Book keeping refers to recording of a financial transaction or events related to business in an orderly manner on a day to day basis. Under book keeping, all the transactions right from the commencement of business to its closure are recorded. Such recording is done with the help of supporting documentation such as invoices, receipts, challans, purchase orders, etc or any other piece of evidence that proves that the transaction took place. Book keeping is a routine procedure and takes place on a regular basis. It entails the primary recording of all transactions in the books of account.
Book keeping requires all transactions to be recorded by way of ‘double entry’ book keeping system. The double entry book keeping system recognizes two fold aspects of every transaction i.e. debit and credit. In the world of book keeping, every debit has a equal and corresponding credit. Double entry book keeping system ensures arithmetical accuracy of books of accounts, minimizes the chances of errors and frauds and also aids in decision making. Under the double entry book keeping system, the financial transactions are recorded by way of journal entries and posted in respective ledger accounts.
Under book keeping, the financial transactions may be recorded in any one of the following methods:
A system where the transactions of receipts and payments are recorded when money is paid or received. In this system, the transactions are not recorded in the period in which they occur or accrue, but are recorded in the period in which they are monetized.
A system where transactions are recorded when they accrued (irrespective whether they are monetized or not). It is also called as the accrual system of accounting.
Under the double entry book keeping system, first the transaction is identified basis its supporting documents. Thereafter, the accounts involved in the transaction are detected. These accounts could be Personal account (i.e. accounts of natural persons, artificial persons or representative persons) or Real account (i.e. accounts of assets, properties or possessions, including both tangible and intangible) or nominal account (i.e. accounts of expenses, losses, profits, incomes and gains). Then, the journal entry is recorded basis the following rules:
Debit the receiver or the one who owes to business, credit the giver or the ones to whom the business owes.
Debit what comes into the business, credit what goes out of the business
Debit all expenses and losses, credit all incomes and gains.
While book keeping is the recording phase of transactions, accountancy is the summarising phase of transactions. It refers to preparation of financial statements at the end of a financial period using the records maintained in the books. At the end of an accounting period (could be quarterly or semi-annually or annually), after conducting the regular activity of book keeping, the journal entries recorded therein and the postings made to ledger accounts are reviewed, interpreted and reported in the form of financial statements. Accountancy helps to provide a complete financial picture.
At the end of a financial period, all the journal entries ledger postings are reviewed and a Trial Balance is prepared. The Trial balance is a statement summarising all the balances (both debit and credit) and listing them down in order to verify their arithmetical accuracy and correctness. The Trial Balance forms the basis of preparation of the final financial statements.
The financial statements pertain to a complete accounting period. They show the outcome of business activity in the said period in a summarised form. The same comprises of the following:
It is prepared by business who purchase raw materials and convert them into finished goods. It is made to ascertain the cost of goods manufactured during the accounting period.
An account prepared by a merchandising / trading concern which earns its living from buying and selling goods and services. The purpose of this account is to find the gross profit / loss earned by the business.
This account summarizes the revenues earned and expenses incurred by the business. It is prepared to ascertain the Net profit / loss earned by the business
A statement capturing the details of all assets and liabilities which have a life of more than one year. It includes the resources used to run the business and the funds through which such resources have been acquired.
In addition to the above mentioned financial statements, some businesses also prepare a cash flow statement. This statement summarizes all the cash dealings by reporting the receipts and payments of money made in the entire accounting period.