Accounting

and
financial
management
 Meaning of Accounting

Accounting, which is often just called "accounting," is the process of

measuring, processing, and sharing financial and other information
about businesses and corporations.

Accounting is the process of tracking and recording financial activity.

People and businesses use the principles of accounting to assess their
financial health and performance. Accounting also serves as a useful
way for people and companies to honor their tax obligations.
Accounting is the processor keeping the accounting books of the
financial transactions of the company. The accountants summarize the
transactions in the form of journal entries. These entries are used in
bookkeeping. The books of accounts are prepared by the accountants
as per the regulation of the auditors and various regulating bodies.
The accountants might follow the Generally Accepted Accounting
Principles (GAAP) or the IFRS (International Financial Reporting
Standards) principles.
 Accounting Objectives

The objectives of accounting primarily consist of a systematic way of

recording all transactions of a business entity to access the
functioning of a business.
The primary objectives of accounting include systematic maintenance
of records of transactions summarising and analysing business reports
to assess the financial standing of the business entity. The following
are the various objectives of accounting –

Maintaining systematic financial records

One of the most important accounting objectives is that accounting
helps the business organisation keep a systematic and accurate record
of the day-to-day transactions, which helps to understand the working
of the business, payments made, income received, etc.

To estimate and ascertain profits or losses

Recording transactions concerning revenues and expenditures helps
us ascertain the profit/ loss at the end of the financial year.
Ascertaining profits or losses is important to make payments, making
it one of the important objectives of accounting.

Preparing financial reports to assess the financial position 

Accounting involves the preparation of a balance sheet which is a
record of the assets and liabilities of a business entity. This helps in
the analysis of the financial position of the business organisation.
Ascertaining profitability can help us understand the strengths and
weaknesses of the business organisation and formulate various
policies and strategies to correct the weaknesses and improve the
organisation’s strengths.
Auditing of financial reports 
Another objective of accounting is that it helps in understanding the
financial position of a company in the form of assets, debts, profits
and losses, etc. These records are made available to the auditor, who
can then analyse the reports to find any discrepancies and suggest the
required corrective reforms. These reports also help the higher
authorities formulate plans and make rational decisions.

To forecast future payments, expenditures and budgets 

Accounting helps to predict the future profitability of a business
entity. This helps plan future payments, debts, expenditures and
budgets accordingly. It also helps in distributing funds among
different departments of the business organisation based on past
allocations and profitability.
These are a few of the most important objectives of accounting. Once
we understand the objectives of accounting, it becomes easier to
understand the role of accounting.
 Accounting concept – principle and
convections

Accounting Concepts :- Accounting concepts are the basic rules,

assumptions, and conditions that define the parameters and constraints
within which the accounting operates. These are the basic “
Assumptions on the basis of which Financial Statements are
prepared.” Concepts are Perceived/ Assumed and Accepted by the
governing Accounting body of a country. Some Accounting concepts
are applicable in recording stage (while Journal Entry) like Separate
Entity, Going Concern, Money Measurement, Dual Aspect, Cost
Concept and Periodicity.

 Accounting Principles :- Accounting principles are the

rules and guidelines that companies must follow when reporting
financial data.

 Money Measurement: This concept says only

events/transactions which are measurable in terms of money are
to be recorded in the account books. In other words, anything
that is non-quantifiable should not be recorded a business’
financial accounts. Over time, money has been adopted as a
measurement unit in accounting.
 Business Entity : This concept says business is separate and
businessman is separate. Further, the separate entity concept
states that we should always separately record the transactions
of a business and its owners. The concept is most critical in
regard to a sole proprietorship, since this is the situation in
 which the affairs of the owner and the business are most likely
to be intermingled.
 Matching Concept : According to this concept Expenses are
to be matched with the revenue to which they pertains. The
matching principle requires that revenues and any related
expenses be recognized together in the same reporting period.
 Going Concern : According to this concept in accounting an
enterprise is considered as Going Concern and it is presumed
that it will continue it’s operations for the forcible future.
Further, It is also presumed that there is no Intention/Need
contrary to this concept exists.
 Dual Aspect Concept : The dual aspect concept states that
every business transaction requires recordation in two different
accounts. This concept is the basis of double entry accounting,
which is required by all accounting frameworks in order to
produce reliable financial statements.In simple words, the dual
aspect concept brings into notice how every single transaction
ends up affecting two accounts.
Accounting conventionS :- Accounting conventions are certain
guidelines for complicated and unclear business transactions, though
it is not compulsory or legally binding, however, these generally
accepted principles maintain consistency in financial statements.
While standardizing financial reporting process these conventions
consider comparison, relevance, full disclosure of transactions, and
application in financial statements. These are developed from usage
and practices of accounting, which emerge out of accounting practices
adopted over a period of time. Accounting bodies change them as per
need of their country considering the required quality of Financial
Information. 1. Conservatism: In accounting, the convention of
conservatism, also known as the doctrine of prudence, is a policy of
anticipating possible future losses but not future gains. This policy
tends to understate rather than overstate net assets and net income,
and therefore lead companies to “play safe”. Example : Provision for
Bad Debts, Discount on Debtors, Valuation of Inventories at lower of
Cost or Market Price which ever is Lower.

1. Conservatism: In accounting, the convention of conservatism,

also known as the doctrine of prudence, is a policy of anticipating
possible future losses but not future gains. This policy tends to
understate rather than overstate net assets and net income, and
therefore lead companies to “play safe”. Example : Provision for Bad
Debts, Discount on Debtors, Valuation of Inventories at lower of Cost
or Market Price which ever is Lower.

2. Full Disclosure : This convention says that all relevant and

Realistic Information must be disclosed. Disclosure should be in such
a way that information is easily accessible to the Financial Statement
user. Normally needed Information is provided as Schedules,
Annexures and Notes to the Financial Statements. Underlying concept
of disclosure is that Information must be disclosed at One place and in
no case it should be scattered. Information is provided for the decision
making of the Financial Statement users.

3. Consistency: This convention is linked with the comparability of

the Financial Statements. Accounting Principles are followed Year to
Year and uniformly in one Industries to make Financial Statements
comparable. Deviation from consistency is permissible if it is required
by Law or any Accounting Standard or it may give better presentation
to the Financial Statements.
 The branches of accounting
There are several different branches of accounting, all of which came
into existence keeping in view the various types of accounting
information needed by different stakeholders, including business
owners (management), creditors, suppliers, government agencies,
taxation authorities and so on.

The ten branches of accounting include the following:

 Financial Accounting

 Management accounting

 Cost Accounting

 Tax accounting

 Auditing

 Accounting information systems

 Forensic accounting

 Fiduciary accounting

 Public accounting

 Governmental accounting
1. Financial Accounting:
Financial accounting deals with the recording and
classifying of a company’s financial transactions, as well as preparing
and presenting financial statements for internal and external
stakeholders.

While preparing financial statements, strict compliance with generally

accepted accounting principles or GAAP needs to be observed.
Financial accounting focuses on the analysis of historical data.

2. Management accounting:
Also called managerial accounting, management
accounting primarily provides information for use by internal users,
that is, the management of the company. Any information used for
managerial decision-making forms part of management accounting.
This branch of accounting may not strictly comply with GAAP.

Management accounting comprises budgeting and forecasting, cost

analysis, financial analysis, evaluation of business decisions and other
such areas.

3. Cost Accounting:
Cost accounting is sometimes considered a subset of
management accounting. It refers to the recording, presentation and
analysis of costs related to manufacturing. This branch of accounting
is extremely useful for manufacturing businesses because they
typically have very complicated costing processes.

Cost accounting uses various costing techniques, standards and

principles that help companies to develop budgets for controlling
costs and be cost-effective.
4. Tax accounting:
This branch of accounting helps customers follow rules
laid down by tax authorities. It comprises tax planning and
preparation of tax returns, as well as determination of income and
other taxes, tax advisory services including analysis of the
consequences of tax decisions, methods to minimize taxes legally and
other similar tax-related matters.

5. Auditing:
There are two types of auditing: internal and external.
Internal auditing refers to the evaluation of the acceptability of an
organization’s internal control structure by testing policies and
procedures, segregation of duties, degrees of authorization and other
controls executed by management.

External auditing, on the other hand, deals with the inspection of

financial statements by an independent party to express an opinion as
to compliance with GAAP and fairness of presentation.

6. Accounting information systems:

Accounting information
systems tackles the development, installation, execution and tracking
of accounting systems and procedures used in the accounting process.
This includes accounting personnel direction, employment of business
forms and software management.
7. Forensic accounting:
Forensic accounting handles fraud investigation,
litigation and court cases, claims and dispute resolution, and other
areas that deal with legal matters.

8. Fiduciary accounting:
This branch of accounting deals with accounts
managed by a person who is entrusted with the custody and
management of another's property or assets. Some examples of the
fiduciary branch of accounting are estate accounting, receivership and
trust accounting.

9. Public accounting:
Public accounting handles companies that provide
accounting advisory services to customers based on their specific
needs. This could include auditing work, assisting with preparing tax
returns, providing legal advice or consulting on procedures tailored to
the installation of technology or computer programs.

10. Governmental accounting:

Governmental accounting deals with the
financial planning and allocation of resources to departments within a
local, state or federal government. This type of accounting follows
standards that comply with the Governmental Accounting Standards
Board (GASB), which is responsible for developing consistent
accounting procedures for local and state governments.

Federal employees need to comply with the Federal Accounting

Standards Advisory Board (FASAB). Governmental accounting also
monitors a government's budget and allocates funds appropriately.
 The Accounting Cycle
The accounting cycle is a multistep process used by businesses to
create an accurate record of their financial position, as summarized
on their financial statements. During the cycle’s various stages,
companies will record their financial transactions in a journal, transfer
the details into a general ledger, analyze the entries and make sure the
books are balanced and error-free before generating financial
statements and closing the books for the period.
The amount of time it takes a company to advance through the
accounting cycle depends on several factors, including the volume of
transactions, whether it uses automated accounting software and the
type of financial close. A hard close is a thorough approach to closing
the books, ensuring that all information is accurate and marking the
end of financial activity for an accounting period. A soft close is more
like a solid estimate, typically used for internal management
reporting, not for the public or investor purposes. Ideally, a business
will engage in a “continuous close,” spreading the workload across
the course of the accounting period, rather than waiting until its end.
This results in a faster close, regardless of whether the target is a
weekly soft close or a hard close at the end of a quarter.
The accounting cycle comprises eight steps businesses follow to
ensure that their books are balanced so they can be closed and reset
for the next accounting period, when the cycle begins again.
Typically, the domain of an accounting team or bookkeeper, the
accounting cycle begins with a business event, or transaction. Ensuing
steps include data analysis and adjustments, if necessary. The
sequence culminates in the preparation of standardized reports that
reflect the company’s financial performance and help guide internal
and external decision-making.

 The accounting cycle is an eight-step process companies use to

identify and record their financial transactions.
 Before companies can close their books, transactions must be
balanced and devoid of errors.
 Once the accounting cycle is completed, financial statements can be
generated.

The Purpose of the Accounting Cycle

The main purpose of the accounting cycle is to keep track of all

financial activities that occur during a specific accounting period, be it
monthly, quarterly or annually. In short, the accounting cycle verifies
that every dollar going into or out of the various general-ledger
accounts is reported.
Some steps in the accounting cycle are more tedious than others, but
each one is set up to enable bookkeepers or accountants to diligently
check their work before proceeding. This is especially crucial for the
final steps of the accounting cycle, when financial statements are
created and the books are reset.
The 8 Steps of the Accounting Cycle

The goal of the accounting cycle is to develop an accurate account of

a company’s financial position. Below are the eight steps of the
accounting cycle.

 Identify and analyze transactions.

 Record transactions in a journal.

 Post transactions to a general ledger.

 Determine the unadjusted trial balance.

 Analyze the worksheet.

 Adjust journal entries and fix any errors.

 Create financial statements.

 Close the books.

1. Identify and analyze transactions.

The first step in the accounting cycle is to identify and analyze all
transactions made during the accounting period, including expenses,
debt payments, sales revenue and cash received from customers.
During this initial stage, companies go through every transaction that
affects their financials, though this should be an ongoing step for
companies that are continuously creating customer invoices, buying
inventory, paying bills, making payroll and collecting cash.
Say, for example, a small business that sells custom picture frames —
let’s name it Picture Perfect — sells a customer a $350 frame. This
marks the accounting cycle’s starting point.
2. Record transactions in a journal.

The next step is to record the details of all financial transactions, in

chronological order, as journal entries, whether in an actual book or in
an accounting program. With double-entry accounting, each
transaction is recorded as a debit and corresponding credit in two or
more subledger accounts. Exactly when the transaction is recorded
depends on whether the business prefers the accrual accounting
method (as most do) or the cash accounting method.
When Picture Perfect generates an invoice for the $350 transaction in
its billing system, the transaction is recorded (at its simplest) as a
$350 debit in the AR subledger and as a $350 credit in the revenue
subledger.
3. Post transactions to general ledger.

Once journal entries are recorded and approved, they are posted to the
general ledger. The GL is the master record and summary of all
financial transactions, broken down by account.
On the same day Picture Perfect sold the $350 frame, it sold another
two frames for $200 apiece. The total of the three sales is detailed in
the AR subledger and posted to the GL.
4. Determine unadjusted trial balance.

Closing balances of all the accounts in the GL at the end of an

accounting period are reflected in a trial balance. At this point, the
trial balance doesn’t reflect any adjustments that need to occur if
errors — i.e., unbalanced debits and credits — are caught. That’s why
it’s considered “unadjusted.”
Picture Perfect adds up the amounts of debits and credits, confident
that the totals will balance.
5. Analyze the worksheet.

This step identifies errors and anomalies that may have occurred up
until this point by lining up debits and credits from various accounts
in a single spreadsheet. If the numbers don’t balance, a bookkeeper or
accountant will need to review the transaction data entered into the
journal and adjust entries accordingly.
Picture Perfect’s bookkeeper pours himself a coffee, puts on his
reading glasses and gets to work. He compares the balance of debits
to credit and is surprised to find a $100 discrepancy.
6. Adjust journal entries and fix errors.

This step is a continuation of the two previous steps. If an error was

made, it has to be corrected and recorded as an adjusting journal entry
that reflects a change to a previously recorded journal entry.
Additionally, manual adjustments are recorded in this step, such as
accruals for expenses incurred that didn’t make it into the AP
system before that account was posted to the GL, or for reconciling
items uncovered during the account reconciliation process.
It doesn’t take long before Picture Perfect’s bookkeeper discovers the
mistake: The $350 frame sale was mistakenly entered as $250. He
creates an adjusting journal entry for $100 to correct the error.
7. Create financial statements.

Once adjustments are made and account balances have been

corrected, financial statements can be created. Financial statements
are accounting reports that summarize a company’s activities and
performance for a defined period of time, such as monthly or
quarterly. The three key financial statements that companies generate
are the income statement, the balance sheet and the cash flow
statement.Picture Perfect’s bookkeeper is satisfied that the company’s
financial statements are accurate and properly reflect its financial
health.
8. Close the books.

This is the final stage of the accounting cycle, locking in the

accounting period. Closing the books resets temporary accounts on
the income statement, such as revenue and expenses, to zero balances,
meaning that they don’t carry into the next accounting period. Net
income or loss from the income statement is transferred to
the retained earnings account, which is a permanent account on the
balance sheet that carries over to the next period. Of note, the
resetting of accounts to zero doesn’t apply to a soft close.
 Types of account

A general ledger account that deals with assets and liabilities other
than individual’s accounts is known as a Real Account. These are
accounts that are not required to be closed at the close of the financial
year because they are carried forward to the following year. A bank
account is a simple example of a real account.

A personal account is a general ledger account that is linked to all

persons or people, such as individuals, businesses, or organizations. A
personal account could be a creditor account. A nominal account is a
general ledger account that tracks all revenue and spending, as well as
profits and losses. An interest account is a simple example of a
nominal account.

Personal Account
Personal accounts are accounts that are linked to real people and
organizations. John’s account, Peter’s account, Procter & Gamble’s
account, Vibrant Marketing Agency’s account, City bank’s account,
and so on are examples of personal accounts. For the purpose of
determining the amount due from or owed to each individual and
organization, the business keeps a separate account for them.

These accounts types are related to persons. These persons may be

natural persons like Raj’s account, Rajesh’s account, Ramesh’s
account, Suresh’s account, etc.

These persons can also be artificial persons like partnership firms,

companies, bodies corporate, an association of persons, etc.

For example – Rajesh and Suresh trading Co., Charitable trusts, XYZ
Bank Ltd, C company Ltd, etc.

There can be personal representative accounts as well.

For example – In the case of Salary, when it is payable to employees,
it is known how much amount is payable to each of the employee. But
collectively it is called as ‘Salary payable A/c’.

Rule for this Account

Debit the receiver.

Credit the Giver.

For Example  – Goods sold to Suresh. In this transaction, Suresh is a

personal account as being a natural person. His account will be debited
in the entry as the receiver.

Types of Personal Account

Natural Person
Natural account
Natural accounts exist for a range of Assets, Liabilities, Equity accounts, Revenues, and Expenses

Artificial Account
These accounts are linked to a variety of businesses and
organizations, including Roy Brothers Pvt Ltd A/c, Lion’s Club A/c,
and others. As a result, such institutions and businesses are those that
exist in the eyes of the law.
Representative Account
Representative accounts are accounts that represent a specific type of
work. Outstanding Wages Accounts, Outstanding Interest Accounts,
Prepaid Expense Accounts, and so on.

Real Account
Real accounts are accounts that relate to a company’s assets or
properties (both tangible and intangible). To account for increases and
declines in the value of each asset, a separate account is kept. Cash
account, inventory account, investment account, plant account,
building account, goodwill account, patent account, copyright
account, and so on are examples of real accounts.

Types of Real Account

Tangible Account
Accounts that are physical in nature are referred to as tangible actual
accounts. To put it another way, these advantages are visible to the
naked eye. These assets can be felt, seen, and touched. For example,
a/c in a building, a/c in a vehicle, a/c in machinery, and so on.

Intangible Account
Accounts that deal with non-physical assets or things are referred to
as this type of account. In other words, these assets cannot be seen,
felt, or touched, yet they can be evaluated in financial terms. These
assets can be said to have some value associated with them. For
instance, goodwill, patents, trademarks, and copyrights are all
examples.
Real Account Rules
Debit what comes into the business.

Credit what goes out of business.

For Example – Furniture purchased by an entity in cash. Debit

furniture A/c  and credit cash A/c.

Nominal Accounts
Nominal accounts are accounts that deal with incomes, gains,
expenses, and losses. These accounts are typically used to collect data
for the purpose of creating a business’s income statement or profit and
loss account for a specific time.  Sales account, purchases account,
wages account, salaries account, interest account, rent account, gain
on sale of fixed assets account, loss on sale of fixed assets account,
and so on are examples of nominal accounts.

Rules for this account

Debit all the expenses and losses of the business.

Credit the incomes and gains of business.

For Example  – Salary paid to employees of the entity. Salary A/c will
be debited when the expenses are incurred. Whereas, when an entity
receives any interest, discount, etc these are credited whenever these are
received by the entity.
 Debit and Credit

What Are Debits (DR) and Credits (CR)?

In accounting, the definitions of debit and credit may seem
counterintuitive to what they mean in everyday language. These
differences are important to grasp from the start. In accounting, a
debit (DR) typically records an amount of value flowing into an asset
or bank account — unlike, for example, a debit card, where money is
taken out of an account. On the flip side, a credit (CR) generally
records an amount of value flowing out of an asset account, as
opposed to receiving credit in the form of a loan or return, where
money flows into an account. Debits and credits are recorded as
monetary units, but they’re not always cash and may include gains,
losses and depreciation. For this reason, we refer to them as “value.”
Debits and credits underpin a bookkeeping system called double-entry
accounting, in which every transaction equally affects two or more
separate general-ledger accounts, such as assets and liabilities.
Debits vs. credits: Debits and credits are like the yin and yang
of accounting, interconnected and responsible for keeping a
business’s bookkeeping entries in balance and harmony. There is no
debit without a credit. A debit increases the balance of an asset,
expense or loss account and decreases the balance of a liability,
equity, revenue or gain account. Debits are recorded on the left side of
an accounting journal entry. A credit increases the balance of a
liability, equity, gain or revenue account and decreases the balance of
an asset, loss or expense account. Credits are recorded on the right
side of a journal entry.

 Every transaction in double-entry accounting is recorded with at lease

one debit and credit.
 Debits and credits indicate where value is flowing into and out of a
business. They must be equal to keep a company’s books in balance.
 Debits increase the value of asset, expense and loss accounts. Credits
increase the value of liability, equity, revenue and gain accounts.
 Debit and credit balances are used to prepare a company’s income
statement, balance sheet and other financial documents.

Why Are Debits and Credits Important?

Debits and credits keep a company’s books in balance. They are
recorded in pairs for every transaction — so a debit to one financial
account requires a credit or sum of credit of equal value to other
financial accounts. This process lies at the heart of double-entry
accounting. Accuracy is crucial because accounts “roll up” into
specific lines on a company’s balance sheet or income statement, both
of which paint a picture of a company’s financial health, value and
profitability. They also inform decision-making for internal and
external stakeholders, including company management, lenders,
investors and tax agencies.
Advantages of a Debit Card
In addition to the convenience if you don't have cash readily
available, debit cards have several advantages for users.

 Avoid increasing your debt. Using a debit card instead of a

credit card is a good way to decrease your chances of getting
into debt. This payment method should help keep you within
your budget and from spending all of the money in your
checking account. If you ever do spend more than your checking
account allows, you may be charged an overdraft or return
fee from your bank.
 Debit cards give you easy access to your cash. You can use
your debit card to withdraw cash from ATM machines. Some
retail stores will also allow you to get “cash back,” charging
more than your initial transaction to your checking account and
giving the cash to you with your receipt.
 Pay now to avoid a bill later. Since the money from a purchase
you make with your debit card is taken directly out of your
checking account, you don't have to worry about a bill coming
your way at the end of the month. This also means that you don't
have to worry about interest accumulating on that bill. Using a
debit card is a great way to control your spending, just be
careful to avoid overdraft and return fees!
Advantages of a Credit Card
There are several benefits of having and using a credit card.

 Credit cards give you extra time to pay for purchases. At the
end of your monthly credit card cycle, you will receive a bill
stating how much you owe for purchases made in the last 30
days. Depending on when you made the purchase, you have up
to a few weeks to pay your credit card bill. Technically, you are
only required to pay the minimum fee each month, but this
could lead to future debt.

For example, if you spend $1,000 in a month and only pay your
monthly minimum payment of $15, and then you spend again
next month, you are likely to fall into a debt trap. Each month
that you don't pay off the entire bill, there will be a certain
amount charged for interest by the credit card company. A
helpful tip is to pay off as much as you can each month to earn
better credit and avoid building up debt.
 Credit card use builds your credit history. Each time you
purchase something with your credit card and then pay it off on
time, your credit history will build up. Having good credit is
important when you are taking out a loan, or buying a car or
house. Paying off your credit card bill each month will show
that you are capable of paying off debt and can help increase
your credit score.
 Convenient for emergencies. Having a credit card is very
useful and convenient when there is an emergency. If you
suddenly need to pay for a repair in your house, you can put the
charge on your credit card. In this case, you probably did not
plan for this expense, so your credit card company will extend
you credit until you pay the bill at the end of the month. Again,
this gives you a little extra time to pay for something you
weren’t expecting to pay.
How Are Debits and Credits Used?
Debits and credits indicate value flowing into and out of a business.
They are equal but opposite and work hand in hand: For every
transaction, an accountant or bookkeeper places a debit in one account
and a credit in another account. No matter how many accounts or line
items are involved, the total value of debits equals the total value of
credits.

The concepts of debits and credits may be clear to accountants and

bookkeepers, but they take some getting used to when you’re a
business owner who thinks in the everyday terms of credit and debit
cards. In the world of double-entry accounting, every transaction
impacts two or more financial accounts, whereby a debit indicates
value flowing in and a credit indicates value flowing out. The two
sides must be equal to balance a company’s books, which are used to
prepare financial statements that reflect its health, value and
profitability.
 Book keeping

Bookkeeping means recording the financial transactions and

information concerning the business of a company regularly. It is a
systematic recording of financial transactions in a company. It ensures
that the records of each financial transaction are up-to-date, correct
and comprehensive. 
The bookkeepers are individuals or entities who maintain the books of
account of a company. They manage all the financial data of a
company. The companies can track all their financial transactions on
their books with accurate bookkeeping. Bookkeeping helps
companies to make important investing, operating and financing
decisions.
Bookkeeping focuses on recording and organising financial
data..Accounting is the interpretation and presentation of that data to
business owners and investors.

Connection Between Bookkeeping and Accounting

Bookkeeping is a separate process from accounting, which occurs
within the broader scope of accounting. The accounts are prepared
from the information provided by bookkeeping. A strong relationship
between these two functions is necessary to take the business to the
next level.
Bookkeeping is a segment of the whole accounting system.
Bookkeeping is the basis for accounting as it contains the proper
records of all financial transactions whereas, accounting involves
organising, summarising, classification and reporting financial
transactions. 
If the bookkeeping is correct, the accounting of a company will be
proper. Thus, accounting is broader than bookkeeping and accounting
of a company relies on a proper and accurate bookkeeping system.
Bookkeeping helps to interpret the accounting information for
decision making by both the internal and external users. Bookkeeping
is a subset of accounting and clerical in nature which involves the
following:

 Recording financial transactions

 Posting credits and debits 
 Producing invoices
 Maintaining and balancing current account and general ledgers
 Completing payroll

Types of Bookkeeping System

There are two types of bookkeeping systems. The business entities
can choose any one of the types of bookkeeping system. Some entities
use a combination of both types. The following are the two types of
bookkeeping system:
Single-entry system of bookkeeping
The single-entry system of bookkeeping is a basic system to record
daily receipts or generate a weekly or daily report of a company’s
cash flow. In the single-entry system of bookkeeping, the bookkeeper
records one entry for each financial transaction or activity. 
The single-entry system of bookkeeping involves recording only one
side of the transaction or activity. It maintains only the purchases,
cash receipts and payments and sales. It is used mainly by small
businesses, which have minimal transactions.

Double-entry system of bookkeeping

The double-entry system of bookkeeping records a double entry for
each financial activity or transaction. The double entry system
provides balances and checks as it records the corresponding credit
entry for every debit entry. It is not cash-based, and the transactions
are entered when revenue is earned, or debt is incurred.
The double-entry system of bookkeeping is based on the duality
concept, i.e. every financial transaction affects two accounts. It means
that every debit entry to an account has a corresponding credit entry in
another account and vice versa. This system is universally adopted
and is considered accurate for recording business/financial
transactions.
 Source Document
In the accounting industry, source documents include receipts, bills,
invoices, statements, checks – i.e., anything that documents a
transaction. Any time a business spends or receives money, a source
document is created.

Source documents are an integral part of the accounting and

bookkeeping process. However, many advisors struggle to collect and
manage their clients’ source documents, or don’t collect and manage
them at all.

Implementing a streamlined system for collecting and managing your

clients’ source documents will not only improve the accuracy, speed,
and quality of your work – it will also enable you to be a better
business partner to your small business clients. Let’s explore the
importance of source documents, and how you can introduce a more
efficient system to collect and manage source documents at your
practice.

Why are source documents important?

Source documents exist to provide conclusive evidence of a
transaction, otherwise known as an “audit trail”. However, as cloud-
based general ledger softwares such as Xero and QuickBooks Online
have become more popular, many accountants and bookkeepers have
shied away from collecting client source documents.

This reluctance to collect source documents usually occurs for a

couple of reasons. First, many accounting and bookkeeping
professionals believe that it is the small business’s own responsibility
to keep track of their documents. Second, managing source
documents – especially keeping track of paper – can be a huge pain.

While both of these reasons may be true, bookkeepers who have a

process in place for collecting and managing source documents can
forge more powerful business partnerships with their clients. For
starters, it can help your clients to prepare for an audit and increase
accuracy and efficiency in your bank reconciliation workflow

Examples of Source Documents

‍
Numerous documents can show a transaction—big or small. While a
receipt may be an obvious example, some aren’t so much. To give
you a better idea of what you need to be on the lookout for, we’ve
created a list of some of the most types of source documents. A few
examples include-
‍Receipts
This is a written document issued by one person to another,
to acknowledge that money or valuable property has been received.
When goods are sold for cash, the customer is usually provided with a
receipt.
‍Invoice
An invoice is a business document prepared when goods are
sold. It is normally sent by the seller of the goods to the buyer. When
a business sells goods on credit, it will issue an invoice to the
purchaser. To the seller of the goods, the copy of the invoice is a sales
invoice. The same document in the hands of the buyer of the goods is
called a purchase invoice.
‍
Cheque (or Cheque Stub)
‍ A cheque is a written order made by
a customer to the bank to pay a stated sum of money to the person or
business named on the cheque. When cheques are issued to make
payment, the cheque itself or its counterfoil (or stub) would serve as
the source document for the payment.
‍
Bank – Pay–in–Slip
This is the standard form required to be filled in
duplicate or triplicate whenever cash cheques, bank drafts etc. is being
paid into an account maintained with the bank.
 Accounting Equation
The accounting equation is the basic element of the balance sheet and
the primary principle of accounting. It helps the company to prepare a
balance sheet and see if the entire enterprise’s asset is equal to its
liabilities and stockholder equity. It is the base of the double-entry
accounting system.
Double-entry accounting is a system that ensures that accounting and
transaction equation should be equal as it affects both sides. Any
change in the asset account, there should be a change in related
liability and stockholder’s equity account. While performing journal
entries accounting equation should be kept in mind.
How to calculate the Accounting Equation?
The accounting equation on the basis of a balance sheet can be
calculated as.

 The business total assets should be located on the balance sheet

for a particular period
 The liabilities of a company should be listed separately in the
balance sheet and calculated
 The total liability and total stockholder’s equity should be added
 The total liabilities and equity will equal the company’s asset
The Formula for the Accounting Equation

Assets = Liabilities + Shareholder’s Equity

Example of Accounting Equation:
1. For the budgetary year, leading retailer ABC firm incorporated the
following points on its balance sheet:
Total assets: ₹190 crore

 Total liabilities: ₹130 crore

Total shareholders’ equity: ₹60 crore
If we evaluate the accounting equation (Liabilities + Equity), we
arrive at (₹130Cr + ₹50Cr) = ₹190 crore, which equals to the
calculation of the assets submitted by the company.

2. An organisation ABC wish to buy a ₹500 manufacturing machine

using cash. This deal will result in debt of (-₹500) for equipment and
(+₹500) as a credit to cash. Therefore, the accounting equation will
be.
 Users of Accounting Information

Users of accounting information are internal and external. External

users are creditors, investors, government, trading partners, regulatory
agencies, international standardization agencies, journalists and
internal users are owners, directors, managers, and employees of the
company. There are three primary users of accounting information:
internal users, external users, and the government (which is a specific
form of an external user). Each group uses accounting information
differently and requires the information to be presented differently.

Internal Users
Internal users are owners and managers involved in the day-to-day
operations of the business and in long-term strategic planning. They
are the ones who are making decisions such as whether to lease or buy
equipment or to keep the old equipment and simply keep repairing it.
They also decide what products or services to produce and how much
of each to supply. They decide on the price to charge to customers,
and they want to know how much it costs to make a product.
1. Owners
Owners are the people who provide capital for the business. They need information
about the financial performance and position of the business. For this reason, they use accounting
information to look into the financial affairs of the business.

2. Management
Management is responsible for taking work from others in the most
appropriate way. Management needs accounting information to check
the efforts of subordinates, ensuring that those who are working hard
are properly motivated.
The owners and managers of businesses use accounting information
for the following purposes:
To understand the financial health of their business units
To set organizational goals
To evaluate progress toward organizational goals
To take corrective action where needed
Decisions that are based on accounting information are more likely to
be correct compared to those based on pure intuition.
3. Employees
Employees are the people who serve in the business. Employees are
interested in accounting information because their salary appraisals,
bonuses, and other monetary and non-monetary benefits are attached
to the company’s financial position.
4. Individuals
Individuals make use of accounting information in the day-to-day
affairs of managing their cash and bank balances, making investments, or deciding on
whether to buy or lease a car or home.
 External Users
The external users of accounting information fall into five groups;
each has different interests in the company and wants answers to
unique questions. The groups and some of their possible questions
are:

1. Investors

Investors are the people who are ready to invest their money in
a business. Investors who are looking for business opportunities can only make correct
decisions based on high-quality accounting information.

An investor is interested in knowing about the financial position of

the business. This kind of information is supplied in financial statements.

Accounting information shows the future potential of the business in

terms of future profits for investors.
2. Creditors

Creditors give loans to businesses. Creditors use accounting

information to evaluate creditworthiness and other factors since this
helps to guarantee that the loan will be repaid in the future.

Accounting information also helps creditors to make decisions about

whether to offer loans to a business in the future.

3. Government Agencies

Government agencies such as CBR and the Income Tax Department

need accounting information from businesses in order to levy tax
effectively and accurately.

Without accounting information, these agencies may miscalculate

the revenues generated for the government.

4. Customers

Customers are divided into four categories:

 Producers

 Wholesalers

 Retailers

 Final consumers

Producers must have assurance about the continuous supply of

materials needed to make products. Similarly, wholesalers, retailers,
and final consumers are interested in the fluent supply of materials.
For example, if any party (e.g., a wholesaler) believes that a product
may be unavailable in the future, they will shift their choice to another
product. To help make all these decisions effectively, accounting
information is necessary.

5. Public

The public is interested in accounting information because this

informs them about the financial health of individual businesses. In
turn, it is possible to determine the overall impact on the country’s
economy.

6. Non-Profit Organizations

Even non-profit making organizations, including clubs, non-

governmental organizations (NGOs), and welfare societies, require
accounting information to manage their affairs properly.

In the absence of proper accounting records, non-profit organizations

cannot satisfy their members and other stakeholders regarding the
ways in which their financial affairs are conducted.
 Accounting Standards in India
Indian accounting standards are nothing but guidelines to be followed
in the accounting system. It means rules & regulations that are to be
followed while recording accounting & financial transactions. It
governs the manner in which financial statements are prepared &
presented in a company.
In India, Institute of Chartered Accountants formulate & issue
accounting standards. These standards are followed by accountants of
all the companies registered in India. As we have mentioned before,
these accounting standards help in preparation and presentation of
financial statements.

Indian Accounting Standard provides principles for recognition,

measurement, treatment, presentation and disclosures of accounting
transactions in financial statements prepared by any company.

 The primary objective of accounting standards is to harmonize the

different accounting policies. The policies are used in the
preparation of financial reports.
 The objective of accounting standards is to bring a standard to the
policies.
 The adoption of Indian Accounting Standards has improved the
comparability of financial information of Indian companies
worldwide.
 It is crucial to understand that these Indian Accounting Standards
upscale the methodology of Indian Accounting.
 To maintain the accounting standards companies should closely
evaluate the key areas of impact, and develop an appropriate
strategy for communication to stakeholders to minimize any
surprises or adverse reactions.

List of Accounting Standards in India

 Ind AS 1 Presentation of Financial Statements.
 Ind AS 2 Inventories Accounting.
 Ind AS 7 Statement of Cash Flows.
 Ind AS 8 Accounting Policies, Changes in Accounting Estimates and
Errors.
 Ind AS 10 Events after Reporting Period.
 Ind AS 11 Construction Contracts.
 Ind AS 12 Income Taxes

Ind AS 1 Presentation of Financial Statements

Objective: This standard sets out generally speaking necessities for
show of financial statements, rules for their construction and least
prerequisites for their substance to guarantee likeness.
Ind AS 2 Inventories Accounting
Objective: Its arrangements with accounting of inventories like
estimation of stock, incorporations and avoidances in its expense,
divulgence necessities, and so forth.
Ind AS 7 Statement of Cash Flows
Objective: It manages cash got or paid during the period from
working, financing and contributing exercises. It additionally shows
any adjustment of the money and money counterparts of any element.
Ind AS 8 Accounting Policies, Changes in Accounting Estimates and
Errors
Objective: It prescribes choosing and changing accounting strategies
along with accounting medicines and exposures.
Ind AS 10 Events after Reporting Period
Objective: It manages any changing or unchanging occasion happening
subsequent to reporting.
Ind AS 11 Construction Contracts
Objective: It manages any changing or unchanging occasion happening
subsequent to reports.

Ind AS 12 Income Taxes

Objective: This standard recommends accounting for income tax. The chief
issue in representing annual duties is the means by which to represent the
current and future assessment.
 Matching of Indian Accounting Standards with
International Accounting Standards
The London based group namely the International Accounting
Standards Committee (ASC), responsible for developing International
Accounting Standards, was established in June, 1973.
It is presently known as International Accounting Standards Board
(ASS)), The ASC comprises the professionall accountancy bodies of
quer 75 countries (including the Institute of Chartered Accountants of
India), Primarily, the IASC was established, in the public interest, to
formulate and publish, International Accounting Standards to be
followed in the prisentation of financial statements. International
Accounting Standards were issued to promote acceptance and
observance of International Accounting Standards worldwide. The
members off IASIC have undertaken a responsibility to support the
standards promulgated by ASIC and to propagate these standards in
their respective countries.
Between 1973 and 2001, the International Accounting Standards
Committee (ASC) released International Accounting
Standards.
Between 1997 and 1999, the IASC restructured their organisation,
which resulted in formation of International Accounting Standards
Board (ASB). These changes came into effect on 1st Aprill, 2001.
Subsequently, IASB issued statements about current and future-
standards; IASB publishes its Standa in a series of pronouncements
called International Financial Reporting Standards (IFRS). However,
IASB has not rejected the standards issued by the ISAC.
Those pronouncements continue to be designated as "International
Accounting Standardis" (IAS).
International financial reporting standards as global
standards

The term International Financial Reporting Standards (IFRS)

comprises IFRS issued by IASB; IAS issued by International
Accounting Standards Committee (IASC); Interpretations issued by
the Standard Interpretations Committee (SIC) and the IFRS
Interpretations Committee of the IASB. International Financial
Reporting Standards (IFRSs) are considered a "principles based" set
of standards. In fact, they establish broad rules rather than dictating
specific treatments. Every major nation is moving toward adopting
them to some extent.
 Capital and Revenue Items

Capital items are real assets that a company uses in the process of
production to manufacture goods and services that consumers use in
their life. Capital goods include buildings, machinery, equipment,
vehicles, and tools. Capital goods are used to make finished products
for a company. These are not finished goods but they serve as input
for producing finished goods in a firm. 

Revenue items are items that have short-term effects on business,

(normally less than one year). For example, repairs of machinery and
equipment, wages of employed and workers, salaries for staff, fuel,
etc., are revenue items.

Transactions in business are classified into two types, mainly: Capital,

and Revenue items. When the items have long term effects on
business for more than one year they are called capital items and
when the items have short term effects on the business they are called
revenue items in the business.
Capital Goods

1. Capital goods are termed as the fixed or tangible assets that are
purchased by a corporation in order to produce finished products
or consumer goods. Capital goods are not convertible into cash
very easily. They serve as investments for a company or
enterprise. They are durable in nature and do not deplete
quickly.

2. The most common examples of capital goods are items that are
all-important for starting a firm. For example, it can be
equipment or machinery.

3. There are four essential factors to produce goods, which are

capital goods, land, labor, and entrepreneurship. These four
factors are collectively known as the primary factors of
production. Without these factors, no company can exist.

4. Capital goods are used to increase production. The most

common types of capital goods are referred to as plant, property,
and equipment. For purchasing capital goods, the founder must
make a considerable amount of investment. 

5. Capital goods incur some loss as they are used. They undergo
depreciation or wear year-like repairs or replacements.

6. Capital goods play a very vital role in increasing the production

of goods in the long termiod, as they increase the production of
a firm for producing goods and services.
Revenue GOODS

1. Revenue is the money generated from normal business

operations, calculated as the average sales price times the
number of units sold. It is the top line (or gross income) figure
from which costs are subtracted to determine net income.
Revenue is also known as sales on the income statement.

2. Revenue, often referred to as sales or the top line, is the money

received from normal business operations.

3. Operating income is revenue (from the sale of goods or

services) less operating expenses.

4. Non-operating income is infrequent or nonrecurring income

derived from secondary sources (e.g., lawsuit proceeds).

5. Non-business entities such as governments, nonprofits, or

individuals also report revenue, though calculations and
sources for each differ.

6. Revenue is only sale proceeds, while income or profit

incorporate the expenses to generate revenue and report the net
(not gross) earnings.