BASIC ACCOUNTINGPROCEDURES-JOURNAL ENTRIES• Meaning and significance of Double Entry Systems.• Term – ‘Accounts’ and classification of accounts into personal, real and nominal.• Utility of classification and sub-classification.• Determination of debits and credits from transactions and events.• Recording of transaction in the JOURNAL.
DOUBLE ENTRY SYSTEM• Double entry system of book-keeping has emerged in the process of evolution of various accounting techniques.• It is the only scientific system of accounting.• Every transaction has two fold effects: – Debit – Credit.• Both the aspects are to be recorded in the books of accounts.
ADVANTAGES OF DOUBLE ENTRY SYSTEM• Accuracy could be established through Trial Balance.• Profit earned or loss suffered could ascertained together with details.• Financial position of the concern could be ascertained at the end of each period by preparation of Balance Sheet.• Results could be compared between two periods and reason for the change may be ascertained.• Affords significant information for the purposes of control.
ACCOUNT• The two columns which we referred are put in the form of an account, called the ‘T’ form.• Illustration: CASH Increase Rs. Decrease Rs.Opening 10,000 1,000balance 2,500 300 2,000 200 50 500 1,350 400 TOTAL 2,000 New or 14,300 closing balance 16,300 16,300
ACCOUNT• Increase in asset - Debit• Increase in liability - Credit• Decrease in asset - Credit• Decrease in liability - Debit• Increase in capital - Credit• Decrease in capital - Debit• Increase in expense - Debit• Decrease in expense - Credit• Increase in income - Credit• Decrease in income - Debit
ILLUSTRATION2006 Rs.April1. R. started business 10,0002. He purchased furniture 2,0003. Paid salary to his clerk 1004. Paid rent 505. Received interest 20
ACCOUNTING EQUATION APPROACH• Often Owner’s claim or fund in the business is called equity.• Owner’s claim implies capital invested plus any profit earned minus any loss sustained. EQUITY + LIABILITIES = ASSETS OR EQUITY+LONG-TERM LIABILITIES=FIXED ASSETS+CURRENT ASSETS-CURRENT LIABILITIES
CLASSIFICATION OF ACCOUNTS ACCOUNTSPersonal Accounts Impersonal Accounts Real Nominal Natural Artificial Representative (legal)
GOLDEN RULES OF ACCOUNTING• Personal Account – Debit the receiver – Credit the giver• Real Account – Debit what comes in – Credit what goes out• Nominal Account – Debit all expenses and losses – Credit all incomes and gains
JOURNALISING PROCESS• All transactions are first entered in the journal as and when they occur; the record is Chronological. JOURNAL 1 2 3 4 5DATE PARTICULARS L.F. DEBIT CREDIT AMOUNT AMOUNT Rs. Rs.
ADVANTAGES OF JOURNAL• Chronological order: Complete information on time basis• Narration: Precise explanation of transaction• Posting: Journal forms the basis for posting the entries in the ledger
LEDGERS• Concept of Ledgers• Ledger posting and balancing of accounts• Opening accounts each year taking closing balances of the previous year• Use of ‘balance c/d’ and ‘balance b/d’.
SPECIMEN OF LEDGER ACCOUNTS• Each ledger account has two sides 1. Debit (left part of the account) 2. Credit (right part of the account)• Each of the debit and credit has four columns: 1. Date 2. Particulars 3. Journal folio i.e. page from where the entries are taken for posting 4. Amount
POSTING - RULES• Open separate account• Use of ‘To’ and ‘By’• Respective reference.
BALANCING AN ACCOUNT• It is necessary to ascertain the balance in an account on a regular basis. It is not difficult.• Ascertainment procedures: – Total the sides – Ascertain the difference – The difference is the balance• If credit side is bigger, then it is credit balance. Write on the debit side as, ‘To Balance c/d’.• If debit side is bigger, then it is credit balance.• The totals are written on the two sides opposite one another.
TRIAL BALANCE• Meaning and purpose• Technique of taking balances from ledger accounts to prepare trial balance.
OBJECTIVES• Establish arithmetical accuracy of the books.• Financial statements are prepared on the basis of agreed trial balance.• Trial balance serves as a summary of what is contained in the ledger.
POINTS TO BE NOTED• Prepared on a particular date• Name of the account in second column• Fourth column-debit balance• Next column – credit balance• Two column are totaled at the end• First and third-no explanation
LIMITATIONS• Transactions has not been entered at all in the journal• A wrong amount has been written in both columns of the journal• A wrong account has been mentioned in the journal• An entry has not at all been posted in the ledger• Entry is posted twice in the ledger.
METHODS OF PREPARATION-1 TOTAL METHOD• Every ledger account is totaled and that total amount is transferred to trial balance.• Trial balance can be prepared as soon as ledger account is totaled.• Time taken to balance the ledger accounts is saved.• This is not commonly used as it cannot help in the preparation of financial statements.
METHODS OF PREPARATION-2 BALANCE METHOD• Every ledger account is balanced• Balances are carried forward to the trial balance• Commonly used and helps in preparation of financial statements• Financial statements are prepared on the basis of the ledger accounts.
METHODS OF PREPARATION-3 ADJUSTED TRIAL BALANCE METHOD• If the trial balance do not agree after transferring the ledger accounts including cash and bank balance and also errors are not located timely, then the trial balance is tallied by transferring the difference of debit and credit side to an account known as suspense account. This is a temporary account opened to proceed further and to prepare the financial statements timely.
RULES OF PREPAING THE TRIAL BALANCE• The balances of all a. Asset accounts b. Expenses accounts c. Losses d. Drawings e. Cash and bank balances in the debit side of the trial balance.
RULES OF PREPAING THE TRIAL BALANCE• The balances of all a. Liabilities accounts b. Income accounts c. Profits d. Capital are placed in the credit column of the trial balance.
SUBSIDIARY BOOKS• Techniques of recording transactions in Purchase book, Sales book; Returns Inward Book, Returns Outwards Book; Bills Receivable and Bills Payable book.• Posting of subsidiary to ledger books• Journalisation for many other transactions and events• Difference between Subsidiary books and principle books.
PURPOSE• Cash book – record receipts and payments of cash and bank• Purchase book - record credit purchase• Purchase returns – record return of goods purchased• Sales book – record credit sales• Sales return book – record return of goods sold• Bills receivable books – receipts of promissory notes, etc.• Bills payable book – issue of promissory notes, etc,• Journal proper – transactions which cannot be recorded in any of the above.
ADVANTAGES• Division of work• Specialisation and efficiency• Saving of the time• Availability of the information• Facility in checking
CASH BOOK• It is a type of cash book but treated as principal book• Kinds of cash books• Technique of preparation of – Single column cash book – Double column cash book – Three column cash book• Petty cash book
KINDS OF CASH BOOK• Simple Cash Book• Two – Column Cash Book• Three – Column Cash Book
CAPITAL AND REVENUE EXPENDITURE & RECEIPTS• Criteria for identifying and distinguishing• Deferred Revenue Expenditures• Distinction between Capital and Revenue Receipts• Linkage of distinction with the preparation of final accounts
CONSIDERATION IN DETERMIING CAPITAL&REVENUE EXPENDITURE• Nature of business• Recurring nature of expenditure• Purpose of expenses• Effect on revenue generating capacity of business• Materiality of the amount involved
DEFERRED REVENUE EXPENDITURE• The expenditure for which the payment has been made or a liability incurred but which is carried forward on the presumption that it will be of benefit over a subsequent period or periods.• It refers to that expenditure that is, for the time being, charged against income.• Such suspension of ‘charging of’ operation may be due to the nature of expenses and the benefits and the benefits expected there from.• Balance sheet – Miscellaneous Expenditure
CAPITAL AND REVENUE RECEIPTS• Receipts which are obtained in course of normal business activities are revenue receipts.• Receipts which are not revenue in nature are capital receipts.• These receipts are recognised on accrual basis• Revenue receipts should not be equated with the actual cash receipts• Revenue receipts are credited to the Profit and Loss Account.
RECTIFICATION OF ERRORS• Types of errors• Location of errors• Nature of one-sided and two-sided errors• Suspense account is opened for rectification of errors• Correcting errors of one period in the next accounting period.
TYPES OF ERRORS• Errors of principle• Clerical errors – Errors of omission – Errors of commission – Compensating errors – Errors of principle