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Every food service establishment needs to be assessed periodically to determine its state of efficiency. This assessment is greatly facilitated if accurate books of account are maintained for all transactions that take place.
Definition of Book keeping : The process of recording transactions is referred to as book-keeping or record keeping. The preparation of statements for assessing the state of profitability, and their interpretation for guiding decisions regarding the operation of the business are considered as accounting functions.
Importance of Book Keeping: A systematic record of all large and small transactions is essential. If the establishment is involved with an outsider in any event, the event becomes a business transaction provided it is measurable in terms of money. The largest number of transactions in a business is of the type in which outsiders are involved. Thus, the major part of the records of a food service establishment will be with reference to transactions with others. In addition to these, there are a number of transactions that are not directly concerned with individuals, such as loss due to fire, wear and tear of the equipment, etc. It is essential that such transactions should also be recorded.
Transactions need to be recorded in such a way that a clear and accurate picture emerges or the state of the business at any time. Book-keeping is therefore essentially a method adapted to record transactions, based on a well thought of and effective system.
As all transactions have to be recorded in monetary terms, this implies a transfer of money or money's worth value or benefit from one person to another. Thus there is always a giver of the value or benefit, and a receiver of the value or benefit. When salaries are paid, the employees are receiving the benefit, and the employer is giving the benefit. It can therefore be said that all business transactions have two aspects-giving the benefit and receiving the benefit. Elements of business transaction:
- Persons or firms
- Properties and
- Expenses or incomes.
- If equipment is to be purchased for cash, the two aspects of the transactions are the incoming equipment (property) and the outgoing cash (property).
- If the rent for a building is received, cash received is on aspect (property and the rent received is the other aspect income).
- If salaries are paid in cash, salaries indicate one aspect (expenses) and cash payment indicates the other (property).
- If cash is received from a debtor, the cash received (property) is one aspect and the debtor (person or firm) who is paying the cash is the other important aspect to be recorded.
In this way the two aspects of every transaction can be picked out of the above three elements.
Systems of Book-Keeping
Single entry system: The single entry system is not based on sound principles. Some transactions are not recorded whereas there is only a partial record for others and reliable results cannot therefore be obtained.
Double entry system: The double entry system is more soundly based on the concept that all transactions involve giving and receiving benefit. This system provides for an accurate and complete record of both aspects of all transactions in an establishment. For instance, if provisions are purchased the stock of provisions will increase and either the cash in hand or cash in the bank will be reduced, or an' obligation to pay the priceat a later date will be created. Fundamentally, the record of a transaction must recognize both the aspects of giving and receiving the benefit or value, if it is to be a proper and useful record. This is what is done under the double entry system.
Advantages of the double entry system The double entry system of book-keeping has a number of advantages:
- An establishment can know whenever it wants, how much profit it has earned. or how much it has suffered in a particular period. This information is essential to ascertain whether the business is being run on the right path or whether it needs correction.
- The precise reasons leading to profit or loss can be ascertained, and necessary remedial action taken well in time.
- It is possible to prepare a Balance Sheet at the end of a trading period, disclosing the financial state of affairs during that period it will be known whether the firm is solvent or insolvent. Moreover a comparative study of different years can be undertaken to ascertain the progress of the operation.
- As the business firm can know at any moment, the amount owing from debtors and the amounts owing to creditors, it can arrange to send reminders to the debtors who fail to pay in time, and reduce chances of bad debts. At the same time a strict watch can be kept on the creditors so that the firm knows what amount is to be paid and when.
- Accurate record of transactions is assured under the double entry system, as the existence of errors is revealed by the preparation of the Trial Balance-a list of the balances of all the accounts.
- Through this system, not only are errors prevented, but any frauds can also be discovered and prevented.
- Management can be guided in decision making through properly kept accounts.
- Prom the tax point of view, the figures of profit provided by the double entry system are accepted by tax authorities.
The double entry system can be adopted even by non-profit making organizations, like old age homes, school hostels, etc. with equal advantage.
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