Updated : Nov 21, 2018 in Finance Accounting

Financial Accounting With Double Entry Bookkeeping – Traditional Methods of Financial Accounting

In this series of articles it proposed to cover the following topics. In this article I have discussed the first one given below. More articles describing the other listed topics below may soon be published.

  • Meaning of Bookkeeping
  • Definition and objectives of Bookkeeping
  • Accounting Systems
  • Branches of Accounting
  • Uses of Accounting
  • Limitations of Financial Accounting
  • Explanation of important Accounting terms
  • The Accounting Cycle
  • Responsibilities of an accountant
  • Importance of data in accounting
  • Parties interested in accounting information

In today's world of ours every activity is with some motive, ie purpose. In most of the cases. The purpose is to earn profit while in other cases the purpose may be social welfare, providing education, healthcare, etc. Whatever may be the purpose the activity is likely to be an organized affair. Every organization has to use resources-material, labor, services, capital and to work effectively the people in the organization require information. Money must be spent carefully. If a person spends carelessly, a day would come when he will be left with no money. Same can be said about a business. A business receives money from different sources like sale of goods, sale of assets, receipt of various incomes like rent, interest, commission etc. It has to spend money on items like expenses, purchases etc.

A business man should manage his business in such a way that he should receive more than he spends, other wise he will be in trouble because he will have to meet out expenses from the original amount invested by him for starting business. Thus capital of the business will be reduced due to this loss. If this process is allowed to continue for a long time then the whole capital of the business will be washed away. If the businessman manages his affairs in an efficient way and if receipts are more than the payments year after year it prospers and grows in size.

So, it can be said that profit increases the capital and loss reduces it. It should be kept in mind that profit or loss is the result of cost of goods sold and sales. In actual practice, if a business is to be run at profit then it has to sell goods at such a price as will enable him to meet out not only expense on account of cost of goods sold but also other expenses like, rent, salary, interest, insurance etc. Thus for making a profit either sales should be kept sufficiently high to meet out all expenses or expenses should be kept low so that they are fully met out of sales. Besides it, business also maintains certain properties ie furniture, building, machinery, equipment etc. Similarly, it also borrows money from time to time. In order to keep property in good condition, to pay back in time the debts, to keep down expenses, and to increase sales it is necessary to keep a constant watch, it is necessary that the proprietor of the business is kept well informed of the behavior of these items.

With a view to supply such information the art of accounting was developed. It supplies the following information to traders:

(1) How much will be the total earnings during the period;

(2) What will be the expenditure during the period on salaries, wages, lighting, insurance, rates and taxes etc;

(3) How much will be the profit or loss;

(4) How much will be the capital and causes of its increase or decrease; (5) Nature and value of assets possessed by the business;

(6) Nature and amount of liabilities;

(7) Customers who owe to the business and the amount in each case;

(8) Suppliers to whom the business has to make payments and the amount in each case; and

(9) Other facts for filing sales tax or income tax returns.

Meaning of Bookkeeping

Book-keeping is that branch of knowledge which tells us how to keep a record of financial transactions. The need for recording such transactions arise because

(1) it is difficult to remember the various financial payments and receipts taking place during a period of time;

(2) in modem forms of business organizations the control of business rests with different persons and the results are to be reported to the owners;

(3) the financial information is, required for the purposes of costing, budgeting, forecasting and planning; and

(4) Book-keeping records are to be submitted to various government agencies like Income Tax and Sales Tax 'authorities for taxation purposes.

Most of us do maintain some kind of a written record of their income and expenditure. The essential idea behind maintaining such a record is to show the correct position regarding income and expenditure. Such a record should be clear and systematic so that it can be easily understood. It should show to whom a payment has been made when and what for. The need for maintaining a record of income and expenditure in a clear and systematic manner has given rise to the subject of book-keeping. Book-keeping can as such be defined "as an art and science of recording business transactions in a systematic and, chronological order".

The necessity of recording all the transactions clearly and systematically can not be over emphasized. Goods may be sold on credit to several persons. The latter would pay the price of the goods to the vendor later. The vendor would like to know, from time to time what amount is due and from whom. However, strong one's memory may be, one cannot hope to remember all the details regarding all the transactions. Apart from this, the object of business is to earn profits; and every merchant likes to know at the end of a financial year how much profit he has earned during the course of the year. For this purpose, he would need a lot of factual information which can be derived from written or computerized records of transactions, provided such records have been properly kept; in modern times using a computer software like HiTech Financial Accounting. As such proper maintenance of books of accounts is indispensable for a businessman.