INTRODUCTION TO BOOK-KEEPING

TOPIC OBJECTIVES

a) Explain the meaning of Book-Keeping

b) Discuss the importance of Book-Keeping relate Book-Keeping with Accounting.

Concept of book-keeping

What is book-keeping ?

 Book-keeping is the arts of recording business transaction in term of money or money worth.

Book-keeping is the branch of accounting which deals with recording of data or events.

Or

Book-keeping  deals with analysis classification and recording of business transactions in the books of accounts. ?

What are the objectives/ importance of studying book- keeping?

The following are the objectives /importance of book-keeping

  1. Business control-a business owner will have to maintain proper accounting records of all business assets and liabilities this help in decision making.eg deciding matter like business expansion according to business profit
  2. Knowledge of credit dealing- most business transactions are conducted on credit basis therefore the business owner have to maintain accounting records in order to know the amount due from debtors and those owing to his creditors.
  3. Determination of profit -the main aim of business is to make profit.Complete and proper business records assist in ascertaining the profit.
  4. Reliable financial position- it is very common for business firm to seek financial assistance from financial institution such as bank. For business to receive such assistance the credit worthiness of a business must be known.the proper analytical business records must be maintained as this influence the determination of selling price of business.
  5. Fair tax assessment

 Normally tax Authority requires submission of proper final accounts for fair income tax charge.

What are the differences between bookkeeping and accounting?

  1. Book-keeping is part of account which deals with recordswhile accounts accounting deals with identifying measuring and communicating economic information to permit informed judgments and decisions making by the users of the information.
  2. Bookkeeping is mainly concerned with daily records of business transactions while Accounting deals use daily records for decisions making
  3. The nature of book keeper work is clerical while accountants are responsible for preparation of financial reports and statements as well as the analysis and interpretation of the reports.
  4. Bookkeeper are supervised by accountants while accountant supervise the bookkeeper

Common terms used in bookkeeping

Business is any economic activities that aim at profit making.

Profit the excess of business revenue over the business expenses

Assets these are resources owned by the business. Business resources like land, buildings, machine furniture and motor vehicle are called non-current assets because they last in business for more than one year .assets like stock of goods debtors cash at bank and cash in hand are called current assets because they may last in business for less than one year

Capital / owners’ equity-is the total resources supplied to the business by its owner.

Owners’ equity is when capital is through share contributions eg in company

Liabilities these are loans taken by business and are to be paid back.loans that are to be paid back for more than one year are called  non-current liabilities.eg  bank loan from other financial institutions. Loan that are to be paid back within one year are known as current liabilities eg creditors prepaid income accrued expenses bank overdraft.

Financial transaction is the movement or exchange of money or money worth from one person to another 

Or

Is any data or event which occur in organization and should  be recorded in the book of accounts.

There are two types of business transactions

Cash transactions

These are transactions involving sales or purchases of  goods or services and the  payment is made instantly o  rpromptly.eg buying text book for cash, buying motor van for cash

Credit transactions these are transactions involving purchase or sales of goods or services and the payment is madelater or in the future..eg buying a shirt now and paying it in the next month,. Buying goods on credit, selling goods on credit, ,paying creditor by cheque, receiving money from debtors, owner paying more capital in bank owner drawing money for  personal use.

Ledger is the main book of acoount where transactions are recorded iin double entry system. This book contain a section known as account.

Account is the section in a ledger where transaction are recorded, each account are recorded in a separate page. Account is divided into two side/halves. Left half called debit side and the right half called the credit side. Each side of the account has the following column: Date ,details/particular folio amount.

ACCOUNT

DEBIT SIDE                                                                                                                    CREDIT SIDE

Date

Particular

Folio

Amount

Date 

Particular

Folio

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debtors

A person who owes money to a business for goods or services supplied to him/ her. A person can be an individual, business firm, government, company or any other legal person.

Creditor is the person to whom money is owed for goods or services

Who are the users of accounting information?

The following are the users of accounting information or bookkeeping records.

Owner of the business they want to know the financial position of the business and see whether the business is profitable these help the owner to make right decision about the business.

A prospective partner if the owner  want to inter into joint venture with someone else the accounting information will be required by the respective partner.

A prospective buyer-if the owner want to sell his business the buyer will require the accounting information.

Investors existing and new investors in the business will use the accounting information to make decisions about investment in that particular 

Business.

Tax inspectors they use accounting information to calculate tax payable.

Financial institution if the business owner want to borrow money for use in business  thefinancial and the lending institution will require the accounting information to determine whether to give out money or not.

ACCOUNTING PRINCIPLES

Since the accounting information are used by many users  with different interests it is important that information provided with uniform and contains figures that can be generally accepted. furthermore the user  of accounting information lookat different business information and over different period of time they need some assurance that information provided is within reason accurate and comparable.this can be  achieved  only if the financial statements are prepared using similar approaches across the business and over time, for this  purposes some basic ground rules  and principle have been developed .financial statements  are prepared by following generally accepted accounting rules /principles.acceptedaccounting principles are also known as accounting standards/accounting postulate or accounting convention.  Accounting principle can be defined as those rules of accounting that should  be followed in preparation of all accounts and financial statements.

The accounting principles are classified into two categories:

  1. Accounting concepts and
  2. Accounting convention

Accounting concepts this are basic assumptions or conditions upon which the science account is based. The following are the basic accounting concepts.

  1. Separate entity concept- this concept this concept state that business and the owner are separate therefore accountant must treat business transactions distinct from the owner personaltransaction eg if the owner buy a new pair of shoes it is incorrect to treat this as business expenses.
  2. Going concern concept the- business is assumed to continue in its operations indefinitely unless there is evidence whichindicate other wise. That is the business shouldcontinue to value all its non-current assets at original cost as it is not foreseen that will be sold.
  3. Money measurement concept/unit of measurement concept- state that account is concerned with activities that can be measured in monetary terms .money is used as aunit of measure in reporting and recording all transaction in business. therefore events and attribute that cannot be measured in monetary terms is not major concern in accounting.

 

  1. Cost concept- transaction s are entered in the books of account  at the amount at the amounts actually involved.eg if the firm buy aland  for 1500000 even if it seems to worth 30000000.the purchases must be recorded as 1500000.
  2. Dual aspect concept/duality principle- is a fundamental accounting principle that necessitatethe recognition of all aspects of anaccounting transactions. this concept is the underlying basis of  for double entry accounting system. Each transaction has two aspects. If the business has  acquired an  asset  it must  have  resulted in one of the following
  1. Some other assets have been given up or
  2. The obligation to pay it has risen or
  3. There has been a profit leading to an increase  in the amount that the business owes to the proprietor or
  4. The proprietor has contributed money for the acquisition of asset .the reverse is also true. If forinstance there is increase in the money owed to the others there must have been an increase in assets or aloss. Assets =Capital + liabilities or Capital =assets-liabilities this is called accounting equation or balance sheet equation.

 

  1. Accounting period concept- in determining profit or loss at all times revenue should be matched against expenses incurred in the process of generating that revenue in the same period.it is necessary to recognize all the revenue/ income  earned during a period regardless of the money received.in the same way all expenses incurred by the business should be included regardless when money is paid to them.
  2. Periodic matching costs and revenue concept- although a business is assumed to  continue to exist indefinitely its life can be broken into periods of time usually twelve months during which results can be measured. The significance of this concept is that users do not have to wait until cessation of business to determine profit or loss.
  3. Accrual concept state thatrevenue and expenses are recorded when they occur and not when the cash is received or paid out.

Accounting convention

These are custom traditions which guide the accountant while preparing statements. The following are the important accounting conventions:

  1. Conventions of conservatism prudence financial statements are- usually drawn upon rather a conservatism basis.Window-dressing that is showing a position better that what it is not permitted. Itis not proper to show a position substantiallyworse than what it is. I another wordsecret reserve is not permitted.
  2. Convention of disclosure- accounting report s should disclose fully and fairly the information the y purport to represent. They should honestly prepared and sufficiently disclose information which is not of material interest to proprietors to present and potentialcreditors and investors.
  3. Convention of consistencyonce an accounting method once an accounting method has been chosen that method should be used unless there is a sound reason to otherwise. For example methods of calculating depreciation charges or valuing stocks.
  4. Convention of materialityonly significant items should be considered when preparing financial statements. The purchase of small items like type writers can be treated as expenses in large firms treat as assets. Materiality depends to the nature and size of the firm.

Relevance of accounting concepts and principles

The The importance of these concepts and principles lies on the fact that they are related to the entire financial accounting process while they affect directly the way the financial reports are prepared.

Accountants need to apply professional judgments while preparing financial reports. These concepts and principles help them to ensure that they are not being misled and that providing a true and fair view of financial statements

The accounting concepts and principles properly is necessary for anyone who is willing to make career or working in the accounting field. If these concepts and principle are followed in the professional work in a way as needed accountant  can save money energy time and effort.

While the good grasp of the concept sand the enables them to work effectively and efficiently. The accounting principle and concept are of great help and assistance to the professional accountants to consider and apply whatis the best interests of the user of financial information.

Having a good knowledge of accounting principles most accounting topics will make more sense to help you perform the related activities in a more professional manner,

Relationship among accouting concepts

  1. Going concern concepts and cost concepts
  2. Periodic matching of costs and revenue concept and accrual concept

 

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END  OF TOPIC QUESTIONS.

CHOOSE THE MOST CORRECT ANSWER FROM A GIVEN ALTERNATIVE

  1.       An art of recording business transactions in sets of book sin terms of money or money worth.

A)  Closing etries

B)  A list of assets and liabilities

C)  Book-keeping

D)  Classification of business transactions

2. Which of the following startment is not correct?

  1.      Assets – capital =liabilities
  2.       Liabilities + assets=capital
  3.       Assets =capital +liabilities
  4.      Capital=assets - liabilities

3. Credit transaction are;

  1.      Creditors transaction
  2.      Transaction for credit note
  3.       Transaction made for future payment
  4.      Information relating to selling of good

4. Which of the following is liabilities 

  1.      Office furniture
  2.      Creditor
  3.       Debtor
  4.      Cash at bank

5. Which of the following is not non –current assets?

  1.      Motor van
  2.      Land
  3.       Bank balance
  4.      premises

6  Business  activities are  separate from owners activities this is:

  1.         The cost concept
  2.         Money mearurement concept
  3.           Business entity concept
  4.         Dual aspect concept

7. A business transaction is:

  1.         Movement of money or money worth from one person to another
  2.         The arts of keeping  books of accounts
  3.          Information relating to buying and selling
  4.         Non of the above

 

8. Which of the following is not the objectives of bookkeeping;

  1.         Determination of profit
  2.         Business control
  3.          Knowledge of credit dealing
  4.         Making the business known to every one

9.  The two side of an account are:

  1.         Right and left
  2.         Receipt and payment
  3.          Debit and credit
  4.         Profit and loss

10. Which of the following is an accounting concept:

  1.         Conservatism
  2.         Full disclosure
  3.          Going concern
  4.         Consistence

11. Match the items in list A with the item in list B to give  the most correct meaning

 

List A 

  1.          Creditor
  2.          Dual aspect concept
  3.          Accounting equation
  4.          User of accounting information
  5.          Debit
  6.          Account
  7.          Ledger
  8.          Business
  9.          Capital
  10.          assets

List B

  1.               Total resources supplied to the business by the owner
  2.                The left hand side of an account
  3.                Any legal economic activities aiming at profit
  4.               These are  resources owned by the business.
  5.                Main book of account where transaction are recorded
  6.                Part of double entry record  containing details of transaction
  7.                Tax inspectors
  8.               Assets =capital +liabilities
  9.                  A person whom money is owed for goods or services
  10.                  Accounting principle
  11.               Accounting concept
  12.                Accountant

Fill in the blanks with the correct answers

12. Mention the advantages of business control

a)                  …………………………………………………………………

b)                 ……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

c)                  …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

13.Mention the objectives of  book-keeping and explain any two of them

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  2.                ………………………………………………………………………………………………..
  3.                …………………………………………………………………………………………………………..
  4.                ……………………………………………………………………………………………………..
  5.                ……………………………………………………………………………………………………………

Explanations.

  1. ……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………..
  2. ……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

14. Mention   any five accounting principle

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  3.       ………………………………………………………………
  4.       ……………………………………………………………..
  5.       ……………………………………………………………..

 

15.mention four accounting convention

  1.       ………………………………………………………….
  2.       ………………………………………………………….
  3.       ……………………………………………………………
  4.       …………………………………………………………….

16. Name and explain the user of accounting information

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17. Explain the following accounting concepts

a)     Going concern

b)     Money measurement 

c)      Duality

d)     Accrual

e)     Cost 

f)       Periodic matching of cost and revenue

g)     Business concept

18. Name and explain the four  accounting conventions

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19. Explain the six relevance of accounting concepts and principles

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20. Outline the accounting concept that are closely related

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