Tuesday, 27 May 2014

What is Accounts and two basic methods of accounting

What is Accounting?
All of us know that any business enterprise requires keeping some books of accounting. But, first, let us know what is basically meant by accounting. The accounting basics is basically a process of recording all transactions which involve money value and are maintained in terms of monetary value.

If you buy something, you enter its value. If you pay money you will enter the amount paid. If you sell something, enter its value. If receive payment enter amount received. In the same way, enter all payments made by the amount paid. Enter all receipts by the amount received. So that your account book contains every transaction that you make with date and amount. At the end of a month or year, you can see how much you paid and how much you received. So it facilitates to verify all your transactions and the balance amount left with you as on a date. You can track your spendings with the help of this book.

Two basic Methods of Accounting

There are two basic methods of accounting
1) Single-entry Accounting
2) Double-entry Accounting

Let me explain both of them in detail.

Single entry Accounting

This method of accounting you can see with small retailers and vendors. The small shops which are operated by a single owner with one or two boys purported to be his own relatives do not take the pains to go through all the elaborate procedure of keeping books of accounts. He simply notes down all his purchases made by the total bill amounts and total sales of the day in a single figure. Other expenditure bills are also noted by the amounts paid. Each transaction has only one element of it. If it is a purchase, he enters it under purchases. If bills, he mentions the bill and the amount paid. Total sales are entered by counting the money received during the day. So, in single entry system, every entry is simply a record of the transaction. It does not show the account details.

Double-entry Accounting

Double entry system, on the other hand, contains two sides of every transaction. If you purchase something, you pay the amount. So, you are receiving some goods and paying back its value to the seller. The seller is receiving money and in return, he is selling his stock. So each transaction affects two persons and their accounting books. The seller records the quantity sold item-wise if different types of items are sold and also the money received by him against each item. Similarly, the buyer records quantity and value of purchases made item-wise and the money paid. So for every transaction, there are two entries. Something receiving and something going out. When both these elements are recorded, it becomes a double entry system.

So, you can see that single entry system is simply a record of transactions made date wise with the sole purpose of keeping track of the money involved. But double-entry accounting system is an elaborate process of keeping a detailed record of both sides of each and every transaction giving a clear picture of all the sides of transactions involved in the business.

So, in Single entry system, you keep only one book (generally one bound book with or without rulings) in which you enter all your transactions date wise and will keep all the relevant bills of payments and receipts in original for the income tax assessment.

But, in Double entry system, you need to keep all account books in addition to bills and journal vouchers and all other connected records perfectly as per requirements of the Company Act and Rules.

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