Introduction

❖ Definition of Book–Keeping:

“Book–Keeping is the art of recording business dealings in a set of books” – J. R.

Batliboi

“Book–Keeping is the science and art of correctly recording in books of account in

all those business transactions that result in the transfer of money or money’s
worth” – R. N. Carter

So Book–Keeping is the act of recording a trader’s business dealings in books of

account in such a manner that any subsequent time their nature and effect may be
clearly understood.

❖ Definition of Accounting:
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 results thereof.

According to American Accounting association "Accounting refers to the

process of identifying, measuring and communicating economic information
to permit informed judgment and decisions by users of the information".

According to Prof. Johnson "Accounting may be defined as the collection,

compilation and systematic recording of business transactions in terms of
money, thee preparation of financial reports, the analysis and interpretation of
these reports and the use of these reports for the information and guidance of
management".
According to Weygandt, Kieso, and Kimmel defined, “Accounting is an
information system that identifies records and communicates the economic
events of an organization to interested users.”
 According to the AICPA(American Institute of Certified Public
Accountants), “Accounting is the art of recording, classifying and summarizing
in a significant manner and terms of money, transactions and events, which are,
in part at least, of a financial character and interpreting the result thereof.”

Finally we can say "Accounting is a service activity. Its function is to provide

quantitative information, primarily financial in nature, about economic entities
that is intended to be useful in making reasoned choices among alternative course
of action".
❖ Object of Accounting:
The object of accounting can be described as follows:

01. To maintain a permanent and systematic record of business transaction.

02. To ascertain the amount of profit earned or loss sustained at periodical intervals.
03. To determine the amount which is owing to the trader (i.e. Accounts Receivable)
and by whom.
04. To find out the amount which is owing to the traders (i.e. Accounts Payable) and
to whom.
05. To ascertain the amount of capital or Deficiency of the trader in the business on any
particular date.
06. To supply the trader with necessary information to formulate policies for the
future courses of action.

❖ Advantages of Accounting:
The main advantages or benefit may be summarized as follows

01. It enables a trader to maintain a systematic record of all the transaction.

02. It enables the trader to ascertain clearly the result of his trading at any given
period i.e. whether he is trading at a gain or loss.
03. It affords necessary information with the least possible trouble and thus it
enables the trader to keep due control over his business affairs.
04. It helps the traders to ascertain the total amount owing to him and by whom.
05. It enables the trader to ascertain the total amount owing by him and to whom.
06. It helps the trader to ascertain the total assets and liabilities of his concern at any
 particular date.
07. It enables the trader to co-ordinate the organization most economically and sound
basis.
08. It enables the trader to detect frauds and errors and prevent the same in due
courses.

❖ Nature of accounting information:

The nature/features/characteristics of accounting information can be discussed as

follows:

Relevance: It should be relevance with the present and future activity of the
trader.
Timeliness: The accounting information should be send to user with in right time,
i.e. timeliness is the another feature of the accounting information.
Reliability: Accounting information should must be reliable.
Consistency: Accounting information should be consistent between the
accounting period, otherwise it will not helpful for decision making.
Cost benefit: In case of discloser of accounting information, the trader should
consider the cost benefit of the organization.

❖ Users of accounting information:

There are two types of users of accounting information, such as "Internal Users"
and "External Users".

Internal users of accounting information are managers who plan, organize and
run a business. These include Marketing Managers, Production supervisors,
Finance Directors and Company officers.

There are several types of "External users of accounting information. They are as
follows:

(i) Investor (owners) use accounting information to make decision to buy, hold or
sell stock.
(ii) Creditors, such as suppliers and bankers use accounting information to
evaluate the risks of granting credit or lending money.
(iii) Taxing Authorities, such as the internal revenue service, want to know
whether the company complies with the tax laws.
(iv) Regulatory agencies, such as Security Exchange Commission want to know
whether the company is operating within prescribed rules.
(v) Customers are interested in whether a company will continue to honor product
warranties and support it product times.
(vi) Labor unions want to know whether the owners can pay increased wages
and benefits.
(vi) Economic planners use accounting information to forecast economic activity.

Communication media of accounting information :

Generally accounting information disclose through the following media :

01. Oral communication.
02. Through phone, Telex, Fax etc mass media.
03. Discloser of accounting information through statements.
04. Through Newspaper.
05. Through periodicals.
06. Through charts, Diagrams, Pictogram.
07. Through confidential notes.

❖ Branches of accounting:
Following are the branches of accounting:

01. General Accounting: The general accounting includes book keeping and also
report preparation including interpretation. General accounting can also be called
financial accounting.
02. Auditing: It involves the verification of records and the reports prepared by the
accountants of an enterprise, In order to check errors and frauds and to authenticate
the financial statements.
03. Cost Accounting: Cost accounting emphasizes the determination of business
costs, especially units costs of production and distribution.

04. Management Accounting: It is based upon the concept of accounting as a

method of management or as a tool by which managerial effectiveness is enhanced.

05. Budgetary Accounting: It refers to a systematic forecasting of business

operations in financial terms. It presents in an account form the transactions
planned for the coming period and summarizes these transactions in accounting
statements.

06. Tax Accounting: It refers to the determination of the correct liability for taxes,
especially income taxes and social security taxes and preparation of necessary returns.
07. Industrial Accounting: It refers to the integration of financial accounting and cost
accounting for managerial planning and control of an industry.

08. Government and Municipal Accounting: It specializes in the transactions of

political units such as states and municipalities. It seeks to provide useful
accounting information with regard to the business aspect of public
administration.

09. Social Accounting: Social Accounting is to deal with measurement of social

and national income and national wealth.

The need for accounting concepts and principles:

The development of accounting principles has been closely associated with the
growth of business. The business today has become large in size and complex in
nature. Unlike in the past when various need business accounts were largely
needed by the proprietor, today accounting statements parties namely, proprietors,
creditors, potential investor's and many others.

Proprietor's wants to read the well being of the business the present creditors
want to know about the solvency of the business and the prospective investors
are interested in the earning potential of the business.
In view of the utility of accounting statements to various interested parties. It is
necessary to recognize the urgency of a scientific approach to the recording and
reporting of business transactions. In the absence of scientific approach,
accountants will be free to use their own language and what ever they will be
writing will not necessarily be understand in the same sense by other persons
concerned.

Thus the uniformity in understanding the accounting records is possible only

when some standard language is used.

With a view to making the accounting language a standard language, certain

accounting principles, concepts and conventions have been developed over a
course of period.

ACCOUNTING PRINCIPLES
“Accounting principles are a body of doctrines commonly associated with the theory and
procedures of accounting serving as an explanation of current practices and as a guide for
selection of conventions or procedures where alternatives exist.”
Accounting principles must satisfy the following conditions:
1. They should be based on real assumptions;
2. They must be simple, understandable and explanatory;
3. They must be followed consistently;
4. They should be able to reflect future predictions;
5. They should be informational for the users.

❖ Accounting Concepts and Conventions :

There is a difference of opinion as to the meaning and significance of the terms

"Concepts" and "Conventions". The term "Concept" is used to connote
accounting postulates, i.e. necessary assumptions or conditions upon which
accounting are based. Following is the list of accounting concepts agreed to by
most of author's:
Concepts/ Principles:

01. Separate Entity concept: It requires that the activities of the entity be kept
separate and distinct from the activities of its owner.
02. Cost principle- GAAP requires that most assets and liabilities be counted for and
reported on the basis of acquisition price. For example Lily company will report value of
Building in the Balance sheet at Tk. 3,00,000 instead of Tk. 10,00,000. Here Tk. 3,00,000
is cost value and Tk. 10,00,000 is market value.

03. Revenue recognition principles: This principles states that revenue is generally
recognized (I) when realized and (II) when earned. For this RB corporation reports
revenue in its income statement when it is earned instead of when the cash is collected.

04. Matching Principle: Matching principle states that expenses are recognized not when
wages are paid, or when the work is performed, or when a product is produced, but when
the work (service) or the product actually makes its contribution to revenue. Only those
expenses are matched with revenue which has direct relation with earning revenue.

05. Dual aspect Concept: Under this assumption every transaction should have
double sided affairs one is debit and another is credit.

06. Going concern Concept: Under this assumption the business will continue for
unlimited period. On the basis of this concept, assets and liabilities are recorded at
purchase cost.

07. Accounting period concepts: Under this assumption the organizations

determined profit or loss at the end of each financial year.

08. Money measurement concepts: The organization records all those

transactions that are measurable in terms of monetary value.
09. Accrual/Matching concept: All incomes and charges relating to the financial
year to which the accounts relate shall be taken into accounts, without regard to
the date of receipt or payment.

10. Objective evidence concept: This concept states that every transaction should
have documentary evidence.
 ❖ Conventions:
The term "Convention" is used to signify customs or traditions as a guide to the
preparation of accounting statement. Following are the various accounting
conventions:

01. Full Disclosure: It states that all information must be disclosed which has effect on
decisions of users. Information is provided through:

# Financial statements
# Notes to the financial statements
# supplementary information

02. Materiality: This convention states that the trader should record the
transaction which is material/relevant with the business and which immaterial should
be ignore.

03. Consistency: It required that once a company has decided on one of the
methods, it will treat all subsequent events of same character in the same fashion.

04. Conservatism: Revenue and profits should not be anticipated but recognized
only when they are realized in cash but liabilities and losses which have arisen or
likely to arise in respect of the financial year must be taken into account.

Generally Accepted Accounting Principles (GAAP):

The accounting profession has developed standards that are generally accepted
and universally practiced. The common set of standards is called GAAP. These
standards indicate how to report economic events. Two organizations are
primarily responsibility for establishing GAAP.

The first is the Financial Accounting Standards Boards (FASB). This private
organization establishes broad reporting standards of general applicability as well
as specific accounting rules.
The second standard setting group is the security exchange commission (SEC) the
SEC is government agency that required companies to file financial report
following GAAP.

In general the FASB and SEC work hand in hand to assure that timely and
useful accounting principals are developed.

Capital Expenditure: Capital expenditure consists of all expenditures which result in

the acquisition of permanent assets, employed to run the business for the purpose
of earning revenue, not only in one accounting period, but in several periods.
Such as cost of land and building plant and machinery, tools and fixtures etc.

Revenue Expenditure: Revenue expenditure consists of those expenditures,

which result in the conduct and administration of the business. It also includes
the cost of maintenance of earning capacity including the upkeep of the fixed
assets in productive condition, e.g. office salaries, rent, taxes, insurance and
commission etc.

Accounting Cycle :
The order or sequence in which accounting procedures are performed is known
as accounting cycle. As soon as transactions take place they are recorded in
journalizing and conclude in the post closing trial balance.

In brief the accounting cycle can be described as:

01. Recording: Recording the transactions in the journals or book of original entry.
02. Classifying: Transferring the entries from the journals to the ledger.

03. Summarizing: Preparing a trial balance from the debit and credit balances of
ledger accounts.

04. Preparing financial statements: Preparing the trading account, profit and
loss account and the balance sheet also taking into account all adjustments
affecting the period concerned.
05. Interpreting and analyzing those statements: Giving requisite Information to
the interested groups by calculating accounting ratio and by interpreting the
performance of the organization.

Principles of double entry system of Book Keeping :

The system of Book Keeping is originated fundamentally from the fact that in
every transaction there must be two accounts to complete it one account gives
the benefit and another account receives the same.

The account that receives the benefit is called "Debit" and the account gives
the benefit is called "Credit".

Therefore "The system of book keeping which is employed to record two fold
aspects i.e. both Dr. and Cr. of every transaction in money or money's worth in
two different accounts of the same set of Book is called double entry system of
book keeping.

Does double entry means double work: Some traders think the double entry
system book keeping means double work. Such impression is absolutely wrong.
As a matter of fact this system does not arise from the quantity of work to the
done but arises fundamentally from the necessity of giving perfect reflection to
each and every transaction which is variable involves two parties or accounts.

In each transaction every debit must have a corresponding credit and vice versa. In
order to consider this double effect of transaction, there must be double entry in
the books of account. Therefore the impression (Double Entry means Double
Works) is wrong. It is called double entry as it gives a perfect reflection to the
two-fold aspect of the business transaction.
 Business Transaction

Transaction is the business dealings of a trader in regard to money or money's

worth. A Businessman in the normal course of his business activities has to perform
various types of dealings. Such as, purchasing, selling, receiving the price of the
goods paying money for rent and advertisement etc. All these business dealings are
called business transactions.

Classification of Accounts :
An account is a summarized form of a group of transactions or a particular class
of transactions. Such as Rahim A/C, Cash A/C, furniture Account. There are
three types of accounts such as:
01. Personal Account. 02. Real Account. 03. Nominal Account.

01. Personal Account: The account which refers to the name of firm or person is
called personal account e.g. Rahim account, Karim account, Sonali bank account,
Rahman and Brothers account.

02. Real Account: The account which refers to the assets or property is called real
account e.g. cash account, plant account, Machinery account, Accounts receivable
account.

03. Nominal Account: The account which refers to the income and expenditure is
called Nominal account e.g. Rent Account, Salary account, Interest account,
Commission account etc.

Accounting equation: The relationship of assets liabilities and owner's equity

can be expressed as an equation as follows:

A(Assets) = L (Liabilities) + P (Proprietorship or owners equity).

This relationship is referred as the basic accounting equation.

Under the equation of accounting there are four types of accounts. Such as, 01.
Income account. 02. Expenditure account. 03. Assets account and 04. Liabilities
accounts.

Rules for determination of Debit (Dr.) and Credit (Cr. )

Under traditional method the rules are as follows:

01. Personal account : Receiver of the benefit (Dr.)

Giver of the benefit (Cr. )

02. Nominal account : Expenditure/Loss (Dr.)

Income/Profit/Revenue (Cr.)

03. Real account: What comes in the business (Dr.)

What goes out from the business (Cr.)

Under Modern method/Accounting equation method the rules are as follows:

01. Assets Account - Increase in assets- Debit

Decrease in assets- Credit
02. Liabilities Account - Decrease in liabilities- Debit
Increase in liabilities- Credit
03. Owner’s Equity Account - Decrease in capital/ Owner’s equity-Debit
Increase in capital/ Owner’s equity- Credit
04. Expenses Account - Increase in expenses - Debit
Decreases in expenses- Credit
05. Revenue Account - Decreases in revenue/incomes- Debit
Increases in revenue/incomes- Credit

The Recording Process

 Journal

Definition of Journal:
Journal is a daily register, where the trader record all his business transactions by
analyzing into debit (Dr.) and credit (Cr.), in order of date in such a manner that their
transfer to the ledger is facilitated.

Functions of Journal:

The functions of the Journal are three-(i) To analyze each transaction into Dr. and Cr., So
that its transfer to the ledger becomes easy. (ii) To record the transactions chronologically
(iii) To give narration for each entry in order to facilitating future reference.

Advantages of Journal:
The following advantages are claimed for Journal:
(i) In the Journal each transactions are analyzed to Dr. and Cr. As a result its
transfer to the ledger becomes easy.
(ii) The Journal maintains a concise and chronological record of transactions.
(iii) In the Journal it is possible to provide some sort of full explanations as to the
cause and nature of each entry.
(iv) In case of doubt or dispute with regard to a transaction in future necessary
reference may be made in the Journal.
(v) It helps to prevent or locate errors.

Specimen of Journal:

Each page of the journal is divided into 5 unequal columns, viz-(i) Date (ii) Particulars
(iii) Reference/ Ledger Folio (iv) Debit amount (v) Credit amount.
As:

Date Particulars Ref. Debit Credit

(Tk) (Tk.)
 2007 Cash A/C……………………..Dr. 1,00,000
Jan.- Mr. X’s Capital A/C……Cr. 1,00,000
1 (Being Mr. X invested Tk. 1,00,000 in the
business)

Various types of Journal Entry:

(i) Simple Entry: If a journal entry having single Dr. and Cr. is called simple Journal
entry. e.g. Cash A/C ……….Dr.
Service Revenue ……Cr.

(ii) Compound/Complex/ combined Journal entry: If a Journal entry having two or

more Dr. and Cr. is called compound Journal entry. For example:

Equipment A/C…………Dr.
Cash A/C …………….Cr.
Note payable………….Cr.
(iii) Opening Entry: The entry through which the assets and liabilities of the last
accounting period of a going concern are brought forward to the books of the new period
is called opening Journal entry
For example:

Sundry asset A/C………..Dr.

Sundry liabilities A/C………Cr.
Capital A/C…………………Cr.
(iv) Closing entry: The entries through which the nominal accounts in the ledger are
closed at the time of preparing final account at the close of an accounting period are
called closing entry.

For example:

Income statement ……….. Dr.

 Opening Inventory ………Cr.
Purchase Account…………Cr.
Wages Account……………Cr.
(v) Adjusting entry: If at the time of preparing final accounts, adjustments is necessary
certain items of incomes and expenditures etc than the entries through which it is done are
called Adjusting entry.

For example:
Depreciation A/C ……………..Dr.
Assets A/C …………………Cr.

(vi) Rectifying entry: If an error is detected in the accounts already written,, the entry
through which it is rectified is called rectifying journal entry:

For example: Marchandise sold to karim wrongly debited to Rahim Tk 400, Correcting
entry will be
Karim A/C ……………Dr.
Rahim A/C …………….Cr.

(vii) Transfer entry: The entry through which an amount is transferred from one ledger
to another is called Transfer entry.

(vii) Reversing entry: A reversing entry is made at the beginning of the next accounting
period and is the exact opposite of the adjusting entry made in the previous period.
For example Salary payable ……………Dr.
Salary expenses A/C …………Cr.

Ledger:
Definition of Ledger:
Ledger is the Principal book of a trader. It contains a condensed and classified record of
all the transaction of the business generally brought, transferred or posted from the books
of the original entry.

Why ledger is called the principal book/ the king of all books?

In the ledger both personal and impersonal accounts are maintained in order to record the
two fold aspect of the transactions permanently. Thus this is a principal book; the ledger
contains the final record of the business transactions of a trader.

From the permanent and final record so maintained in the ledger the trader can acquire
readily all necessary information for appraising past result and in formulating future
policy.

For all these reasons ledger is called the king of all books.

❖ Distinguish between Journal and Ledger

1) Journal is called the book of original entry.

Where as Ledger is called the king of all books.

2) Journal is called the subsidiary book.

On the other hand Ledger is called the principal book.

3) Transactions are recorded in Journal with full descriptions.

But in Ledger transactions are recorded without descriptions.

4) In Journal transactions are not classified in their nature.

But in Ledger transactions are recorded by classifying in their nature.

5) From Journal it is not possible to prepare Trail Balance

But from Ledger a trader can easily prepare Trail Balance.

Trail Balance
 ❖ Definition of Trail Balance

A Trail Balance is a classified list of balances both Dr. and Cr. at any specified date
extracted from each account in the Ledger.

❖ Objectives of Trail balance

1) To check the arithmetical accuracy of all the accounts of the ledger

2) To combine all the ledger account balance in one list.
3) To prove the double entry system of book-keeping.
4) To save time and money
5) To help in preparation of financial statement.

Rules for preparation of Trail Balance

Trail balance Debit (Dr.) items: (i) All assets (ii) All expenses and losses (iii)
Advance/Prepaid expenses (iv) Outstanding/Income receivable

Trail Balance Credit (Cr.) items: (i) All liabilities (ii) All income and profit (iii)
outstanding expenses (iv) Unearned/advance income