Bookkeeping:

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Introduction:

The need for a system by which man might keep a record of his business transactions with his fellowmen was felt early in the history of civilization. Many and varied methods were used to record the transactions. But bookkeeping had its beginning at a comparatively recent date and it has passed through many phases since its institution. With the development of commerce it has attained a position of great importance and today the whole fabric of modern commerce rests on bookkeeping. The main objects of bookkeeping can be said to be the following:

1. It must provide a permanent and systematic record of all business transaction
2. The periodical results as to profit or loss should be readily and accurately ascertainable.
3. To enable financial data to be supplied for management of the business
4. The entries and narrations should clearly show the nature and effect of each transaction and the combined result of all taken together

Important Bookkeeping Terms:

Before attempting to learn the art or science of bookkeeping it will be better to clarify some of the terms that will have to be used again and again.

Transaction:

Any dealing between two persons or things in a transaction. It may relate to purchase and sale of goods, receipt and payment of cash and rendering of services by one party to another. Transaction is of two kinds - cash transaction and credit transaction. When cash is paid or received as a result of an exchange, the transaction is said to be a cash transaction. When the payment or receipt of cash is postponed for future date, this transaction is said to be credit transaction.

Business:

It includes any activity undertaken for the purpose of earning profit e.g., banking business, and insurance business, a merchant business etc., etc.

Proprietor:

He is the owner of a business. He invests capital in it, gives his time and attention to it. He is entitled to receive the profit or bear loss arising out of it.

Drawings:

The cash or goods taken away by the proprietor from the business for his personal use are called has drawings.

Purchases:

Goods purchased are called purchases. When the goods purchased for cash they are called cash purchases but if they are purchased for which payment will have to be made at some future date it is known as credit purchases.

Purchases Returns:

If goods purchased are found defective or unsatisfactory, they are sometimes returned to the persons from whom they were purchased or to suppliers are called purchases returns or returns outwards.

Sales:

Goods sold are called sales. When goods are sold for cash they are called cash sales, but when they are sold without having received payment, they are credit sales.

Sales Returns:

If a person to whom goods have been sold finds that they are defective or unsatisfactory and returns them, are called sales returns or returns inwards.

Trade Discount:

It is rebate or allowance from the scheduled price granted by the seller to the buyer. Trade discount is usually granted in the following circumstances:
(a) When selling to a fellow trader.
(b) When the buyer is an old customer.
(c) When sales are made in bulk.
(d) As a custom of trade.

Cash Discount:

It is deduction or allowance allowed by creditor to a debtor. If a person pays his debit before the due date of payment the recipient may grant him an allowance for doing so. This allowance is known as cash discount

Commission:

It is a form of remuneration for services rendered by one person to another.

Expenditure:

An expenditure takes place when assets or service is acquired.

Expense:

It means an expenditure whose benefit is finished or enjoyed immediately such as salaries, rent etc. Difference between expense and expenditure is that the benefit of the former is consumed by the business in present whereas in latter case benefit will be available for future activities of the business.

Account:

A summarized record of transactions relating to person or thing is called an account.

Debtor (Account Receivable):

A person who owes money to another is a debtor. When we say that we owe Mr. Rahim $200, we mean that we have received from Mr. Rahim $200 which we have to repay. We stand as debtor to Mr. Rahim for $200. It is also termed as accounts receivable.

Creditor (Accounts Payable):

A person who pays out something or to whom money is owing is a creditor. It is also termed as accounts payable.

Assets:

These are the things of value possessed by a trader such as building, land, machinery, furniture, etc.

Liabilities:

They are the debt due by a business to its proprietor and others.

Voucher:

Any written evidence in support of a business transaction is called a voucher. When a ream of paper is bought from a stationer, he gives a cash memo. The cash memo is a voucher for the payment. When wages for the month are paid to the peon, receipt is taken from him. The receipt serves as a voucher for the payment.

Goods (Merchandise):

It includes all merchandise commodities which are purchased by the business for selling.

Stock (Inventory):

Goods or merchandise on hand, that is goods remaining unsold, is called stock, stock in trade, or inventory.

Equity:

A claim which can be enforced against the assets of the firm is called equity. In other words, the rights to properties are called equities. Equities are of two types: the right of creditors and the right of owners. The equities of creditors represent debts of the business and are called liabilities. The equities of the owner is called capital, proprietorship or owner's equity.