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Elements of Book Keeping
ELEMENTS OF BOOK KEEPING
Elements of Book Keeping
Book- Keeping is an art and science of recording the business transactions in a set of books.
Every business involves exchange of goods or services. A trader or a businessman purchases and sells goods and services with a view to make profit that means any businessman or a concern deal with other parties in exchange of goods or services. Such dealings in business are called as business transactions. The transactions may be made either on cash or credit basis The business transactions include purchase of goods/services, sale of goods or services, payments, receipts etc. In a business transactions are numerous. All the details of these transactions may not be remembered by businessman. Further the business transactions take place daily throughout the accounting year Therefore it is very necessary to keep a detailed record of such transactions. The record of such transactions should be systematic, so that it may render valuable information to the owner of the business. Bookkeeping is such a system by which the business transactions are recorded systematically in a set of books
Objects of Book keeping.
The objects of Bookkeeping are as under: -
1) To ascertain the amount of profit or loss sustained during the year.
2) To ascertain the amount of capital in the business.
3) The businessman will know the amount of his assets and liabilities in the business on a particular date.
4) To know the amount due to his creditors at any time and amount due to him from each of his customers at any time.
5) He will know the cash balance, bank balance, his stock of goods on hand on any date.
6) To know the amount of profit or loss made on and to ascertain the amount of liability by way of various taxes payable to the government.
In conclusion, the object of book-keeping is to have a permanent record of all business transactions and to show the effect of each transaction and the combined effect of all the transactions upon the financial position of the business.
What is Accounting?
Accounting is a wider concept, which includes bookkeeping. Book keeping is the recording aspect of Accounting. Accounting is the act of recording, classifying and summarizing transactions of an enterprise and interpreting the result thereof. Accounting involves not only maintaining records but it also involves balancing of accounts, interpreting the balances,
preparation of summaries, drawing conclusions from the summaries, ascertaining the results of financial transactions etc. Book keeping is an essential part of accounting.
Accounting has been defined as, "the art of recording, classifying and summarizing in a significant manner of all the business transactions and events and interpreting the results thereof for a particular period."
Objects of AccountingThe primary object of Accounting is to enable a businessman or business concern to know the following information accurately and with minimum time and effort: -
1) The amount of profit earned or the amount of loss suffered during the accounting period.
2) The amount of his capital in the business.
3) The amount of his assets, liabilities in the business on any particular date i.e. what he owns, what he has to receive from others and what he owes to others.
4) To know the amounts due to others (his creditors) at any time.
5) To know the amount of profit or loss how he had made.
6) His cash balance and bank balance on a particular date.
7) Stock of goods he has in hand.
Systems of Accounting
There are various methods of maintaining accounts. Businessman adopts any one of the following methods for their accounts suited for business: -
1. Indian System: - Since time immemorial, the Indian trades have been keeping the accounts of their business. The businessmen write their accounts in vernacular of Indian languages like Hindi, Marathi etc. The accounts are written in the long account books called Bahis and the system is known as Bahikhata. This system is mainly known as Mahajani System. It is based on the principle of the Double Entry System as this system also adopts principle of debit and credit.
2. English System: - The organizations, which undertake large-scale economic activities, prefer to adopt the English system for maintaining the accounts. The system is further classified as, (a) Single Entry System (b) Double Entry System.
a) Single Entry System: - Really speaking this is not a system at all. This is a system in which double entry system is adopted in an incomplete way. Only cash accounts and personnel accounts are maintained in this system and impersonal accounts are ignored. This is not a reliable system, since lack of double aspects of transactions does not assure correctness of accounting.
b) Double Entry System: -The Double Entry System of Book-keeping is the most satisfactory and a scientific system of maintaining the accounts of the business. Really speaking it is a complete, accurate and perfect system of accounting, which records both the aspects of each transaction. Every transaction has two aspects just as there are two parties to every contract or agreement.
3. Cash System: -This system is based on the principle that all transactions are cash transactions and credit transactions have no place in this system. The importance is given to cash receipts and cash payments and non-cash transactions are not at all recorded in the books, even if credit transactions have taken place. They will not be recorded unless they are converted into cash transactions. This is not a complete system of bookkeeping and therefore not adopted by the business concerns.
Double entry system of Book keeping
It involves writing up of accounts in a set of books. Accounts are record of facts relating to business transactions. Double entry system of book keeping denotes that every business transaction has two fold effects. There can not be business transaction unless it has effect on two accounts or parties. When a businessman gives some thing he gets something else in return of that. In other words one account receives the benefit whereas the other account gives benefit. In short, the following are the main features of double entry system of book keeping: -
1) Every business transaction has two fold effect and an account has two sides for recording that effect
2) One account is the receiver of benefit and other one is giver of the benefit.
It must be noted that amount of benefit received by one account is equal to the amount of benefit given by the other party. This enables us to record two effect of any business transaction.GLOSSARY OF ACCOUNTS TERMS:-
Purchases: - The goods bought for resale or manufacture and resale are called purchases. These may be classified as -
I) Cash purchases - When goods are purchased and payment is made on the spot, the purchases are said to be 'Cash purchases'.
II) Credit purchases - When goods are purchased and payment is postponed to some future agreed date, the purchases are said to be 'Credit purchases'.
Sales: - The goods sold by a business are called sales. The sales may be classified as -
I) Cash sales - When the goods are sold and payment is received immediately, the sales are said to be 'Cash sales'.
II) Credit sales - When the goods are sold and it is agreed to receive the payment on some other future date, the sales are said to be 'Credit sales'.
Transaction: - A transaction is an exchange of money or money's worth between two parties. It involves transfer of goods and services for money or money's worth between two or more persons or parties. E.g.) Purchase and sales of goods for cash or on credit cash payments, purchase and sale of asset, payment of salary and wages etc.
Drawings: - Drawing is the total amount withdrawn by a trader from his business for meeting personal expenses. Trader becomes a debtor of business by the amount withdrawn by him. The drawings may be in cash or in kind.
Capital: - Capital is the total amount invested in business. The capital of a business is the claim of the owner to the business.
In accounting sense, capital is the excess of assets over liabilities. The equation will be capital = Assets - liabilities.
Liabilities: - Debts owned by a person or businesses are called liabilities. Liabilities represent the total amount payable to the creditors. Debts arise due to purchase of goods for which payment is not made at the time of purchase. Taxes payable to Government and expenses which are unpaid are also liabilities.
Entry: - means recording of two-fold effect of the transactions. The entry has to be passed for recording the transactions for purchase or sales of goods, for receipts and payment of cash and for each adjustment. It forms the very basis for writing the books of accounts.
Account: -An account is the summarized record of transactions effecting one person, one kind of property and possession, and one class of gains or losses
Debtor: -A person, who owe us something.
Creditor: -A person, to whom we owe something.
Goods: -The form goods are used for the article or things in which a trader trades. Example-Furniture is goods for a trader who does the business of furniture but not for a general merchant.
Assets: -Property of every description owned by a business or a businessman is called as assets.
The Rules for Debit and Credit
Under Double Entry System of accounting, both the aspects of the transaction are recorded. The two aspects involve, receiving of values and giving of values of each transaction. The two aspects are distinguished in terms of Debit and Credit. Every account is capable of receiving and giving values. It is debited, when it receives benefit and it is credited when it gives benefit. Hence, the rule is:
Debit the account that receives the benefit and Credit the account that gives the benefit.
Every transaction affects at least two accounts. When one account receives the benefit of certain value, another account gives the benefit of the same value. Hence the rule is:
Every debit must have a corresponding credit and every credit must have corresponding debit
The rules of Debit and Credit for different types of accounts are given below:
1) Personal Accounts:Debit the receiver and Credit the giver.
For example: If cash is paid in Bank, debit the Bank Accounts the Bank is receiver of the benefit. If cash is received from Bank, credit the Bank Accounts it is the giver of the benefit.
2) Real Accounts: Debit what comes in and Credit what goes out.
For example: When machinery is purchased, debit the Machinery Account as it comes in the business. When goods are sold out, credit the Goods Account as the goods are going out.
3) Nominal Accounts: Debit expenses and losses and Credit gains or incomes
For example: If rent is paid, debit the Rent Account, as it is an expense. If a Bad Debt occurs, debit the Bad Debt Account, as it is a loss. If commission is received, credit the Commission Account, as it is a gain.
The JOURNAL or BOOKS OF ORIGINAL ENTRY
Introduction: -The Double Entry System of Bookkeeping provides a basic framework for analysis of business transactions. If the accounting process is to generate valuable information, the transactions, which have taken place during the accounting period must be recorded in a systematic manner. Hence the business transactions are recorded in financial books or books of accounts.
Accounting Cycle and Books of Accounts
The process of accounting cycle consists of the following steps: -
1. Analysis of transactions from source of documents.
2. Journalizing of transactions.
3. Ledger Posting.
4. Balancing of each ledger account.
5. Preparation of a Trial Balance
6. Recording of adjustment entries.
7. Posting of adjustment entries.
8. Recording of closing entries.
9. Preparation of financial statements
Source Documents: - Every business transaction is recorded in the books of accounts on the basis of some documentary evidence which is called as a source document or supporting document or business paper or voucher. It is the first record prepared for a business transaction. The source document shows the date, the amount, the nature of business transaction and the persons involved in its preparation. Following are some of the source documents: -
1. Cash Memos: -The document results from a cash transaction. When goods are sold for cash, the business unit receives cash and gives cash memos which provide detailed information about the transaction. Cash transactions are recorded in the books of accounts on the basis of cash memos.
2. Bill or Invoice: -This document is prepared when business transactions are regarding purchase or sale of goods on credit. The invoice gives details of the transaction. The original invoice is sent to the customers who record purchases on this basis.
3. Receipt: - The document is an acknowledgement of money. It is prepared in duplicate or with counterfoil. The original copy is given to the person who pays money. The duplicate copy or the counterfoil is the basis of record. It is signed by a responsible person in the office of the businessman who receives the cash.
4. Cheque:- It is an instrument in writing signed by the drawer directing the bank to pay a certain sum of money to or to the order of a third person or to the bearer.
1. Pay-in-Slip: -This slip is used for deposing money in a bank. Counterfoil of the slip gives the deposits made.
2. Debit Note and Credit Note: -Debit note indicates that a debit has been given in our books of accounts to the personal account to which it has been sent.
Credit note is a document, which indicates to the businessman, to whom it is given that his account has been credited in our books of accounts.
Meaning of Journal: - A Journal is a book of Original entry or Primary entry. It is a book of daily record. First of all the business transactions are recorded in the Journal and subsequently they are posted in the Ledger. A Journal is divided into various books know as Subsidiary Books .To study Book-keeping one must learn first how to journalise the transactions. To journalise the transactions means to record the two-fold effects of a transaction in terms of debit and credit. This has to be done by observing the rules of debit and credit.
Features of a Journal: -
1. It is a book of prime, original and first entry.
2. It records transactions in a systematic manner.
3. It analyses the transactions into their debits and credits.
4. It is a gateway to the Ledger.
Utility of a Journal: -
A Journal is needed for the following reasons: -
1. It contains a record of various transactions that take place every day.
2. It provides a complete record of transactions as both the aspects of transactions are recorded at one place.
3. Since narration of a transaction is written in the Journal, there is no need to give an explanation in the Ledger.
4. It facilitates cross checking of transactions.
5. Since transactions are recorded in the Journal, there is no need to post the transactions to the Ledger immediately.
6. From the legal point of view also a Journal becomes necessary. Courts recognize the journal as evidence in approving or disapproving claims.
7. It helps to locate and prevent errors
Form of a Journal
Date
ParticularsVoucher No.L.F.Debit
Rs.Credit
Rs.
Explanation of the form of Journal: -
1. Date Column: In this column, the date of the transaction is written. The year is also written in the beginning of the page.
2. Particulars Column: -This column is the most important column. Before the details are written in this column, the bookkeeper decides as to what accounts are affected and which account is to be debited and which account to be credited. The account to be debited is written on the first line just near the date column. On the same line the word Dr is written against the account to be debited. After that, on the second line the account to be credited is written.The name of this account should be preceded by the word To and while writing on the second line a little space should be left from the date column.
On the third line, a brief description of the transaction is written which is known as Narration. Such a narration should be written in between the date line and the folio line. It should not cross these two lines on either side.
A thin line should be drawn between each transaction across the page from the date column to the foil column immediately below the journal entry.
3. Voucher No.: - In this column, serial number of the source voucher or document is written.
4. Ledger Folio: - While recording the transactions nothing has to be written in this column. The journal entries are required, to be posted to the debit and credit of accounts in the Ledger. At that time, the page number of the ledger on which the two accounts appear are entered in this column.
5. Debit Amount Column:-In this column, the amount of transaction is written against the word Dr in particulars column on that line.
6. Credit Amount Column: - In this column, the amount of transactions written against the name of the account credited On that line.
At the end of each page of a journal the debit and credit amount columns are totaled up and the total of the debit and credit amount columns must be equal, as the amount debited and credited are equal for every transaction. These totals are carried forward to the next page.
THE LEDGER
A Ledger is the principal or final book of accounts. A Journal is meant for passing the entries of business transactions. It facilitates posting of transactions to respective ledger accounts. All the entries made in the journal must be posted into the Ledger.
A group of accounts is knows as a Ledger. The Ledger is the main book of accounts, it contains an account for each asset, liability, proprietorship, revenue and expense account. The Ledger contains the same information as the journal. However, in the journal each transaction is completely recorded as a unit. The entire effect of a transaction completely recorded at one place in the Ledger. The Ledger where it is accumulated includes all the basic accounts needed for the preparation of the financial statements.
A businessman cannot get information about the transactions from the Journal. For example, the amount receivable from debtors, the amount payable to creditors, total payments on any head of expenditure etc. In order to get information about the above, a Ledger has to be maintain.
In conclusion, the Ledger helps to achieve the following results:-
1. All personal accounts would show how much money is payable to creditors and receivable from debtors.
2. The real accounts would show the value of assets and properties.
3. The nominal accounts would show the sources of income and the amount spent various heads of expenses.
Example: - Journalize the following transactions in the Books of Gupta Brothers: -
1st July 1999 Started Business with cash Rs. 50,000.
2nd July 1999 opened an account with the Dena Bank Rs. 500.
3rd July 1999 Purchased goods for cash Rs. 10,000.
4th July 1999 Purchased furniture for cash Rs. 1000
5th July 1999 sold goods Rs. 280.
6th July 1999 sold goods on Credit to Mahesh Rs. 500
7th July 1999 purchased good on Credit from Rahim Rs. 3800
8th July 1999 paid wages Rs. 160
9th July 1999 received cash on account from Mahesh Rs. 300
10th July 1999 Paid cash on account to Rahim Rs. 2500
11th July 1999 Withdraw cash for personal use Rs. 350
12th July 1999 received commission Rs. 70
13th July 1999 purchased goods from Govind & Sons on Credit Rs. 1280
14th July 1999 Paid rent Rs. 700
15th July 1999 returned goods to Govind & Sons Rs. 480
Journal of Gupta Brothers
DateParticularsL.F.Debit Rs.Credit Rs.
1st July 99Cash A/c Dr.
To Capital A/c
(Being business started with cash)50,00050,000
2nd July 99Bank A/c Dr.
To Cash A/c
(Being opened an account with Dena Bank)500500
3rd July 99Goods A/c Dr.
To Cash A/c
(Being goods purchased for cash)10,00010,000
4th July 99Furniture A/c Dr.
To Cash A/c
(Being furniture purchased for cash)10001000
5th July 99Cash A/c Dr.
To Goods A/c
(Being goods sold for cash)280280
6th July 99Maheshs A/c Dr.
To Goods A/c
(Being goods sold on credit to Mahesh)500500
7th July 99Goods A/c Dr.
To Rahims A/c
(Being goods purchased from Rahim on credit)38003800
8th July 99Wages A/c Dr.
To Cash A/c
(Being wages paid)160160
9th July 99Cash A/c Dr.
To Maheshs A/c
(Being cash received)300300
10th July 99Rahims A/c Dr.
To Cash A/c
(Being cash paid)25002500
11th July 99Drawings A/c Dr.
To Cash A/c
(Being cash withdrawn)350350
12th July 99Cash A/c Dr.
To Commission A/c
(Being commission received)7070
13th July 99Goods A/c Dr.
To Govind & Sons A/c
(Being goods purchased on credit)12801280
14th July 99Rent A/c Dr.
To Cash A/c
(Being rent paid)700700
15th July 99Govind & Sons A/c Dr.
To Goods A/c
(Being goods returned)480480
Grand Total7192071920
Example No. 2 Journalise the following transactions in the books of Shri Anil Kumar.
1st Sept. 2000 Started business with cash Rs. 20,000, Goods Rs. 2000, Land & Building Rs. 18000
2nd Sept. 2000 Purchased goods from Ibrahim on credit Rs. 5000
3rd Sept. 2000 Opened an Bank account with State Bank of India Rs. 500
4th Sept.2000 Sold goods for cash Rs. 640
5th Sept. 2000 Returned goods to Ibrahim Rs. 525
6th Sept.2000 Purchased goods for cash Rs. 3000
7th Sept.2000 Paid cash to Ibrahim on account Rs. 2000
8th Sept.2000 Sold goods on credit to Suresh Rs. 700
9th Sept.2000 Paid commission Rs. 80
10th Sept.2000 Returned goods by Suresh Rs. 100
11th Sept.2000 Burnt goods by fire Rs. 200
12th Sept.2000 Received cash from Suresh in full settlement of his account.
13th Sept.2000 Purchased stationary Rs. 50
14th Sept.2000 Given goods in charity Rs. 120
15th Sept.2000 Deposited into Bank Rs. 1500
Journal of Gupta Brothers
DateParticularsL.F.Debit Rs.Credit Rs.
1st Sept 99Cash A/c Dr.
Goods A/c Dr.
Land & Buildings A/c Dr.
To Capital A/c
(Being business started with cash, goods, L & B)20000
2000
1800040,000
2ndSept 99Goods A/c Dr.
To Ibrahims A/c
(Being goods purchased on credit)50005000
3rdSept 99Bank A/c Dr.
To Cash A/c
(Being an account opened with SBI)500500
4thSept 99Cash A/c Dr.
To Goods A/c
(Being goods sold for cash)640640
5thSept 99Ibrahims A/c Dr.
To Goods A/c
(Being goods returned to Ibrahim)525525
6thSept 99Goods A/c Dr.
To Cash A/c
(Being goods purchased)30003000
7thSept 99Ibrahims A/c Dr.
To Cash A/c
(Being cash paid to Ibrahim)20002000
8thSept 99Sureshs A/c Dr.
To Goods A/c
(Being goods sold on credit)700700
9thSept 99Commission A/c Dr.
To Cash A/c
(Being commission paid)8080
10thSept99Goods A/c Dr.
To Sureshs A/c
(Being goods returned by Suresh)100100
11thSept99Loss by fire A/c Dr.
To Goods A/c
(Being goods burnt by fire)200200
12thSept99Sureshs A/c Dr.
To Cash A/c
(Being cash paid in full settlement of Sureshs account)600600
13thSept99Stationary A/c Dr.
To Cash A/c
(Being stationary purchased)5050
14thSept99Charity A/c Dr.
To Goods A/c
(Being goods given in charity)120120
15thSept99Bank A/c Dr.
To Cash A/c
(Being cash deposited)15001500
Grand Total5601556015
Example ;- Journalise the following transactions in the Journal of ---------
i) Purchased motor-car for cash Rs. 150000
ii) Paid premium of life polity Rs. 460
iii) Paid premium to General insurance company Rs. 740
iv) Burnt goods by fire Rs. 300
v) Ashok became insolvent and received cash Rs. 2000 on account balance Rs. 5000
vi) Purchased goods worth Rs. 5000 to 10% discount to Rahim
vii) Sold goods worth Rs. 1000 on 10% discount
viii) Received cash Rs. 4455 from Rahim and allowed discount to us.
ix) Paid Rs. 6930 to Govind and received discount Rs. 70
Journal of ______________
DateParticularsL.F.Debit Rs.Credit Rs.
i)Motor - Car A/c Dr.
To Cash A/c
(Being purchased motor car)150000150000
ii)Drawing A/c Dr.
To Cash A/c
(Being paid LIC premium)460460
iii)Insurance Premium A/c Dr.
To Cash A/c
(Being insurance premium paid)740740
iv)Loss by fire A/c Dr.
To Goods A/c
(Being goods burnt by fire)300300
v)Cash A/c Dr.
Bad Debts A/c Dr.
To Ashoks A/c
(Being received cash from Ashok and he became insolvent)2000
30005000
vi)Goods A/c Dr.
To Rahims A/c
(Being goods purchased on 10% discount)45004500
vii)Cash A/c Dr.
To Goods A/c
(Being sold goods on 10% dis.)900900
viii)Cash A/c Dr.
Discount A/c Dr.
To Rahims A/c
(Being received cash and allowed discount)4455
455000
ix)Govinds A/c Dr.
To Cash A/c
To Discount A/c
(Being cash paid & received dis.)70006930
70
Grand Total2390023900
Classification of Accounts.
The ledger accounts may be classified as under: -
1) Personal Accounts
2) Impersonal Accounts a) Real or Property Accounts.
b) Nominal or Fictitious Accounts.
1) Personal Accounts: -Personal accounts are the accounts of individuals, firms, private and limited companies, local authorities, associations with whom businessman deals. A separate account is maintained for every person or a firm or a company. Examples Mr. Anil's Account, Bank of India Account, Govt. of Maharashtra Account, Grasim Industries Account, Rotary Club Account etc. These accounts may be of creditors, debtors, banker etc.
2) Impersonal Accounts: These are the accounts, which relate to other than persons. These are again further divided into two types, viz.:
A) Real Accounts: -Real accounts are the accounts of properties, assets or the possession of the businessman such as Plant & Machinery A/c, Motor Car A/c, Cash A/c, Furniture A/c etc. A separate account is maintained for each class of asset or property. Real accounts may assume the following two forms:
i) Tangible Real Accounts: -These accounts consists of assets and properties which can be seen, touched, felt and measured such as Cash, Buildings, Goods Furniture, Machinery etc.
Ii) Intangible Real Accounts: -These accounts consists of assets and properties which cannot be seen, touched, felt but they are capable of measurement in terms of money such as Goodwill, Patents, Trade Marks etc.
c) Nominal Accounts: - These are the accounts of expenses or losses and incomes or gains such as Interest A/c, Discount A/c, Rent A/c, Charity A/c etc. These accounts are called fictitious accounts, as they do not represent any tangible assets. A separate account is maintained for each head of expenses or losses and incomes or gains.
Real AccountsNominal Accounts
1. These are the accounts of assets and properties
2. They represent something tangible or real asset.
3. Real Accounts represent assets, which continue year after year until they are sold of.
4. At the end of the year, the balance of a Real Account is shown in the asset side of the Balance Sheet. 1.These are the accounts of expenses, losses or income and gains.
2.They do not represent anything tangible or real.
3.They do not continue year after year. They appear in the accounts of the year in which they are incurred.
4.At the end of the year, the balance of the Nominal Account is transferred to Profit and Loss Account.
Notes:
1. Bank Account is not a real account. It is a personal account since it is the account of some banking company.
2. Some of the accounts are impersonal in name but they are personal. For example, Capital Account and Drawings Account are personal accounts of proprietors of business.
3. Outstanding expenses or incomes, though nominal in nature, are really personal accounts.
Special Transaction:
Discount
Discount may be of two kinds :-
1) Cash Discount
2) Trade Discount
1) Cash Discount
It is an allowance to the debtor to recover the debts earlier. It is allowed in order to induce the debtor to make the payment immediately or within a stipulated period. Obviously, a cash discount is allowed when payment is received and a cash discount is received when the payment is made if a cash discount is given to debtor, the amounts are recovered immediately. A businessman prefers to give a cash discount to debtors instead of borrowing money from a bank at a higher rate of interest. Again, there is no fear of bad debt if the amount is recovered early. The debtors also make the payment earlier to obtain the advantage of a cash discount. Discount allowed is a loss, while when it is received is a gain to the business. Hence it appears in the books of accounts.
2. Trade Discount
It is an allowance given by a wholesaler or manufacture to a retailer in order to retailer to sell the articles at list or print price and earn a reasonable margin of profit. The amount of Trade Discount is deducted from the invoice. Therefore it has no connection as to the receipt of cash and payment of cash. Hence the trade discount does not appear in the books of accounts.
Bad debts
When a customer is declared insolvent and the amount due is irrecoverable, Bad debts accounts are debited and the customers account is credited for unrealized amount.
Loss of Goods by fire
When goods are damaged by fire, the loss should be debited to loss by fire account and credited to Goods account. If any part of the loss is recoverable from the insurance company, the insurance companys account is debited and loss by fire account is credited.
Expenses on the Purchases of AssetsAll the expense in connection with purchase of assets increase the cost of asset. Hence the asset account is debited and the cash account is credited. Debt should not be given to the expenses account.
Premium of Life Policy
Insurance premium paid on a life policy of the proprietor should be debited to the Drawings Account and Credited to Cash A/c.
Subsidiary Books
Sub Division of Journal :-
In earlier times, the volume of business was small and number of transactions very few, Journal as a book of accounts was convenient. But with the growth of business, the number of transactions increased manifold and the need was felt to have a better method of recording business transactions. Therefore, in order to meet the requirements of modern business, the original journal is divided into the following :-
1. Purchases Books
2. Sales Book
3. Purchases return book / return outward book
4. Sales return book / return inward book
5. Cash book
6. Bills receivable book
7. Bills payable book
8. Journal proper
The documents which are used as the evidence or basis of writing the various Journals.
Subsidiary JournalDocument used as the basis
1. Purchases book
2. Sales Book
3. Purchases return book
4. Sales return book
5. Cash book
6. Bills receivable book
7. Bill payable book
8. Journal proper
Inward invoice
Outward invoice
Debit Note
Credit Note
Cash receipt, Cash memo, Cash vouchers
Bills received duly accepted by drawee
Bills sent to Drawer duly accepted by us
Depends on the type of transaction
Purchases Book
This book is maintained to record credit purchases of goods only. Credit purchase means the purchase of goods, without making payment on the spot.
Ruling of the book
Purchases Book
DateParticularsL.F.Inward Invoice No.Amount Rs.
Explanation of Columns :-
1. Date: - Date of purchases is written in this column.
2. Particulars: - In this column, the names of the suppliers are entered and also given narration.
3. L.F.: - Page number of the Ledger , on which the account of the supplier appears, is entered in this column.
4. Journal Invoice No.: - All inward invoices are filed properly and the consecutive number of the invoice is shown in this column.
5. Amount: - The net amount of purchases is entered in this column.
Ledger posting of the purchases book :-
At the end of a certain period debit Purchases Account in the Ledger with the total of the purchases book as To Sundries as per Purchases Book And credit the personal accounts of the suppliers with the respective amount of purchases as By Purchases A/c
Sales Book :-
A separate book is maintained to record all credit sales of goods. The manner of recording sales in this book is the same as in the case of purchases book.
Ruling of sales book: -
Sales book
DateParticularsL.F.Outward Invoice No.Amount Rs.
Explanation of the accounts: -
1. Date: - The date on which the sales took place is entered in this column.
2. Particulars: - The name of the customer is written in this column and also given narration of transaction.
3. L.F.: - The page number of the ledger on which the customers account appears is shown.
4. Outward Invoice No. :- The serial number of the invoice is entered.
5. Amount: - The net amount of sales is recorded (amount arrived at, after deducting the trade discount from the gross value of the sales.)
Ledger posting of the sales Book: -
The personal accounts of the customers are debited with the respective amount of the sales and sales account is credited with the total of the sales book as By Sundries as per sales book .
Purchases Return Book
This book is also called the Returns Outward Book . It records all returns of goods purchased on credit. The goods purchased may be returned for one or two of the following reasons, the goods supplied are: -
1. Not as per the sample
2. In excess of the requirements
3. Of different design and colour
4. Of inferior quality
5. Damaged in transit
6. Delayed supply
A debit note is sent to the supplier when the goods purchased from him are returned. A debit note is a statement sent by the buyer to the supplier stating the full details of the goods returned.
Rulings of purchase return book: - Purchases return book
DateParticularsL.F.Debit Note No.Amount Rs.
Ledger posting of the purchases return book :-
Following two steps should be taken for posting after the transactions are recorded in the book: -
1. At the end of the day each entry is posted to the debit side of the respective individual account to update the account.
2. At the end of the month, the grant total of the book is posted to purchases return account as By sundries as per purchases return book .
Sales Return Book
This book is also called as the Returns Inward Book . The book is meant for the purpose of recording the return of goods sold on credit. Goods sold to customers may also be returned by them if the goods supplied to them are not upto the sample or if inferior quality or damaged etc. A credit note is sent to the customers when we receive goods returned from them. It gives full details of the goods returned by the customers.
Ruling of sales return book
Sales Return Book
DateParticularsL.F.Credit Note No.Amount Rs.
Ledger Posting of sales return book: -
After entries of all the transactions in the sales return book following steps should be taken to complete the posting: -
1. At the end of the day, each entry is posted to the credit side of the respective individual account to update the accounts.
2. At the end of the month, the grant total of the book is posted to sales return account as To sundries as per sales return book .
Journal Proper
This book is used for recording those transactions, which do not find any place in any of the foregoing books of original entry. Such as opening entries, transfer entries, rectification entries, adjustment entries etc.
Ruling of Journal Proper
Journal Proper
DateParticularsVoucher No.L.F.Debit No.Credit No.
Example: - Record the following transactions in the proper subsidiary books and post ledger accounts.
1st Sept. 2000 Purchased goods from Anil Rs. 1000
2nd Sept. 2000 Sold goods to Rahim Rs. 5000
3rd Sept. 2000 Returned goods to Anil Rs. 100
4th Sept. 2000 Allowance granted to Rahim due to damage of goods Rs. 500
5th Sept. 2000 Sold goods to Ashok Rs. 2700
6th Sept. 2000 Purchased furniture from Mohan Rs. 700
7th Sept. 2000 Returned goods by Ashok Rs. 200
8th Sept. 2000 Burnt goods by fire Rs. 150
9th Sept. 2000 Allowance granted by Mahesh for short delivery Rs. 350
10th Sept. 2000 Purchased goods worth Rs. 2000 from Mohan on 10% discount.
11th Sept. 2000 Sold goods worth Rs. 500 to Surendra on 5% discount.
12th Sept. 2000 Paid life insurance premium Rs. 300
13th Sept.2000 given goods worth Rs. 3000 on 5% discount from Govind.
14th Sept.2000 Purchased goods worth Rs.3000 on 5% discount from Govind.
15th Sept. 2000 Allowance granted to Surendra Rs. 95 for short delivery.
Purchases Book
DateParticularsL.F.Invoice No.Amount Rs.
1st Sept.2000To Anil A/c1000
10th Sept.2000To Mohans A/c1800
14th Sept.2000To Govinds A/c2850
Purchased A/c Dr.5650
Ledger Posting of Purchases Book
Purchases Account
DateParticularsJ.F.Amt. Rs.DateParticularsJ.F.Amt. Rs.
30th Sept 2000To Sundries as per purchases book
5650
Anils Account
DateParticularsJ.F.Amt. Rs.DateParticularsJ.F.Amt. Rs.
1st Sept
2000By Purchases A/c1000
Purchases Book
DateParticularsL.F.Invoice No.Amount Rs.
2nd Sept.2000By Rahims A/c5000
5th Sept. 2000By Ashoks A/c2700
11th Sept. 2000By Surendra A/c475
Sales A/c Cr.8175
Ledger Posting of Purchases Book
Sales Account
DateParticularsJ.F.Amt. Rs.DateParticularsJ.F.Amt. Rs.
30th Sept
2000By Sundries as per sales book8175
Rahims Account
DateParticularsJ.F.Amt. Rs.DateParticularsJ.F.Amt. Rs.
2nd Sept. 2000To Sales a/c5000
Purchases Return Book
DateParticularsL.F.Invoice No.Amount Rs.
3rd Sept. 2000By Anils A/c100
9th Sept. 2000By Maheshs A/c350
Purchased A/c Cr.450
Ledger Posting of Purchases Book
Purchases Return Account
DateParticularsJ.F.Amt. Rs.DateParticularsJ.F.Amt. Rs.
30th Sept 2000By sundries as per purchase return book450
Anils Account
DateParticularsJ.F.Amt. Rs.DateParticularsJ.F.Amt. Rs.
3rd Sept 2000To Purchases Return A/c100
Sales Return Book
DateParticularsL.F.Invoice No.Amount Rs.
4th Sept.2000To Rahims a/c500
7th Sept. 2000To Ashoks A/c200
15th Sept. 2000To Surendras A/c95
Sales Return A/c Dr.795
Ledger Posting of Purchases Book
Sales Return Account
DateParticularsJ.F.Amt. Rs.DateParticularsJ.F.Amt. Rs.
30th Sept 2000To Sundries as per Sales return book795
Rahims Account
DateParticularsJ.F.Amt. Rs.DateParticularsJ.F.Amt. Rs.
4th Sept 2000By Sales Return A/c500
Journal Proper
DateParticularsL.F.Voucher No.Debit Rs.Credit No.
6th Sept. 2000Furniture A/c Dr.
To Mohans A/c
(Being furniture purchased)700700
8th Sept. 2000Loss by fire A/c Dr.
To Goods A/c150150
13th Sept. 2000Charity A/c Dr.
To Goods A/c
(Being goods given in charity)100100
Total950950
Ledger Posting
Furniture Account
DateParticularsJ.F.Amt. Rs.DateParticularsJ.F.Amt. Rs.
6th Sept. 2000To Maheshs A/c700
Mohans Account
DateParticularsJ.F.Amt. Rs.DateParticularsJ.F.Amt. Rs.
6th Sept. 2000By Furniture A/c700
Cash Book
A cash book is one of the subsidiary books. All the cash transactions are recorded in the cash book. It serves both purposes of being a book of original entry as well as a ledger. Since the cash book enables the traders to find out the daily cash and bank balance, it serves the purpose of a cash account. Therefore, there is no need to open a separate cash account in the ledger. Similarly, writing in the cash book saves a lot of time and labour by enabling recording of cash and bank transactions without posting journal entries. Hence the cash book is very useful and results in economy of time and labour.
Types of Cash book
The following are the different types of cash books and a businessman maintains a cash book as per his requirements
1. Single column cash book
2. Double column cash book
3. Three column cash book
1. Single Column Cash book :-
The debit side of the cash book is meant for recording all the receipts and therefore, it is known as Receipt Side . The credit side of the cash book is meant for recording all the transactions pertaining to payment and therefore it is known as Payment Side . After recording all the transactions in the cash book it is balanced daily and carrying forward the balance to the next day.
Single Column
Proforma of a cash bookCash Book
DateParticularsV.No.L.F.Amt. Rs.DateParticularsV.No.L.F.Amt. Rs.
In order to complete the double entry of each and every transaction that has been recorded in the cash book, posting of such transactions is to be made to the respective ledger accounts.
2. Double Column Cash Book
The double column cash book has two columns on both the sides of the cash book as under
i) Cash and discount columns
ii) Cash and bank columns.
iii) Bank and discount columns.
However, of the three types of double column cash book, the most common cash book used is with cash and discount columns.
DateParticularsV.
No.L.
F.Dis. Rs.Cash Rs.DateParticularsV.
No.L.
F.Dis. Rs.Cash Rs.
3. Petty Cash Book
A businessman who deposits all receipts into bank and makes all payments by means of issuing cheques maintains a Petty Cash Book. This book is maintained for recording all petty expenses as all payments cannot be made by cheque.
Payment of coolie charges, cartage, taxi fare and such other expenses cannot be made by issuing cheques. Therefore, Petty cash book is maintained to record the payment of such expenses by cash.
When the amount is received from the chief cashier it is entered on the receipt side of the petty cash book and when payments are made they are first entered in the total column of the expenditure. At the end of certain period the expenditure columns are totaled. The petty cashier prepares a statement showing the summary of expenses paid and submit it to the chief cashier passes an entry in the journal as sundry expense a/c debited and petty cash a/c credited.
The totals of each head of expenditure are posted in the debit side of respective accounts in the ledger so that double entry is complete.
Ruling of Petty Cash Book
Dr.
Cr.
ReceiptsDa t eParti-cularsV.
NoTotal Amt.PostageStat-ionaryConve-yanceAdverti-
sementMisc.
Exps
Example : From the following particulars, prepare the petty cash book having analysis columns
1st Oct. 2000 Received from the chief cashier
Rs. 200
3rd Oct.2000 Paid for postal stamps
____________________________________________Rs. 20
5th Oct.2000 Paid Telephone charges
Rs. 18
6th Oct.2000 Purchased pencils
Rs. 15
7th Oct.2000 Paid for conveyance of the officer
Rs. 25
9th Oct.2000 Purchased revenue stamps
Rs.20
14th Oct.2000 Paid for advertisement
Rs. 25
15th Oct.2000 Purchased files
Rs. 15
Petty Cash Book
ReceiptsDateParticularsV.
No.Total Amt.PostageTelephoneStationaryConveyanceAdvertisement
Rs.2000Rs.Rs.Rs.Rs.Rs.Rs.Rs.Rs.
200Oct 1st To Cash
3rd By Postal 2020
5thBy Tele.1818
6thBy pencil1515
7thBy Conve.2525
9thBy Reve. Stamps2020
14th By advt.2525
15thFiles1515
1384018302525
16thBy Bal.62
Banking Transactions
Introduction
When a trader has at his disposal an amount in excess of his immediate requirements, he lodges the same with a banker. He opens an account with the banker with a certain sum and is at liberty to add thereto or withdraw therefrom amounts from time to time, as the occasion may require. The cash so deposited with the banker is said to be on Current Account.
A Bank Current Account may thus be defined as a running account between a bank and a customer. On a current account being opened, there arises an implied undertaking that the banker will honour cheques drawn against him by his customer as long as there are sufficient funds to the customers credit, and he will not pay away any part of the moneys against the wishes of the customer.
The advantages of opening a Current Account with a Banker are:-
(a) The money remains with the Bank in safe custody.
(b) The banker collects for his customers the amounts of all cheques, bills of exchange, etc. paid in.
(c) If desired, the banker takes charge of the customers securities, collects periodical dividends and interest thereon, and credits the same in the current account of the customer.
(d) The banker allows the certain rate of interest on the cash placed in his keeping.
(e) The payments by the merchant to his creditors are greatly facilitated, as these would be made by means of Cheques, i.e. orders on the banker; and
(f) Under certain circumstances, the banker renders financial help to his customer by allowing him to overdraw his current account.
CHEQUES:-
On a trader wishing to discharge a debt, he signs a written order on his banker, authorizing him to pay a certain sum of money as mentioned therein to his creditors. This order is termed a Cheque. A Cheque may be defined as an order addressed by a customer to his banker to pay on demand a stated sum of money to or to the order of a specified person or to bearer.
There are three parties to a cheque:-
(1) The Drawee, i.e. the Bank on whom the cheque is drawn.
(2) The Drawer, i.e. the person who signs the order to the Bank.
(3) The Payee, i.e. the person in whose favour the cheque is made payable.
Accounting Treatment of Banking Transactions in a Cash Book:-
(!) A Cheque is received but not deposited in the Bank: Every cheque received, so long as it is not paid into the Bank, should be treated as cash and should be recorded in the cash column.
(2) A Cheque is received and deposited in the bank on the same day: In this case, the amount of such a cheque should be entered on the receipt side of the Cash Book in the bank column as To XYZ.
(3) A Cheque received on the previous day deposited into a Bank: In this respect, a contra entry should be passed on the day on which the cheque is deposited in the bank. It will appear in the cashbook on the receipt side as To Cash bank column, and on payment side as By Bank Cash column.
(4) Payment by issuing a Cheque: Whenever payments are made by cheque they should appear in the CashBook on the payment side as Partys Account, Expenditure Account- Bank column.
(5) Collection of interest on investment by the bank: When, the Bank collects on investment or allows interest on deposits the credit entry of such a collection is made in the pass book by the Bank. On receiving advice or the passbook from the Bank, it will be entered on the receipt side of the CashBook as To Interest on Investment.
(6) Bank charges and Bank commission: A Bank charges some amount for the services rendered to the customers. The Bank makes a credit entry in the passbook. On receiving the passbook or advice, it is entered on the payment side of the CashBook as By Bank Charges or By Commission.
(7) Payments made by the Bank under standing instructions: As per standing instructions, a Bank makes payment on behalf of customer, on account of insurance premium, interest on loan taken, call money on shares, etc. On making such payments, the Bank passes a debit entry in the passbook. After receiving the advice or passbook, it is entered on the payment side of the CashBook as By Insurance Premium or By Interest or By Calls on Shares as the case may be.
4.Three Column Cash Book
Under this type of cash book the use of cash book is extended to record the transactions involving discount, cash and bank alos. When the bank transactions are numerous, instead of having a separate bank account in the ledger to record the bank transactions bank a/c is maintained in the cash book itself by providing bank column on each side of the cash book. As and when discount is allowed on receipts of cash both the amounts are recorded on the debit side whenever the discount is received on payment of cash both the amounts are recorded on the credit side. Cash and bank account respectively and therefore the balances are extracted at the time of closing the cash book. But the discount column in the cash book is not treated as an account. And as such it is not balanced. Separate discount account is opened in the ledger for discount allowed and discount received.
DateParti
cularsV.
No.L.
L/FAmount.DateParti
cularsV.
No.L.
F.Amt.
Dis. Rs.Cash Rs.Bank Rs.Dis. Rs.Cash Rs.Bank Rs.
Example: - Enter the following transactions in the three column cash book of M/s. Rajkumar:
1st Sept. 2000 Started business with cash Rs. 50,000
2nd Sept.2000 Opened an account with Dena Bank Rs. 500
3rd Sept.2000 Purchased goods Rs. 6700
4th Sept.2000 Remitted cash into Bank Rs. 32800
5th Sept.2000 purchased goods Rs. 10,000 and issued a cheque on 1% discount.
6th Sept.2000 Sold goods Rs. 800 to Narendra and received a cheque for Rs. 790 in full settlement and deposited into bank on the same day.
7th Sept.2000 Paid wages Rs. 100
8th Sept.2000 Purchased furniture worth Rs. 2000 on 10% discount from Akbar and made payment on 2 discount by cheque.
9th Sept.2000 Purchased stationary Rs. 250
10th Sept.2000 Sold goods worth Rs. 5000 to Govind on 10% discount and received a cheque on 2% discount and cheque remitted into bank.
11th Sept.2000 Charged bank charges by Bank Rs. 200
12th Sept. 2000 Withdrawn Rs. 1000 for personal use.
13th Sept. 2000 Sold goods Rs. 1800 to Rahim and received cheque and deposited into bank.
14th Sept.2000 Made payment to Mahesh by cheque Rs. 3000
15th Sept. 2000 Sold goods worth Rs. 700 on 5% discount to Mukesh for cash.
Solution :
Dt.ParticularsV.
No.L.
F.Amt.Dt.ParticularsV.
No.L.
F.Amt.
Dis. .Rs.Cash Rs.Bank Rs.Dis. Rs.Cash Rs.Bk Rs.
1stTo Capital A/c500002nd By BankC500
2nd To Cash A/cC 5003rdBy purch.6700
4th To Cash A/cC328004th By BankC32800
6th To Sales A/c107905th By Purch.1009900
10To Sales A/c9044107th By Wages100
13To Sales A/c18008th By Furni.361764
15To Sales A/c6659thBy Stati.250
11By Bank Charges200
12By Drawing1000
14By Mahesh3000
30By Balance931525436
10050665403001365066540300
30To Bal. B/d931525436
Final Book of Account Ledger: -
A ledger is the principle book of accounts. A Journal is meant for passing the entries of business transactions. A businessman cannot get information about the business transactions from the Journal. For example, the amount received from debtors, the amount payable to creditors, total payments on any head of expenditure etc. In order to get such information, a ledger has to be maintained. While transferring the transactions from the Journal to the ledger, the transactions are classified. For each person, head of 1income, head of expenditure, assets etc. separate accounts are opened in the ledger.
The ledger contains the same information as the Journal. However, in the Journal each transaction is completely recorded as a unit. The entire effect of a transaction is completely recorded in one place in the Journal. Periodically the same information is posted to the ledger where it is accumulated according to individual items.
In conclusion, the ledger helps to achieve the following results :-
a) All personal accounts would show how much money is payable to creditors and received from debtors.
b) The real accounts would show the value of assets and properties.
c) The nominal accounts would show the sources of income and the amount spent on various heads of expenses.
Nature of a Ledger :-
A Ledger is a bound book. It contains many pages, which are called folios. These pages are consecutively numbered. For each account a separate page is kept. Every ledger has an index.
Standard form of Ledger Account
Each ledger account is divided into two sides, having columns of varying sizes. The left-hand side is known as Dr side and the right hand side is known as Cr side of a ledger account. The column date, particulars, J.F. and amount appear on both sides of ledger account.
Name of A/c_________________
Dr.
DateParticularsJ.F.Amount Rs.DateParticularsJ.F.Amount Rs.
Explanation: -
1. Date column is used to show the date of the transaction.
2. Particular columns are used to write the names of the accounts debited or credited.
3. Folio column is used to show the page number of the Journal on which the transaction is recorded.
4. Dr. amount column shows the amount of the account debited.
5. Cr. Amount column shows the amount of the account credited.
Ledger Posting :-
The process of transfer of entries from Journal to Ledger account is called ledger posting. Posting may be made immediately after the entry has been passed or at any convenient time.
Ledger posting process :-
1. Date column :- Write date of the transaction as recorded in the Journal.
2. Particulars Column :-
On Debit side Write name of the credited account in the Journal entry after the word To
On Credit side Write name of the Debited account in the Journal entry after the word By
3. J.F. Column Write page number of the Journal from where the entry is posted.
4. Amount column Write the amount in the debit column of the Journal on the debit side and the amount in the credit column of the Journal on the credit side.
A special mark is marked in the Journal against entry which is posted in the ledger
Example :- Journalise the following transaction in the Journal of Shri Mahesh and post in the ledger Goods A/c and Cash A/c only
1st May 2000 Purchased goods Rs. 2000
2nd May 2000 Sold goods Rs. 300
3rd May 2000 Paid wages Rs. 70
4th May 2000 Received cash from suresh on accout Rs. 700
5th May 2000 Sold goods to Ramesh Rs. 900
6th May 2000 Given goods in charity Rs. 50
7th May 2000 Paid cash to Ganesh on account Rs. 300
Journal of Shri Mahesh
DateParticularsL.F.Debit Rs.Credit Rs.
1st May 2000Goods A/c Dr.
To Cash A/c
(Being goods purchased)20002000
2nd May 2000Cash A/c Dr.
To Goods A/c
(Being goods sold)300300
3rd May 2000Wages A/c Dr.
To Cash A/c
(Being wages paid)7070
4th May 2000Cash A/c Dr.
To Sureshs A/c
(Being cash received on account)700
700
5th May 2000Rameshs A/c
To Goods A/c
(Being goods sold to Ramesh)900900
6th May 2000Charity A/c Dr.
To Goods A/c
(Being goods given in charity)5050
7th May 2000Ganeshs A/c Dr.
To Cash A/c
(Being cash paid)300
300
Grand Total43204320
Ledger of Shri. Mahesh
Goods A/c
Dr. Cr.
DateParticularsJFAmt. Rs.DateParticularsJFAmount Rs.
May 1 To Cash A/c2000May 2 2000
May 5 2000
May 6 2000By Cash A/c
By Ramesh A/c
By Charity A/c300
900
50
Cash A/c
Dr. Cr.
DateParticularsJFAmt. Rs.DateParticularsJFAmount Rs.
May 2
4To Balance
To Goods A/c
To Suresh A/c------
300
700May 1 2000
May 3 2000
May 7 2000By Goods A/c
By Wages A/c
By Ganeshs A/c2000
70
300
Balancing of Accounts
At the end of a certain period, the accounts are balanced. The following steps should be taken in balancing in an account :-
1. Make a total of both the sides of a ledger account. This may be done on a rough sheet.
2. Complete the difference between the totals of both the sides.
3. Put the difference on the right side of the accounts, by writing against it in Particulars column as By Balance C/d or To Balance C/d as the case may be. If the debit side is heavier the difference will appear on the credit side as By Balance C/d and if the credit side is heavier, the difference will appear on the debit side of the account as To Balance C/d.
4. Make the total of both sides. The total of the debit side will now agree with the total of the credit side of the account.
5. Draw a single line before making the totals.
6. Draw a double line across the amount column after the totals are made.
7. Bring down the balance on the opposite side of the account. That means, To Balance C/d is brought down on the credit side below the totals in the particulars columns as By Balance b/d and By Balance C/d is brought down on the debit side as To Balance B/d .
Trial Balance :
Trial balance is a statement showing the list of debit and credit balances standing in the ledger of a trader at any date. It is prepared at the end of the month or at the end of the accounting period or at the end of the financial year after the ledger accounts are balanced.
The system of preparing trial balance based on the principles of double entry system of book keeping. That means every debit should have a corresponding credit and total debits must tally with total credit. When all the ledger accounts are balanced the total of all the accounts showing debit balance must agree with the total of all the accounts showing credit balances.
Purposes of Trial Balance :- It serves the following purposes :-
1. To ascertain arithmetical accuracy of the accounts opened in the ledger.
2. To know the balance of any ledger account.
3. To serve as an evidence of the fact that the double entry has been completed in respect of every transactions.
4. To facilitate preparation of final accounts promptly.
5. To help the proprietor to draw conclusions by comparing trial balances of past and present.
Ruling of Trial Balance
Trial Balance as on --------
Sr. No.Name Of the AccountsL.F.Debit Totals or Debit Balance Rs.Credit Totals or Credit Balance Rs.
Total---------------------
TOTALLING AND SUSPENSE ACCOUNT: -
Trial balance may be prepared on a loose sheet of paper. All the accounts with their debit and credit balances are listed serially. The cash and bank balances as shown by the cashbook are also included in a trial balance. Closing stock of goods at the end of the year is not included in the trial balance. After all the accounts are included in the trial balance, the totals of the two sides are made, which should be equal.
In case the two sides of the trial balance is not found to be equal, the same is re-checked and even though if the difference exists, the difference amount is kept under a suspense head of account and thus the two sides of the trial balance are made equal. Later on, the actual heads of accounts are traced and the suspense account is cleared.
TRIAL BALANCE NOT TRACEABLE ERRORS: -The trial balance is prepared to check the arithmetical accuracy of the books of account. If the total of the trial balance agree, it can be reasonably presumed that the books of accounts are correct. However, even if there is an agreement of the totals, it is not a conclusive proof of the correctness of the books of Accounts.
Following are the errors not disclosed by the trial balance
1) Errors of Principle: -These are the errors arising from not observing the accounting principles correctly. For e.g.) Purchased furniture worth Rs.5000/-, In this case, instead of debiting the furniture account, if the purchase account is debited, the mistake will not be disclosed by the trial balance.
2) Errors of Compensatory: - Whenever, one error exists and another error takes place, as a result of which, the effect of the previous error is counterbalanced, there is said to be a Compensatory error. For e.g.) If sales account total is under cast by Rs.5000/- and also the purchase account total is under cast by Rs.5000/-, the error so called is a compensatory error, which will not be disclosed by the trial balance.
3) Error of Omission and Commission: - When a transaction is completely not recorded in the books of accounts, such error is called error of Omission, which will not be disclosed by the trial balance.
When the bill is prepared and in case the arithmetical error exists in the bill, due to which less or excess amount of billing is done, the actual accounting for of such bills will not be disclosed by the trial balance. Such errors are called errors of Commission.
In view of above, it can be concluded that the agreement of total of debit and credit of the trial balance do not all the time ensure that the books of accounts are correct.
FINAL ACCOUNTS: -At the end of an accounting period, all the ledger accounts are balanced and then a trial balance is prepared. A trial balance is not a part of the final accounts. The trial balance helps in the preparation of the final accounts. The final accounts are prepared to find out the net profit or net loss and to know the financial positions of the business. These accounts consist of
1) Trading Account.
2) Profit and Loss Account.
3) Balance Sheet.
1) Trading Account: -
A Trading account shows the trading results in the form of Gross profit or Gross loss, as the case may be. The Gross profit or Gross loss is transferred to the Profit and Loss account. The Gross profit is the difference between the cost of Goods sold and the sales proceeds, without any deduction of indirect expenses. Hence, in the trading account, it is necessary to include all items of expenses directly affecting the cost of Goods sold.
2) Profit and Loss Account: -
Profit and Loss account is summary account, which is prepared after preparation of Trading Account. Trading account does not disclose the net profit or net loss. There are other expenses to be incurred for operating the business. Therefore, Profit and Loss account is prepared to consider other business operating expenses in order to ascertain net profit or net loss. The net profit or net loss is transferred to the balance sheet.
3) Balance Sheet: -The balance sheet is a statement of the financial position of a business on a given date. The entire situation of a business concern can be understood at a glance. Hence, it is rightly said that the balance sheet is a mirror of the business, which shows the liabilities and assets of the business on a particular date.
Difference between Real Accounts and Nominal Accounts
ZONAL RAILWAY TRAINING INSTITUTE, BHUSAWAL
ACCOUNTS FACULTY
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