1.0 INTRODUCTION
This is the first note of this course - Introduction to
Accounting and this will take you about one hour to study. In this note, you
will learn about the definition and objectives of book - keeping, need for
keeping records and types of accounts - Personal accounts, Real accounts and
Nominal accounts.
2.0 OBJECTIVES
At the end of this note, you should be able to:
• define book-keeping
• explain the objectives of book-keeping
• explain the need for book-keeping
• list and explain the three types of account i.e. Personal
account, Real Accounts and Nominal accounts.
3.0 MAIN CONTENT
3.1 Definition and Objectives of Book-Keeping
3.1.1 Definition of Book-Keeping
Book-Keeping can be defined as "the Science of recording
and classifying all the transactions of a business which involve the transfer
of money or money's worth. So as to show, without undue delay, the financial
position of the business in relation to itself, the owners or shareholders, and
outside persons".
3.1.2 The Objectives of Book-Keeping
From the above definition; you should be able to understand
the following objectives of book-keeping. The objectives of book-keeping can be
concisely stated in a variety of ways. For examples, it is helpful to set them
out as follows:
1. To show at any point of time the amount invested in the
business by each owner or shareholder and the amount owing by the business to
each outside person and to the business by each outside person.
2. To show at any point or time the value of the properties of
all kinds belonging to the business; and
3. To show the income and expenditure and profit or losses of
the business for a period of time.
3.2 Need for Book-Keeping
From the above definition and objectives of book-keeping, it
is necessary for us to state the need for keeping records. You will agree with
me that every individual person always keep records for many reasons. What are
your own reasons for keeping records?
In every business, it is highly desirable and often legally
necessary that certain records should be kept. Let us now look at those
essential records which can be classified under five headings:
3.2.1 Capital
Every proprietor of a business has invested money in his
business. This money is used to buy goods and services which he intends to sell
at a later date and, very often, to buy the premises, fixtures, machinery, etc.
required to carry on the business. The amount of money which he invests in his
business is known as the 'CAPITAL'. Even when a business is owned and
personally managed by one proprietor it is obviously desirable that, a record
should be kept of the Capital he has invested in the business, but when a
business is owned by more than one proprietor a record of the Capital investor
by each is essential if justice and equity are to prevail.
As you understand that, nowadays, the greater part of business
activity is carried on by corporate bodies, such as Cooperative Society and
Joint Stock Companies. The Capital of these organisations is always contributed
by more than one person.
These persons are called members of Cooperative Societies
those of Joint Stock Companies are Shareholders and the Capital they contribute
is called "Share Capital". You should note that one of the first
essentials in such an organisation is for you to keep accurate records of the
amount of share Capital contributed by each shareholders.
3.2.2 Amounts Owing by the Business (Liabilities)
Apart from the above record, we should also keep record for
amounts owed by the business.
In most business, goods and services are bought on credit. The
payment that has to be made for this is made at some future date. This is an
essential feature of modern business activity for, in the absence of
arrangements of this kind, business could not be run so smoothly. For example,
it would be very inconvenient if a cooperative society had pay cash on delivery
for all the goods it purchases. It is of the
importance that the amount
which is owing to each person who has supplied goods and services to the
business should be accurately recorded so that one can see at a glance the
exact amount that has to be paid to each person.
Likewise, when a person loans money to a business it is
essential to keep a record of the amount lent. You should note that these
amount owing by a business on account of goods or services or money received
are called "LIABILITIES": This term will be more fully explained
later
3.2.3 Amounts Owing to a Business (ASSETS)
As discussed above, you should also note that, in the same way
as businesses buy goods or services on credit, because it is convenient to
them, they frequently sell goods or services on credit to suit the convenience
of their customers.
And in the same way explained above, it is equally essential
to keep a record of the amount owing to a business by each person (the Debtor)
whom goods or services have been supplied. Note that all these amounts owing to
a business formed part of the "Assets" of the business. This also
will be more fully explained later.
As you understand that, nowadays, the greater part of business
activity is carried on by corporate bodies, such as Cooperative Society and
Joint Stock Companies. The Capital of these organisations is always contributed
by more than one person.
These persons are called members of Cooperative Societies
those of Joint Stock Companies are Shareholders and the Capital they contribute
is called "Share Capital". You should note that one of the first
essentials in such an organisation is for you to keep accurate records of the
amount of share Capital contributed by each shareholders.
3.3.4 Property of All kinds belonging to a Business
Apart from the amounts owing to a business which formed part
of the Asset, every business has properties of various kinds, e.g. land,
buildings, machinery, furniture, stocks of goods for sale, cash etc. It is very
desirable that records should be kept of these.
You should note that properties of all kinds as well as
amounts owing to a business, are called "ASSETS".
3.3.5 Income and
Expenditure
Every business sells goods or services. The value of these
sales is said to be income of the business. The costs involved in purchasing,
manufacturing, or providing these goods or services, or in preparing them for
sale and distributing them are known as expenditure. For reason which will be
given later, these costs are often termed revenue expenditure.
The amount by which the income of a business exceeds the
expenditure during a given period is the "PROFIT" for the period.
Note that sometimes the expenditure exceeds the income during a period, and the
excess is a "Loss". It is essential that the profit or loss of a
business for a
trading period should be known, and for this purpose records
of income and expenditure are kept.
3.3 Types of Ledger Accounts
Ledger accounts can be classified into three- Personal, Real
and Nominal Accounts.
It should be clear to you now what objectives of book-keeping
are. If yes, how are the objectives of book-keeping achieved? A simple answer
to this question is that the objectives are achieved through keeping
appropriate ledger accounts.
Then what do you understand by ledger account?
Answer — Ledger account is a ledger record (in a summarised
form) of all business transactions that have taken place with a particular
person or things specified.
3.3.1 Personal Accounts
These are the accounts of individual persons, shareholders,
registered business organisations etc. Personal account show at any point of
time the amount invested in the business by each owner or shareholders and the
amount owing by the business to an outside person and to the business by an
outside person. From the above statement, there are three main classes of
personal accounts:.6
1. Shareholders Accounts
2. Creditors Accounts and
3. Debtors Accounts
3.3.2 Real Accounts
These are accounts of tangible things. They show at any point
of time the values of the properties of all kinds belonging to the business —
e.g. those things we can see, touch and move — land, building, motor vehicle,
machinery (Assets).
3.3.3 Nominal Accounts
Nominal accounts are accounts of intangible things e.g. income
and expenditure, profit and losses of a business for a period of time.
As explained earlier, note that each of the above three
objectives of book-keeping is achieved by keeping a different kind of ledger
accounts.
4.0 CONCLUSION
In this note you have learned the definition of book-keeping,
objectives/or book-keeping and the types of ledger accounts which would be
referred to in the subsequent notes.
5.0 SUMMARY
We have successfully defined book-keeping in a simple way and
mentioned the need for keeping records. In this note, we also stated the
objectives of book-keeping which can be more concisely stated as follows:
1. To show the capital, liabilities and assets with the
business at anypoint of time and
2. To show the income and expenditure and profits and loses of
the business for a period of time.
Apart from the objectives of book-keeping, we also mentioned
and explained the three types of ledger accounts-
1. Personal
2. Real and
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