Accountancy · Chapter 4
Study notes aligned to the official NEB syllabus.
"Book" refers to the set of accounts in which different financial transactions are recorded, and "keeping" refers to the process or act of recording such transactions in a proper manner in the books of account. So, book keeping can be defined as an act of collecting and systematically recording different financial transactions in a given set of books.
a) To identify the financial transactions: this is one of the most important objectives of book keeping. In book keeping, only financial transactions are recorded. Therefore, book keeping identifies transactions of a financial character in order to keep their record.
b) To keep permanent and systematic records: permanent and systematic records are necessary because they are useful not only for the current period but are equally important for the future, since they can be used as references.
c) To classify the transactions: book keeping not only records all the identified financial transactions but also classifies them into different groups. According to their nature, financial transactions are classified into three different accounts: personal account, real account, and nominal account.
d) To help in the preparation of financial statements: it is necessary to know how much profit is earned or loss suffered by the business at the end of an accounting period. So, book keeping helps to prepare different financial statements at the end of the accounting period in order to find out the operating results and to show the financial position of the business.
a) Provides financial information: book keeping records all financial transactions, and therefore can provide the financial information and data needed for cost ascertainment, planning, budgeting, and forecasting.
b) Helpful in ascertaining profit or loss: book keeping keeps complete records of business transactions, so profit or loss from business transactions can be easily ascertained.
c) Knowledge of financial position: a true and correct financial position of a business concern can be known at any time with the help of the recorded financial transactions under book keeping.
d) Helpful in detection and prevention of errors and frauds: book keeping records all business transactions scientifically and systematically, so it enables the detection of errors and frauds that have already taken place, and also helps to take steps to prevent them.
e) Helpful in determining tax burden: a business concern is required to pay value added tax (VAT), income tax, etc. to the government. Such tax burden can be easily determined with the help of book keeping records.
The exact date of the origin of book keeping is not yet known. It is said that the practice of book keeping began with the invention of money in Lydia, Asia Minor, during 700 BC, and clearly book keeping in its true sense first arose in classical Greece. However, the well known system of double entry book keeping evolved in Italy during the 13th and 14th centuries.
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. A systematic way of recording and reporting the financial transactions of a business or organization is called accounting.
a) To keep systematic records: accounting is done to keep a systematic record of financial transactions. In the absence of accounting there would be a terrific burden on human memory, which in most cases would be impossible to bear.
b) To ascertain the operational profit or loss: accounting helps to ascertain the amount of net profit earned or loss suffered on account of carrying out the different business activities.
c) To ascertain the financial position of the business: the profit and loss account gives the amount of profit or loss made by the business during a particular period, but that is not enough; ascertainment of the financial position of the business is equally needed. By preparing the balance sheet, the position of different assets, capital, and liabilities can be known very easily.
d) To analyze and interpret the financial records: the summarized records of the business organization are analyzed and interpreted using different accounting tools and techniques, like ratio analysis and trend analysis, so as to know the financial performance of the business during the given period. By analyzing the accounting records, the strong points as well as the weaknesses of the business organization can be known very clearly.
e) To communicate the results of business operations: after analyzing and interpreting the accounting records, an annual report is also prepared at the end of the accounting period. This annual report, along with the financial statements, is provided to different users according to their needs.