ACCOUNTING & BOOK KEEPING
Stage
Book keeping is the primary stage whereas accounting is the secondary stage as it starts where book keeping ends.
Replaces memory
A systematic and timely recording of transactions obviates the necessity to remember transactions.
Ignores qualitative elements
Accounting is confined to monetary matters only. Qualitative elements like quality or skills of employees and management, industrial relations and public relations are ignored.
Recording
The process of recording business transaction of financial nature in the book of original entry, i.e., JOURNAL
Owners
To know the profit earned or loss incurred besides the safety of their capital
Nature of job & staff requirement
Book keeping job is routine in nature and can be performed by not so trained staff whereas accounting job is analytical and dynamic in nature and performed by a trained staff.
Facilitates comparative study
A systematic record enables comparison of one year's results with those of other years or comparison between similar firms is also possible.
Accounting is not fully exact
Transactions are recorded on the basis of facts but some estimates are also made for calculating profit or loss.
Measuring the identified transactions
Financial transactions are measured in terms of money as qualitative transactions are not recorded in the books of accounts.
Creditors
To satisfy themselves about the credit worthiness of the business before granting credit.
Special skills
Book keeping is mechanical in nature and doesn't require special skills whereas accounting requires special skills and ability to analyse and interpret.
Evidence in court
Systematic record of transactions is often accepted by courts as good evidence.
Unrealistic information
Assets are recorded in the books of accounts at historical cost. Estimates are made for calculating useful life of the asset and then to charge depreciation. All this makes information unrealistic.
Classification
The process of grouping transactions of one nature at one place. This is done in main book of accounts known as LEDGER.
Management
To arrive at decisions such as determination of SP, cost controls and reduction, investments in new projects.
Objective
The objective of book keeping is to maintain systematic records of financial transactions whereas the objective of accounting is to ascertain net results of operations and financial position and to communicate information to the interested parties.
Assistance to management
Accounting information helps to make business plans, take decisions and exercise control
Ignores the effect of price level change
Accounting statements are prepared at historical cost but value of money changes frequently. So, accounting information will not show correct financial results.
Identification of financial transactions & events
Accounting records only those transactions and events which can be measured in terms of money.
Employees and Workers
To know the amount of bonus (as it is linked to profit earned), amount transferred to EPF and Employees' State Insurance
Scope
Financial information about business
Accounting information helps in knowing the Financial Performance (from Trading & Profit & Loss A/c) and Financial position (from Balance Sheet) of the business.
Leads to window dressing
Window dressing means manipulation of accounts in a way to conceal vital facts and prepare the financial statements to show better financial position. so, the financial position and performance shown will not necessarily be true & fair.
Summarising
Summarising is done by preparing:
Trial Balance
Trading & Profit & Loss A/c & Statement of Profit & Loss in case of Companies.)
Balance sheet
Banks & Financial Institutions
To know whether business is making progress as projected so as to ensure the safety and recovery of the loan advanced and payment of interest.