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CHAPTER: 2
BOOK KEEPING VS ACCOUNTING
1. BOOK KEEPING: book keeping is the first phase in accounting. It involves the recording
of business transection in specific manner. It is clerical in nature. It does not require
professional knowledge.
Book keeping is defined as
 It is an art of recording in books of account, transactions in money or money’s terms.
2. ACCOUNTING: Book keeping serves as a base of accounting process. As accounting is the
next phase after book keeping. The accounting starts when the book keeping ends.
 Accounting is a system to summarize, analyze and report financial Transactions of a
business in the form of Financial Statements.

TYPE OF ACCOUNTING

1. Financial Accounting:
Financial accounting involves recording and classifying business transactions, and preparing
and presenting financial statements to be used by internal and external users.
In the preparation of financial statements, strict compliance with generally accepted
accounting principles or GAAP is observed. Financial accounting is primarily concerned in
processing historical data.

2. Managerial Accounting
Managerial or management accounting focuses on providing information for use by internal
users, the management. This branch deals with the needs of the management rather than strict
compliance with generally accepted accounting principles.
Managerial accounting involves financial analysis, budgeting and forecasting, cost analysis,
evaluation of business decisions, and similar areas.

3. Cost Accounting:
Sometimes considered as a subset of management accounting, cost accounting refers to the
recording, presentation, and analysis of manufacturing costs. Cost accounting is very useful
in manufacturing businesses since they have the most complicated costing process.
Cost accountants also analyze actual and standard costs to help managers determine future
courses of action regarding the company's operations.

BASIC TERMINOLOGIES
1. Business: Any activity undertaken for the purpose of earning profit. Such as the buying and
selling of goods, rendering services and manufacturing goods. Buying and selling business in
called trading. Service rendering business is called service concerns. Producing goods are
called as manufacturing concerns.

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2. Proprietors: A person who invest the money or things in business is called owner or
proprietors. He is entitled to receive all the profit and loss of business.
3. Transaction: Any dealing between two or more people for goods and services, which affects
the performance and financial position of business. Transaction can be done by money or
credit.
4. Voucher: any written evidence of business transaction is called voucher.
5. Cash memo: Any written proof or evidence for the goods purchased from particular seller on
cash is called cash memo.
6. Invoice: any written evidence given by seller to the buyer for credit sale of goods is called
invoice.
7. Account: it is device which contains a systemic record of increase or decrease in an item
during a particular period of time.
8. Merchandise: The things purchased by a business for the purpose of reselling.
9. Purchase: The cost of merchandise purchased is called purchase. There are two types cash
purchase and credit purchase.
10. Sales: The amount earned from the sale of goods. It may be cash or credit sales.
11. Revenue: All sort of incomes received or accrued are called as revenue.
12. Expense: Certain kind of payments made to achieve the objective of business is called
expense.
13. Profit: Sales minus cost and expense is called profit.
14. Loss: when the expenses are greater than revenue loss occurs.
15. Trade Discount: Any concession given by seller to buyer is called trade discount.
16. Cash discount: A discount which is allowed or received at the time of cash receipt or cash
payment before the due date. Discount received is revenue and discount allowed is an
expense.
17. Commission: Remuneration for services performed by one person to another.
18. Stock: stock means inventory/goods/merchandise on hand at any time is called as stock.
19. Turn over: It means the total amount of sales during a particular period. It is also called
stock or inventory turnover.
20. Balance: The difference between the total debit and total credit of any account is called
balance. When debit is more it is called debit balance and when the credit is more it becomes
credit balance.
21. Account Receivable/Debtor: A person to whom goods are sold on credit.
22. Account Payable/ Creditor: A person from whom goods are purchased on credit.

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23. Notes Payable: Any instrument in writing payable by the firm on certain future date is called
notes payable. These are bills or notes payable by the firm.
24. Note Receivable: Any instrument in writing receivable by the firm on certain future date is
called notes payable. These are bills or notes receivable by the firm.
25. Cash Book: A book in which all the cash inflow and outflow is recorded is called cash book.
It has three type
26. Bad Debts/ Un-Collectables: The amount which is finally written off as un collectable is
called bad debts. It is treated as losses for business.
27. Reserve for Bad Debts: An amount set aside to cover the future loss on account of doubtful
debts is called as Reserve for Bad Debts.
28. Outstanding Expenses: It means those expenses, which have been incurred but not actually
Paid. These are called as Accrued Expense or unpaid expenses.
29. Prepaid Expenses: It means the expenses, which have been paid in advance, but not yet
expired. It is also called as unexpired expenses.
30. Unearned Income: Any income, which has been received in advance but not earned in
current year is called unearned income.
31. Accrued income: The income, that is earned during the period but not yet have been
received is called as accrued income.
32. Assets: Anything valuable possessed by a firm with the following three features
a) The legal title of ownership
b) Right to use
c) Right to sale/ Disposed off

Kinds of assets are as follows:

1. Current Assets: Those assets which are easily convertible to cash and require for the
day to day activity of business such as cash, account receivable, notes receivable etc.
2. Non-Current Assets: These are the assets which earn for business other than business
operation such as investments, fixed deposits, government securities etc.
3. Fixed Assets: Those assets which are required for longer period of time for the
business operation such as land, building, Plant and machinery etc.
4. Intangible Assets: Those assets which has no physical existence and we cannot touch
it but still valuable for business such as trade mark, good will etc.

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33. Equities: The right possessed by owner or outsider against the assets of the firm are called
equities.
a) Owner’s Equity: The capital invested by owner in the business.
b) Liabilities: it is the claim of the outsiders against assets. It may be current
liability or long term liability.
34. Drawings: The cash or goods withdrawn by the owner for his personal use from business is
called drawing.
35. Financial Statements: The statements prepared by which are prepared by the accountants to
show the results of the business at the end of particular period. These are income statement
and balance sheet.
36. Income Statement: The statement which is prepared to check the business performance. The
income statement shows whether business is earning profit or losses.
37. Balance Sheet: The statement which shows the balance of Asset = Liability + Owner’s
Equity. This statement shows the financial position of business.

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