Basic Materials

Accountancy: The The meth method od of iden identi tify fyin ing, g, arra arrang ngin ing g and and pass passin ing g on the the requ requir ired ed 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 Accounting Conventions

Accounting concepts 1) Business entity concept: whi while reco record rdiing the busi busine ness ss tran transa sact ctiions, ons, only only those hose trans ransac acttions ions which hich have have a bear beariing on the prof profit it/l /los osss of the the firm firm (Concern) should be taken into account from the view point of business. 2) Money measurement concept: Acco Accoun unti ting ng recor records ds only only tran transa sact ctio ions ns 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 concep concept: t: gene genera rall lly y the the busi busine ness ss trans ransac acttions ons are are reco record rded ed at cost 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 need to maint aintai ain n book bookss of acco accoun unt. t. The The conc concep eptt is also also usef useful ul to det determi ermine ne the value of fixed fixed assets. 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” imaginar nary 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 aspe aspect ct”. ”. The The “rec “recei eivi ving ng aspe aspect ct”” is call called ed “deb “debit it”” and and the the “giv “givin ing g aspe aspect ct”” is call called ed “cre “credi dit” t”.. Ther Theref efor ore, e, for for ever every y debi debit, t, ther theree is an equa equall corr corres espo pond ndin ing g 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: Ever Every y busi busine ness ss Opera perattion deal dealss with ith exch exchan ange ge of cash cash,, good goodss and and serv servic ices es.. This This resu result ltss in chan change ge in the the fina financ ncia iall posi positi tion on of the the busi busine ness ss conc concer ern. n. Henc Hence, e, a busi busine ness ss trans ransac acttion ion may may be defi define ned d as an act activi ivity that hat bri brings ngs a change In the aspe spects of the business. ss. It is also tran ransfer of may or money’ ey’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 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

CREDIT

To debit an account means toTo Credit an account means to enter the transaction on theenter the transaction on the debit side of that account. Itcredit side of that account. It means left hand side of themeans right hand side of an account. account. (Incoming benefit or receiving (Out going benefit or giving  benefit is called Debit)  benefit in called credit)

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”. CLASIFICATION OF ACCOUNTS (Golden Rules of accounting nothing but personal & Real & Nominal a/c’s)

(It is two types) Personal Accounts Impersonal Accounts Real Accounts Nominal Accounts Capital type Accounts Assets Accounts Liabilities Accounts Revenue Type Accounts

Expenses Accounts Income Accounts Principles of Double entry Personal Accounts Real Accounts Nominal Accounts Debit Credit Debit Debit Credit Credit Receiver

Giver what Comes in

what Expenses Incomes goes out & losses &

gains 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.., 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

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) Account Cr Dr

Date

Particulars J.F.No. Amo.

Date Particulars

J.F.No.

Amo.

Compound Entry: Whenever two or more transactions of the same nature (i.e. transactions where either the account to be debited of the account to be credited is common) take place on the same date a composite or compound or combined  journal entry may be passed for them instead of passing a separate journal entry for each of them. It should be noted that the amount in debt column equals to the amount in credit column, based on double entry system of book-keeping. One amount in the debit column must be equal to two or more amounts in the credit column or one amount in the credit column equals to two or more amounts in the debit column. 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

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

Real Accounts

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

Nominal Accounts

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

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. Cash Discount: If a debtor clears his debt before or on the date v 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 v v

Cheques received can be deposited in their bank accounts. All payments can be made through cheques. 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. Dat e

Particulars

Proforma of Triple Column Cash Book L F no discount Allowed

cash

Bank

Date

particulars

LF

Discount

Cr. Cash

Bank  

Received

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. Receip Date Parti Vouch Total Analysis of Payment Conveyance Cartag Statione Postage

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

1998 Cash a/c…………...Dr  Jan. 1St 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)

Ledger Debit a/c Credit a/c Folio 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

Solution: Date 1998 Jan 1st

15,000Cash 24,000Sundry Debtor  41,000Furniture Stock 

25,000 15,000 20,000 20,000

80,000

80,000

Particulars

LF

Debit

Cash a/c…………..Dr 

25,000

Sundry Debtors a/c Dr 

15,000

Stock a/c………..

Dr 

20,000

Furniture a/c ……. Dr 

20,000

To Bills Payable a/c To Sundry Creditor a/c To Ram’s Capital a/c

Credit

15,000 24,000 41,000

(Being the balance of the previous year brought into the current year books)

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  8,000 Bank a/c…………….Dr  10,000 Debtor a/c…………..Dr  20,000 Furniture a/c………..Dr  12,000 Bills Receivable a/c…Dr  11,000 Machinery a/c……….Dr  21,000 Building a/c…………Dr  15,000 Stock a/c ……………Dr  5,000 To Creditors a/c 12,000 To Bills Payable a/c 6,000 To Capital a/c 84,000 (Being the balance of previous year   brought into the current year books) 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.., 1