (Dr) and one who gives is a creditor (Cr). Under the double entry system, both the aspects of giving and receiving are recorded in terms of accounts. The account which receives the benefit is debited and the account which gives the benefit is credited. It is the ultimate result of this system that every debit must have corresponding credit and vice versa and on any particular day the total of the debit entries and the credit entries on the various accounts must be equal.
Advantages of Double Entry System:
The main advantages of double entry theory of book keeping are as follows:
Trial balance can be drawn up on any day to prove the arithmetical accuracy of record.
The nominal sides of transactions being recorded: it is possible to prepare Trading and Profit and Loss Account from which the Gross Profit and Net Profit made by the business during a particular period can be easily ascertained.
As all personal accounts of debtors and creditors as well as real accounts are kept, it is possible to prepare Balance Sheet.
The transactions being recorded in the most scientific and systematic way gives the most reliable information of business.
It prevents fraud by rendering any alteration in any account more difficult.
It enables the trader to compare the different items, such as sales, purchases, opening stock and closing stock of one period with similar items of preceding period and the trader may thus know whether his business is progressing or not.
Disadvantages of Double Entry System:
The following are the main disadvantages of this system:
This system requires the maintenance of a number of books of accounts which is not practical in small concerns.
The system is costly because a number of records are to be maintained.
There is no guarantee of absolute accuracy of the books of accounts inspite of agreement of the trial balance.
Definition and Explanation:
The double entry theory of bookkeeping can be defined as the system of recording transactions having two fundamental aspects - one involving the receiving of a benefit and the other to giving the benefit - in the same set of books.
In this theory, as the two fold aspects of each transaction are recorded, the name "double entry" has been given to this system.
Every transaction involves two fold aspects e.g., an aspect of receiving and an aspect of giving. One who receives is a debtor (Dr) and one who gives is a creditor (Cr). Under the double entry system, both the aspects of giving and receiving are recorded in terms of accounts. The account which receives the benefit is debited and the account which gives the benefit is credited. It is the ultimate result of this system that every debit must have corresponding credit and vice versa and on any particular day the total of the debit entries and the credit entries on the various accounts must be equal.
Advantages of Double Entry System:
The main advantages of double entry theory of book keeping are as follows:
Trial balance can be drawn up on any day to prove the arithmetical accuracy of record.
The nominal sides of transactions being recorded: it is possible to prepare Trading and Profit and Loss Account from which the Gross Profit and Net Profit made by the business during a particular period can be easily ascertained.
As all personal accounts of debtors and creditors as well as real accounts are kept, it is possible to prepare Balance Sheet.
The transactions being recorded in the most scientific and systematic way gives the most reliable information of business.
It prevents fraud by rendering any alteration in any account more difficult.
It enables the trader to compare the different items, such as sales, purchases, opening stock and closing stock of one period with similar items of preceding period and the trader may thus know whether his business is progressing or not.
Disadvantages of Double Entry System:
The following are the main disadvantages of this system:
This system requires the maintenance of a number of books of accounts which is not practical in small concerns.
The system is costly because a number of records are to be maintained.
There is no guarantee of absolute accuracy of the books of accounts inspite of agreement of the trial balance.
Important Bookkeeping Terms:
Before attempting to learn the art or science of bookkeeping it will be better to clarify some of the terms that will have to be used again and again.
Transaction:
Any dealing between two persons or things in a transaction. It may relate to purchase and sale of goods, receipt and payment of cash and rendering of services by one party to another. Transaction is of two kinds - cash transaction and credit transaction. When cash is paid or received as a result of an exchange, the transaction is said to be a cash transaction. When the payment or receipt of cash is postponed for future date, this transaction is said to be credit transaction.
Business:
It includes any activity undertaken for the purpose of earning profit e.g., banking business, and insurance business, a merchant business etc., etc.
Proprietor:
He is the owner of a business. He invests capital in it, gives his time and attention to it. He is entitled to receive the profit or bear loss arising out of it.
Drawings:
The cash or goods taken away by the proprietor from the business for his personal use are called has drawings.
Purchases:
Goods purchased are called purchases. When the goods purchased for cash they are called cash purchases but if they are purchased for which payment will have to be made at some future date it is known as credit purchases.
Purchases Returns:
If goods purchased are found defective or unsatisfactory, they are sometimes returned to the persons from whom they were purchased or to suppliers are called purchases returns or returns outwards.
Sales:
Goods sold are called sales. When goods are sold for cash they are called cash sales, but when they are sold without having received payment, they are credit sales.
Sales Returns:
If a person to whom goods have been sold finds that they are defective or unsatisfactory and returns them, are called sales returns or returns inwards.
Trade Discount:
It is rebate or allowance from the scheduled price granted by the seller to the buyer. Trade discount is usually granted in the following circumstances:
(a) When selling to a fellow trader.
(b) When the buyer is an old customer.
(c) When sales are made in bulk.
(d) As a custom of trade.
Cash Discount:
It is deduction or allowance allowed by creditor to a debtor. If a person pays his debit before the due date of payment the recipient may grant him an allowance for doing so. This allowance is known as cash discount
Commission:
It is a form of remuneration for services rendered by one person to another.
Expenditure:
An expenditure takes place when assets or service is acquired.
Expense:
It means an expenditure whose benefit is finished or enjoyed immediately such as salaries, rent etc. Difference between expense and expenditure is that the benefit of the former is consumed by the business in present whereas in latter case benefit will be available for future activities of the business.
Account:
A summarized record of transactions relating to person or thing is called an account.
Debtor (Account Receivable):
A person who owes money to another is a debtor. When we say that we owe Mr. Rahim $200, we mean that we have received from Mr. Rahim $200 which we have to repay. We stand as debtor to Mr. Rahim for $200. It is also termed as accounts receivable.
Creditor (Accounts Payable):
A person who pays out something or to whom money is owing is a creditor. It is also termed as accounts payable.
Assets:
These are the things of value possessed by a trader such as building, land, machinery, furniture, etc.
Liabilities:
They are the debt due by a business to its proprietor and others.
Voucher:
Any written evidence in support of a business transaction is called a voucher. When a ream of paper is bought from a stationer, he gives a cash memo. The cash memo is a voucher for the payment. When wages for the month are paid to the peon, receipt is taken from him. The receipt serves as a voucher for the payment.
Goods (Merchandise):
It includes all merchandise commodities which are purchased by the business for selling.
Stock (Inventory):
Goods or merchandise on hand, that is goods remaining unsold, is called stock, stock in trade, or inventory.
Equity:
A claim which can be enforced against the assets of the firm is called equity. In other words, the rights to properties are called equities. Equities are of two types: the right of creditors and the right of owners. The equities of creditors represent debts of the business and are called liabilities. The equities of the owner is called capital, proprietorship or owner's equity.
Transaction:
Any dealing between two persons or things in a transaction. It may relate to purchase and sale of goods, receipt and payment of cash and rendering of services by one party to another. Transaction is of two kinds - cash transaction and credit transaction. When cash is paid or received as a result of an exchange, the transaction is said to be a cash transaction. When the payment or receipt of cash is postponed for future date, this transaction is said to be credit transaction.
Business:
It includes any activity undertaken for the purpose of earning profit e.g., banking business, and insurance business, a merchant business etc., etc.
Proprietor:
He is the owner of a business. He invests capital in it, gives his time and attention to it. He is entitled to receive the profit or bear loss arising out of it.
Drawings:
The cash or goods taken away by the proprietor from the business for his personal use are called has drawings.
Purchases:
Goods purchased are called purchases. When the goods purchased for cash they are called cash purchases but if they are purchased for which payment will have to be made at some future date it is known as credit purchases.
Purchases Returns:
If goods purchased are found defective or unsatisfactory, they are sometimes returned to the persons from whom they were purchased or to suppliers are called purchases returns or returns outwards.
Sales:
Goods sold are called sales. When goods are sold for cash they are called cash sales, but when they are sold without having received payment, they are credit sales.
Sales Returns:
If a person to whom goods have been sold finds that they are defective or unsatisfactory and returns them, are called sales returns or returns inwards.
Trade Discount:
It is rebate or allowance from the scheduled price granted by the seller to the buyer. Trade discount is usually granted in the following circumstances:
(a) When selling to a fellow trader.
(b) When the buyer is an old customer.
(c) When sales are made in bulk.
(d) As a custom of trade.
Cash Discount:
It is deduction or allowance allowed by creditor to a debtor. If a person pays his debit before the due date of payment the recipient may grant him an allowance for doing so. This allowance is known as cash discount
Commission:
It is a form of remuneration for services rendered by one person to another.
Expenditure:
An expenditure takes place when assets or service is acquired.
Expense:
It means an expenditure whose benefit is finished or enjoyed immediately such as salaries, rent etc. Difference between expense and expenditure is that the benefit of the former is consumed by the business in present whereas in latter case benefit will be available for future activities of the business.
Account:
A summarized record of transactions relating to person or thing is called an account.
Debtor (Account Receivable):
A person who owes money to another is a debtor. When we say that we owe Mr. Rahim $200, we mean that we have received from Mr. Rahim $200 which we have to repay. We stand as debtor to Mr. Rahim for $200. It is also termed as accounts receivable.
Creditor (Accounts Payable):
A person who pays out something or to whom money is owing is a creditor. It is also termed as accounts payable.
Assets:
These are the things of value possessed by a trader such as building, land, machinery, furniture, etc.
Liabilities:
They are the debt due by a business to its proprietor and others.
Voucher:
Any written evidence in support of a business transaction is called a voucher. When a ream of paper is bought from a stationer, he gives a cash memo. The cash memo is a voucher for the payment. When wages for the month are paid to the peon, receipt is taken from him. The receipt serves as a voucher for the payment.
Goods (Merchandise):
It includes all merchandise commodities which are purchased by the business for selling.
Stock (Inventory):
Goods or merchandise on hand, that is goods remaining unsold, is called stock, stock in trade, or inventory.
Equity:
A claim which can be enforced against the assets of the firm is called equity. In other words, the rights to properties are called equities. Equities are of two types: the right of creditors and the right of owners. The equities of creditors represent debts of the business and are called liabilities. The equities of the owner is called capital, proprietorship or owner's equity.
Definition and Explanation of Bookkeeping:
The work book or books mean books of accounts and keeping implies maintaining in proper form and order. Thus bookkeeping may be defined as the art of recording business transactions in books in a regular and systematic manner. It has been defined by different experts as:
"The science and art of correctly recording in books of accounts all those business transactions that result in the transfer of money's worth."
"The art and science of recording business transactions in such a systematic way as a trader may know the result of his trade at the end of a certain period and may also prove the accuracy of such record."
"The science and art of correctly recording business dealings in a set of books with a view to having a permanent record of transactions and the financial result thereof."
It should be noted from the above definitions that bookkeeping primarily deals in the art of recording transactions in books.
"The science and art of correctly recording in books of accounts all those business transactions that result in the transfer of money's worth."
"The art and science of recording business transactions in such a systematic way as a trader may know the result of his trade at the end of a certain period and may also prove the accuracy of such record."
"The science and art of correctly recording business dealings in a set of books with a view to having a permanent record of transactions and the financial result thereof."
It should be noted from the above definitions that bookkeeping primarily deals in the art of recording transactions in books.
Petty cash imprest system
Petty cash imprest system
Petty cash imprest system allows only to replenish the spending. So, if you start the month with $100 in your petty cash float and spend $90 of that cash in the month, an amount of $90 will be then placed in your petty cash float to bring the balance of your petty cash float back to $100. The replenishment is credited to the primary cash account and the debits will go to the respective expense accounts, based on the petty cash receipts.
===Why use the imprest system In this example the maximum amount of petty cash that can be issued (spent) is $100. You can only spend what you have and you are only replenished with what you spend, in this case $90
In a non imprest system where a fixed amount is issued every month e.g. $100 every time cash is required, there is no incentive to ensure all money issued has been documented because when money is all spent a check for a fixed amount is issued. It is much more difficult to reconcile a non imprest system as you never know how much exactly should be in the float.
In an imprest system the amount requested is documented, the documentation being the petty cash dockets and their associated receipts or invoices. So at all times you can check how much should be left in the petty cash float by deducting the amount spent from the opening petty cash float.
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How petty cash imprest system works
The imprest system ensures that you must document how the petty cash is spent. In a petty cash system, petty cash receipts are written for each amount issued. So, when all of these receipts are totalled at the end of the month and deducted from the opening petty cash float, the calculated value must agree with what is left in the petty cash float. Under the imprest system, only that which is recorded as spent is replenished. Any shortfalls may have to be replenished by the guardian, usually a bookkeeper, of the petty cash float from their own personal resources.
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