Introduction To Accounting: Part 2: Book Keeping, Accounting And Accountancy

Book Keeping:

Book Keeping is mainly concerned with record keeping or maintenance of books of accounts. The maintenance of books of accounts includes the following four activities:

1. Identifying the transactions of financial nature from amongst the various transactions.
2. Measuring the identified transactions in terms of money.
3. Recording the identified transactions. Recording is done in what is called the “Books of Original Entry”, also known as “Journal”.

4. Classifying them.

Classification is done in what is called “Ledger”.

Account:

• In actual practice, the individual transactions of like nature are recorded, added and subtracted at one place. Such a place is customarily termed as an “Account”.
• It is abbreviated as “A/c”.
• Examples:
  • Any organisation these days needs a computer. Many a times, more than one computer is required. Old Computers would be sold off and new Computers would be bought for as long as the Business continues. The purchase and sale of computers will be recorded in one place, called the “Computer Account” or the “Computer A/c”.
  • All the transactions related to a particular supplier^*, say, Ram, would be recorded in a place called “Ram A/c”. Supplier: a person from whom the business purchases goods for further sale; for example, in the business of a book store, the wholesalers or the publishers from whom the business purchases books, are suppliers.

• All the transactions related to Cash will be recorded in a place called “Cash A/c”.

• When a transaction of a particular nature occurs for the first time, it is said that an Account is opened for that type of transaction. For example, in case of a new supplier, say Shyam, with whom no business has ever been transacted, a new Account, called the “Shyam A/c” will be opened in the books of accounts, and all the transactions related to Shyam, i.e. Purchase of Goods and Payment to the supplier will be done in Shyam A/c.

Ledger:

Ledger is a book containing various “Accounts”.

Accounting:

Accounting starts where Book-Keeping ends. It includes the following activities:

1. Summarising the classified transactions. Summarising is done in the following three forms:

• Trial Balance
• Trading and Profit & Loss Account
• Balance Sheet
• Note: We’ll be studying these in detail later.

2. Analysing and interpreting the summarised results.
3. Communicating the information to the interested parties.

However, in actual practice, the accounting process includes the book-keeping function also.

Therefore, the definition of Accounting is as follows:

Accounting is a systematic process of identifying, measuring, recording, classifying, summarising, interpreting and communicating Financial Information.

Thus, Accounting involves the following processes:

1. Identifying,
2. Measuring,
3. Recording,
4. Classifying,
5. Summarising,
6. Interpreting, and
7. Communicating.

On taking a look at the above definition, we find that these processes revolve around one thing, i.e. “Financial Information”. Financial Information is explained in a while.

Hence, it is clear that Accounting concerns itself with only Financial Information. Any kind of Non-Financial Information is out of the scope of Accounting.

Accountancy:

It refers to a systematic knowledge of accounting, concerned with the principles and techniques, which are applied in accounting. It tells us the following:

1. How to prepare the books of accounts,
2. How to summarise the accounting information, and
3. How to communicate it to the interested parties.