accounting calculations - learning of fundamentals

8/10/2019 Accounting Calculations - Learning of Fundamentals

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Book of Accounts

The book, which contains accounts, is known as the Books of Accounts. In other words, it means

the khata or books in which the businessman keeps the records of business transactions.Recording of transactions in books of account is a process of entering the transactions in the

proper books of accounts in a systematic manner. It means putting into black and white thetransaction that takes place in course of business activities.

Normally transactions are recorded in two sets of books step by step. Transactions are firstrecorded in Journal,which is also known as book of original entryor Primary Books.. The

ne!t step of recording of transactions is in "edger, which is also known as book of final entry

or Secondary Books. These Books of accounts are specially printed and ruled books where theaccounts of a firm can be written up.

Journals

The word Journal has been derived from the French word JOUR means daily

records. Journal is a book of original entry in which transactions are recorded as and

when they occur in chronological order in order of date! from source documents.

Recording in "ournal is made showing the accounts to be debited and credited in a

systematic manner. Thus# the "ournal $rovides a date%wise record of all the

transactions with details of the accounts and amounts debited and credited for each

transaction with a short e&$lanation# which is known as narration.

Firms having limited number of transactions record those in "ournal and from there

$ost these to the concerned ledger accounts. Firms having large number oftransactions# maintain some s$ecial $ur$ose "ournals such as# 'urchase (ook# )ales

(ooks# Returns books# (ills (ook# *ash (ook# Journal $ro$er etc.

Format of Journal

#ate $articulars#ebit %redit

Rs. Rs.

Process of Journalising&

The process of 'ournalising means the steps to be followed for ascertaining the account heads tobe debited(credited for a particular transaction. There are three steps involved in the process of

'ournalising a transaction.

)tep *& Identification of accounts or account heads+ affected by the transaction.)tep & %lassification of accounts or accounts heads.

)tep -& Application of Rules for #ebit and %redit


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Types of journal ntries&

ntries recorded in the 'ournal may be of two types.

*. )imple /ournal ntry and

. %ompound /ournal ntry

Simple Journal ntry&

0hen a transaction affects only one aspect(account in the debit and one aspect(account in thecredit. It is known as )imple /ournal ntry.

!ompound Journal ntry&0hen a transaction affects more than two accounts at a time 1 one or more accounts being

debited( one or more accounts being credited, such entry is known as %ompound /ournal ntry.

"eaning of #edger

"edger posting means making entries of the transactions in the ledger books from the 'ournals.

$osting is a process of transferring debit and credit aspects of the entries appearing in the 'ournaland other books of original entry to the debit and credit sides of the relevant accounts in the

ledger. $ostings are made using the word To+ and By+ as a prefi!. 2or debit side entry To+

prefi! is used and for credit side entry By+ prefi! is used. The aim of posting is to make aclassified and summarised record of all business transactions under appropriate account heads.

$ules generally follo%ed %&ile posting t&e transactions in t&e #edger &

The following basic rules are to be followed while posting the transactions in the ledger&

3a4 )eparate accounts should be opened in the ledger for posting the different transactions

recorded in the 'ournal.3b4 All the transactions pertaining to one account head should be posted to that account.

3c4 Two aspects of the business transaction namely 1 debit and credit aspects 1 should be postedon the debit side and credit side of the account respectively.

Basic points regarding posting&

Basic points to be kept in mind before posting are&

'( )pening of separate accounts& )eparate accounts should be opened for different accountheads+ in the ledger for posting the different transactions recorded in the 'ournal. 2or e!ample&

%ash A(c, salary A(c, purchases A(c etc.

*( )ne account for eac& kind of transactions& 5ne account should be opened for each kind oftransaction. Transactions taking place during an accounting period relating to that particularaccount should be posted to that account only. If more than one account is opened for one kind of

transactions, the ob'ect of summarisation of transactions of similar nature will not be achieved.

2or e!ample, it may be found that in the 'ournal, %ash A(c has been debited during a week, sayon si! different dates and the same account has been credited on four different dates. 2or

recording in %ash A(c, only one %ash A(c will be opened for transactions taking place on all the

days and posting of all entry relating to %ash A(c will be made in that account only.


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+llustration

5n *st /anuary 667, )rinath started business with a capital Rs. *7,666

Journal of "-s Srinat&

#ate $articulars".

2.

#r.Amount

3Rs.4

%r.Amount

3Rs.4

667

/an*

%ash A(c #r.

To %apital A(c3Being cash brought in as

capital4

*7,666

*7,666

In the above entry, the accounts affected are %ash A(c and %apital A(c. Therefore, in the ledger,

%ash A(c and %apital A(c will be opened. $osting in both the accounts are shown as under.Posting in cas& account&

8(s )rinath

#edger

!as& Account

#r. %r

#ate $articulars"

2

Amount

Rs.#ate $articulars

"

2

Amount

Rs.

667

/an*

To %apitalA(c

*7,666

As the %ash A(c has been debited in the /ournal, %ash account will also be debited in the "edger.This means that posting will be made in the debit side of the %ash A(c. 5n the debit side, in the

date column+, date will be written. In the /ournal i.e. 667, /an. *, the date of the transaction,

will be written. In particulars column+, the account which has caused an effect in the %ash A(cwill be written. As per the entry in the 'ournal, %apital A(c will be written in the particulars

column+ with To+ as prefi!. In the /.2. column+, the 2olio number 3page number4 where the

entry appears in 'ournal will be written. In the amount column+ in the ledger, the figure statedagainst %ash account in the 'ournal, as shown above, will be entered.

Posting in t&e capital account&

"-s Srinat&

#edger

!apital Account

#r. %r.


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#ate $articulars"

2

Amount

Rs.#ate $articulars

"

2

Amount

Rs.

667/an *

By %ash A(c *7,666

As the %apital A(c has been credited in the 'ournal, %apital A(c will also be credited in the

"edger. This means that posting will be made on the credit side of the %apital A(c. 5n the credit

side, in the date column+, date as written in the /ournal i.e. 669, /an. *, the date of the

transaction, will be written. In the particulars column+, the account which has caused an effect inthe %apital A(c will be written. As per the entry in the 'ournal, %ash A(c has caused an effect in

the %apital A(c. Therefore, %ash A(c will be written in the particulars column+ with a prefi!

By+. In the /.2 column+, the 2olio number 3page number4 where, the entry appears in 'ournalwill be written. In the amount column+ in the ledger, the figure stated against %apital A(% in the

'ournal, as shown above, will be entered.

Trial Balance

+fter $osting the accounts in the ledger and balancing the same# a statement is

$re$ared to show se$arately the debit and credit balances. )uch a statement is

known as Trial (alance.

The Trial (alance is a statement which shows the closing balances# debit balances

as well as credit balances of all ledger accounts. This statement is always $re$ared

in T )ha$e. ,n the left hand side# debit balances and in the right hand side# credit

balances of ledger accounts are written and both sides are totalled. The totals of the

both the sides# should always be e-ual. This e-uality in the totals of debit side and

credit side ensures the com$letion of double entry system of book%kee$ing. ,t also

ensures the arithmetical accuracy of ledger accounts.

Objects of Trial Balance:

The following are the ob"ectives of $re$aring the Trial (alance.

1. Ascertainment of arithmetical accuracy of the ledger accounts The Trial

(alance is a test of arithmetical accuracy of ledger accounts. ,f the totals of two

sides of Trial (alance i.e. debit side and credit side are e-ual# it ensures the

arithmetical accuracy of the ledger accounts. ,t means that there is no mistake intotalling the debit side and credit side of all the ledger accounts.

2. Help in the preparation of inal Accounts:Trial (alance facilitates the

$re$aration of Trading +ccount# 'ro/t and loss +ccount and the (alance )heet.

're$aration of these /nancial statements is very clumsy. ,f the ledger accounts

balances are collected and grou$ed under the two headings of 0ebit and *redit in

the Trial (alance# it becomes easier to $re$are the /nal accounts.


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!. "ro#iding summary information of inancial result and position + close

and intelligent observation of the Trial (alance gives us some information of the

$ro/t or loss and the /nancial $osition of the /rm.

$. Help in locating errors: )ome of the errors in the books of accounts can belocated with the hel$ of the Trial (alance. ,f the Trial (alance does not agree# an

intelligent scrutiny to the items and their amounts may reveal the cause of

disagreement of the Trial (alance. Thus Trial (alance discloses some of the errors in

the books of accounts.

%. &ompletion of 'ouble (ntry Trial (alance# if it agrees# i.e. the two sides are

e-ual# $roves the com$letion of double entry.

1ow to $re$are trial balance2

*. :ori;ontal 2ormat. T+ shape 2ormat

)tep of construction&

*. %lose the account in ledgers and cash books.. Balance all the accounts.

-. 0rite all the #ebit balances on a sheet of paper.

9. 0rite all the %redit balances on a separate sheet of paper.


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bottom of the two columns.

7. )ee that totals of both debit balance and credit balance column agree or not.If we want to prepare the Trial Balance under T+ shape format, then the following format should

be used but, the procedure of prepare it 3i.e. steps of preparation4 is the same.

T s&ape Trial Balance

Trial Balance as on -*?6-?66>

:eads of

Accounts

".2. #ebit

Balance

:eads of

Accounts

".2. %redit

Balance

Rs. Rs

3ou s&ould remember and try ne4er forgetting( Be clear in

fundamentals(

o All real accounts show debit balance

o All liabilities show credit balance

o %apital generally shows credit balance

o #rawings show debit balance

o !penses show debit balance

o Incomes show credit balance

o $urchases A(c shows debit balance

o $urchases return 3Returns outward4 shows credit balance

o )ales A(c shows credit balance

o )ales Return 3Return Inward4 shows debit balance

o %ash book without bank column never shows a credit balance

o Bills Receivable A(c shows a debit balance

o Bills payable A(c shows a credit balance

o #ebtors A(c shows debit balance


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o creditors A(c shows credit balance

o All losses show debit balances.

accounting calculations - learning of fundamentals

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