Effective financial management is one of the basic tenets of business, no matter in which industry sector it operates. When Bookkeeping and Accounting are done efficiently, it ensures the wide growth of business and significantly mitigates risks.
Books of accounts refer to documents / statements or registers maintained by any person or entity carrying on any kind of business or profession. Some common examples of such documents that form part of the books of accounts include – Journal, Ledgers, Cash Book, Purchase Book, Sales Book, Trial Balance, Profit & Loss Account, Balance Sheet, etc.
Take a glance at the article, which explains the difference between bookkeeping and accounting in Infographic form.
Types of Bookkeeping System
- Single-Entry System: Generally single-entry system is used where business have minimal and simple accounting transactions. In this system, transaction shall be recorded only when they are actually incurred. Each entry is recorded chronologically in a journal just like a transaction log.
- Double-Entry System: Double entry bookkeeping services are used in businesses where entities have more complex transactions. In this system, each transaction is recorded with two equal and offsetting entries – a debit and a credit.
During audit this system is supposed to provide required information to the auditor accurately.
Benefits & Advantages Bookkeeping and Accounting
- Quick document submission and Report creation
- Document management
- Improves the organisations accounting functions
- Provide tracking capabilities
- Increase data delivery time and ensures accuracy
- Secure and protect critical data through ISO compliance
- Improve and streamline the workflows
- Enhanced integrity and quality of service
- Ensure business continuity with active management
- Identify, implement and upgrade accounting information system
Principles of Accounting
Principles of accounting refer to the commonly followed rules or guidelines that are to be kept in mind by the accountant during the process of accounting. Some of the major principles are discussed below:
- Principle of conservatism: A conservative approach is applied in recording the revenue. In a situation where two different accounting treatments are possible, the conservative principle will require to follow the treatment that leads to lower profits.
- Revenue Recognition Principle: This principle requires that revenue should be recognized as soon as sale takes place or income is earned and not when the income is actually received. It is possible that revenue recognized in a quarter is actually realized in the next quarter.
- Historical Cost Principle: Also known as the cost principle, assets are recognized based on the actual amount spent/ cost incurred in obtaining such asset. This is irrespective of whether the asset is purchased 1 month ago or 10 years ago.
- Accrual Principle: This relates to the recording of income and expense in the period in which they relate to and not in the period in which they actually occur. For e.g. Salary of employees for the month of March, 2020 is actually paid on 7th April, 2020. Under the accrual principle the salary should be recognized as a liability in March, 2020 itself. The accountant decides to follow accrual basis or cash basis depending on the nature of the business.
- Matching Principle: The expenses are matched with the related income. This is directly related to the accrual basis of accounting. Expenses incurred for earning an income should be recognized in the same period in which such income is recognized and not when the expense is actually incurred.
- Going Concern Principle: This principle assumes that the business will continue to exist and carry out its objectives and the business will not liquidate in the near future. Where the accountant has valid reasons to believe that the business may not be a going concern, the same should be considered in the accounting process. For e.g. Cash basis should be followed in recognizing the income.
- Full Disclosure Principle: This principle requires disclosure of all financial information that may be relevant for the users of the financial statements. The various accounting standards followed in the preparation of financial statements are based on this principle.
- Objectivity Principle: Under this principle each entry/ transaction recorded in the books of accounts should be backed by verifiable evidence. There should be proper trail of the flow of entries. The accounting data should be free from any bias either from the management or from the accountant.
Video on Accounting & Bookkeeping service:
Watch video to know:
- Who should maintain books of accounts?
- Financial Statements
- Books of Accounts to be maintained by Specified Professionals
- Deemed Income
- Period of Maintenance