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1. LESSON 1 INTRODUCTION TO ACCOUNTING Contents 1.0 Aims and Objectives 1.1 Introduction 1.2 Book- Keeping 1.2.1 Meaning 1.2.2 Definition 1.2.3 Objectives 1.3 Accounting 1.3.1 Meaning 1.3.2 Definition 1.3.3 Objectives 1.3.4 Importance 1.3.5 Functions 1.3.6 Advantages 1.3.7 Limitations 1.4 Methods of Accounting 1.4.1 Single Entry 1.4.2 Double Entry 1.4.3 Steps involved in double entry system 1.4.4 Advantages of double entry system 1.5 Meaning of Debit and Credit 1.6 Types of Accounts and its rules 1.6.1 Personal Accounts 1.6.2 Real Accounts 1.6.3 Nominal Accounts 1.7 Distinction between Book Keeping and Accounting 1.8 Branches of Accounting 1.8.1 Financial Accounting 1.8.2 Cost Accounting 1.8.3 Management Accounting 1.9 Let us Sum Up 1.10 Lesson-End Activities 1.11 Check your Progress 1.12 Points for Discussion 1.13 References 1.0 AIMS AND OBJECTIVES i) To know the Meaning ,Definition and objective of Book- Keeping ii) To study the objectives, functions, importance and limitations of Accounting iii) To understand the methods of Accounting, kinds of Accounts and Accounting rules. This watermark does not appear in the registered version - http://www.clicktoconvert.com
2. 1 iv) To study the difference between Book- keeping and Accounting v) To study the various branches of Accounting 1.1 INTRODUCTION In all activities (whether business activities or non-business activities) and in all organizations (whether business organizations like a manufacturing entity or trading entity or non-business organizations like schools, colleges, hospitals, libraries, clubs, temples, political parties) which require money and other economic resources, accounting is required to account for these resources. In other words, wherever money is involved, accounting is required to account for it. Accounting is often called the language of business. The basic function of any language is to serve as a means of communication. Accounting also serves this function. 1.2. MEANING AND DEFINITION OF BOOK- KEEPING 1.2.1 Meaning Book- keeping includes recording of journal, posting in ledgers and balancing of accounts. All the records before the preparation of trail balance is the whole subject matter of book- keeping. Thus, book- keeping many be defined as the science and art of recording transactions in money or money’s worth so accurately and systematically, in a certain set of books, regularly that the true state of businessman’s affairs can be correctly ascertained. Here it is important to note that only those transactions related to business are recorded which can be expressed in terms of money. 1.2.2 Definition “Book- keeping is the art of recording business transactions in a systematic manner”. A.H.Rosenkamph. “Book- keeping is the science and art of correctly recording in books of account all those business transactions that result in the transfer of money or money’s worth”. R.N.Carter 1.2.3 Objectives of Book- keeping i) Book- keeping provides a permanent record of each transactions. ii) Soundness of a firm can be assessed from the records of assets and abilities on a particular date. iii) Entries related to incomes and expenditures of a concern facilitate to know the profit and loss for a given period. iv) It enables to prepare a list of customers and suppliers to ascertain the amount to be received or paid. v) It is a method gives opportunities to review the business policies in the light of the past records. vi) Amendment of business laws, provision of licenses, assessment of taxes etc., are based on records. This watermark does not appear in the registered version - http://www.clicktoconvert.com
3. 2 1.3 ACCOUNTING 1.3.1 Meaning of Accounting Accounting, as an information system is the process of identifying, measuring and communicating the economic information of an organization to its users who need the information for decision making. It identifies transactions and events of a specific entity. A transaction is an exchange in which each participant receives or sacrifices value (e.g. purchase of raw material). An event (whether internal or external) is a happening of consequence to an entity (e.g. use of raw material for production). An entity means an economic unit that performs economic activities. 1.3.2 Definition of Accounting American Institute of Certified Public Accountants (AICPA) which defines accounting as “the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events, which are, in part at least, of a financial character and interpreting the results thereof”. 1.3.3 Objective of Accounting Objective of accounting may differ from business to business depending upon their specific requirements. However, the following are the general objectives of accounting. i) To keeping systematic record: It is very difficult to remember all the business transactions that take place. Accounting serves this purpose of record keeping by promptly recording all the business transactions in the books of account. ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit earned or loss suffered in business during a particular period. For this purpose, a business entity prepares either a Trading and Profit and Loss account or an Income and Expenditure account which shows the profit or loss of the business by matching the items of revenue and expenditure of the some period. iii) To ascertain the financial position of the business: In addition to profit, a businessman must know his financial position i.e., availability of cash, position of assets and liabilities etc. This helps the businessman to know his financial strength. Financial statements are barometers of health of a business entity. iv) To portray the liquidity position: Financial reporting should provide information about how an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its capital transactions, cash dividends and other distributions of resources by the enterprise to owners and about other factors that may affect an enterprise’s liquidity and solvency. v) To protect business properties: Accounting provides upto date information about the various assets that the firm possesses and the liabilities the firm owes, so that nobody can claim a payment which is not due to him. This watermark does not appear in the registered version - http://www.clicktoconvert.com
4. 3 vi) To facilitate rational decision – making: Accounting records and financial statements provide financial information which help the business in making rational decisions about the steps to be taken in respect of various aspects of business. vii) To satisfy the requirements of law: Entities such as companies, societies, public trusts are compulsorily required to maintain accounts as per the law governing their operations such as the Companies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is also compulsory under the Sales Tax Act and Income Tax Act. 1.3.4 Importance of Accounting i) Owners: The owners provide funds or capital for the organization. They possess curiosity in knowing whether the business is being conducted on sound lines or not and whether the capital is being employed properly or not. Owners, being businessmen, always keep an eye on the returns from the investment. Comparing the accounts of various years helps in getting good pieces of information. ii) Management: The management of the business is greatly interested in knowing the position of the firm. The accounts are the basis, the management can study the merits and demerits of the business activity. Thus, the management is interested in financial accounting to find whether the business carried on is profitable or not. The financial accounting is the “eyes and ears of management and facilitates in drawing future course of action, further expansion etc.” iii) Creditors: Creditors are the persons who supply goods on credit, or bankers or lenders of money. It is usual that these groups are interested to know the financial soundness before granting credit. The progress and prosperity of the firm, two which credits are extended, are largely watched by creditors from the point of view of security and further credit. Profit and Loss Account and Balance Sheet are nerve centres to know the soundness of the firm. iv) Employees: Payment of bonus depends upon the size of profit earned by the firm. The more important point is that the workers expect regular income for the bread. The demand for wage rise, bonus, better working conditions etc. depend upon the profitability of the firm and in turn depends upon financial position. For these reasons, this group is interested in accounting. v) Investors: The prospective investors, who want to invest their money in a firm, of course wish to see the progress and prosperity of the firm, before investing their amount, by going through the financial statements of the firm. This is to safeguard the investment. For this, this group is eager to go through the accounting which enables them to know the safety of investment. vi) Government: Government keeps a close watch on the firms which yield good amount of profits. The state and central Governments are interested in the financial statements to know the earnings for the purpose of taxation. To compile national accounting is essential. vii) Consumers: These groups are interested in getting the goods at reduced price. Therefore, they wish to know the establishment of a proper accounting control, This watermark does not appear in the registered version - http://www.clicktoconvert.com
5. 4 which in turn will reduce to cost of production, in turn less price to be paid by the consumers. Researchers are also interested in accounting for interpretation. viii) Research Scholars: Accounting information, being a mirror of the financial performance of a business organization, is of immense value to the research scholar who wants to make a study into the financial operations of a particular firm. To make a study into the financial operations of a particular firm, the research scholar needs detailed accounting information relating to purchases, sales, expenses, cost of materials used, current assets, current liabilities, fixed assets, long-term liabilities and share-holders funds which is available in the accounting record maintained by the firm. Check Your Progress 1 List out five objectives of Accounting. Notes: (a) Write your answer in the space given below. (b) Check your answer with the ones given at the end of this Lesson (pp. 13). ………………………………………………………………………… ………………………………………………………………………… ………………………………………………………………………… ………………………………………………………………………… ………………………………………………………………………… 1.3.5 Functions of Accounting i) Record Keeping Function: The primary function of accounting relates to recording, classification and summary of financial transactions-journalisation, posting, and preparation of final statements. These facilitate to know operating results and financial positions. The purpose of this function is to report regularly to the interested parties by means of financial statements. Thus accounting performs historical function i.e., attention on the past performance of a business; and this facilitates decision making programme for future activities. ii) Managerial Function:Decision making programme is greatly assisted by accounting. The managerial function and decision making programmes, without accounting, may mislead. The day-to-day operations are compared with some pre- determined standard. The variations of actual operations with pre-determined standards and their analysis is possible only with the help of accounting. iii) Legal Requirement function: Auditing is compulsory in case of registered firms. Auditing is not possible without accounting. Thus accounting becomes compulsory to comply with legal requirements. Accounting is a base and with its help various returns, documents, statements etc., are prepared. iv) Language of Business: Accounting is the language of business. Various transactions are communicated through accounting. There are many parties-owners, creditors, government, employees etc., who are interested in knowing the results of the This watermark does not appear in the registered version - http://www.clicktoconvert.com
6. 5 firm and this can be communicated only through accounting. The accounting shows a real and true position of the firm or the business. 1.3.6 Advantages of Accounting The following are the advantages of accounting to a business: i) It helps in having complete record of business transactions. ii) It gives information about the profit or loss made by the business at the close of a year and its financial conditions. The basic function of accounting is to supply meaningful information about the financial activities of the business to the owners and the managers. iii) It provides useful information form making economic decisions, iv) It facilitates comparative study of current year’s profit, sales, expenses etc., with those of the previous years. v) It supplies information useful in judging the management’s ability to utilise enterprise resources effectively in achieving primary enterprise goals. vi) It provides users with factual and interpretive information about transactions and other events which are useful for predicting, comparing and evaluation the enterprise’s earning power. vii) It helps in complying with certain legal formalities like filing of income- tax and sales-tax returns. If the accounts are properly maintained, the assessment of taxes is greatly facilitated. 1.3.7 Limitations of Accounting i) Accounting is historical in nature: It does not reflect the current financial position or worth of a business. ii) Transactions of non-monetary mature do not find place in accounting. Accounting is limited to monetary transactions only. It excludes qualitative elements like management, reputation, employee morale, labour strike etc. iii) Facts recorded in financial statements are greatly influenced by accounting conventions and personal judgements of the Accountant or Management. Valuation of inventory, provision for doubtful debts and assumption about useful life of an asset may, therefore, differ from one business house to another. iv) Accounting principles are not static or unchanging-alternative accounting procedures are often equally acceptable. Therefore, accounting statements do not always present comparable data v) Cost concept is found in accounting. Price changes are not considered. Money value is bound to change often from time to time. This is a strong limitation of accounting. This watermark does not appear in the registered version - http://www.clicktoconvert.com
7. 6 vi) Accounting statements do not show the impact of inflation. vii) The accounting statements do not reflect those increase in net asset values that are not considered realized. 1.4 Methods of Accounting Business transactions are recorded in two different ways. 1.4.1 Single Entry 1.4.2 Double Entry 1.4.1. Single Entry: It is incomplete system of recording business transactions. The business organization maintains only cash book and personal accounts of debtors and creditors. So the complete recording of transactions cannot be made and trail balance cannot be prepared. 1.4.2 Double Entry: It this system every business transaction is having a two fold effect of benefits giving and benefit receiving aspects. The recording is made on the basis of both these aspects. Double Entry is an accounting system that records the effects of transactions and other events in atleast two accounts with equal debits and credits. 1.4.3 Steps involved in Double entry system (a) Preparation of Journal: Journal is called the book of original entry. It records the effect of all transactions for the first time. Here the job of recording takes place. (b) Preparation of Ledger: Ledger is the collection of all accounts used by a business. Here the grouping of accounts is performed. Journal is posted to ledger. (c) Trial Balance preparation: Summarizing. It is a summary of ledge balances prepared in the form of a list. (d) Preparation of Final Account: At the end of the accounting period to know the achievements of the organization and its financial state of affairs, the final accounts are prepared. 1.4.4 Advantages of Double Entry System i) Scientific system: This system is the only scientific system of recording business transactions in a set of accounting records. It helps to attain the objectives of accounting. ii) Complete record of transactions: This system maintains a complete record of all business transactions. iii) A check on the accuracy of accounts: By use of this system the accuracy of accounting book can be established through the device called a Trail balance. iv) Ascertainment of profit or loss: The profit earned or loss suffered during a period can be ascertained together with details by the preparation of Profit and Loss Account. This watermark does not appear in the registered version - http://www.clicktoconvert.com
8. 7 v) Knowledge of the financial position of the business: The financial position of the firm can be ascertained at the end of each period, through the preparation of balance sheet. vi) Full details for purposes of control: This system permits accounts to be prepared or kept in as much detail as necessary and, therefore, affords significant information for purposes of control etc. vii) Comparative study is possible: Results of one year may be compared with those of the precious year and reasons for the change may be ascertained. viii) Helps management in decision making: The management may be also to obtain good information for its work, specially for making decisions. ix) No scope for fraud: The firm is saved from frauds and misappropriations since full information about all assets and liabilities will be available. 1.5 Meaning of Debit and Credit The term ‘debit’ is supposed to have derived from ‘debit’ and the term ‘credit’ from ‘creditable’. For convenience ‘Dr’ is used for debit and ‘Cr’ is used for credit. Recording of transactions require a thorough understanding of the rules of debit and credit relating to accounts. Both debit and credit may represent either increase or decrease, depending upon the nature of account. 1.6 Types of Accounting Types of Accounts The object of book-keeping is to keep a complete record of all the transactions that place in the business. To achieve this object, business transactions have been classified into three categories: (i) Transactions relating to persons. (ii) Transactions relating to properties and assets (iii) Transactions relating to incomes and expenses. The accounts falling under the first heading are known as ‘personal Accounts’. The accounts falling under the second heading are known as ‘Real Accounts’, The accounts falling under the third heading are called ‘Nominal Accounts’. The accounts can also be classified as personal and impersonal. The following chart will show the various types of accounts: Accounts Personal Accounts nal Impersonal Natural Groups/ Representative Real Nominal Tangible Intangible Revenue, Expense Artificial or Legal This watermark does not appear in the registered version - http://www.clicktoconvert.com
9. 8 1.6.1 Personal Accounts: Accounts recording transactions with a person or group of persons are known as personal accounts. These accounts are necessary, in particular, to record credit transactions. Personal accounts are of the following types: (a) Natural persons: An account recording transactions with an individual human being is termed as a natural persons’ personal account. eg., Kamal’s account, Mala’s account, Sharma’s accounts. Both males and females are included in it (b) Artificial or legal persons: An account recording financial transactions with an artificial person created by law or otherwise is termed as an artificial person, personal account, e.g. Firms’ accounts, limited companies’ accounts, educational institutions’ accounts, Co-operative society account. (c) Groups/Representative personal Accounts: An account indirectly representing a person or persons is known as representative personal account. When accounts are of a similar nature and their number is large, it is better tot group them under one head and open a representative personal accounts. e.g., prepaid insurance, outstanding salaries, rent, wages etc. When a person starts a business, he is known as proprietor. This proprietor is represented by capital account for all that he invests in business and by drawings accounts for all that which he withdraws from business. So, capital accounts and drawings account are also personal accounts. The rule for personal accounts is: Debit the receiver Credit the giver 1.6.2 Real Accounts Accounts relating to properties or assets are known as ‘Real Accounts’, A separate account is maintained for each asset e.g., Cash Machinery, Building, etc., Real accounts can be further classified into tangible and intangible. (a) Tangible Real Accounts: These accounts represent assets and properties which can be seen, touched, felt, measured, purchased and sold. e.g. Machinery account Cash account, Furniture account, stock account etc. (b) Intangible Real Accounts: These accounts represent assets and properties which cannot be seen, touched or felt but they can be measured in terms of money. e.g., Goodwill accounts, patents account, Trademarks account, Copyrights account, etc. The rule for Real accounts is: Debit what comes in Credit what goes out 1.6.3 Nominal Accounts Accounts relating to income, revenue, gain expenses and losses are termed as nominal accounts. These accounts are also known as fictitious accounts as they do not represent any tangible asset. A separate account is maintained for each head or This watermark does not appear in the registered version - http://www.clicktoconvert.com
10. 9 expense or loss and gain or income. Wages account, Rent account Commission account, Interest received account are some examples of nominal account The rule for Nominal accounts is: Debit all expenses and losses Credit all incomes and gains 1.7 DISTINCTION BETWEEN BOOK-KEEPING AND ACCOUNTING The difference between book-keeping and accounting can be summarized in a tabular from as under: Basis of difference Book-keeping Accounting Transactions Recording of transactions in books of original entry. To examine these recorded transactions in order to find out their accuracy. Posting To make posting in ledger To examine this posting in order to ascertain its accuracy. Total and Balance To make total of the amount in journal and accounts of ledger. To ascertain balance in all the accounts. To prepare trial balance with the help of balances of ledger accounts. Income Statement and Balance Sheet Preparation of trading, Profit & loss account and balance sheet is not book keeping Preparation of trading, profits and loss account and balance sheet is included in it. Rectification of errors These are not included in book-keeping These are included in accounting. Special skill and knowledge It does not require any special skill and knowledge as in advanced countries this work is done by machines. It requires special skill and knowledge. Liability A book-keeper is not liable for accountancy work. An accountant is liable for the work of book- keeper. This watermark does not appear in the registered version - http://www.clicktoconvert.com
11. 10 1.8 BRANCHES OF ACCOUNTING The changing business scenario over the centuries gave rise to specialized branches of accounting which could cater to the changing requirements. The branches of accounting are; i) Financial accounting; ii) Cost accounting; and iii) Management accounting. Now, let us understand these terms. 1.8.1 Financial Accounting The accounting system concerned only with the financial state of affairs and financial results of operations is known as Financial Accounting. It is the original from of accounting. It is mainly concerned with the preparation of financial statements for the use of outsiders like creditors, debenture holders, investors and financial institutions. The financial statements i.e., the profit and loss account and the balance sheet, show them the manner in which operations of the business have been conducted during a specified period. 1.8.2 Cost Accounting In view of the limitations of financial accounting in respect of information relating to the cost of individual products, cost accounting was developed. It is that branch of accounting which is concerned with the accumulation and assignment of historical costs to units of product and department, primarily for the purpose of valuation of stock and measurement of profits. Cost accounting seeks to ascertain the cost of unit produced and sold or the services rendered by the business unit with a view to exercising control over these costs to assess profitability and efficiency of the enterprise. It generally relates to the future and involves an estimation of future costs to be incurred. The process of cost accounting based on the data provided by the financial accounting. 1.8.3 Management Accounting It is an accounting for the management i.e., accounting which provides necessary information to the management for discharging its functions. According to the Anglo-American Council on productivity, “Management accounting is the presentation of accounting information is such a way as to assist management in the creation of policy and the day-to-day operation of an undertaking.” It covers all arrangements and combinations or adjustments of the orthodox information to provide the Chief Executive with the information from which he can control the business e.g. Information about funds, costs, profits etc. Management accounting is not only confined to the area of cost accounting but also covers other areas (such as capital expenditure decisions, capital structure decisions, and dividend decisions) as well. This watermark does not appear in the registered version - http://www.clicktoconvert.com
12. 11 1.9 Let us Sum Ups Accounting plays a vital role in the field of commerce and business. One should know the basic purpose of accounting, its merits, kinds of accounting and rules of accounting. By studying this lesion one can understand the above said things and need of double entry system. The next lesion will deal with principles of accounting. 1.10 Lesson-End Activities. 1. Define Accounting. 2 Explain the primary objectives of accounting? 3. What is Double entry system? 4. What is meaning of Debit and Credit? 5. Explain the different methods of accounting. 6. Explain the various types of accounts. 7. Discuss the limitations of accounting. 8. Distinguish between book-keeping and accounting. 9. Explain the accounting rules. 1.11 Check your Progress 1. Your answer may include any five of the following. 1.To keeping systematic record 2.To ascertain the results of the operation 3.To ascertain the financial position of the business 4.To portray the liquidity position 5.To product business properties 1.12 Points for Discussion 1. Explain the accounting rules. 2. Discuss the objectives; functions; importance and limitations of accounting. 1.13 References 1. Grewal, T.B, Double Entry Book Keeping. 2. Jain & Narang, Advanced Accountancy. 3. R.L. Gupta, Advanced Accountancy. This watermark does not appear in the registered version - http://www.clicktoconvert.com
13. 12 LESSON – 2 PRINCIPLES OF ACCOUNTING Contents: 2.0 Aims and Objectives 2.1 Introduction 2.2 Accounting concepts and Conventions 2.2.1 Accounting concepts 2.2.2. Accounting Conventions 2.3 Bases of Accounting 2.3.1 Accounting on Cash basis 2.3.2 Accrual Basis of Accounting or Mercantile System 2.3.3 Mixed or Hybrid Basis of Accounting 2.4 Accounting Terminology 2.4.1 Transaction 2.4.2 Debtor 2.4.3 Creditor 2.4.4 Capital 2.4.5 Liability 2.4.6 Asset 2.4.7 Goods 2.4.8 Revenue 2.4.9 Expense 2.4.10 Expenditure 2.4.11 Purchases 2.4.12 Sales 2.4.13 Stock 2.4.14 Drawings 2.4.15 Losses 2.4.16 Account 2.4.17 Invoice 2.4.18 Voucher 2.4.19 Proprietor 2.4.20 Discount 2.4.21 Solvent 2.4.22 Insolvent 2.5 Accounting equation 2.5.1 Rules of Accounting 2.6 Let us Sum Up 2.7 Lesson-End Activities 2.8 Check your Progress 2.9 Points for Discussion 2.10 References This watermark does not appear in the registered version - http://www.clicktoconvert.com
14. 13 2.0 AIMS AND OBJECTIVES 1. To understand the meaning and definition of Accounting. 2. To study the basic accounting principles. 3. To know the bases of accounting. 4. To understand the accounting terminology and equation. 2.1 INTRODUCTION The word ‘Principle’ has been differently viewed by different schools of thought. The American Institute of Certified Public Accountants (AICPA) has viewed the word ‘principle’ as a general law of rule adopted or professed as a guide to action; a settled ground or basis of conduct of practice” Accounting principles refer, to certain rules, procedures and conventions which represent a consensus view by those indulging in good accounting practices and procedures. Canadian Institute of Chartered Accountants defined accounting principle as “the body of doctrines commonly associated with the theory and procedure of accounting, serving as an explanation of current practices as a guide for the selection of conventions or procedures where alternatives exist. Rules governing the formation of accounting axioms and the principles derived from them have arisen from common experiences, historical precedent, statements by individuals and professional bodies and regulations of Governmental agencies”. To be more reliable, accounting statements are prepared in conformity with these principles. If not, chaotic conditions would result. But in reality as all the businesses are not alike, each one has its own method of accounting. However, to be more acceptable, the accounting principles should satisfy the following three basic qualities, viz., relevance, objectivity and feasibility. The accounting principle is considered to be relevant and useful to the extent that it increases the utility of the records to its readers. It is said to be objective to the extent that it is supported by the facts and free from personal bias. It is considered to be feasible to the extent that it is practicable with the least complication or cost. Though accounting principles are denoted by various terms such as concepts, conventions, doctrines, tenets, assumptions, axioms, postulates, etc., it can be classified into two groups, viz., accounting concepts and accounting conventions. 2.2 ACCOUNTING CONCEPTS AND CONVENTIONS 2.2.1 Accounting concepts: The term ‘concept’ is used to denote accounting postulates, i.e., basic assumptions or conditions upon the edifice of which the accounting super-structure is based. The following are the common accounting concepts adopted by many business concerns. 1. Business Entity Concept 2. Money Measurement Concept 3. Going Concern Concept 4. Dual Aspect Concept 5. Periodicity Concept 6. Historical Cost Concept 7. Matching Concept 8. Realisation Concept 9. Accrual Concept 10. Objective Evidence Concept This watermark does not appear in the registered version - http://www.clicktoconvert.com
15. 14 i) Business Entity Concept: A business unit is an organization of persons established to accomplish an economic goal. Business entity concept implies that the business unit is separate and distinct from the persons who provide the required capital to it. This concept can be expressed through an accounting equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itself owns the assets and in turn owes to various claimants. It is worth mentioning here that the business entity concept as applied in accounting for sole trading units is different from the legal concept. The expenses, income, assets and liabilities not related to the sole proprietorship business are excluded from accounting. However, a sole proprietor is personally liable and required to utilize non-business assets or private assets also to settle the business creditors as per law. Thus, in the case of sole proprietorship, business and non-business assets and liabilities are treated alike in the eyes of law. In the case of a partnership, firm, for paying the business liabilities the business assets are used first and it any surplus remains thereafter, it can be used for paying off the private liabilities of each partner. Similarly, the private assets are first used to pay off the private liabilities of partners and if any surplus remains, it is treated as part of the firm’s property and is used for paying the firm’s liabilities. In the case of a company, its existence does not depend on the life span of any shareholder. ii) Money Measurement Concept: In accounting all events and transactions are recode in terms of money. Money is considered as a common denominator, by means of which various facts, events and transactions about a business can be expressed in terms of numbers. In other words, facts, events and transactions which cannot be expressed in monetary terms are not recorded in accounting. Hence, the accounting does not give a complete picture of all the transactions of a business unit. This concept does not also take care of the effects of inflation because it assumes a stable value for measuring. iii) Going Concern Concept: Under this concept, the transactions are recorded assuming that the business will exist for a longer period of time, i.e., a business unit is considered to be a going concern and not a liquidated one. Keeping this in view, the suppliers and other companies enter into business transactions with the business unit. This assumption supports the concept of valuing the assets at historical cost or replacement cost. This concept also supports the treatment of prepaid expenses as assets, although they may be practically unsaleable. iv) Dual Aspect Concept: According to this basic concept of accounting, every transaction has a two-fold aspect, Viz., 1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry system is that every debit has a corresponding and equal amount of credit. This is the underlying assumption of this concept. The accounting equation viz., Assets = Capital + Liabilities or Capital = Assets – Liabilities, will further clarify this concept, i.e., at any point of time the total assets of the business unit are equal to its total liabilities. Liabilities here relate both to the outsiders and the owners. Liabilities to the owners are considered as capital. V) Periodicity Concept: Under this concept, the life of the business is segmented into different periods and accordingly the result of each period is ascertained. Though the business is assumed to be continuing in future (as per going This watermark does not appear in the registered version - http://www.clicktoconvert.com
16. 15 concern concept), the measurement of income and studying the financial position of the business for a shorter and definite period will help in taking corrective steps at the appropriate time. Each segmented period is called “accounting period” and the same is normally a year. The businessman has to analyse and evaluate the results ascertained periodically. At the end of an accounting period, an Income Statement is prepared to ascertain the profit or loss made during that accounting period and Balance Sheet is prepared which depicts the financial position of the business as on the last day of that period. During the course of preparation of these statements capital revenue items are to be necessarily distinguished. vi) Historical Cost Concept: According to this concept, the transactions are recorded in the books of account with the respective amounts involved. For example, if an asset is purchases, it is entered in the accounting record at the price paid to acquire the same and that cost is considered to be the base for all future accounting. It means that the asset is recorded at cost at the time of purchase but it may be methodically reduced in its value by way of charging depreciation. However, in the light of inflationary conditions, the application of this concept is considered highly irrelevant for judging the financial position of the business. vii) Matching Concept: The essence of the matching concept lies in the view that all costs which are associated to a particular period should be compared with the revenues associated to the same period to obtain the net income of the business. Under this concept, the accounting period concept is relevant and it is this concept (matching concept) which necessitated the provisions of different adjustments for recording outstanding expenses, prepaid expenses, outstanding incomes, incomes received in advance, etc., during the course of preparing the financial statements at the end of the accounting period. viii) Realisation Concept: This concept assumes or recognizes revenue when a sale is made. Sale is considered to be complete when the ownership and property are transferred from the seller to the buyer and the consideration is paid in full. However, there are two exceptions to this concept, viz., 1. Hire purchase system where the ownership is transferred to the buyer when the last instalment is paid and 2. Contract accounts, in which the contractor is liable to pay only when the whole contract is completed, the profit is calculated on the basis of work certified each year. ix) Accrual Concept: According to this concept the revenue is recognized on its realization and not on its actual receipt. Similarly the costs are recognized when they are incurred and not when payment is made. This assumption makes it necessary to give certain adjustments in the preparation of income statement regarding revenues and costs. But under cash accounting system, the revenues and costs are recognized only when they are actually received or paid. Hence, the combination of both cash and accrual system is preferable to get rid of the limitations of each system. x) Objective Evidence Concept: This concept ensures that all accounting must be based on objective evidence, i.e., every transaction recorded in the books of account must have a verifiable document in support of its, existence. Only then, the transactions can be verified by the auditors and declared as true or otherwise. The verifiable evidence for the transactions should be free from the personal bias, i.e., it This watermark does not appear in the registered version - http://www.clicktoconvert.com
17. 16 should be objective in nature and not subjective. However, in reality the subjectivity cannot be avoided in the aspects like provision for bad and doubtful debts, provision for depreciation, valuation of inventory, etc., and the accountants are required to disclose the regulations followed. 2.2.2 Accounting Conventions The following conventions are to be followed to have a clear and meaningful information and data in accounting: i) Consistency: The convention of consistency refers to the state of accounting rules, concepts, principles, practices and conventions being observed and applied constantly, i.e., from one year to another there should not be any change. If consistency is there, the results and performance of one period can he compared easily and meaningfully with the other. It also prevents personal bias as the persons involved have to follow the consistent rules, principles, concepts and conventions. This convention, however, does not completely ignore changes. It admits changes wherever indispensable and adds to the improved and modern techniques of accounting. ii) Disclosure: The convention of disclosure stresses the importance of providing accurate, full and reliable information and data in the financial statements which is of material interest to the users and readers of such statements. This convention is given due legal emphasis by the Companies Act, 1956 by prescribing formats for the preparation of financial statements. However, the term disclosure does not mean all information that one desires to get should be included in accounting statements. It is enough if sufficient information, which is of material interest to the users, is included. iii) Conservatism: In the prevailing present day uncertainties, the convention of conservatism has its own importance. This convention follows the policy of caution or playing safe. It takes into account all possible losses but not the possible profits or gains. A view opposed to this convention is that there is the possibility of creation of secret reserves when conservatism is excessively applied, which is directly opposed to the convention of full disclosure. Thus, the convention of conservatism should be applied very cautiously. 2.3 BASES OF ACCOUNTING There are three bases of accounting in common usage. Any one of the following bases may be used to finalise accounts. 1. Cash basis 2. Accrual or Mercantile basis 3. Mixed or Hybrid basis. 2.3.1 Accounting on ‘Cash basis Under cash basis accounting, entries are recorded only when cash is received or paid. No entry is passed when a payment or receipt becomes due. Income under cash basis of accounting, therefore, represents excess of receipts over payments during an accounting period. Government system of accounting is mostly on cash basis. This watermark does not appear in the registered version - http://www.clicktoconvert.com
18. 17 Certain professional people record their income on cash basis, but while recording expenses they take into account the outstanding expenses also. In such a case, the financial statements prepared by them for determination of their income is termed as Receipts and Expenditure Account. 2.3.2 Accrual Basis of Accounting or Mercantile System Under accrual basis of accounting, accounting entries are made on the basis of amounts having become due for payment or receipt. Incomes are credited to the period in which they are earned whether cash is received or not. Similarly, expenses and losses ere detailed to the period in which, they arc incurred, whether cash is paid or not. The profit or loss of any accounting period is the difference between incomes earned and expenses incurred, irrespective of cash payment or receipt. All outstanding expenses and prepaid expenses, accrued incomes and incomes received in advance are adjusted while finalising the accounts. Under the Companies Act 1956, all companies are required to maintain the books of accounts according to accrual basis of accounting. 2.3.3 Mixed or Hybrid Basis of Accounting When certain items of revenue or expenditure are recorded in the books of account on cash basis and certain items on mercantile basis, the basis of accounting so employed is called ‘hybrid basis of accounting’. For example, a company may follow mercantile system of accounting in respect of its export business. However, government subsidies and duty drawbacks on exports to be received from government are recorded only when they are actually received i.e., on cash basis. Such a method could be adopted because of uncertainty with respect of quantum, amount and time of receipt of such incentives and drawbacks. Such a method of accounting followed by the company is called the hybrid basis of accounting. In practice, the profit or loss shown under this basis will not be realistic. Conservative people who prefer recognising income when received but cautious to provide for all expenses, whether paid or not prefer this system. It is not widely practised due to the inconsistency. 2.4 ACCOUNTING TERMINOLOGY It is necessary to understand some basic accounting terms which are daily in business world. These terms are called accounting terminology. 2.4.1 Transaction “An event the recognition of which gives rise to an entry in accounting records. It is an event which results in change in the balance sheet equation. That is, which changes the value of assets and equity. In a simple statement, transaction means the exchange of money or moneys worth from one account to another account Events like purchase and sale of goods, receipt and payment of cash for services or on personal accounts, loss or profit in dealings etc., are the transactions”.Cash transaction is one where cash receipt or payment is involved in the exchange. Credit transaction, on the other hand, will not have ‘ cash’ either received or paid, for something given or received respectively, but gives rise to debtor and This watermark does not appear in the registered version - http://www.clicktoconvert.com
19. 18 creditor relationship. Non-cash transaction is one where the question of receipt or payment of cash does not at all arise, e.g. Depreciation, return of goods etc., 2.4.2 Debtor A person who owes money to the firm mostly on account of credit sales of goods is called a debtor. For example, when goods are sold to a person on credit that person pays the price in future, he is called a debtor because he owes the amount to the firm. 2.4.3 Creditor A person to whom money is owing by the firm is called creditor. For example, Madan is a creditor of the firm when goods are purchased on credit from him 2.4.4 Capital It means the amount (in terms of money or assets having money value) which the proprietor has invested in the firm or can claim from the firm. It is also known as owner’s equity or net worth. Owner’s equity means owner’s claim against the assets. It will always be equal to assets less liabilities, say: Capital = Assets - Liabilities. 2.4.5 Liability It means the amount which the firm owes to outsiders that is, excepting the proprietors. In the words of Finny and Miller, “Liabilities are debts; they are amounts owed to creditors; thus the claims of those who ate not owners are called liabilities”. In simple terms, debts repayable to outsiders by the business are known as liabilities. 2.4.6 Asset Any physical thing or right owned that has a money value is an asset. In other words, an asset is that expenditure which results in acquiring of some property or benefits of a lasting nature. 2.4.7 Goods It is a general term used for the articles in which the business deals; that is, only those articles which are bought for resale for profit are known as Goods. 2.4.8 Revenue It means the amount which, as a result of operations, is added to the capital. It is defined as the inflow of assets which result in an increase in the owner’s equity. It includes all incomes like sales receipts, interest, commission, brokerage etc., However, receipts of capital nature like additional capital, sale of assets etc., are not a pant of revenue. 2.4.9 Expense The terms ‘expense’ refers to the amount incurred in the process of earning revenue. If the benefit of an expenditure is limited to one year, it is treated as an expense (also know is as revenue expenditure) such as payment of salaries and rent. This watermark does not appear in the registered version - http://www.clicktoconvert.com
20. 19 2.4.10 Expenditure Expenditure takes place when an asset or service is acquired. The purchase of goods is expenditure, where as cost of goods sold is an expense. Similarly, if an asset is acquired during the year, it is expenditure, if it is consumed during the same year, it is also an expense of the year. 2.4.11 Purchases Buying of goods by the trader for selling them to his customers is known as purchases. As the trade is buying and selling of commodities purchase is the main function of a trade. Here, the trader gets possession of the goods which are not for own use but for resale. Purchases can be of two types. viz, cash purchases and credit purchases. If cash is paid immediately for the purchase, it is cash purchases, If the payment is postponed, it is credit purchases. 2.4.12 Sales When the goods purchased are sold out, it is known as sales. Here, the possession and the ownership right over the goods are transferred to the buyer. It is known as. 'Business Turnover’ or sales proceeds. It can be of two types, viz.,, cash sales and credit sales. If the sale is for immediate cash payment, it is cash sales. If payment for sales is postponed, it is credit sales. 2.4.13 Stock The goods purchased are for selling, if the goods are not sold out fully, a part of the total goods purchased is kept with the trader unlit it is sold out, it is said to be a stock. If there is stock at the end of the accounting year, it is said to be a closing stock. This closing stock at the year end will be the opening stock for the subsequent year. 2.4.14 Drawings It is the amount of money or the value of goods which the proprietor takes for his domestic or personal use. It is usually subtracted from capital. 2.4.15 Losses Loss really means something against which the firm receives no benefit. It represents money given up without any return. It may be noted that expense leads to revenue but losses do not. (e.g.) loss due to fire, theft and damages payable to others, 2.4.16 Account It is a statement of the various dealings which occur between a customer and the firm. It can also be expressed as a clear and concise record of the transaction relating to a person or a firm or a property (or assets) or a liability or an expense or an income. 2.4.17 Invoice While making a sale, the seller prepares a statement giving the particulars such as the quantity, price per unit, the total amount payable, any deductions made and shows the net amount payable by the buyer. Such a statement is called an invoice. This watermark does not appear in the registered version - http://www.clicktoconvert.com
21. 20 2.4.18 Voucher A voucher is a written document in support of a transaction. It is a proof that a particular transaction has taken place for the value stated in the voucher. Voucher is necessary to audit the accounts. 2.5.19 Proprietor The person who makes the investment and bears all the risks connected with the business is known as proprietor. 2.4.20 Discount When customers are allowed any type of deduction in the prices of goods by the businessman that is called discount. When some discount is allowed in prices of goods on the basis of sales of the items, that is termed as trade discount, but when debtors are allowed some discount in prices of the goods for quick payment, that is termed as cash discount. 2.4.21 Solvent A person who has assets with realizable values which exceeds his liabilities is insolvent. 2.4.22 Insolvent A person whose liabilities are more than the realizable values of his assets is called an insolvent. 2.5 ACCOUNTING EQUATION As indicated earlier, every business transaction has two aspects. One aspect is debited other aspect is credited. Both the aspects have to be recorded in accounts appropriately. American Accountants have derived the rules of debit and credit through a ‘novel’ medium, i.e., accounting equation. The equation is as follows: Assets = Equities The equation is based on the principle that accounting deals with property and rights to property and the sum of the properties owned is equal to the sum of the rights to the properties. The properties owned by a business are called assets and the rights to properties are known as liabilities or equities of the business. Equities can be subdivided into equity of the owners which is known as capital and equity of creditors who represent the debts of the business know as liabilities. These equities may also be called internal equity and external equity. Internal equity represents the owner’s equity in the assets and external represents he outsider’s interest in the asset. Based on the bifurcation of equity, the accounting equation can be restated as follows: Assets = Liabilities + Capital (Or) Capital = Assets – Liabilities (Or) Liabilities = Assets – Capital. This watermark does not appear in the registered version - http://www.clicktoconvert.com
22. 21 The equation is fundamental in the sense that it gives a foundation to the double entry book-keeping system. This equation holds good for all transaction and events and at all periods of time since every transaction and events has two aspects. Check your progress 2 What you understand about the following terminology (i) Liabilities (ii) Assets (iii) Stock (iv) Losses List out five objectives of Accounting. Notes: (a) Write your answer in the space given below. (b) Check your answer with the ones given at the end of this Lesson (pp. 25). ………………………………………………………………………… ………………………………………………………………………… ………………………………………………………………………… ………………………………………………………………………… ………………………………………………………………………… 2.5.1 Rules for accounting equation: Following rules help in making the accounting equation: (i) Assets: If there is increase in assets, this increase is debited in assets account. If there is decrease in assets, this decrease credited in assets account. (ii) Liabilities: When liabilities are increase, outsider’s equities are credited and when liabilities are decreased, outsider’s equities are debited. (iii) Capital: When capital is increased, it is credited and when capital is withdrawn, it is debited. (iv) Expenses: Owner’s equity is decreased by the amount of revenue expenses. (v) Income or profits: Owner’s equity is increased by the amount of revenue income. 2.6 LET US SUM UP While recording business transaction, one should know the principals of accounting, concepts and conventions. This chapter elaborately explains the principles which are needed for consistency in accounting throughout the lifetime of the concern. Accounting terminologies needed for preparing accounts that also explained clearly. Next lesion will cover the basic journal and ledger preparation. 2.7 LESSON END ACTIVITIES 1. Discuss the accounting concepts and conventions. 2. What is dual aspect concept? 3. What do your understand by convention of materiality? 4. What is an accounting equation? This watermark does not appear in the registered version - http://www.clicktoconvert.com
23. 22 2.8 CHECK YOUR PROGRESS (i) Liability: It means the amount which the firm owes to outsiders that is, excepting the proprietors. In the words of Finny and Miller, “Liabilities are debts; they are amounts owed to creditors; thus the claims of those who ate not owners are called liabilities”. In simple terms, debts repayable to outsiders by the business are known as liabilities. (ii) Asset: Any physical thing or right owned that has a money value is an asset. In other words, an asset is that expenditure which results in acquiring of some property or benefits of a lasting nature. (iii) Stock: The goods purchased are for selling, if the goods are not sold out fully, a part of the total goods purchased is kept with the trader unlit it is sold out, it is said to be a stock. If there is stock at the end of the accounting year, it is said to be a closing stock. This closing stock at the year end will be the opening stock for the subsequent year. (iv) Losses: Loss really means something against which the firm receives no benefit. It represents money given up without any return. It may be noted that expense leads to revenue but losses do not. (e.g.) loss due to fire, theft and damages payable to others. 2.9 POINTS FOR DISCUSSION 1. Explain the following terms a) Assets b) Liabilities c) Capital d) Revenue e) Expenses 2. Explain the various types of accounting conventions. 2.10 REFERENCES 1. Gneval, T.B. Double Entry Book Keeping. 2. Jain & Navang – Advanced Accountancy. This watermark does not appear in the registered version - http://www.clicktoconvert.com
24. 23 LESSON 3 JOURNAL AND LEDGER Contents: 3.0 Aims and objectives 3.1 Introductions 3.2 Advantages of Journal 3.3 Sub division of journal 3.4 Ledger 3.4.1 Ruling of ledger account 3.4.2 Sub-division of ledger 3.4.3 Distinction between journal and ledger 3.5 Illustrations 3.6 Let us Sum Up 3.7 Lesson-End Activities 3.8 Check Your Progress 3.9 Points for Discussion 3.10 References 3.0 AIMS AND OBJECTIVES (i) To understand the meaning of journal and ledger. (ii) To study the advantages and important point of journal. (iii) To know the rules and sub-division of ledger. (iv) To study the distinguish between journal and ledger. 3.1 INTRODUCTIONS When the business transactions take place, the first step is to record the same in the books of original entry or subsidiary books or books of prime or journal. Thus journal is a simple book of accounts in which all the business transactions are originally recorded in chronological order and from which they are posted to the ledger accounts at any convenient time. Journalsing refers to the act of recording each transaction in the journal and the form in which it is recorded, is known as a journal entry. 3.2 ADVANTAGES OF JOURNAL The following are the inherent advantages of using journal, though the transactions can also be directly recorded in the respective ledger accounts; 1. As all the transactions are entered in the journal chronologically, a date wise record can easily be maintained; 2. All the necessary information and the required explanations regarding all transactions can be obtained from the journal; and This watermark does not appear in the registered version - http://www.clicktoconvert.com
25. 24 3. Errors can be easily located and prevented by the use of journal or book of prime entry. The specimen journal is as follows: Date Particulars L.F. Debit Rs. Credit Rs. 1 2 3 4 5 - - The journal has five columns, viz. (1) Date; (2) Particulars; (3) Ledger Folio; (4) Amount (Debit); and (5) Amount (Credit) and a brief explanation of the transaction by way of narration is given after passing the journal entry. (1) Date: In each page of the journal at the top of the date column, the year is written and in the next line, month and date of the first entry are written. The year and month need not be repeated until a new page is begun or the month or the year changes. Thus, in this column, the date on which the transaction takes place is alone written. (2) Particulars: In this column, the details regarding account titles and description are recorded. The name of the account to be debited is entered first at the extreme left of the particulars column next to the date and the abbreviation ‘Dr.’ is written at the right extreme of the same column in the same line. The name of the account to be credited is entered in the next line preceded by the word “To” leaving a few spaces away from the extreme left of the particulars column. In the next line immediately to the account credited, a short about the transaction is given which is known as “Narration”. “Narration” may include particulars required to identify and understand the transaction and should be adequate enough to explain the transaction. It usually starts with the word “Being” which means what it is and is written within parentheses. The use of the word “Being” is completely dispense with, in modern parlance. To indicate the completion of the entry for a transaction, a line is usually drawn all through the particulars column. (3) Ledger Folio: This column is meant to record the reference of the main book, i.e., ledger and is not filled in when the transactions are recorded in the journal. The page number of the ledger in which the accounts are appearing is indicated in this column, while the debits and credits are posted o the ledger accounts. (4) Amount (Debit): The amount to be debited along with its unit of measurement at the top of this column on each page is written against the account debited. (5) Amount (Credit): The amount to be credited along with its unit of measurement at the top of this column on each page is written against the account credited. This watermark does not appear in the registered version - http://www.clicktoconvert.com
26. 25 3.3 SUB-DIVISION OF JOURNAL When innumerable number of transactions takes place, the journal, as the sole book of the original entry becomes inadequate. Thus, the number and the number and type of journals required are determined by the nature of operations and the volume of transactions in a particular business. There are many types of journals and the following are the important ones: 1. Sales Day Book- to record all credit sales. 2. Purchases Day Book- to record all credit purchases. 3. Cash Book- to record all cash transactions of receipts as well as payments. 4. Sales Returns Day Book- to record the return of goods sold to customers on credit. 5. Purchases Returns Day Book- to record the return of goods purchased from suppliers on credit. 6. Bills Receivable Book- to record the details of all the bills received. 7. Bills Payable Book- to record the details of all the bills accepted. 8. Journal Proper-to record all residual transactions which do not find place in any of the aforementioned books of original entry. 3.4 LEDGER Ledger is a main book of account in which various accounts of personal, real and nominal nature, are opened and maintained. In journal, as all the business transactions are recorded chronologically, it is very difficult to obtain all the transactions pertaining to one head of account together at one place. But, the preparation of different ledger accounts helps to get a consolidated picture of the transactions pertaining to one ledger account at a time. Thus, a ledger account may be defined as a summary statement of all the transactions relating to a person, asset, expense, or income or gain or loss which have taken place during a specified period and shows their net effect ultimately. From the above definition, it is clear that when transactions take place, they are first entered in the journal and subsequently posted to the concerned accounts in the ledger. Posting refers to the process of entering in the ledger the information given in the journal. In the past, the ledgers were kept in bound books. But with the passage of time, they became loose-leaf ones and the advantages of the same lie in the removal of completed accounts, insertion of new accounts and arrangement of accounts in any required manner. 3.4.1 Ruling of ledger account The ruling of a ledger account is as follows: Type- 1 Dr. Cr. Date Particulars J.F. Rs. Date Particulars J.F. Rs. To name of the account to be credited By name of the account to be debited Type- 2 This watermark does not appear in the registered version - http://www.clicktoconvert.com
27. 26 Date Particulars J.F. Dr. Rs. Cr. Rs. Dr. / Cr. Balance Rs. To name of the account to be credited By name of the account to be debited Ledger Account Type 1 is followed in almost all the business concerns, whereas Type 2 is followed only in banking institutions to save space, time and clerical work involved. 3.4.2 Sub-division of ledger In a big business, the number of accounts is numerous and it is found necessary to maintain a separate ledger for customers, suppliers and for others. Usually, the following three types of ledgers are maintained in such big business concerns. (i) Debtors’ Ledger: It contains accounts of all customers to whom goods have been sold on credit. From the Sales Day Book, Sales Returns Book and Cash Book, the entries are made in this ledger. This ledger is also known as sales ledger. (ii) Creditors’ Ledger: It contains accounts of all suppliers from whom goods have been bought on credit. From the Purchases Day Book, Purchases Returns Book and Cash Book, the entries are made in this ledger. This ledger is also known as Purchase Ledger. (iii) General Ledger: It contains all the residual accounts of real and nominal nature. It is also known as Nominal Ledger. 3.4.3 Distinction between journal and ledger (i) Journal is a book of prime entry, whereas ledger is a book of final entry. (ii) Transactions are recorded daily in the journal, whereas posting in the ledger is made periodically. (iii) In the journal, information about a particular account is not found at one place, whereas in the ledger information about a particular account is found at one place only. (iv) Recording of transactions in the journal is called journalising and recording of transactions in the ledger is called posting. (v) A journal entry shows both the aspects debit as well as credit but each entry in the ledger shows only one aspect. (vi) Narration is written after each entry in the journal but no narration is given in the ledger. (vii) Vouchers, receipts, debit notes, credit notes etc., from the basic documents form journal entry, whereas journal constitutes basic record for ledger entries. 3.5. ILLUSTRATIONS 1. Journalise the following transactions in the books of Shankar & Co. 1998 Rs. June 1 Started business with a capital of 60,000 June 2 Paid into bank 30,000 This watermark does not appear in the registered version - http://www.clicktoconvert.com
28. 27 June 4 Purchased goods from Kamal on credit 10,000 June 6 Paid to Shiram 4,920 June 6 Discount allowed by him 80 June 8 Cash Sales 20,000 June 12 Sold to Hameed 5,000 June 15 Purchased goods from Bharat on credit 7,500 June 18 Paid Salaries 4,000 June 20 Received from Prem 2,480 June 20 Allowed him discount 20 June 25 Withdrew from bank for office use 5,000 June 28 Withdraw for personal use 1,000 June 30 Paid Hanif by cheque 3,000 Solution: In the books of Shankar & Co. Date Particulars L.F. Dr. Rs. Cr. Rs. 1998 June 1 Cash A/c Dr. 60,000 To Capital A/c 60,000 (Capital brought into the business) June 2 Bank A/c 30,000 To Capital A/c 30,000 (Cash paid into bank) June 4 Purchases A/c 10,000 To Kamal’s A/c 10,000 (Purchased goods from Kamal on credit) June 6 Shriram’s A/c Dr. 4,920 To Cash A/c 4,920 (Cash paid to Shriram) June 6 Shriram’s A/c Dr. 80 To Cash A/c 80 (Cash allowed by Shriram) June 8 Cash A/c Dr. 20,000 To Sales A/c 20,000 (Cash sales effected) June 12 Hameed’s A/c Dr. 5,000 To Sales A/c 5,000 (Goods sold to Hameed) June 15 Purchases A/c Dr. 7,500 To Bharat’s A/c 7,500 (Purchased goods from Bharat) June 18 Salaries A/c Dr. 4,000 To Cash A/c 4,000 (salaries paid) June 20 Cash A/c Dr. 2,480 This watermark does not appear in the registered version - http://www.clicktoconvert.com
29. 28 To Prem’s A/c (Cash received from Prem) 2,480 June 20 Discount A/c Dr. 20 To Prem’s A/c 20 (Discount allowed to Prem) June 25 Cash A/c Dr. 5,000 To Bank A/c 5,000 (Cash withdrawn from bank) June 28 Drawings A/c Dr. 1,000 To Cash A/c 1,000 (Cash withdrawn from bank for personal use June 30 Hanif’s A/c Dr. 3,000 To Bank A/c 3,000 (Paid to Hanif by cheques) Illusration-2 Journalise the following transactions: 1998 June 1 Purchased goods worth Rs.300 from Vimal and Rs.500 from Kamal on credit. June 3 Sale of goods worth Rs.1,000 to Balram and Rs.700 to Dhanram. June 5 Cash of Rs.900 received from Ramasamy and Rs.800 from Krishnasmy. June 7 Paid Rs.800 to Pradeep and Rs.500 to kuldeep. June 9 Withdrawn from bank Rs.600 for office use and Rs.300 for personal use. Solution: Journal Date Particulars L.F. Dr. Rs. Cr. Rs. 1998 June 1 Purchases A/c Dr. 800 To Vimal’s A/ c 300 To Kamal’s A/c 500 (Purchased goods from Vimal and Kamal on credit June 3 Balram’s A/c Dr. 1,000 Dhanram A/c Dr. 700 To Sales A/c 1,700 (Sales of goods to Balram and Dhanram) June 5 Cash A/c Dr. 1,700 To Ramasamy’s A/c 900 To Krishnasamy’s A/c 800 (Cash received from Ramasamy and Krishnasamy) June 7 Pradeep’s A/c Dr. 800 Kuldeep’s A/c Dr. 500 To Cash A/c 1,300 (Paid Pradeep and Kuldeep ) June 9 Cash A/c Dr. 600 Drawings A/c Dr. 300 To Bank A/c 900 This watermark does not appear in the registered version - http://www.clicktoconvert.com
30. 29 (Withdrawn from bank for office use and personal use) Check your progress - 3 List out any three different between Journal and Ledger Notes: (a) Write your answer in the space given below. (b) Check your answer with the ones given at the end of this Lesson (pp. 39). ………………………………………………………………………… ………………………………………………………………………… ………………………………………………………………………… ………………………………………………………………………… ………………………………………………………………………… Illustration - 3 Journalise the following transactions, post the same in relevant ledger account and balance the same. 1998 June 1 Karthik commenced business with Rs.20,000. June 2 Paid into bank Rs.5,000. June 3 Purchased Plant worth Rs.10,000 from Modi & Co. June 4 Purchased goods worth Rs. 5,000 form Anwar. June 6 Goods worth Rs.4,000 sold to Anbu June 8 Sold goods worth Rs.2,000 for cash. June 10 Goods returned by Anbu Rs.50. June 15 Paid rent Rs.250. June 18 Withdrawn from bank for office use Rs. 2,500. June 20 Paid Salaries Rs.1,800. June 25 Withdrawn for personal use Rs.250. June 26 Goods returned to Anwar Rs.100. June 27 Paid for office furniture Rs.1,500 by cheque. June 28 Received Rs.3,900 cash from Anbu and discount allowed Rs.50. June 29 Paid Anwar on account Rs.4,800 and discount allowed by him Rs.100. Date Particular L.F. Dr. Rs. Cr. Rs. 1998 June 1 Cash A/c To Karthik’s Capital A/c (Capital brought into the business by Karthik) Dr 20,000 20,000 June 2 Bank A/c To Cash A/c (Cash Paid in to bank) Dr 5,000 5,000 This watermark does not appear in the registered version - http://www.clicktoconvert.com
31. 30 June 3 Plant A/c To Modi & Co’s. A/c (Plant purchased from Modi & Co.) Dr 10,000 10,000 June 4 Purchase A/c To Answar’s A/c (Goods purchased from Anwar) Dr 5,000 5,000 June 6 Anbu’s A/c To Sales A/c (Goods sold to Anbu) Dr 4,000 4,000 June 8 Cash A/c To Sales A/c (Goods sold for cash) Dr 2,000 2,000 June 10 Sales Returns A/c To Anbu’s A/c (Goods returned by Anbu) Dr 50 50 June 15 Rent A/c To Cash A/c (Rent paid) Dr 250 250 June 18 Cash A/c To Bank A/c (Withdrawn from bank for office use) Dr 2,500 2,500 June 20 Salaries A/c To Cash A/c (Salaries paid) Dr 1,800 1,800 June 25 Drawing A/c To Cash A/c (Withdrawn for personal use) Dr 250 250 June 26 Anwar’s A/c To Purchases Returns A/c (Goods returned to Anwar) Dr 100 100 June 27 Furniture A/c To Bank A/c (Payment by cheque for office furniture) Dr 1,500 1,500 June 28 Cash A/c Discount A/c To Anbu’s A/c (Cash received from Anbu and discount allowed Rs.50) Dr Dr 3,900 50 3,950 June 29 Anwar’s A/c To Cash A/c To Discount A/c (Cash paid to Anwar and discount allowed by him) Dr 4,900 4,800 100 Ledger Cash A/c Dr. Cr. Date Particulars J.F. Rs. Date Particulars J.F. Rs. 1998 1998 This watermark does not appear in the registered version - http://www.clicktoconvert.com
32. 31 June 1 To Karthik’s Capital A/c 20,000 June 2 By Bank A/c 5,000 June 8 To Sales A/c 2,000. June 15 By Rent A/c 250 June 18 To Bank A/ c 2,500 June 20 By Salaries A/c 1,800 June 28 To Anbu’s A/c 3,900 June 25 By Drawings A/c 250 June 29 By Anwar’s A/c 4,800 June 30 By Balance c/d 16,300 28,400 28,400 July 1 To Balance b/d 16,300 Bank Dr. Cr. Date Particulars J.F. Rs. Date Particulars J.F. Rs. 1998 1998 June 2 To Cash A/c 5,000 June 18 By Cash A/c 2,500 June 27 By Furniture A/c 1,500 June 30 By Balance c/d 1,000 5,000 5,000 July 1 To Balance b/d 1,000 Karthik’s Capital A/c Dr. Cr. Date Particulars J.F. Rs. Date Particulars J.F. Rs. 1998 1998 June 30 To Balance c/d 20,000 June 1 By Cash A/c 20,000 20,000 20,000 July 1 By Balance b/d 20,000 Plant A/c Dr. Cr. Date Particulars J.F. Rs. Date Particulars J.F. Rs. 1998 1998 June 3 To Modi & Co’s. A/c 10,000 June 30 By Balance c/d 10,000 10,000 10,000 July 1 To Balance c/d 10,000 Modi & Co’s. A/c Dr. Cr. Date Particulars J.F. Rs. Date Particulars J.F. Rs. 1998 1998 June 30 To Balance c/d 10,000 June 3 By Plant A/c 10,000 10,000 10,000 July 1 By Balance b/d 10,000 Purchase A/c Dr. Cr. Date Particulars J.F. Rs. Date Particulars J.F. Rs. 1998 1998 This watermark does not appear in the registered version - http://www.clicktoconvert.com
33. 32 June 4 To Anwar’s A/c 5,000 June 30 By Balance C/d 5,000 5,000 5,000 July 1 To Balance b/d 5,000 Anwar’s A/c Dr. Cr. Date Particulars J.F. Rs. Date Particulars J.F. Rs. 1998 1998 June 26 To Purchases Returns A/c 100 June 4 By Purchases A/c 5,000 June 29 To Cash A/c 4,800 June 29 To Discount A/c 100 5,000 5,000 Sales A/c Dr. Cr. Date Particulars J.F. Rs. Date Particulars J.F. Rs. 1998 1998 June 30 To Balance c/d 6,000 June 6 By Anbu’s A/c 4,000 June 8 By Cash A/c 2,000 6,000 6,000 July 1 To Balance b/d 6,000 Anbu’s A/c Dr. Cr. Date Particulars J.F. Rs. Date Particulars J.F. Rs. 1998 1998 June 6 To Sales A/c 4,000 June 10 By Sales Returns A/c 50 June 28 By Cash A/c 3,900 June 28 By Discount A/c 50 4,000 4,000 Purchases Returns A/c Dr. Cr. Date Particulars J.F. Rs. Date Particulars J.F. Rs. 1998 1998 June 30 To Balance c/d 100 June 26 By Anwar’s A/c 100 100 100 July 1 By Balance b/d 100 Sales Returns A/c Dr. Cr. Date Particulars J.F. Rs. Date Particulars J.F. Rs. 1998 1998 June 10 To Anbu’s A/c 50 June 30 By Balance c/d 50 50 50 July 1 To Balance b/d 50 Furniture A/c Dr. Cr. Date Particulars J.F. Rs. Date Particulars J.F. Rs. 1998 1998 This watermark does not appear in the registered version - http://www.clicktoconvert.com
34. 33 June 27 To Bank A/c 1,500 June 30 By Balance c/d 1,500 1,500 1,500 July 1 To Balance b/d 1,500 Discount A/c Dr. Cr. Date Particulars J.F. Rs. Date Particulars J.F. Rs. 1998 1998 June 28 To Anbu’s A/c 50 June 29 By Anwar’s A/c 100 June 30 To Balance c/d 50 10,000 100 July 1 By Balance b/d 100 50 Drawings A/c Dr. Cr. Date Particulars J.F. Rs. Date Particulars J.F. Rs. 1998 1998 June 25 To Cash A/c 250 June 30 By Balance c/d 250 250 250 July 1 To Balance b/d 250 Rent A/c Dr. Cr. Date Particulars J.F. Rs. Date Particulars J.F. Rs. 1998 1998 June 15 To Cash A/c 250 June 30 By Balance c/d 250 250 250 July 1 To Balance b/d 250 Salaries A/c Dr. Cr. Date Particulars J.F. Rs. Date Particulars J.F. Rs. 1998 1998 June 20 To Cash A/c 1,800 June 30 By Balance c/d 1,800 1,800 1,800 July 1 To Balance b/d 1,800 1,800 3.6. LET US SUM UP Business transactions are first entered in the records in the form of journal. As per the double entry system of accounting we have to classify the accounts and apply the double accounting rule accordingly. Then in order to summaries the accounts, posting should be done through ledger. 3.7 Lesson-End Activities 1. What is journal? 2. What is ledger? 3. Distinguish between journal and ledger? 4. What are the advantages of journal? 5. Journalize the following transactions This watermark does not appear in the registered version - http://www.clicktoconvert.com
35. 34 2000 Jan. 1. Mohan started business with Rs.25,000 2. Bought goods from B Rs.20,000 3. Paid into bank Rs.10,000 4. Returned goods to B Rs.1000 5. Sold goods to R Rs.2500 6. Paid cartage Rs.20 7. Received dividend on investment Rs.100 8. Paid salary Rs.250 3.8 Check your progress answer Your answer may include any five following (i) Journal is a book of prime entry, whereas ledger is a book of final entry. (ii) Transactions are recorded daily in the journal, whereas posting in the ledger is made periodically. (iii) In the journal, information about a particular account is not found at one place, whereas in the ledger information about a particular account is found at one place only. (iv) Recording of transactions in the journal is called journalising and recording of transactions in the ledger is called posting. (v) A journal entry shows both the aspects debit as well as credit but each entry in the ledger shows only one aspect. 3.9 Points for Discussion 1. Journalize the following transactions in the books of Mr.Chandran: 2001 Apr. 1 Started business with cash Rs.40,000 and furniture Rs.10,000. 5 Paid tuition fee of the son Rs.1,000 8 Paid household expenses Rs.1,400. 10 Sold personal car for Rs.18,000 and the amount is brought into the business. 15 Withdrew goods for personal use Rs.2,000. 16 Sold goods to Navin on credit Rs.8,000. 18 Sold old typewriter Rs.1,000. 19 Purchase goods on credit from Ramesh Rs.20,000 20 Received interest on investment Rs.6,000. 22 Received commission from Manohar Rs.2,000. 23 Receive a cheque from Navin Rs.5,000. 25 Issued a cheque to Ramesh Rs.12,000 26 Received cash from Anand on account Rs.4,000 27 Paid cash to Bhagwan on account Rs.1,000. 28 Returned goods to Ramesh Rs.1,000. This watermark does not appear in the registered version - http://www.clicktoconvert.com
36. 35 29 Navin returned goods Rs.500. 30 Paid rent Rs.1,000. Paid salaries Rs.12,000. 2. Journalise the following transactions in the books of Sabitha and post them in the Ledger: 2000 Apr. 1 Bought goods for cash Rs. 15,000 3 Sold goods for cash Rs. 19,000 5 Bought goods on credit from Perara Rs. 12,000 6 Sold goods on credit to Ravindar Rs. 16,000 8 Received from Ravindar Rs. 12,000 10 Paid to Perara Rs. 7,500 25 Bought furniture for cash Rs. 4,500 3. Enter the following transactions in the journal and ledger of Murali of New Delhi: 2001 Rs. Mar. 1 Murali commenced business with cash 90,000 4 Purchased goods for cash 6,000 5 Deposited into bank 40,000 6 Withdrew from bank for office use 4,500 8 Sold goods to Raja 4,800 12 Purchased goods on credit from Kathar 1,380 15 Received from Raj Rs.4,650 and allowed him discount 150 20 Cash sales 7,200 28 Paid to Kathar in full settlement 1,300 30 Paid rent 300 Paid salary 1,600 Accounts are closed on 31st March 2001. 4. Journalise the following transactions and Post them in relevant ledger accounts: 1991 Rs. Jan. 1. Bought from Das 1,000 Jan. 2. Sold to Sen 400 Jan. 3. Sold to Ramesh 250 Jan. 4. Purchased from Suresh 200 Jan. 5. Sales returns by Sen 50 Jan. 10. Bought from Shyam 600 Jan. 12. Returned to Suresh 100 Jan. 15. Sold to Roy 800 Jan. 16. Roy returned goods 200 Jan. 17. Sold goods to Ram 300 Jan. 19. Bough from Naresh 650 Jan. 21. Sold to Bhatanger 750 Jan. 22. Returned to Naresh 50 Jan. 25. Bought from Khatju 850 This watermark does not appear in the registered version - http://www.clicktoconvert.com
37. 36 Jan. 27. Sold to Dheeran 260 Jan. 29. Returns from Bhatanger 100 Jan. 30. Dheeran Returned 60 Jan. 31. Returns to Khatju 150 3.10 References 1) Grewal, T.B., Double Entry Book Keeping. 2) Gupta & Radhasway – Advanced Accountancy. This watermark does not appear in the registered version - http://www.clicktoconvert.com
38. 37 LESSON 4 SUBSIDIARY BOOKS Contents: 4.0 Aims and Objectives 4.1 Introduction 4.2 Kinds of subsidiary books 4.2.1 Purchases Books 4.2.2 Sales Books 4.2.3 Purchases Returns Books 4.2.4 Sales Returns Books 4.2.5 Bills Receivable Books 4.2.6 Bills payable Book 4.2.7 Journal proper 4.2.8 Cash book 4.3 Basic Document for subsidiary Books 4.3.1 Inward Invoice 4.3.2 Outward Invoice 4.3.3 Debit Note 4.3.4 Credit Note 4.3.5 Cash Receipts and Vouchers 4.4 Advantage of subsidiary 4.4.1 Division of work 4.4.2 Facilitate posting 4.4.3 Time Saving 4.4.4 Minimum frauds and errors 4.4.5 Better information 4.4.6 Management decisions facilitated 4.4.7 Specialisation and efficiency 4.5 Imprest system 4.6 Discounts 4.6.1 Trade discount 4.6.2 Cash discount 4.6.3 Difference between Trade discount and Cash discount 4.7 Illustrations 4.8 Let us Sum Up 4.9 Lesson-End Activities 4.10 Check your Progress 4.11 Points for Discussion 4.12 References 4.0 AIMS AND OBJECTIVES i. To know the Meaning of subsidiary books, ii. To understand the kinds of subsidiary books This watermark does not appear in the registered version - http://www.clicktoconvert.com
39. 38 iii. To know the meaning of Trade and Cash discount and also to understand the difference between these two discounts. 4.1 INTRODUCTION Journal is subdivided into various parts known as subsidiary books or sub- divisions of journal. Each one of the subsidiary books is a special journal and a book of original or prime entry. There are no journal entries when records are made in these books. Recording the transactions in a special journal and then in the ledger accounts is the practical system of accounting which is also referred to as English System. Though the usual type of journal entries are not passed in these sub-divided journals, the double entry principles of accounting are strictly followed. 4.2 KINDS OF SUBSIDIARY BOOKS There are different types of subsidiary books which are commonly used in any big business concern. They are: 4.2.1 Purchases Book 4.2.2 Sales Book 4.2.3 Purchases Returns Books 4.2.4 Sales Returns Books 4.2.5 Bills Receivable Books 4.2.6 Bills Payable Books 4.2.7 Journal Proper 4.2.8 Cash Book 4.2.1 Purchases Book This book is used to record all credit purchases made by the business concern from its suppliers. This book is also known as ‘Purchases Books’, ‘Purchases Journal’ or ‘Invoice Book’. It contains five columns, viz., Date, Particulars, Ledger Folio, Inward Invoice Number and Amount. Whenever any credit purchase is made, the date on which the transaction has taken place is entered in the ‘Date Column’, the name of the party from whom the purchase has been made the particulars column, the inward invoice number with which the purchase has been made in the ‘inward Invoice Number Column’ and the money value of the purchase in the ‘Amount Column’. The ‘L.F. Column’ is to record the ledger folio number while posting is made. Posting: The total of purchases book for a specified period is debited to the purchases account in the Ledger. The personal accounts are posted by crediting the individual accounts. Purchases Book Date Particulars L.F. Inward Invoice Number Amount Rs. 4.2.2 Sales books This book is used to record all credit sales effected by the business to its customers. This book is also called as ‘Sales Book’, ‘sales Journal’ or ‘Sold Book’. It contains five columns, viz., Date, Particulars, L.F., Outward Invoice Number and Amount. When any credit sales is effected, the date is entered in the ‘Date Column’, the name of the party to whom the sale is made in the ‘Particulars Column’, the This watermark does not appear in the registered version - http://www.clicktoconvert.com
40. 39 invoice number with which the sales have been effected in the ‘Out-ward Invoice Number Column’ and the money value of the sales in the ‘Amount Column’, The LF column is entered while posting is effected. Posting: The total of the Sales Book for a specified period is credited to the Sales Account in the Ledger. The personal account is posted by debiting the individual accounts. The specimen ruling of a Sales Book is as follows: Sales Book Date Particulars L.F. Outward Invoice Number Amount Rs. 4.2.3 Purchases Returns Books This book is used to record all transactions relating to the goods returned to suppliers. This book is also known as ‘Purchases Returns journal’ or ‘Returns Outward Book’, the specimen ruling of a Purchases Returns Book is given below: Purchases Returns Book Date Name of supplier L.F. Debit Note Amount Rs. The columns in this book are similar to those of Purchases Book except the Debit Note Column in which the debit note number is recorded. A debit note represents a note sent to the supplier for the value of goods retuned by the business. While posting, all the personal accounts are debited in the Ledger and the total of Purchases Returns Book is credited to Purchases Returns Account. 4.2.4 Sales Returns Books This book is used to record all transactions relating to goods returned by customers. This book is also known as ‘Sales Return Journal’ or ‘Returns Inwards Book’, the specimen ruling of sales returns book is given below: Sales Returns Book Date Name of Customer L.F. Credit Note Amount Rs. The columns in this book are similar to those of Sales Book except the Credit Note Column in which the credit note number is recorded. A credit note represents a note sent to the customer for the value of the goods returned by him. While posting, all the personal accounts are credited in the Ledger and the total of sales returns book is debited to Sales Returns Account 4.2.5 Bills Receivable Book: This book is used to record all the bills received by the business from its customers. It contains details regarding the name of the acceptor, date of the bill, This watermark does not appear in the registered version - http://www.clicktoconvert.com
41. 40 place of payment, term of the bill, due date and the amount of the bill. The specimen ruing of a Bills Receivable Book is given below: Bills Receivable Book Sl. No. Date of Receipt L.F. Drawer Acceptor Term Due Date Rs. Remarks While posting, the individual customers’ accounts will be credited and the total of the Bills Receivable Book for a specified period will be debited to the Bills Receivable Account in the Ledger. 4.2.6 Bills Payable Book: This book is used to record all the bills accepted by the business drawn by its creditors. It contains details regarding the name of the drawer, payee and date of acceptance, due date, place of payment, term and amount of the bill. The specimen ruling of Bills payable Book is given below: Bills Payable Book Sl. No. Date of Acceptance Drawer Payee L.F . Where Payable Date of bill Term Due Date Rs. Remar ks While posting the individual drawer or payee account is debited and the Bills payable Account is credited with the total in the Bills Payable Book. 4.2.7. Journal Proper This book is used to record all the residual transactions which cannot find place in any of the subsidiary books. While recording, the entries are made in the journal covering both the aspects of the transaction. The following are some of the examples of transactions which are entered in this book. 1. Opening entries and closing entries. 2. Adjusting entries 3. Transfer entries from one account to another account. 4. Rectification entries. 5. Bills of Exchange Entries 6. Credit Purchase/sale of an asset other than goods. 4.2.8 Cash Book Cash Book is a sub-division of Journal recording transactions pertaining to cash receipts and payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are posted subsequently to the respective ledger accounts. The Cash Book is maintained in the form of a ledger with the required explanation called as narration and hence, it plays a dual role of a journal as well as ledger. All cash receipts are recorded on the debit side and all cash payments are recorded on the credit side. All cash transactions are recorded chronologically in the Cash Book. The Cash Book will always show a debit balance since payments cannot exceed the receipts at any time. This watermark does not appear in the registered version - http://www.clicktoconvert.com
42. 41 Kinds of Cash Book: From the above it can be observed that the Cash Book serves as a subsidiary books as well as ledger. Depending upon the nature of business and the type of cash transactions, various types of Cash books are used. They are: a) Single Column Cash Book b) Two Column Cash Book or Cash Book with cash and discount columns. c) Three Columnar Cash Book or Cash Book with cash, bank and discount columns. d) ‘Bank’ Cash Book or Cash Book with bank and discount columns. e) Petty Cash Book. a) Single or Simple Column Cash Book :This is the simplest form of Cash Book and is used when payments and receipts are mostly in the form of cash and where usually no cash discount is allowed or received. But, when transactions involving discounts are effected, it is recorded in a separate ledger account. The ruling of Single Column Cash Book is as follows: Single Column Cash Book Dr. Cr. Date Particulars R.No. L.F. Rs. Date Particulars V.No. L.F. Rs. From the above it can be observed that the Single Column Cash Book is just like a ledger account. When cash is received, it is recorded on the debit side, i.e., ‘Receipts Side’ of the Cash Book, with the date on which the transaction is effected, in the ‘Date Column’, the name of the party or the head of a nominal account, from whom or for which the cash has been received, in the ‘Particulars Column’, the receipt number, with which the cash has been received by the cashier, in the ‘R. No. Column and the money value of the transaction in the ‘Amount Column’ respectively. The L.F. (Ledger Folio) column is for entering the reference ledger folio number when posting to the ledger is made. Similarly when payment of cash is made, it is recorded on the credit side, i.e., “Payments Side” of the Cash Book, with the date in the ‘Date Column’, the name of the party or head of a nominal account in the ‘Particulars Column’, the voucher number in the ‘V. No. Column’, and the money value of the transaction in the ‘Amount Column’ respectively. The voucher represents the supporting document for all cash payments effected. Positing: Once the Cash Book is entered with all the cash transactions, posting of the entries is made to the respective ledger accounts subsequently. For posting, from the debit side of the Cash Book, the concerned accounts are credited and from the credit side, the concerned accounts are debited. b) Tow Column Cash Book or Cash Book with Cash and Discount Columns: This type of Cash Book is used when cash transactions involving discount allowed or received are effected. Usually, discount is allowed when payments are promptly made by the customers and discount is enjoyed when payments are promptly made by the business. In this two column Cash Book, instead of only one column for This watermark does not appear in the registered version - http://www.clicktoconvert.com
43. 42 cash as in a Single Column Cash Book, one additional column is introduced, viz., ‘Discount Column’. The discounts allowed by the business are entered on the debit side and discounts received are entered on the credit side of the Cash Book. The discount columns as such cannot be balanced since they are purely memorandum columns and will not serve the purpose of a ledger account as cash columns do. To know the balance of discount columns, separate ledger accounts, viz., Discount Allowed Account and Discount Received Account can be opened. The ruling of a two column Cash Book is as follows. Two Column Cash Book (with Cash and Discount Columns) Dr. Cr. Date Particulars R.No. L.F. Discount allowed Rs. Date Particulars V.No. L.F. Discount received Rs. Posting: The following points should be kept in mind while posting from the Cash Book is effected. 1. The opening and closing balances should not be posted. 2. From the debit side of the Cash Book, all the concerned accounts are given credit. 3. From the credit side of the Cash Book, all the concerned accounts are given debit. 4. While posting cash received from a debtor or cash paid to a creditor, due care should be taken to credit the personal account with the amount of both cash and discount allowed or debit the personal account with the amount of both cash and discount received. 5. Separate accounts should be opened for discount allowed and discount received. The total of the discount allowed column represents a loss sustained by the business and the same should be debited to discount allowed account by writing ‘To sundries’ in the particulars column. The total of the discount received column represent as gain made by the business and it should be credited to the discount account by writing ‘By Sundries’ in the particulars column. c) Three Columnar Cash Book or Cash Book with Cash, Bank and Discount Columns: Nowadays, every businessman invariably has a bank account to reap the advantages of safety, convenience, credit facilities and less clericalwork. Thus, when a business is maintaining a bank account, the transactions can be made through cheques. Instead of maintaining the bank account in the ledger, it is found more convenient if it is included in the Cash Book as Cash Column. Thus, the three column Cash Book is the resultant effect where in addition to cash and discount columns, bank column is also included. The ruling of a three columnar cash book is as follows: Three Columnar Cash Book (with Cash, Bank and Discount Columns) Dr. Cr. Date Particulars R.No. L.F. Discount allowed Rs. Cash Rs. Bank Rs. Date Particulars V.No. L.F. Discount received Rs. Cash Rs. Bank Rs. This watermark does not appear in the registered version - http://www.clicktoconvert.com
44. 43 All cash receipts are entered on the debit side in the cash column and all cash payments on the credit side in the cash column of the Cash Book. Amounts paid into the bank or deposited are recorded on the debit side in the bank column and all payments made by cheques are recorded on the credit side in the bank column. d) ‘Bank’ Cash Book or Cash Book with Bank and Discount Columns: In case of a business where all transactions are effected through bank, i.e., all receipts are banked (deposited into the bank) on the same day and all payments are made by cheques only, the cash column in the cash book is of no use. Hence, the Cash Book with bank and discount columns alone is maintained. The ruling of a Cash Book with bank and discount column is as follows: Two Column Cash Book (with Bank and Discount Columns) Dr. Cr. Date Particulars R.No. L.F. Discount allowed Bank Rs. Date Particulars V.No. L.F. Discount received Bank Rs. e) Petty Cash Book: The word ‘petty’ has its origin from the French word ‘petit’ which means small. The petty cash book is used to record items like carriage, cartage, entertainment expenses, office expenses, postage and telegrams, stationery, etc. The person who maintains this book is called the ‘petty cahsier’. The petty cash book is used by many business concerns to save the much valuable time of the senior official, who usually writes up the main cash book, to prevent over burdening of the main cash book with so many petty items and to find out readily and easily information about the more important transactions. The amount required to meet out various petty items is estimated and given to the petty cashier at the beginning of the stipulated period say a fortnight or a month. When the petty cashier finds shortage of money, he has to submit the petty cash book, after making all the entries, to the chief cashier for necessary verifications. The chief cashier in turn, verifies all the entries with supporting vouchers and disburses cash or issues cheque for the exact amount spent. Columnar Petty Cash Book or analytical Petty Cash Book In this cash book various items of petty cash payments are analysed and separate analytical columns are provided for recording each and every item. The amount of cash received from the chief cashier for meeting out the petty expenses is recorded on the debit side and the actual cash payments towards various petty items are recorded on the credit side in the total as well as analytical columns. The analytical column is provided for each usual head of expense like postage & telegrams, printing & stationery, carriage & cartage, traveling expenses, entertainment expenses, office expenses, sundry expenses, etc. Subsequently, the totals of these analytical columns are posted to the respective ledger accounts which save labour used in posting each item of payment separately in the ledger. The balancing of petty cash book is done in the total payments column. This watermark does not appear in the registered version - http://www.clicktoconvert.com
45. 44 Where the debit side (Receipts) exceeds that of the credit side (in the totals column-Payments), it represents the unspent balance of cash remaining with the petty cashier. 4.3 BASIC DOCUMENT FOR SUBSIDIARY BOOKS 4.3.1 Inward Invoice: This is the document sent by the suppliers of goods giving details of goods sent, price, value, discount etc. It is the basis for entries in purchases book. 4.3.2 Outward Invoice: This is a document sent by the firm to the customers, showing the details of goods supplied, their price and value, discounts etc., it is the basis for writing sales book. 4.3.3 Debit Note: It is a simple statement sent by a person to another person showing the amount debited to the account of the latter along with a brief explanation. The debit notes are issued by a trader relating to purchase returns in order to put up his claim for abatement of his dues to the other party. Debit notes are serially numbered and are similar to invoices although they are usually printed in red ink. 4.3.4 Credit Note: It is nothing but a statement sent by one person to another person showing the amount credited to the account of the latter along with a brief explanation. The credit notes are used for sales return in order to intimate related abatement and are similar to invoice although they are usually printed in red ink. 4.3.5Cash Receipts and Vouchers: These are the vouchers and receipts for cash received and paid. Entries in cash book are made on the strength of the vouchers and receipts. They are also useful for auditing purpose. Contra Entries For any single transaction the same account cannot be debited and credited. But since cash and bank accounts are maintained in the cash book, the debit and credit may be found in the two different accounts in the Cash Book. They are transactions which affect both the sides of the Cash Book. For instance, when cash is deposited into the bank, bank account should be debited and cash account should be credited. Hence, on the debit side of the Cash Book. ‘To Cash’ is written in the particulars column and the amount is entered in the bank column. Similarly, on the credit side of the Cash Book, ‘By Bank’ is written in the particulars column and the amount is entered in the cash column. When cash is withdrawn from the bank, on the debit side of the Cash Book, ‘To Bank’ is written in the particulars column and the amount is written in the cash column. Likewise, on the credit side of the Cash Book, ‘By Cash’ is written in the particulars column and amount is entered in the bank column. Therefore, those entries which appear on both the sides of the Cash Book are called Contra Entries and they are identified and denoted in the Cash Book itself by writing the letter ‘C’ in the Ledger Folio Columns on either side. For these transactions, as This watermark does not appear in the registered version - http://www.clicktoconvert.com
Accounting Package-R.D.Sivakumar

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