2. Meaning of Accounting :
Accounting is the process of recording financial
transactions pertaining to a business. The Accounting
process includes summarizing, analyzing, and reporting
these transactions to oversight agencies, regulators, and
tax collection entities. The financial statements used in
Accounting are a concise summary of financial
transactions over an accounting period, summarizing a
company’s operations, financial position, and cash flows.
3. Meaning of Book-keeping :
Bookkeeping, often called record-keeping, is the
part of Accounting that records transactions
and business events in the form of journal
entries in the Accounting system. In other
words, bookkeeping is the means by which data
is entered into an accounting system.
Since the principles of accounting rely on
accurate and thorough records, bookkeeping is
the foundation accounting.
4. Difference between Bookkeeping and
Accounting
Bookkeeping
Bookkeeping is a process of identifying
financial transactions and events
and recording and classifying them in the
respective ledger account.
It is a primary stage.
Objective of bookkeeping is to
maintain systematic records of financial
transactions and events.
No preparation of financial statements.
Bookkeeping is routine in nature and does
not require special skills. It could be
performed by less experienced staff.
Accounting
Accounting is a process
of summarizing the recorded
transactions and events and interpreting
them.
It is a secondary stage. It begins
where bookkeeping ends.
Objective of accounting is to ascertain net
results of operations and financial position
and to communicate results to the users.
Financial statements are prepared.
Accounting requires special skills and
ability to analyze and interpret. Thus, it is
performed by experienced staff.
5. BASIC ACCOUNTING TERMS
Event : An accounting event is a transaction that an accounting entity
reports in its financial statement.
Examples : sale of goods, asset depreciation, net
profit, inventory etc.
Transaction : An accounting transaction is a business event having a
monetary impact on the financial statements of a business. It is recorded
in the books of account.
Examples : sales of goods, purchase of assets, payment to creditors, etc.
6. . Vouchers : A voucher is a document which establishes that a
transaction has taken place. It is the evidence on the basis of
which an entry is recorded In the books of account.
Examples : Cash memo, invoice, receipts, debit/credit notes,
etc.
Trade Debtor : It is a person or entity who owes amount to the
enterprise on account of credit sale of goods or services.
Trade Creditor : It is a person or entity to whom the enterprise
owes an amount for credit purchase of goods and services.
7. .
Purchases : It means purchase of goods for resale or for manufacture of
goods. The term purchases includes both Cash Purchases and Credit
Purchases.
Purchased goods may be returned due to any reason, say,
they are defective. Goods returned are known as Purchases Returns
or Returns Outward.
Sales : It means sale of goods dealt in by the enterprise. The term 'sales'
includes both Cash Purchases and Credit Purchases.
Goods sold when returned by the purchaser are known as Sales Returns
or Returns Inward.
8. . Assets : Assets are property or legal rights with economic value that an
individual, corporation, or country owns or controls with the expectation
that it will provide a future benefit.
Examples : Money owed by debtors, stock of goods,
property, machines, patents, etc.
Assets can be classified as :
i. Fixed Assets
ii. Current Assets
iii. Liquid Assets
iv. Wasting Assets
v. Fictitious Assets
9. Liabilities : A liability is something which the enterprise owes, usually a
sum of money. It may be towards the outsiders or the proprietors.
Liabilities can be classified as :
i. Internal Liabilities
ii. External Liabilities
iii. Contingent Liabilities
Goods traded in : Goods traded are the goods purchased with the
purpose of reselling. They are the products in which an enterprise is
dealing or trading in.
For example : For an enterprise trading in home appliances, T.V.,
A.C., washing machine, grinder, refrigerator, etc. are goods.
10. .Ø Profit : It is the enterprises total earnings over a fixed period of
time, mostly a financial year. It is financial metric which is used to
evaluate the health of the enterprise.
Profit is categorized as :
i. Gross Profit : excess of revenue over cost of goods sold.
ii. Net Profit : Revenue left after deducting the explicit cost of running the
business.
Loss : Loss is excess of expenses of a period over revenues for that period.
It decreases the owner's equity. It refers to the money or money's worth
against which the enterprise receives no benefit.
11. . Stock : Stock is the tangible property held by an enterprise with the
intention of resale or for the purpose of production of goods meant for
sale. Stock may be Closing Stock or Opening Stock. Closing Stock of one
period becomes the Opening Stock of next period.
Expense : It is the amount spent to purchase goods and services.
Examples : payment of salaries or wages, rent, stock price, etc.
Revenue : It is the income derived from normal business operations,
such as sales of good or services.
Examples : Amount received from sales of goods, rent,
commission, etc.
12. . Income : Income is profit earned during a period of time. It is the
difference between revenue and expense.
Income = Revenue - Expense
Drawings : It is the amount of goods or assets which the proprietor or a
partner withdraws for his personal use. Drawings reduces capital of the
owners.
Capital : Capital is the amount which the proprietor has invested in the
business, increased by profits and claims from the firm. For the firm, it is
a liability towards the owner because for accounting purpose, owner is
separate from the business. Capital is also known as owner's equity.
Capital = Assets - Liabilities