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Book Keeping and Accounting

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It is essential for every entrepreneur to have a basic knowledge and understanding of business accounting and book keeping. Typically, after incorporation, most business entities tend to focus less on day-to-day book keeping and more on profit-generating business activities. However, maintaining detailed records and books of account is not only logical, but also mandatory as per applicable laws and regulations.

Hence, every entrepreneur must know and understand the following primary accounting requirements:

  • All business transactions, payments and receipts, must be recorded with appropriate supporting documentation.
  • In general, business and individual/personal funds should never be mixed or used for purposes other than those designated, i.e. personal funds should not be used for business purposes and vice versa.
  • Where it becomes necessary to use personal funds for business purposes, such funds should be recorded as a 'receipt' and their usage entered/explained in the appropriate books of account.
  • Where business funds are used for personal purposes, they should be recorded as payment/withdrawal/loan in all relevant business records.

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Any business, whether it is a Proprietorship, Partnership, LLP or Company needs to keep proper books of accounts to reflect the business transactions including all receipts, payments, purchase of assets etc in the organization. All this information should also to be supported by proper documents such as vouchers, invoices etc.

In a market economy, running a business is with the objective to make profit. Without proper books of accounts, it is not possible to determine the profit or loss of a business. Apart from information for decision making, books of accounts are mandatory under tax laws, company law and LLP law. Tax law makes it mandatory to assess tax on income or sale goods or services.

What is bookkeeping?

Bookkeeping is the process of recording of financial transactions. Financial transactions include sales, purchases, income, expenses, receipts and payments.

What is accounting?

Accounting is the systematic recording, reporting and analysis of financial transactions of a business. Accounting allows a company to analyze the financial performance of its business, and look at statistics such as net profit or loss for a particular period

Are bookkeeping and accounting the same?

No. Many individuals mistakenly consider bookkeeping and accounting as the same. The accounting process includes the bookkeeping function.

What is the Double Entry Method of bookkeeping?

Business entities generally follow the Double Entry Method of book keeping. Under this method, every transaction will be recorded with double aspects, termed as Debit and Credit, depending on the nature of transactions.

For example, if 'A' buys a Computer from 'B' and pays Rs.20000.00 cash as its price, the double aspects of this transaction from A's point of view will be:

And From B's point of view:

What are the records to be maintained by the business for efficient book keeping?

It is advisable to keep vouchers for all receipts and payments. Generally, different colored voucher slips are maintained for receipts and payments of money. Considering the volume, these vouchers are segregated and recorded according to the nature of transactions such as income, expenditure, debtors, creditors, assets and liabilities.

Is book keeping mandatory for all business?

It is statutorily mandatory for an incorporated business to keep the records of books of accounts. However, it is essential for every business to keep the accounting records to analyse the financial status, to take timely decisions and to assess the profitability of business at the year end.

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