Accountancy: The method of identifying, arranging and passing on
the required financial information to the decision makers is business
Book-Keeping: It is the
process of recording business transactions and submitting statements of accounting
information to the decision makers by summarizing and analyzing these
transactions.
accounting
Principles
(It is classified into two categories)
Accounting
concepts
1)
Business entity concept: while recording the business transactions, only those
transactions which have a bearing on the profit/loss of the firm (Concern)
should be taken into account from the view point of business.
2)
Money measurement concept: Accounting
records only transactions that are expressed in terms of money. From the
business point of view services of
employees and depreciation on fixed assets like furniture, machinery
should be measured in terms of money
only but not in any other terms.
3)
Cost concept:
generally the business transactions are recorded at cost in the books of
accounts.
Eg: A
firm purchases a machine for Rs 100000 only though
The machine Plays very important role in
the
Production activity.
4)
Going concern concept: Accounts are recorded assuming that the business will
continue for a long time. While selling goods to outsiders or purchasing goods
from outsider’s business concern presumes that they will stay in the business
for longer period. In absence of this view there is no need to maintain books
of account. The concept is also useful to determine the value of fixed assets.
Eg: While taking a
properly on lease basis “the going concern
Concept
is Useful to assess the intangible assets like
Goodwill.
5)
Realization concept: According to this concept” imaginary profits” should not be recorded
at all
6)
Dual Aspect concept: As per this concept, every transaction should have two aspects, one is
“receiving aspect” and the other is “giving aspect”. The “receiving aspect” is
called “debit” and the “giving aspect” is called “credit”. Therefore, for every
debit, there is an equal corresponding credit.
Eg: If
a machine is purchased for 50,000
Increase in the
machine account
Increase in the cash
account both
are Equal
Accounting Conventions
1) Consistency
2) Conservation
3)
Disclosure
4)
Relevance
5)
Feasibility
Accounting terminology
Business
Transaction: Every business Operation
deals with exchange of cash, goods and services. This results in change in the
financial position of the business concern. Hence, a business transaction may
be defined as an activity that brings a change In the aspects of the business.
It is also transfer of may or money’s worth between two parties. Event like
purchase an sale of goods, receipts and payments of cash etc…,
Business: It
is an activity which involves exchange of goods/services with the intention of
earning income and profit.
Assets: Assets refer to any properties or things owned by a
business concern including the amount due to it from others.
Eg: Building
Machinery
Stock
Cash
and Bank Balance
Investment
etc..,
Fixed
Assets: It is permanent assets it is
also provide long-term benefits for running the business. Change in the value
of these assets is minimum.
Eg: Land, Building, Plant,
Machinery, Vehicles, and Furniture
Floating
Assets: In these assets dedicate
their benefits for running the business and which change in value with in a
short span of time. Values of those assets always change.
Eg: Goods, Debtors, Cash &
Investment etc..,
Current
Assets: Cash and other short term
assets or circulating assets like debtors, stock, bills receivable , cash etc…,
Eg: Investment, debtors, Closing Stock,
Cash at Bank, Cash in
hand, prepaid expenses, accrued incomes
Fictitious
Assets: It is also called intangible
assets. In these assets are types of peculiar assets whose existence in
invisible but whose benefit is enjoyed.
Eg: Good will, Copy rights, Patents.
Unabsorbed portion of
Differed revenue expenses like
advertisement, preliminary
Exp, samples can also be shown under this heading.
Cash
transactions: when payment for
business activity in made immediately, it is called cash transaction.
Credit
Transactions: when the payment is
postponed to a future data it is called credit transaction.
Non-Cash
Transaction: A non-cash transaction
is a business transaction where these is no payment or receipt of cash either
immediately or at a future date.
Eg: Depreciation, bad Debts etc..,
Proprietor: The owner of business is called proprietor he invests
capital in the business with the intention of earning profit.
Capital: It is the Amount invested by the proprietor in the
business. It is always equal to (Assets-Liabilities) it is also called owners
equity i.e. Owners claim against the Assets.
Assets =
Capital + Liabilities
Capital =
Assets – Liabilities
Liabilities
= Assets - Capital
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Drawings: it is the
value of cash or goods withdrawn from the business by the owner for his
personal use.
Goods: It refers to commodities, articles or things in which a trader deals.
Goods refer to commodities or things intended for resale. Unsold goods lying in
a business concern on any given date are called stock.
Debtor: A debtor is a person who owes money to the business.
Creditor: A Creditor is a person to whom the business owes
money.
Liabilities: it is refer to debits or amount due from a business
to other either for money borrowed or for goods or assets purchased on credit
or services received without making immediate payment. This includes (Bank
Loan, or Over Draft, Trade Creditors, Outstanding Expenses) etc….,
Fixed liabilities: Fixed or long term liabilities are the loans payable
after a reasonable long term durations say 5 to 10 years.
Eg: Debentures, long term lones, Mortgage loans etc…,
Current liabilities: Current liabilities are the Repayment obligation
payable from one year to three years. These are no hard and fast rules for
this.
Eg: Sundry creditors, Bills payable, Bank loans etc..,
Contingent Liabilities: It is the liabilities which may arise in future
depending on happening of an uncertain event.
Eg: Damages payable but still under dispute. Bills
Discounted But likely to
dishonored etc..,
Liquid Liabilities: which are to be paid at very short notice can be
included in this category.
Eg: Outstanding expenses, Income Received in Advance,
Bank
Overdraft etc..,
Equity: All claims against the assets of business are called
“equity” the claim of outsider is called “creditors Equity” or liability. The
claim of the proprietor in called “owners Equity” or capital.
Book Debt or
Debt: the amount due form a debtor is
called debt. Book debt is nothing but debt. It is called “Book Debt” because it
is the amount due from debtor as per the books of account.
Good Debt: It is a debt which is fully recoverable.
Bad Debt: A Debt which is irrecoverable is called “Bad debt”.
Revenue: It refers to the earnings of a Business. It includes
the sale proceeds of goods, receipts for services rendered and earnings from
interest, Commission etc..,
Expense: It is the
amount spent in conducting business activities. It is the expenditure, in
return for some benefit.
Eg: Salary paid to staff.
Rent paid to
landlord etc..,
DEBIT
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CREDIT
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To debit an account means to enter the transaction
on the debit side of that account. It means left hand side of the account.
(Incoming benefit or
receiving benefit is called Debit)
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To Credit an account means
to enter the transaction on the credit side of that account. It means right
hand side of an account.
(Out going benefit or
giving benefit in called credit)
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Entry: The record of a transaction in a journal is called
“entry”. In practice the term is used for record made in any book of account.
Posting: Posting is the process of entering in the ledger the
information already recorded in journal or subsidiary books.
Books of
Accounts: Books of account refer to
suitable ruled account books in which business transactions are recorded. These
are mainly two sets of books of accounts maintained by a concern. They are:
a) Journal or subsidiary Books
b) Ledger.
Journal: It is an account Book. Where business transactions
are first recorded. It is a book of original entry. Every business transactions
recorded in a chronological order. And day to day transactions are to be
recorded in a journal. This book also
called “daily recorded” or “day book” and also “book of prime entry”
Eg:
Sales Returns, purchase rate, C/R and payment, loans & advances
Ledger: It is a book in which various accounts are opened. It
is also called “Book of final entry”
Brought Down
(b/d): This term is written in the ledger to show
the opening balance in any account. It suggests that the account has been
brought down from the previous period.
Carried down
(c/d): this is written in the ledger
account at the time of closing the account.
Accounting: “it is the art of recording, classifying and
summarizing in a significant and In
terms of money, transactions and events which are in part at least, of a
financial character and interpreting the results there of.”
AICPA: American Institute of Certified Public Accountants.
Account: It is a summarized statement of Debit & Credit.
These are two parts for every account. The left hand side of the part is called
“Debit” side and the right hand side of the is known as “Credit” side.
Expenditure: Amount spent for acquiring goods or services for
running business is known as expenditure. It may be
Capital expenditure
Revenue expenditure
Capital
expenditure: The amount spent for the
acquisition of fixed asset which have long life and which are useful for the
long term benefit of the business is known as capital expenditure.
Eg: Machinery, furniture, fixtures,
land, building
Revenue
Expenditure: All expenses incurred
for running the business for the current year is known as “Revenue Expenditure”
Eg: Salaries, Rent, Interest,
Manufacturing and selling goods etc..,
Income: The amount earned by a firm out of its business
transaction during a period is called income. Particular Income is of two
types. Capital gains, Revenue Income.
Capital
gains: Capital gains are the excess
amount received over the book value of the asset owned by the firm.
Eg: Profit earned over sale of
building.
Revenue
Income: Revenue income is the income
received during business transactions or sale and purchase of goods or on
services rendered to outsider.
Eg: Interest and commission received
Journal
Entry: The process of recording the
business transaction in the journal is known as journalizing. To divide
business a transaction into two aspects and recording in the journal is called
“journal entry” the first one is debt aspect and the second one is credit
aspect.
Cheque: A cheque is an instrument, by means of which a
depositor can order the bank to pay a certain sum of money only to the order of
a person or to the bearer of the instrument.
Invoice: it is a statement sent by the seller to the purchaser
which contains the details of the quantity of goods sold and price of the
goods/product, terms and conditions of payment particulars.
Loss: Loss refers to money or moneys worth given up without
any benefit in return. It is an expenditure in return for which no benefit is
received. Loss of goods by fire, damages paid to others is examples of losses.
Loss is different form an expense. An expense brings some benefit, a loss does
not bring any benefit, Rent paid is an expense but a goods destroyed by fire is
a loss. It is two types 1) Normal Loss
2) Abnormal Loss
Normal Loss: Loss of stock is said to be normal loss when it is of
unavoidable nature and due to inherent characteristics of commodity. Such loss
may be arise due to loading and unloading of goods, cutting the bulk material
into small parts evaporation, drying etc..,
Abnormal
Loss: Abnormal Loss is that loss
which is avoidable and which does not arise due to the nature of goods. Such
loss is caused due to fire, theft, pilferage etc..,
A business man records the business transactions in
two ways. They are
1)
Single entry system:
This Method is unscientific an
incomplete. Some experts in accountancy revealed that single entry system is
not at all a system of accountancy. In this system only one side aspect of the
transaction (Either Debit or Credit) is to be recorded instead of two aspects.
Hence this system is called “Single entry system”. In this method the
accountant maintain only personal account and cash book and also maintain real
account and leaves the nominal account. This method is known as “incomplete”
double entry system. According to Indian companies act 1956 the single entry
system of accounts should not be followed by “Joint Stock Companies”.
2)
Double Entry System: The double
entry system was invented by a Trader called “LUCI PACIOLO” in “Italy” he wrote
about this system in his first book “DE COMPUTISET SCRIPTURIS” In the year
“1434”. According to him every transaction takes place between either two
persons or two firms/enterprises. When such a transaction takes place one person
receives benefit and the other person gives benefit. These two benefits are
inseparable. Hence, we can not think of one transaction leaving the other. If
one person is “receiving” the benefit, it indicates that some other person is
giving that benefit. In accountancy the receiving benefit in called “Debit”
aspect and giving benefit is called “Credit” aspect. This, the procedure of
recording both the receiving and giving aspects related to business transaction
is called “Double entry system”.
Personal
Accountants: Personal accountants
are accounts of persons with whom a concern carries on business.
 When the
Account Holder Receives Benefit Debit  When
the Account Holder Gives benefit Credit
( Debit the Receiver ) (Credit the Giver )
Eg: - Names of persons, Company etc..,
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Real
Accountants: Accounts relating to properties or assets of a
trader are known as real accounts. It includes tangible assets such as
buildings, furniture’s cash etc.., and also intangible assets such as goodwill,
Trade marks etc…,
 When Assets comes into the firm Debit
When Assets goes out of the firm Credit
(Debit what comes in)
(Credit what goes out )
Eg: - Machinery, Furniture, goods
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Nominal
Accountants: Accounts dealing with expenses, losses, gains
and incomes are called nominal accountants.
Eg: Salaries, rents, Commission etc..,
When the firm receives
benefit Debit  When the firm gives benefit Credit
(Debit all losses and
expenses)
(Credit all gains and
incomes)
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Opening Entry: At the time of beginning of a new accounting year,
every businessman has to write and keep a new set of books of accounts. The
accounts not closed in the previous accounting period are recorded in a new set
of books with an entry called “Opening entry”. All the assets accounts are
debited and liabilities accounts are credited. The difference between the
assets and liabilities is to be credited to the capital Account.
Capital type Accounts: the capital type accounts are those accounts whose
effect is not limited to a particular financial year but carries over to future
financial years also.
Revenue type accounts: When
the effect of income and expenditure is limited to a particular financial year,
it is known as ‘Revenue type of account’.
Eg: Commission Received, Interest Received, rent paid,
Salaries
paid etc.., its classified two types
1) Income A/C
2) Expenses A/C
Personal Accounts:
a)
Sold goods to sukumar for Rs.900
Sukumar a/c ……..Dr
To goods a/c ……..Cr
b)
Received cash from Ravisankar Rs.2000
Cash a/c ………Dr
To Ravisankar……...Cr
c)
Paid cash to Subramanyam Rs.1000
This transaction is influenced by two
a/c’s Real & Personal a/c’s
Subramanian a/c……Dr
To Cash a/c………Cr
Real Accounts:
a)
Received cash from Sivaram Rs.1600
This transaction is influenced by two a/c’s
Real & Personal a/c’s
Cash a/c …..Dr
To Sivaram a/c……Cr
b)
Purchased furniture from Sumalatha traders for Rs.30000
This transaction is influenced by two
a/c’s Real & Personal a/c’s
Furniture a/c….Dr
To Sumalatha traders
a/c……Cr
c)
Purchases machinery for cash Rs. 16000
This transaction is influenced by two Real a/c’s
Machinery a/c…Dr
To Cash a/c…….Cr
d) Cash paid to
Sivaramakrishna & Company, for Rs.900
This transaction is influenced by Real
& Personal a/c’s
Sivaramakrishna & Company
a/c…Dr
To Cash a/c…….Cr
Nominal Accounts:
a) Paid wages Rs.10000
Wages a/c ….Dr
To Cash a/c……..Cr
b) Received Commission Rs.430
Cash a/c……..Dr
To Commission a/c…….Cr
c) Received Interest Rs.600
This transaction is influenced by Real
& Nominal a/c’s
Cash a/c ……..Dr
To Commission a/c ……..Cr
Personal
Accounts
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Real
Accounts
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Nominal
Accounts
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1) Sivaram a/c
2) Sangita a/c
3) ICICI Bank a/c
4) National Insu. Co. a/c
5) Kumar Cotton co. a/c
6) Venugopal & co. a/c
7) Salaries to be paid a/c
8) Comm. to be paid a/c
9) Rent rec in advn a/c
10)Insu. paid in advn a/c
11) Capital a/c
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1) Machinery a/c
2) Building a/c
3) cash a/c
4) goods a/c
5) furniture a/c
6) investment a/c
7) good will a/c
8) patents a/c
9) loose tools a/c
10) Office furniture a/c
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1) Rent a/c
2) salaries a/c
3) interest a/c
4) commission a/c
5) insurance a/c
6) stationery a/c
7) printing a/c
8) traveling exp. a/c
9) advertisement a/c
10) discount a/c
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Kinds
(Classifications) of ledger accounts
1) Debtors ledger Accounts: When customer
purchases goods on credit basis from the business concern, they becomes the
“Debtors’ of the firm. When all their accounts are recorded in one book that
book is known as
“Debtors
ledger”. All the accounts in the Debtors ledger show only debit balances. The total balances of these accounts indicate
the total amount to be received from the customers.
2) Creditors Ledger Accounts: When the firm purchase goods on credit basis from the
Suppliers, the suppliers become “Creditors” to the firm.
When
all the accounts of creditors are recorded in one book, that book is known as “Creditors
Ledger”. All the accounts in the creditors ledger show only credit balances.
The Total balance of these accounts indicates the total amount to be paid by
the company to the supplier.
3) General Ledger: The business firm acquires many assets for successful
operation of the business similarly it makes different types of expenditure in
the process of business. The business gets income out of its business
transactions. When the company records all these accounts that means accounts
related to the assets, income and expenditure in one book, that book is known
as “General Ledger”
Assets a/c = Goods,
Cash, Machinery etc…,
Expenses a/c = Wages,
Salaries, freights, etc..,
Income a/c = Commission
received, discount received etc..,
Are
recorded in general, ledger accounts related to real accounts and the balance
of all types of accounts related to nominal accounts always show only debit
balance. On the other hand, all the accounts related to incomes show only
credit balances.
4) Self Ledger: When all accounts which indicate the relationship
between proprietor and the business firm are recorded is one book, that book is
known as “Self Ledger” this is called “Private Ledger”
Eg:
Capital Account, Drawing Accounts, Profit and Loss a/c’s etc..,
This ledger is highly
confidential.
Subsidiary Books
In this Book maintained separate books to record each
kind of transaction. As all the similar
kind of transactions is recorded in separate book, it becomes easier post all
such transactions in ledger at a time. It is overcome such problems the posting
of journal entries in ledger can be avoided at every time a transaction occurs.
This, the different Transactions are classified into various groups and
relevant transactions are recorded in a separate journal. Such journals are
called “Subsidiary Journals” or “Books of original entry” or “Subsidiary
Books”.
Kinds of Subsidiary Books:
1) Purchases Book: Only the credit purchases of goods are recorded in this book cash
purchases and purchase of asset are not recorded in this book. It is also known
as “Invoice Book” it is posted to the debit of Purchase account.
2) Sales Book: The credit sales of goods are recorded in the sales
book. Cash sales and sales of assets are not recorded in this Book. It is also
know as “Sales day Book”.
3) Purchases returns Book: This book keeps a record of the returns outwards:
that is, return of goods to the supplier. When goods are purchases on credit
basis and returned to the supplier for some reasons the transaction related to
the return outwards are recorded in this book “Return outward book”.
4) Sales Returns Book: This book is kept for recording returns inwards. When
goods are sold on credit basis and returned by the customer due to some
reasons, Transactions related to returns inwards are recorded in the sales
returns book “Returns inward Book”.
5) Cash Book: The cash book in maintained to record all cash
transactions. All the cash receipts and payments are recorded in the book.
6) Bills Receivable Book: The bills on which the amount is yet to be received
and promissory notes drawn by the seller or creditors are recorded in the bills
receivable book.
7) Bills payable Book: All bills and promissory notes accepted by the buyer
or debtor are recorded in the bills payable book.
8) Journal Proper: This book is used for recording only those
transactions which can not be recorded in any of the above mentioned subsidiary
books.
Debit Note: While Returning the goods. It is prepared by the
purchaser. Net amount is debited to the supplier’s account. Two copies of the
debt note are prepared. One is sent to the suppliers and the other one is
retained by the firm. It is recorded in purchases return book. It is mainly contain
name and address of the supplier. “It is Reason for returning the goods should
be mentioned”.
Credit Note: When goods are sold on credit, on account is opened
under the customer’s name and the total amount of goods sold is noted in the
debit side of his account. When goods are returned by him, his account should
be credited with the exact amount of the goods returned. It is maintained two
copies. One is given to the customer and the other is retained by the firm.
This is entered in the sales return book.
CASH BOOK
It is customary to every businessman to have cash
transactions, i.e. cash receipts and payments, regardless of the size of the
business organization. If the size of the firm is small, the cash transactions
are in small amounts. In case of large organizations, the transactions will be
in big amount. If cash receipts and payments are recorded in a separate book,
it is known as “Cash Book”. The person who maintains this book is called a
“cashier”. There are chances for fraud
and manipulation of cash. In order to avoid the probable fraud, all the cash
transactions are recorded in the cash book, through which the closing balance
of cash is known.
Importance:
Usually
there are two types of transactions in every business organizations, cash transactions
and credit transactions. Credit transactions are recorded in the respective
subsidiary books. Cash transactions are recorded in the cash book. Cash
transactions are or two types: 1) Cash
receipts
2) Cash Payments
Cash
receipts should be shown on the debit side & Cash payments on the credit
side of the cash book. Cash received and paid pertaining to previous
transactions are also recorded. The difference between the debit total and the
credit total reveals the cash balance available with in the firm, no business
concern can pay more than what is receives. It means the payments should not
exceed receipts. Sometimes, the debit and credit may figure the same. When the
amounts of receipts equal the payments, the cash balance with the firm is nil. Cash
book can be used either as a book of original entry or a ledger. It plays the
role of both a ledger and subsidiary book. As cash transactions are first
recorded in this book, it is also called the “Book of final Entry”.
Transactions recorded in the cash book need not be posted in the ledger again.
That is way, it is also called “Book of final Entry”. Cash book should be
prepared and maintained with minimum errors. Cash book helps the firm to have a
proper control on cash.
Characteristics of Cash Book
1) It can also be treated as a subsidiary book.
2) Like ledger, there are the debit and the credit
columns is cash book.
3) Only cash transactions are recorded.
4) It always shows debit balance but it never shows the
credit balance.
5) The balance of cash can be known at any point of time.
Types of Cash Book
Cash
book mainly four types 1) Simple cash book
2) Double
column cash book
a)
Containing cash and discount columns
b)
Containing bank and discount columns
3) Triple
column cash book
4) Petty cash
book
1) Simple Cash book
The simple cash book is maintained,
usually, by newly started business firms, whose trade activities are limited.
Only cash transactions are recorded in this book. So, it is called “single column cash book”. Credit transaction (credit purchases &
credit sales) does not recorded in this book.
2) Double Column Cash Book
a) Cash book with cash and discount
column
In this book pertaining to cash and cash discounts are
also recorded. That is way; it is called “Double column cash Book”. In this
book expressly various types of discounts are offered. 1) Trade discount 2)
Cash discount.
v Trade
Discount: The discount offered by the
seller to the buyer on the price of the goods purchased is called “Trade
discount”. It is shown in the Invoice. It is prepared with the net amount. It
is does not appear either in the cash book or any other Book.
v Cash
Discount: If a debtor clears his debt before or on the date
specified, he may receive some rebate in the form of cash form the creditor. This
is treated as “cash discount received” by the debtor. This rebate given by
creditors is treated by him as “discount allowed”. This discount always
recorded in the cash book. Along with
the cash column, discount column is maintained on both the debit and credit
sides of the book. Hence this book is called “double column cash book”. The
discount column of the debit side is called” discount allowed” and the discount
column of the credit side is called is called “discount received”.
b) Cash Book with Bank and Discount
Columns
The modern business concerns, for
safety reasons, do not, usually carry out their transactions only in the form
of cash. The transactions are usually carried out through banks. The payments
and receipts are usually made through cheques.
Every day the cash and cheques
deposited in the bank are recorded on the debit side and the cheques drawn are
shown on the credit side. The discount obtained regarding these transactions is
shown on the credit side and the discount allowed is recorded on the debit
side. Usually, the bank column shows a debit balance, but sometimes it can show
a credit balance also. If it shows a credit balance, we call it an overdraft.
3) Triple column Cash Book
(Cash Book with discount, cash and bank
columns)
The modern organizations, in which the cash
transactions are made amounts, deal with banks regularly to gain the following
advantage.
v Cheques received can be deposited in their bank
accounts.
v All payments can be made through cheques.
v Interest can be earned by depositing the cash balance
in the bank.
As the business firms deal largely with banks. They
prepare a cash book containing cash, discount and bank columns. So, this book
is called “Triple column cash book”. As we include a bank column in the cash
book itself, there is no need of opening a bank account in the ledger.
By adding a bank column on both the debit and credit
side of a double column cash book a triple column cash book is obtained. This
book is thus, a mixed record of three accounts. The three accounts are.
Discount account as Nominal A/c
Cash A/c as Real A/c
Bank A/c as personal
A/c
Dr. Proforma of Triple Column
Cash Book Cr.
Important points to be noted while recording the
transactions in the triple column cash book.
a) When opening cash and bank balances are given, they
should be recorded on the debit side of the cash and bank columns when opening
bank balance is given as an overdraft, it should be recorded on the credit side
bank column of the cash book.
b) When cash is received by the firm, it should be
recorded on the debit side cash column of the cash book. In the same way, cash
payments made by the firm are shown in the cash column on the credit side of
the cash book.
c) When cash or cheque is received from debtors
through cash sales or any other sources, it is recorded in the cash column on
the debit side of the cash book. If the cheque Is deposited into bank on the
same day or assumed to be deposited on the same day, it is recorded in the bank
column on the debit side.
d) If any payment is made or a debt is cleared in the
form of cheques, it is recorded in the bank column on the credit side.
e) If discount is involved in cash/bank transactions,
it should be treated as under:
v If discount is allowed by the firm, it is recorded in
the discount column, on the debit side of the cash book.
v If discount is received, it is recorded on the
discount column on the credit side of the cash book.
f) If the cheques sent to bank for collection are
dishonored, these should be recorded in the bank column on the credit side of
the cash book. Similarly, if we receive any information that the cheques issued
by us are dishonored, it should be promptly noted in the bank column on the
debit side.
g) If cash is withdrawn from the bank for the business
use, it should be recorded in the cash column an its debit side and bank column
on the credit side of the cash book. Similarly if we deposit cash into bank it
should be recorded in the bank column and credit the cash column of the cash
book. This type of entry is called contra entry.
h) The cash and the bank columns are balanced
periodically. But, the discount column will not be balanced. These columns are
totaled and the amounts are carried forward to ledger accounts.
i) Contra entry: If a transaction requires
entries on both the debit and the credit sides simultaneously, it is called
“Contra entry”. Here, both the sides are affected. Example: when the cheques
previously rare deposited now in the bank, they should be recorded in the bank
column on the debit side and he cash column on the credit side of the cash
book. Contra entries do not have ledger folio. To indicate that in is a contra
entry, the alphabet “C” is mentioned in the ledger folio column on both the
debit and the credit sides. “C” means contra entry.
Note: if cash is withdrawn from the bank for the proprietor’s
personal use, then it is not a contra entry.
Usually, the contra entries will appear in the
following occasions.
v When an account is opened with a bank.
v The firm’s cash is deposited in the bank.
v The cash is withdrawn from bank for office use.
v The cheques received from debtors, are deposited in
the bank.
In transactions a & b, the cash balance available with
the firm is decreased, the cash in bank is increased. In transaction “C”, the
cash in the bank is decreased and the cash in the firm is increased.
Note:
1) When cheque received from a debtor is
deposited in the bank on the same day, the entry will be as under:
Bank A/c Dr.
To Debtor A/c
(Being the cheque received from the
debtor is treated as cash)
2) When the cheque received from a debtor is not
deposited into bank on the same day, two entries are recorded.
v When the cheque
is received:
Cash A/c Dr.
To debtor A/c
(Being the cheque received from
the debtor is treated as cash)
v When the cheques are sent to the bank next day for
collection. (this entry is called contra entry)
Bank a/c Dr.
To Cash A/c
(Being the
cheque deposited in the bank)
Problem: prepare a triple column cash book in Vijay & Co.,
Books.
1996
July 1 Commenced business with cash Rs.19, 000
2 Deposited in Bank of India
Rs. 10,000
4 furniture purchased by
cheque payment Rs. 5,000
6 Electricity deposit paid in
cheque Rs. 3,500
9 Credit purchases from shyam
lal Rs. 20,000
13 wages paid in cash Rs. 6,500
15 Credit Sales to Ratan Rs.
14,000
16 Transport expenses paid Rs.60
18 Cash sales Rs. 6,000
19 Received from Ratan by cheque
of Rs. 13,850
21 Paid to Shyanlal by cheque
Rs. 19,900
22 Ratanlal cheque deposited in
bank
24 cash brought into business on
cheque Rs.10, 000
25 withdraw from bank for office
use Rs. 2,500
28 Rent paid by cheque Rs. 2,000
29 wages paid Rs. 4,000
29 cash sales Rs. 15,600
31 Electricity bill paid Rs.250
31 Rent received by cheque Rs.6000
Cheque deposited in bank on
the same day.
Petty Cash Book: in a business where there are large numbers of small
payments the entries are not made in cash book, but in petty cash book. The
petty cashier is given a certain sum of money and all small payments below a
certain limit are made by him. The petty cash book is maintained just like cash
book generally petty cash book is maintained on Imprest system.
Imprest System: under this system a rough estimate of the small
payment for a period of month or week is made and the head cashier gives the
petty cashier the estimated amount. Petty cashier makes payment and records the
transactions in the petty cash book. At the end of the period the petty cashier
balances his book. Then the chief cashier pays him the amount which he spent,
so that original amount of petty cash with which he started is restored.
Imprest System is very useful
especially if an analytical petty cash book is used. Under this method a
separate column is provided to record each head of petty expense along with a
total column. Every payment is entered in the concerned head of petty expense
and in total column. All the payments made are analyzed in the column of petty
cash book itself, under the different heads of expenses. Hence it is called
analytical petty cash book. It will be on the following lines.
Journal proper
This book is used for recording only those
transactions which can not be recorded in any of the above mentioned subsidiary
books. It is one kind of Subsidiary book
Example: In the event
of purchase of furniture for Rs. 10,000/- from Mr. Srinivas, the transaction
cannot be recorded in the purchase book because it is not the purchase of
goods. So, we record it in the journal proper as under:
Furniture a/c Dr 10000
To Mr. Srinivas a/c 10000
(Being
the furniture brought from Mr. Srinivas on Credit)
Note: If the purchase is made for cash, it must be recorded in the cash Book.
Example: The firm owes to Mr. Rama Chandra a rent of Rs. 3000/-
this entry will be as follows:
Rent a/c Dr 3000
To Mr. Rama Chandra a/c
(Being rent to be paid to Mr.
Rama Chandra)
Note: Had the rent been paid earlier, it would have been recorded in the cash
book. As it is not paid, it is viewed as a liability of the firm.
Ledger Postings: The sum total of all the subsidiary books is posted to
the relevant ledger accounts. We know that we have recorded all the purchase of
goods in different amounts in the purchase book and while posting on the debit
side of the purchase account the total amount is shown as a single item.
Similarly, the sum total of the sales book is credited to the sales account.
The ledger postings are also necessary for the entries in the journal proper.
Advantages of Journal proper:
As business transactions are classified and recorded
in their respective subsidiary books, the following entries are recorded in the
journal proper.
a) Opening Entries: The assets or capital brought in should be recorded
first in the journal proper and then, it must be posted to the respective
accounts in the ledger. Thus, students must remember that before posting any
entry in the ledger, it must be recorded first in the journal proper. The
entries recorded in this manner are called the opening entries. Such entries
should be recorded only in the journal proper.
Example: Suppose Kumar commenced business on January 1st,
1998 with the assets Rs.10, 000/- in cash, furniture worth Rs. 5,000/-,
Machinery worth Rs.4, 000/- and stock worth Rs. 3000/-, He writes journal
entries as under.
Solution:
Date
|
Particular
|
Ledger
Folio
|
Debit a/c
|
Credit a/c
|
1998
Jan.
1St
|
Cash
a/c…………...Dr
Furniture a/c………Dr
Machinery a/c…….Dr
Stock a/c………..…Dr
To Capital a/c
(Being assets brought into
the business as capital along with cash)
|
10,000
5,000
4,000
3,000
|
22,000
|
Example: The balance sheet of Mr. Ramu as on 31st
December, 1997 is as under shows the opening entries in his book as on
01-01-1998.
Balance sheet of Mr. Ramu
as on 31-12-1997
Liabilities
|
Amount
|
Assets
|
Amount
|
Bills
Payable
Sundry
Creditors
Capital
|
15,000
24,000
41,000
|
Cash
Sundry Debtor
Furniture
Stock
|
25,000
15,000
20,000
20,000
|
80,000
|
80,000
|
Solution:
Date
|
Particulars
|
LF
|
Debit
|
Credit
|
1998 Jan 1st
|
Cash a/c…………..Dr
Sundry Debtors a/c Dr
Stock a/c……….. Dr
Furniture a/c ……. Dr
To Bills Payable a/c
To Sundry Creditor a/c
To Ram’s Capital a/c
(Being the balance of the
previous year brought into the current year books)
|
25,000
15,000
20,000
20,000
|
15,000
24,000
41,000
|
Example: The ledger balance of the accounts of Sunitha and Co
as on December 31st, 1998 is as under. You are required to show the
opening entries in their book as on January 1st, 1999.
Cash – Rs. 8,000; Cash at Bank – Rs.
10,000; Debtors – Rs. 20,000
Furniture
– Rs.12,000; Machinery – Rs. 21,000; Bills Receivable – Rs. 11,000; Building –
Rs.15,000; Creditors – Rs. 12,000; Stock – Rs. 5,000; Bills Payable – Rs.6,000;
Capital- Rs.84,000/-
Solution:
Date
|
Particular
|
LF
|
Debit
|
credit
|
1999
Jan 1st
|
Cash a/c…………….Dr
Bank a/c…………….Dr
Debtor a/c…………..Dr
Furniture a/c………..Dr
Bills Receivable a/c…Dr
Machinery a/c……….Dr
Building a/c…………Dr
Stock a/c ……………Dr
To Creditors a/c
To Bills Payable a/c
To Capital a/c
(Being the balance of
previous year brought into the current year books)
|
8,000
10,000
20,000
12,000
11,000
21,000
15,000
5,000
|
12,000
6,000
84,000
|
Note: 1) in
the entry of the journal proper, if two or more debit or credit items are
shown, they are called compound entries.
2) It should be noted that in order to facilitate the
recording of the opening entries cash items are included in the journal proper.
b) Rectification Entries: Some times, errors may occur while recording
transactions, posting them into the ledger or while balancing the ledger accounts.
In such cases, certain entries should be passed in order to rectify the errors.
Such entries are called “Rectification Entries”. When there is an error in
passing an entry, another entry (rectification entry) should be passed to
nullify the effect of the previous incorrect entry.
Example: Let us imagine that the firm has paid Rs. 9,500 as
Salaries. Let us presume the accountant wrote Rs.5, 900. This is an error. In
order to rectify this error. (This entry must now be posted in the ledger)
Sol: Salaries a/c …Dr 3,600
To Cash a/c 3,600
(Being the error in noting down the
salaries amount, now rectified)
Example: Rama paid Rs. 100. This was erroneously credited to
Bheema’s a/c the rectification entry will be as follows:
Sol: Bheema’s a/c ……Dr 100
To Rama’s
a/c 100
(Being the wrong credit given to
Bheems’s a/c, now rectified)
Example: A businessman, instead of debiting the salary a/c with
Rs. 10,000 debited the insurance a/c. Correct this entry.
Sol:
In order to rectify this
error, we should debit the salary a/c with Rs. 10,000 and credit the insurance
a/c. (Which was mistakenly debited) by Rs.10, 000. The entry will be as
follows:
Salary a/c………Dr 10,000
To Insurance a/c 10,000
(Being wrong debit given to insurance
a/c, now rectified)
c) Adjustment Entries: The value of the assets at the beginning of the year
is not equal to that of the end of the year. It is because the constant use of
assets throughout the year reduces their value. So, the value of an asset is
either decreased (Depreciation) or increased (Appreciation) at the end of the
year. To provide for these changes in
the value of assets, adjustment entries are passed.
In order to write an entry for
appreciation in the value of an asset, there should be an increase in the cash
inflows as a result of the increase in the value of an asset. These adjustment
entries should be first recorded in the journal proper and only then it should
be posted in the ledger, these entries which are passed in the journal proper
for adjusting the increase/decrease in the value of assets are called
“Adjustment Entries”.
Example: Suppose a machinery costing Rs. 30,000/- is to be
depreciated at the rate of 10%. The adjustment entry for this will be as
follows:
Sol: Depreciation a/c….Dr 3000
To Machinery a/c 3000
(Being the Machinery is
depreciated by 10%)
Similarly,
interest on capital, outstanding expenses, income receivable, and bad debts
provision require certain adjustments. If such adjustment entries are not
passed.
d) Closing Entries: In order to know the net result of his business i.e.,
in order to know whether he has obtained profit or incurred losses, every
businessman prepares final accounts. Final a/c’s are prepared in three parts.
a) Trading a/c
b) Profit and Loss
a/c
c) Balance Sheet.
At the end of every financial year,
the balances of all the nominal accounts are computed and transferred to the
trading and profit and loss accounts. These transferred entries will become the
closing entries. These nominal accounts include accounts pertaining to both
expenses and revenues. The accounts pertaining to revenue expenditure a/c are
balanced and the totals are debited to trading or profit and loss accounts. The
accounts pertaining to revenue or income are balanced and the totals are
credited to the trading or profit and loss accounts.
These closing entries are recorded in
the journal proper. The following the closing entries.
e) Other Entries:
The transactions which should not
occur in the journal are recorded in the journal proper. Some of them are as
under:
v Goods taken from the business by the proprietor for
his personal use.
v Goods lost due to theft, fire accident etc.,
v Goods sent on consignment for sale purpose.
v Interest on capital, interest on drawings, provision
for doubtful debts, Provision for depreciation etc..,
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