1. Basics of Book-keeping:
a). Meaning of Book-keeping: Book-keeping is the art and science of recording transactions into a set of related books. This systematised procedure of writing into the books enables easy access to information regarding the activities of the business concerned.
Owners of a business would like to know from time to time and also at the end of each period of operation several things that would help them in handling the business in a more viable manner. Places where expenses should be controlled, where revenues can be increased, etc as well as the following things would be possible from book-keeping records.
a. If they want to know the profits or losses of their firm.
b. If they want to borrow money from bank or other financial institutions or persons, then the lenders would like to see the book-keeping records to assess the firm’s status.
c. If the owner wants to sell his business, the buyer will want to know the real value of the business.
d. If the owner wants to admit someone else as partner or want to float a public issue, then also the financial and profitability aspects of the business are required.
Double-entry Book-keeping: Every business transaction has a two-fold effect (one the receiving aspect and the other giving aspect) the receiving and the imparting of benefit. To record these two aspects, a
book of account called as Ledger has been designed accordingly. The left side of an account is called the Debit side and the right side is the Credit side. The receiving aspect of a transaction is entered on the debit side and the giving aspect is entered on the credit side. It is this recording of the two-fold effect of every business transaction that has given rise to the term 'Double-Entry'.
b). Classification of accounts
: The different parts of transactions receiving or giving benefit are grouped under three classes to achieve the desired results.
They are Personal, Real or Property and Nominal or Fictitious accounts.
Personal Account: Each individual and firm with whom a business has dealings is recorded in this class of accounts. It shows how much his customers owe him, how much he owes to his suppliers.
Examples: M/s.Larsen & Toubro Ltd. A/c; Mr.Lawrence’s A/c; M/s.Ashok Traders A/c. John’s A/c. etc.
Real Account: Each and every property or asset the business owns is recorded. The acquisition, depreciation and sale of assets are recorded in this class of accounts.
Examples: Building A/c; Cash A/c; Machinery A/c; Bank A/c. Land A/c etc.
Nominal Account: Each income or gain and expenditure or loss that are incurred during the conduct of the business is recorded.
Examples: Salaries A/c; Rent A/c; Sales A/c; Interest Received A/c. etc.
The procedure for posting in these three types of accounts is easy to remember –
Personal Account: Debit the receiver and credit the giver. Real Account: Debit what comes in and credit what goes out.
Nominal Account: Debit all expenses or losses and credit all incomes or gains.
c). Proofs of transaction, nature and usage:
Each organization has it’s own set of procedures and documentation. They may be of different shapes, but the gist of them is the same, they are all meant for controlling the organization in it’s day to day working as well as for periodic review of performance.
The normal proofs of transaction viz. CASH BILL, CREDIT BILL / INVOICE, RECEIPT, VOUCHER, DEBIT NOTE and CREDIT NOTE are discussed in this chapter.
All transactions are written down into a Journal or a Subsidiary book from the above proofs. From there they are posted into the Ledger to get the information about each account’s balance value, the spending or the income.
CASH BILL: used in a cash transaction
This is prepared by the seller of goods / services, when he receives cash against the sale. After receiving cash he has to stamp on it that cash has been received and deliver the goods / services.
SUMIT MANWAL