Definition and Objectives of Bookkeeping

Accounting is defined as "the art of recording, classifying and summarizing in terms of

money transactions and events of financial character and interpreting the results thereof."
In simplest words, we can say:

(1) Accounting is an art

(2) of recording classifying and summarizing

(3) in terms of money

(4) transactions and events of financial nature and

(5) interpreting the results thereof

Accounting is an art of correctly recording the day to day business transactions: It is a

science of keeping the business records in a regular and most systematic manner so as to
know the business results with minimum trouble. Therefore, it is said to be a statistical
procedure for the collection, classification and summarization of financial information.

Objectives of Accounting

The objectives of accounting are two-fold:

(1) To record permanently, all business transactions, and

(2) To show the effect of each transaction and also the combined effect of all such
transactions for a given period so as to find out the profit the business has earned or loss
incurred, and also to know the correct financial position on a particular date.

The necessity and importance of accounting can be understood by answering the

following questions:

(1) How much we have earned this year ?

(2) How much was earned during the last year ?

(3) Is our business improving?

(4) How much cash do we have?

(5) How much money we owe?

(6) How much others owe to us ?

Accounting Systems

There are various systems of accounting for maintaining business records:

Cash system of accounting

This system records only cash receipts and payments on the assumption that there are no
credit transactions. If at all there are any credit transactions, they are not at all recorded
until the cash is actually paid or received. Receipts and payments account in case of
clubs, societies, hospital, educational institutes, lawyers etc. is the best example of cash
system.

Single Entry System

This system ignores the two fold aspect of each transaction as considered in double entry
system. Under single entry system, merely personal aspects of transaction i.e. personal
accounts are recorded. This method takes no note of the impersonal aspects of the
transactions other than cash. It offers no check on the accuracy of the posting and no
safeguard against fraud because it does not provide any check over the recording of cash
transactions. Therefore, it is called as "imperfect accounting."

Double Entry System

The double entry system was first evolved by Luca Pacioliin, who was a Franciscan
Monk of Italy. With the passage of time, the system has gone through lot of
developmental stages. It is the only method fulfilling all the objectives of systematic
accounting. It recognizes the two fold aspect of every business transaction.

These questions are of decisive importance for a trader and the answers can only be
derived from up to-date financial records. Only the system of keeping the perfect records
of all business transactions will help the proprietor to know the amount he has gained or
lost.

The main objective of any business is to earn maximum possible profits with minimum
expense. In view of this, a commercial organization always tries to expand its business,
increase its sales and reduce operating expenses. The progress made in this regard, is
always indicated only by the properly maintained financial records.

Meaning of Accounting

In the beginning, the main objective of accounting was to ascertain the result of the
business activities (whether profit has been earned or loss has been suffered) during a
year and to show the financial position of the business as on a particular date. Accounting
has to meet the requirements of taxation authorities; investors, government regulations;
management and owners. This has resulted in widening the scope of accounting and may
be defined as follows:
"Accounting is the art of recording, classifying and summarizing, in a significant manner
and in terms of money transactions and events which are in part at least, of a financial
character and interpreting the result thereof."

Is Accounting a Science or an Art?

In simple words, science establishes relationship of cause and effect whereas the art is the
application of knowledge comprising of some accepted theories, principles and rules.
Since accounting docs not establish cause and effect relationship it only provides us with
the procedure by which objectives of accounting can be achieved, therefore accounting is
an art and not a science. Accounting is an art of recording financial transactions in a set
of books; classifying in desired categories and summarizing the information for
presentation in a suitable manner to the concerned persons for their benefit.

Scope of Accounting

The need of a system of accounting was felt by man early in the history of trade and
commerce. The art of book-keeping is as old as the art of trading itself. This art of
keeping records passed through many phases since its inception. With the development of
commerce, it has attained a position of great importance. Indeed, it can be truly said that
accounting has become the foundation on which the whole fabric of modem commerce
rests.

Though there is no legal obligation on an ordinary trader to keep the records, every
business house finds it essential and convenient to keep the systematic records so as to
know where exactly it stands. Moreover, it is legally binding on some forms of business,
such as joint stock companies, to prepare periodically, statements in proper forms
showing the position of the business. A proper and satisfactory method of accounting is
an essential part of any business house for the following reasons :

(1) If no records are kept, it will be difficult to find out accurate net profit. Under such
circumstances, tax authorities may overestimate the profits and thus a trader will suffer
for not having kept the business records.

(2) In absence of proper business records, the trader will find it difficult to submit the true
position to the court in case he becomes insolvent.

(3) Keeping of proper records helps the trader in framing future business plans &
policies.

(4) It will be difficult to ascertain and fix the price of business to be sold or disposed off,
if no records are kept.

(5) Finally, in spite of the best memory it is beyond the capacity of a trader to remember
all the business dealings with back references.
Financial Accounting with double-entry Bookkeeping

In this series of articles it proposed to cover the following topics. In this article I have
discussed the first one given below. More articles describing the other listed topics below
may soon be published.

• Meaning of Bookkeeping
• Definition and objectives of Bookkeeping
• Accounting Systems
• Branches of Accounting
• Uses of Accounting
• Limitations of Financial Accounting
• Explanation of important Accounting terms
• The Accounting Cycle
• Responsibilities of an accountant
• Importance of data in accounting
• Parties interested in accounting information

In today's world of ours every activity is with some motive, i.e. purpose. In most of the
cases. The purpose is to earn profit while in other cases the purpose may be social
welfare, providing education, healthcare, etc. Whatever may be the purpose the activity is
likely to be an organized affair. Every organization has to use resources-material, labor,
services, capital and to work effectively the people in the organization require
information. Money must be spent carefully. If a person spends carelessly, a day would
come when he will be left with no money. Same can be said about a business. A business
receives money from different sources like sale of goods, sale of assets, receipt of various
incomes like rent, interest, commission etc. It has to spend money on items like expenses,
purchases etc.

A business man should manage his business in such a way that he should receive more
than he spends, other wise he will be in trouble because he will have to meet out expenses
from the original amount invested by him for starting business. Thus capital of the
business will be reduced due to this loss. If this process is allowed to continue for a long
time then the whole capital of the business will be washed away. If the businessman
manages his affairs in an efficient way and if receipts are more than the payments year
after year it prospers and grows in size.

So, it can be said that profit increases the capital and loss reduces it. It should be kept in
mind that profit or loss is the result of cost of goods sold and sales. In actual practice, if a
business is to be run at profit then it has to sell goods at such a price as will enable him to
meet out not only expense on account of cost of goods sold but also other expenses like,
rent, salary, interest, insurance etc. Thus for making a profit either sales should be kept
sufficiently high to meet out all expenses or expenses should be kept low so that they are
fully met out of sales. Besides it, business also maintains certain properties i.e. furniture,
building, machinery, equipment etc. Similarly, it also borrows money from time to time.
In order to keep property in good condition, to pay back in time the debts, to keep down
expenses, and to increase sales it is necessary to keep a constant watch, it is necessary
that the proprietor of the business is kept well informed of the behavior of these items.

With a view to supply such information the art of accounting was developed. It supplies
the following information to traders :

(1) How much will be the total earnings during the period;

(2) What will be the expenditure during the period on salaries, wages, lighting, insurance,
rates and taxes etc;

(3) How much will be the profit or loss;

(4) How much will be the capital and causes of its increase or decrease; (5) Nature and
value of assets possessed by the business;

(6) Nature and amount of liabilities;

(7) Customers who owe to the business and the amount in each case;

(8) Suppliers to whom the business has to make payments and the amount in each case;
and

(9) Other facts for filing sales tax or income tax returns.

Meaning of Bookkeeping

Book-keeping is that branch of knowledge which tells us how to keep a record of

financial transactions. The need for recording such transactions arise because

(1) it is difficult to remember the various financial payments and receipts taking place
during a period of time;

(2) in modem forms of business organizations the control of business rests with different
persons and the results are to be reported to the owners;

(3) the financial information is, required for the purposes of costing, budgeting,
forecasting and planning; and

(4) Book-keeping records are to be submitted to various government agencies like

Income Tax and Sales Tax' authorities for taxation purposes.

Most of us do maintain some kind of a written record of their income and expenditure.
The essential idea behind maintaining such a record is to show the correct position
regarding income and expenditure. Such a record should be clear and systematic so that it
can be easily understood. It should show to whom a payment has been made when and
what for. The need for maintaining a record of income and expenditure in a clear and
systematic manner has given rise to the subject of book-keeping. Book-keeping can as
such be defined "as an art and science of recording business transactions in a systematic
and, chronological order".

The necessity of recording all the transactions clearly and systematically can not be over
emphasized. Goods may be sold on credit to several persons. The latter would pay the
price of the goods to the vendor later. The vendor would like to know, from time to time
what amount is due and from whom. However, strong one's memory may be, one cannot
hope to remember all the details regarding all the transactions. Apart from this, the object
of business is to earn profits; and every merchant likes to know at the end of a financial
year how much profit he has earned during the course of the year. For this purpose, he
would need a lot of factual information which can be derived from written or
computerized records of transactions, provided such records have been properly kept; in
modern times using a computer software like HiTech Financial Accounting. As such
proper maintenance of books of accounts is indispensable for a businessman.