Books of Accounts

Books of Accounts

Books of accounts primarily consist of journal and Ledger. Journal is used for recording the transactions in first place and ledger is used to classify those recorded transaction. It is important to remember that in ordinary business practice all accounting record is knows as books of accounts.

Books of account is manual accounting concept, in computerized accounting all information is kept or stored in accounting software, therefore accounting software can be regarded as books of accounts.

Types of Books of Accounts

Books of accounts is consist of two books i.e. journal & ledger.

1.    Journal

First book of account is journal, which is used to record the transaction in first place, therefore is also known as book of original entry. Transaction is recorded in journal with the help of debit & credit rules.

2.    Ledger

Second book of account is ledger, and ledger is used to classify the transaction. Ledger basically contains different accounts. The transaction from the journal is classified in these accounts.

3.    No other Books of Accounts

Accounting system does not contain any other book. Any other record would be a memorandum record. However, normally in business all accounts related records is known as books of accounts i.e. journal, ledger, trial balance, agreements, and vouchers.

4.    Summaries & Reports

Summaries like trial balance and report (balance sheet and profit & loss account) are not books of accounts. These summaries and reports can be generated or prepared any time from the books of accounts i.e. journal & ledger.

Limitations of Accounting

Limitations of Accounting

Limitations of accounting can be explained in terms of misleading results, mistake & fraud detection, management biased, and high cost.

1.    Misleading Results

First limitation of accounting is its misleading result, if not handle appropriately. Accounting is based on certain rules, and wrong application of those rules may produce misleading results.

2.    Mistakes Detection Failure

Second limitation of accounting is its inability to detect all mistakes. Accounting system can detect only that mistake which has single effect. Accounting system cannot detect wrong application of principles, or counter balancing transaction.

3.    Management Biased

Third limitation of accounting system is management biased in selection of policies and interpretation thereof. Accounting system is not independent and in many circumstance, it requires management interpretation, for example in making estimate. Therefore accounting is not independent information system.

4.    Frauds Detection Failure

Frauds are not detected by accounting system automatically; however accounting may provide some indications of fraud. For example accounting system provides information for comparison the result of two periods and fluctuation in results without any explanation may be an indication of fraud.

5.    Cost & time

Fifth limitation of accounting is its high cost. Business need to hire a competent manager and good accounting software (now days). Therefore accounting system is not feasible option for many small businesses.

Advantages of Accounting

Advantages of Accounting

Advantages of accounting include tracking of receivables, profit calculation, controlling the business, information tracking, and mistake & fraud identification. These advantages of accounting have been explained below;

1.    Tracking Receivable

First advantage of accounting is tracking the receivable & payable amount from the customers and employees. In modern business world, almost every business is making credit sales and credit purchases to. Therefore a proper tracking of amount receivable & payable is must and this requirement is met by accounting.

2.    Profit Calculation

Second advantage of accounting is profit calculation of business. Accounting facilitates the profit calculation at any point of time. The core or primary objective of every business is profit maximization and accounting provides information about achievement of this objective.

3.    Controlling Tool

Third advantage of accounting is its role in controlling of business. Accounting provides details break of different costs and this information can be used to control the costs.

4.    Information Tracking

Fourth advantage of accounting is quick tracking of information. Any recorded transaction and relevant documents can be easily tracked from the accounting record as every transaction is recorded by a unique voucher number.

5.    Mistake & Fraud Identification

Fifth advantage of accounting is identification of fraud & mistake. Information generated from the accounting system i.e. trial balance, profit & loss, and customer balances, supplier balances, cash balances helps management in judging the fraud or mistakes.

6.    Performance Evaluation

Sixth advantage of accounting is performance evaluation. With the help of segment reporting, results or performance of different segments can be measured.

Accounting

 Accounting

Accounting is primarily the processing of financial information. The processing is consisting of five stages. These five stages are also referred as accounting cycle.

1.    Recording

First stage of accounting is recording of financial transaction in the books of accounts (journal). Recording is done in accordance with debit & credit rules. Broadly recording can be classified into recording of expenses, income, assets and liabilities.

2.    Classifying 

Second stage of accounting is classification. It means that transaction recorded in journal is now classified into different account. The book used for such classification is known as ledger and it contains all accounts. Classification is done on the bases of nature & functions of transactions.

3.    Summarizing 

Third stage of accounting of is summarizing of financial transactions. It means that summaries are prepared from the classified transactions (different accounts) .in simple term summary of different account is prepared and in accounting language, this summary is known as trial balance. Technically summary report showing the closing balances of different accounts.

4.    Reporting Results

Fourth stage of accounting is reporting of results in the form of balance sheet & profit and loss account. This is end product of accounting and these reports (results) are used by different user for decision making.

5.    Interpreting results

Fifth stage of accounting is interpreting the result with the help of ratio analyses like gross margin ratio, current ratio. These ratios are used to judge the financial position and financial performance of the entity.

Disadvantages of Money

Disadvantages of Money

Disadvantages of money or monetary system can be expressed in terms of artificial shortage created in the market, unequal distribution of income, trade cycles, fluctuation in the money value, and speculation in the market etc.

1.    Artificial Shortages

Disadvantages of money include creation of artificial shortage for profit making. Prices are raised by artificial shortages. Producer reduces supply for increase in price and hold money instead of investment until prices rises. The produce can hold money is , because it store value quality.

2.    Income Distribution Issues

Money has vital importance in capital economy. In capital economy resources are utilized for self interest and overall interest is ignored.  Monetary system promotes accumulation of wealth in few hands and discourages equal distribution of income.

3.    Trade Cycles is Money Phenomena

Monetary system creates trade cycles i.e. boom, decline, recession, recovery. This phenomenon is only characteristics of monetary system. In barter system there is no concept of trade cycle and the economy functions in smooth manner all the time.

4.    Money Value Fluctuation

Disadvantage of monetary system include money value fluctuation. Money value tends to fall with the passage of time due to raise in general price level. Therefore money does not store value in real terms or in long term.

5.    Money Create Speculations

Money creates speculative trend in the market, which may not be representative of actual market conditions. These speculative trends may bring heavy losses to market stakeholder. Speculation can be more clearly observed in stock markets.

6.    Illegal Activities

Monetary system provides more convenience to carry out illegal activities i.e. drugs trafficking, terrorism. Money can be easily transferred to one place to another; therefore illegal activities can be easily funded.

Advantages of Money

Advantages of Money

Advantages of money include large scale production, variety of product, credit & advance transactions, standard pricing, creation of markets, and saving & investment.

1.    Store Value

Money can store value and this is one of the main advantages of money. It means you can use money any time & money can help you in accumulation of wealth. It is important to note that money value also falls with passage of time due to inflation.

1.    Large Scale Production

Large scale production is only possible in monetary system. In barter system only limited goods were produced to satisfy personal needs of producers. Monetary system introduced the concept of large production for business.

2.    Variety of Products

Monetary system made possible the production of variety of goods. In barter system production of goods were based on the daily needs, and there was no concept of luxury & artistic goods. Goods were exchanges for those goods which have fundamental importance in the routine life.

3.    Credit Transactions

Monetary system facilitates the credit transactions. In modern economy credit transactions play fundamental role and all business receives credit and gives credit. In barter system it was not the case, because goods were not a perfect store of value and perishes with passage of time.

4.    Standard Price

Monetary system made it possible to determine the standard price of a product. In barter system this standard pricing was not possible and it was a major limitation of barter system. Concept does not work and exchange is based on the intensity of demand.

5.    Advance Payment

Monetary system support advance payment concept, this concept was not possible in barter system because goods cannot store value like money; there was not concept of future transactions in barter system.

6.    Saving & Investment

In monetary system the concept of saving and investment works. In barter system there is no concept of saving and investment of amounts saved. Barter system was based on immediate consumption of goods.