NEB Class 11 Account Note Unit One: Book-Keeping and Accounting Concept

NEB Class 11 Account Note Unit One: Book-Keeping and Accounting Concept

Accounting Theories                   

 

Unit-One: Book-Keeping and Accounting Concept

Concept and Meaning of Book Keeping

Book-keeping is that branch of knowledge which tells us how to keep a record of financial transactions in scientific and systematic manner. It keeps record of financial transactions systematically in a chronological order for future reference. It involves recording, classifying and summarizing of financial transactions.

Objectives of book keeping

 Objectives of book keeping are:

1. It identifies the financial or non-financial transaction.
2. Book-keeping records the financial transactions in scientific and ordered manner.
3. Book-keeping measures transaction in terms of money effect and creates documentation of transactions.
4. Book-keeping classifies all the transaction as per the nature of transaction and its effect.

Concept and Meaning of Accounting

Accounting involves the process of identifying, measuring, recording, classifying, summarizing, analyzing, interpreting and communication the economic information of an organization to its users who are directly or indirectly related to the business organization.

Objectives of accounting

The main objectives of accounting are

1. To keep systematic record of all financial transactions.
2. To determine profit or loss at the end of accounting period.
3. To ascertain the financial position of an organization.
4. To provide information about determination of tax liability.
5. To provide essential information to the related parties of organization.

Scope of Accounting/ Area of Accounting

        The scope of accounting is very wide. The scope of accounting is mention as under

a) Business Organization: Accounting is necessary for all types of business organization. On the basis of volume and need of business organization different branches of accounting like financial accounting, cost accounting and managerial accounting are used.

b) Non- Trading Organization: Accounting is also used in non government organization. Non government organization have their own income and expenditure .So, to know the surplus or deficit of financial position of the business, accounting is used.

c) Government: Accounting is also used by government. Both central level and operating level offices use an accounting system according to their needs.

d) Professional and individual: Professional and individual have also their own income and expenditure. They need to pay income tax to government. An accounting system helps them to record all financial transaction.

 

         Basic Accounting concepts

1. Business Entity Concept

According to this concept the business organization and the owner of the business are two different entities or legal bodies. So business transactions are recorded in the books of account of a business organization only not the personal transaction of the owner. The difference between the business and its owner is essential in order to ascertain the true financial picture of a business.

2. Going Concern Concept

According to this concept the business will continue to operate for a long period of time. All transactions are recorded with this point of view. Hence, long term expenses are treated as assets and long term liabilities are treated as capital and loan. According to this concept fixed assets are depreciated for revaluation.

3. Money Measurement Concept

According to this concept only those transactions are recorded in the books of accounts which can be measured in terms of money or monetary value. But those transactions which we cannot measure in monetary terms like conflict between staffs, health problem of CEO etc are not recorded in the books of account.

4. Concept Cost

According to this concept the cost of goods and services are recognize when it is incurred and not when cash is paid for it. Under this concept the fixed assets are recorded in the books of account at the purchase price rather than market price.

The cost of machine are shown at net of depreciation on the assets side of balance sheet.

5. Accounting Period Concept

According to this concept the life of the business is divided into equal appropriate segment and each segment is called an accounting period. Normally one year time of accounting period is accepted. At the end of each accounting period the books of accounts are closed and income statement and balance sheet of the business is prepared. These statements show the profit or loss made by the firm during the accounting period and the real financial position of the firm.

6. Matching Concept

According to this concept all the expenses of a business organization should be matched with revenue. Revenue should be recognized at the time when it is actually earned, no matter whether it is actually received or not. If the revenue of a particular period is more than the expenses incurred during the same period the difference is profit and if the expenses are more the difference is loss. We have to consider the various factor like revenue relating to an item entered to credit side of profit and loss account and expenses whether paid or outstanding should be recorded on debit side.

Double Entry system of Book- keeping

Double entry system of book keeping is a scientific system of record keeping system under which every transaction is recorded into two separate accounts with equal amount.  One side is known as debit and other is credit. Every debit should have a credit and every credit should have a debit. This concept is developed by Luca Pacioli in 1494.

Characteristics or features of Double Entry system of Book- keeping ( DES)

a) Two fold effect: Recording a transaction on double entry system is made with two fold effects or double effects. The rule of double entry is that every debit should have a credit and every credit should have a debit.

b) Equal effect: According to this system every transaction should have equal amount effect on both sides of accounts. It means debit must be equal to credit.

c) Change in ownership: According to this system ownership should be changed or transferred when transactions are occurred.

d) Classification of Account: It maintains the records of transactions classifying them into personal account, real account and nominal account.

Importance/ Advantages of Double entry system

1. It records all the aspects of all the financial transactions, which reveals a complete and clear picture of the organization.
2. It checks arithmetical accuracy through trial balance.
3. It helps to prepare financial statements to know the true financial position of the organization.
4. It is scientific and accounting system which accepted by government and tax authorities.
5. It provides complete information about regarding assets, capital, liabilities, debtors, creditors etc.

Limitations /Disadvantages of Double entry system

1. It is quite expensive because it requires skilled manpower.
2. It does not keep the records of all business activities.
3. It is difficult to use corrective measures within the accounting period.
4. It is complicated because accounts cannot be maintained without adequate knowledge.
5. It becomes failure to disclose some errors like complete omission of a transaction, recording of a wrong amount etc.

Accounting Process

Accounting process is the sequence of accounting procedures which includes identification of financial transactions, recording, classifying, summarizing, analyzing and interpretation of the financial situation.

Debit note

Debit note is a statement prepared by buyer mentioning the causes of goods return, quantity and rate of goods return. While purchasing good , supplier’s account is credited, whereas supplier’s account is debited at the time of returning goods. Therefore, debit note is a letter sent by buyer to seller stating that the seller’s account has been debited by the amount of goods return due to the mention causes.

Credit note

Credit note is an acceptance letter or statement which is prepared by seller   mentioning   the quantity, rate and total amount of goods which is credited in debtors account. Such letter sent by seller to the buyer mentioning acceptance of returned goods is called credit note.

Cheque

A cheque is a written order issued by depositor (account holder) to a particular bank directing to pay a certain sum of money to a certain person or the bearer of the cheque.

Types of cheque

1. Bearer Cheque

It is an order to the bank to pay any bearer with good title so that anybody who takes the cheque in god faith and gets title to the value written on the face of the cheque.

2. Order cheque

It is a cheque to which the right of the payment of the amount stated in the cheque is   the person whose name is written on the cheque. The bank can make the payment if the bank is sure that the cheque holder is the right person as specified in the cheque. The bank can inquire and get the signature of payee on the back of the cheque leaf.

3. Crossed cheque

It is a cheque on the face of which two parallel lines are drawn.  The effect of crossing is that the amount of the cheque will not be paid across the counter. It can be paid only through a bank account of the specified person.

Types of crossing

a) General crossing

If a cheque bears two parallel lines with or without any words across the line, it is called general cross cheque. In between two parallel lines the words like “and company”, “not negotiable” etc are present.

b) Special crossing

It includes the name of particular bank lines with or without the words ‘ not negotiable’ and ‘ and company’ in the parallel line.  The duty of drawee or paying bank is to pay amount only to the bank mentioned in the crossing.

Bank reconciliation statement

When cash book and pass book balance does not agree with each other on particular date, then we prepare a statement to reconcile (verify) which is known as bank reconciliation statement.

Causes of difference between cash book and pass book balance.

1. Cheque issued but not presented for payment.
2. Cheque paid or deposited into bank but not collected or credited by bank.
3. Bank interest allowed or dividend collected and credited by bank.
4. iv) Interest charge, bank charge, commission, interest on overdraft etc debited by bank but not recorded by cash book.
5. Interest on investment collected and credited by bank but not recorded in cash book.
6. Any amount directly deposited by customer into bank but not recorded in cash book.
7. Any expenses directly paid by bank as per standing instruction but not recorded in cash book.
8. Cheque deposited into bank or bills discounted into bank but dishonored.

Objectives of General Reserve

1. To strengthen the financial health of a business
2. To provide resources for further expansion and operations.
3. To provide stability in profit and dividend distribution.

Differences between Capital Expenditure and Revenue Expenditure

Capital Expenditure	Revenue Expenditure
1.    Related with acquisition of fixed assets.	1.    Related with upkeep and maintenance of fixed assets.
2.    These expenditures are non- recurring nature.	2.These expenditures are usually recurring nature.

Government accounting

Concept

The accounting system used in government offices to record, classify and reporting their financial transactions is known as government accounting. It is concerned with systematic and scientific recording of government revenue and expenditure of a country. Government accounting reveals how public fund have been generated and utilized for welfare of the general public. It reflects the receipt and payment position of the public funds.

Objectives of Government Accounting

1. To maintain the systematic and scientific records of financial transactions of government offices.
2. To control the expenditure made by government on the basis of approved budget.
3. To provide information of various public funds and their utilization.
4. To provide financial information and data for preparation of budget.
5. To control government assets and other inventories.

Features of government accounting

1. Government accounting system is based on the principle of double entry system of book keeping.
2. Government accounting system is not meant for profit earning.
3. It is based on financial act and rules of government.
4. Government accounting is guided and directed by the government annual budget.
5. Government accounting system is a simple and flexible system of accounting.

New Accounting System

Features of New Accounting System:

1. The new accounting system is based on the principle of double entry system.
2. This accounting system is uniform, simple and flexible.
3. This accounting system gives more emphasis on banking transaction.
4. It is a cash basis accounting system.
5. The accounts are kept under various budget heads.

Objectives of New Accounting System

1. To record systematic accounting for cash and other properties.
2. To provide information about various funds and their utilization.
3. To provide financial data and information for preparing annual budget.
4. To insure that limitation of budget are properly observed.
5. To enable preparation of periodical reports and statements.

Importance of New Accounting System

1. To provide financial data and information for preparation of annual budget.
2. To provide information about the revenue and expenditure of the government to general people.
3. To insure the right use of foreign aid and loan provided by donor agencies.
4. To control on government expenditure through budget limit.
5. To provide guidance for preparation and implementation of economic policies in the nation.

Limitation/Weakness of New Accounting System

1. It doesn’t follow the principle of double entry system in practice.
2. It has given emphasis only for expenditure and less emphasis for goods properties and assets.
3. It fails to provide accounting information of cost of production, working efficiency of office employees, etc.
4. It is costlier in regarding small government offices.
5. Lack of systematic basis for the classification of budget expenditure in different budget head.

Statement of Expenditure

Statement of Expenditure is an important monthly report prepared by operating level offices. It provides information of expenditure, annual budget, budget release and balance budget. It is prepared as per the forms A.G.F. no. 210.

What is account payee cheque?

Account payee cheque is a crossed cheque. If account payee only is written between two parallel lines is known as account payee cheque. Amount of this cheque deposited into the drawees personal account. The drawer can withdrawn the amount by issuing his personal account cheque.

Concept of cost Accounting

Cost means the expenditure incurred in the production and accounting means to maintain the record of those expenditure as well as income in a systematic way. Cost accounting is the branch of accounting that maintain the complete records of cost and provides require information according to the cost objectives. It determines the cost by collecting classifying and allocating the cost as per the cost objectives such as product or service or process or department or job order etc. It also provides the detailed information regarding the cost of production that facilitates cost control and other decision making process.

• Objectives of cost accounting

1. To help in determining cost of production.
2. To help in indicating efficiency of management.
3. To help in determination of selling price of a product.
4. To have comparative analysis of the cost.
5. To maintain control over cost.

• Advantage of cost accounting.

1. Helpful to determine the selling price of a product.
2. Helpful to guide future production policies.
3. Useful to determine idle time cost.
4. Helpful to minimize the cost.
5. Helpful to decision making.

• Limitation of cost accounting

1. Lack of uniformity.
2. More formalities.
3. Costlier / Expensive.

Concept / Objectives /Advantage/ Limitation Financial Accounting:

Concept of Financial Accounting

         Financial accounting is that branch of accounting which facilitates the preparation of financial statement based on the record of financial transaction occurred in the business maintained in a systematic to the various user for taking various decisions regarding operational  and  financial performance of the business form .

Objectives of financial accounting.

1. To Maintain the proper records of business transactions
2. To calculate profit and loss.
3. To depict the financial position.
4. To communicate the financial result
5. To help to determine the tax liability.

Limitation of Financial Accounting

1. Based on historical information.
2. Lack of mechanism for control over cost,
3. Deals only with the overall profitability of the business concern.
4. No assistance in planning and decision making.

• Differences between cost accounting and financial accounting

S.N..	Cost Accounting	Financial Accounting
i.	It is mainly used   by manufacturing concern .	It is maintained in almost all types of business concern.
ii.	It’s objectives is to determine the cost of production and   facilitates for cost controlling and decision making.	Its objective is to determine the profit / loss and financial position of the firm at the end of   accounting period.
iiii	Cost accounting is informal and internal in nature and therefore no acts of the country governed for its preparation.	Final accounting   is governed by company is act, income tax act, finance act and other rules for the   country.
iv	The final output is in the form of cost sheet.	The final output is in   the form of profit and loss a/c and balance sheet.
v	Profit maximization is the objective.	Profit/ loss ascertainment is the objective.

Prepared By: Lecturer Hom Nath Paudyal (MBS TU/Bed)