“IN THIS “AGE OF ACCOUNTSAGE OF ACCOUNTS” SOME LITERACY IN ACCOUNTING HAS BECOME A PRIME NECESSITY ”.

PAUL A SAMUELSON

DEFINITIONS• ACCOUNTING IS THE ART OF RECORDING, CLASSIFING AND SUMMARISING IN A SIGNIFICANT MANNER AND IN TERMS OF MONEY, TRANSACTIONS AND EVENTS WHICH ARE, IN PART AT LEAST, OF FINANCIAL CHARACTER AND INTERPRETING THE RESULTS THEREOF.

• THE PROCESSOF IDENTIFING, MEASURING AND COMMUNICATING ECONOMIC INFORMATION TO PERMIT INFORMED JUDGEMENTS AND DECISIONS BY THE USERS OF INFORMATION

TYPES OF ACCOUNTING FINANCIAL ACCOUNTING. DATES BACK TO THE ADVENT OF JOINT STOCK COMPANIES. IT INVOLVES RECORDING OF TRANSACTIONS AFTER THEY HAVE OCCURRED/ACCRUED.

COST ACCOUNTING. DEVELOPED AS A GUIDE TO INDUSTRIAL MANAGEMENT ACTIONS. IT AIMS TO ASCERTAIN COSTS WITH AVIEW TO CONTROLLING IT (COST).

MANAGEMENT ACCOUNTING. THIS SYS AIMS AT USING ACCOUNTING INFO AS A DIRECT AID TO MANAGEMENT FOR DECISION MAKING.

ACCOUNTING CONCEPTS BUSINESS ENTITY CONCEPT. THIS CONCEPT OF

ACCOUNTING CONSIDERS AN ENTERPRISE/ BUSINESS AS AN

ECONOMIC UNIT SEPARATE AND APART FROM ITS OWNER(S)

MONEY MEASUREMENT CONCEPT. ONLY THOSE FACTS

WHICH CAN BE EXPRESSED IN TERMS OF MONEY ARE

RECORDED.

CONTINUITY CONCEPT. IT ASSUMES THAT CONTINUITY

OF BUSINESS ACTIVITY IS THE REASONABLE EXPECTATION

FOR THE BUSINESS UNIT FOR WHICH THE ACCOUNTING

FUNCTION IS BEING PERFORMED.

ACCOUNTING CONCEPTS(CONT’D)

MATERIALITY CONCEPT. ITEMS OF SMALL SIGNIFICANCE NEED NOT BE GIVEN STRICT THEORETICALLY TREATMENT. HERE TO DRAW A LINE BETWEEN MATERIAL AND IMMETERIAL EVENTS IS A MATTER OF JUDGEMENT.

CONSISTENCY CONCEPT. A SYS OF ACCOUNTING ONCE ADOPTED THE SAME SHOULD CONTINUE TO BE FOLLOWED.

COST CONCEPT. THIS CONEPT STIPULATES THAT AN ASSET IS WORTH THE PRICE PAID OR COST INCURRED TO ACQUIRE IT SUBJECT TO SYSTEMATICALLY BEING REDUCED BY A PROCESS OF DEPRECIATION.

ACCOUNTING CONCEPTS(CONT’D)

• ACCRUAL CONCEPT. THIS CONCEPT MAKES A DISTINCTION BETWEEN THE ACTUAL RECEIPT/PAYMENT AND THE RIGHT/LEGAL OBLIGATION TO RECEIVE/PAY THAT AMOUNT.

• PERIODICITY CONCEPT. THERE IS A NEED TO KNOW THE STATE OF THE BUSINESS AT REGULAR INTERVALS. EXTERNAL REPORTING TO THE GOVT/TAX AUTHORITIES/SHAREHOLDERS/CREDITORS IS ALSO NECESSARY.

OBJECTS OF BOOK KEEPING AND ACCOUNTING

1. TO RECORD EACH BUSINESS TRANSACTION AND ANALYSE ITS FINANCIAL EFFECT.

2. TO RECORD THE COMBINED EFFECT OF ALL SUCH TRANSACTIONS OF A GIVEN PERIOD SO THAT THE NET RESULT OF THE TRADING AS WELL AS THE ACCURATE FINANCIAL POSITION OF THE TRADER MAY BE PROMPTLY ASCERTAINED.

DOUBLE ENTRY SYSTEM

1. EVERY FINANCIAL TRANSACTION INVOLVES A TRANSFER OF MONEY OR ITS EQUIVALENT FROM ONE PERSON TO ANOTHER.

2. IT MUST NECESSARYLY, THEREFORE REQUIRE TWO PARTIES.

3. TO DENOTE WHETHER ANY PARTICULAR TRANSACTION HAS RESULTED IN THE RECEIPT OF A BENEFIT OR THE GIVING OF A BENEFIT.

4. THEREFORE IT IS NECESSARY TO DIVIDE EACH ACCOUNT IN TWO SECTIONS

- ONE SECTION (THE LEFT HAND SIDE) OF EACH ACCOUNT IS THUS UTILISED FOR RECORDING THE TRANSACTIONS IN RESPECT OF WHICH BENEFIT HAS BEEN RECEIVED BY THAT ACCOUNT,

AND

- THE OTHER SECTION (THE RIGHT HAND SIDE) FOR RECORDING TRANSACTIONS IN RESPECT OF WHICH BENEFITS HAVE BEEN IMPARTED BY THAT ACCOUNT

5. THIS WAY, THE ULTIMATE POSITION OF THAT ACCOUNT COULD BE PERCEIVED

DOUBLE ENTRY SYSTEM (CONT’D)

THE RECORD MUST BE OF FACTS ONLY AND ACCURATE IN EVERY DETAIL.

THE ENTRIES MUST BE SO CLEAR THAT THE EXACT NATURE OF EACH TRANSACTION MAY BE READILY PERCEIVED AT ANY FUTURE DATE.

THE BOOKS SHOULD BE SO ARRANGED THAT THE TOTAL RESULT OF ALL THE TRANSACTIONS OR A SERIES OF TRANSACTIONS WITHIN A GIVEN PERIOD, MAY EASILY BE DETERMINED.

THE SYSTEM OF ACCOUNTING MUST BE SUCH THAT THE AMOUNT OF LABOUR INVOLVED MAY NOT BE OUT OF PROPORTION TO THE RESULTS OBTAINED.

PRINCIPLES & PRACTICE OF ACCOUNTING

EVERY BUSINESS TRANSACTION HAS A TWO FOLD EFFECT AND THUS IT AFFECTS TWO ACCOUNTS IN OPPOSITE DIRECTION.

IF ONE ACCOUNT RECEIVED A BENEFIT THERE SHOULD BE ANOTHER ACCOUNT TO IMPART THE BENEFIT.

IT IS THIS RECORDING OF THE TWO FOLD EFFECT OF EVERY TRANSACTION IN TWO ACCOUNTS IS KNOWN AS “DOUBLE ENTRY SYSTEM”.

THE PRINCIPLE OF DOUBLE ENTRTY IS BASED ON THE FACT THAT THERE CAN BE NO GIVING WITHOUT RECEIVING NOR CAN THERE RECEIVING WITHOUT SOME ONE GIVING.

PRINCIPLES & PRACTICE OF ACCOUNTING (CONT’D)

THE RECEIVING ASPECT IS KNOWN AS ‘DEBIT’ AND IS ENTERED ON THE LEFT HAND SIDE OF THE ACCOUNT, OR WHAT IS CALLED THE ‘DEBIT SIDE’, MARKED ‘Dr’.

THE GIVING ASPECT IS KNOWN AS ‘CREDIT’ AND IS ENTERED ON THE RIGHT HAND SIDE OF THE ACCOUNT OR WHAT IS CALLED THE ‘CREDIT SIDE’, MARKED ‘Cr’.

PRINCIPLES & PRACTICE OF ACCOUNTING (CONT’D)

SUBSIDIARY BOOKSSUBSIDIARY BOOKS

• BOOKS LIKE THE PURCHASE BOOK/SALES BOOK/ JOURNAL MERELY FACILITATE THE PREPARATION OF THE ACCOUNTS OR THE LEDGER AND HENCE ARE KNOWN AS SUBSIDIARY BOOKS OR BOOKS OF ORIGINAL ENTRY

JOURNALTHE JOURNAL IS USED AS THE BOOK OF FIRST ENTRY

FOR ALL TRANSACTIONS WHICH CANNOT BE RECORDED IN THE CASH BOOK. ALL NON-CASH TRANSACTIONS SCHOULD BE RECORDED IN THE JOURNAL. FOR PRACTICAL CONVENIENCE THE JOURNAL IS MAINTAINED BY USING A NUMBER OF BOOKS CALLED THE SUBSIDIARY BOOKS. FOR EXAMPLE, THE FOLLOWING SUBSIDIARY BOOKS MAY CONSTITUTE THE JOURNAL FOR AN ENTERPRISE

(a) PURCHASE BOOK(b) PURCHASE RETURNS BOOK(c) SALES BOOKS(d) SALES RETURNS BOOK(e) BILLS RECEIVABLE BOOK(f) BIILS PAYABLE BOOK(g) JOURNAL PROPER

PURCHASE BOOKALSO KNOWN AS THE PURCHASE JOURNAL, THIS BOOKS IS

USED TO RECORD CREDIT PURCHASES OF GOODS ONLY. THE TERM ‘GOODS’ COVERS ONLY THOSE ITEMS PROCURED BY THE BUSINESS FOR RESALE.

PURCHASE RETURNS BOOKSTHIS SUBSIDIARY BOOKS IS USED TO RECORD THE GOODS

PURCHASED ON CREDIT AND SENT BACK TO SUPPLIERS AS NOT CONFIRMING TO SPECIFICATIONS OR FOR ANY OTHER REASON.

SALES BOOKALSO KNOWN AS THE SALES JOURNAL, THIS SUBSIDIARY BOOK

IS USED TO RECORD ALL SALE OF GOODS ON CREDIT.

SALES RETURNS BOOKSTHIS BOOK IS USED TO RECORD THE TRANSACTIONS RELATING

TO GOODS SOLD ON CREDIT AND RECEIVED FROM THE CUSTOMERS AS NOT CONFIRMING TO THE SPECIFICATIONS OR FOR ANY OTHER REASON

BILLS RECEIVABLE BOOKTHE BILLS RECEIVABL OF AN ENTERPRISE CONSIST OF ALL

PROMISSSORY NOTES GIVEN OR BILLS OF EXCHANGE ACCEPTED BY CUSTOMERS IN RESPECT OF AMOUNTS DUE FROM THEM. THE BILLS RECEIVABLE BOOK IS USED TO RECORD ALL PROMISORY NOTES GIVEN OR BILLS OF EXCHANGE ACCEPTED BY CUSTOMERS.

BILLS PAVABLE BOOKTHE BILLS PAYABLE CONSIST OF ALL PROMISSORY NOTES

GIVEN OR BILLS OF EXCHANGE ACCEPTED BY THE BUSINESS IN RESPECT OF AMOUNTS OWING TO ITS SUPPLIERS. THE BILLS PAYABLE BOOK IS USED TO RECORD ALL SUCH PROMISSORY NOTES GIVEN OR BILLS OF EXCHANGE ACCEPTED BY THE BUSINESS.

JOURNAL PROPERTHIS BOOK IS USED TO RECORD ALL TRANSACTIONS WHICH

CANNOT BE INCLUDED IN THE CASH BOOK OR ANY OF THE OTHER SIX SUBSIDIARY BOOKS DISCUSSED SO FAR. THE TRANSACTIONS THAT WILL BE RECORDED IN JOURNAL PROPER ARE, PURCHASE OR SALES OF FIXED ASSETS AND INVESTMENTS ON CREDIT, ADJUSTING ENTRIES, RECTIFICATION ENTRIES ETC.

JOURNALISING THE TRANSACTIONS

RECORDING THE DUAL ASPECTS OF A TRANSACTION IS KNOWN AS JOURNALISING. NORMALLY, IN A BUSINESS IT IS IMPOSSIBLE TO RECORD EVERY TRANSACTION AS A JOURNAL ENTRY. HENCE, SPECIAL JOURNALS SUCH AS PURCHAE BOOK, SALES BOOK ETC ARE USED. ONLY CERTAIN SEPCIAL TRANSACTIONS ARE RECORDED IN THE JOURNAL BOOK. HOWEVER, FOR A CLEAR UNDERSTANDING THE JOURNAL ENTRIES FOR VARIOUS TRANSACTION ARE EXPLAINED.

TRANSACTION

ASPECTS ACCOUNTDEBITED

REASONFOR DEBIT

ACCOUNTCREDITED

REASONFORCREDIT

ABC LTDRECEIVEDRS. 5,000FROMGUPTA

ASPECT 1CASH OFRS 5,000 ISRECEIVED.ASPECT 2THEAMOUNT ISGIVEN BYGUPTA &CO

CASH A/C CASH A/CIS A REALA/C THERULE OFDEBITWHATCOMES INAPPLIES

GUPTA &CO

GUPTA &CO A/C IS APERSONALA/C THERULE OFCREDITTHE GIVER’APPLIES

Transaction Aspects AccountDebited

Reason for theDebit

AccountCredited

Reasonf for theCredit

PQR LtdPurchasedRs 6000Worth ofgoods fromX CO

Aspect 1Goods worthRs 6000 isreceived.Aspect 2 thegoods aresupplied by XCO

Inventory A/C(orpurchases A/C)

Inventory A/C orpurchases A/C isa real A/C. Therule of ‘Debitwhat comes’ inapplies’.

X Co A/C X CO A/C is apersonal A/C. Therule of credit thecredit the giver’Applies.

Transaction Aspects AccountDebited

Reason for theDebit

AccountCredited

Reasonf for theCredit

XYZ Ltd.paid thesalaries ofRs 15500 toits staff forthe Monththroughbanktransfer

Aspect 1.Payment ofan expense ofRs 15500Aspect 2.Bank balanceis reduce byRS 15500

SalariesA/C

Salaries A/C is aNominal A/C.The rule of ‘Debitall expenses’applies’

Bank A/C Bank A/C is a RealA/C. The rule of‘Credit what goesout’ applies

CASH BOOK

THE BOOK MEANT FOR RECORDING ALL CASH

TRANSACTIONS IRRESPECTIVE OF ITS NATURE IS

KNOWN AS CASH BOOK. THE LEFT HAND SIDE IS

KNOWN AS THE DEBIT SIDE. THE RIGHT HAND SIDE

IS KNOWN AS THE CREDIT SIDE. THE CASH BOOK

ALSO RECORDS BANK TRANSACTIONS.

CASH BOOK FOR THE MONTH OF …………..

DRRECEIPTS

DATE FROM ON WHAT RV LEDGER CASH BANK INITIAL WHOM ACCOUNT NO FOLIO NO (RS) (RS)

CRPAYMENTS

DATE TO WHOM ON WHAT CHEQUE PV L.F. CASH BANK INITIAL

ACCOUNT NO NO NO (RS) (RS)

PREPARATION OF CASH BOOK

1. TRANSCRIPTION CERTIFICATE.

2. BOOK SL.No. & PAGENUMBERING.

3. AUTHENTICATION.

4. RECORD OF CHECKS.

5. BROUGHT FORWARD CASH AND BANK BALANCES /TOTALS.

6. RECORD TRANSACTIONS CHRONOLOGICALY

7. BANK BALANCE CERTIFICATE AND BRS.

CONTRA ENTRIES

WHEN CASH/CHEQUE IS DEPOSITED INTO

BANK OR CASH IS WITHDRAWN FROM THE

BANK, BOTH ENTRIES WILL APPEAR IN CASH

BOOK IN THE DEBIT AS WELL AS THE CREDIT

SIDE. SUCH TRANSACTIONS ARE CALLED AS

“CONTRA ENTRIES”

BALANCING OF CASH BOOK

• CASH BOOK IS TO BE RULED OFF AND BALANCED ON THE FOLLOWING OCCASIONS :-

– LAST DAY OF EVERY MONTH.– CHANGE OF OFFICER INCHARGE– SURPRISE CHECK OF CASH– CHANGE OF COMMAND– STAFF / INSPECTION VISIT

BANK RECONCILIATION STATEMENT

BANK BALANCE CERTIFICATE IS TO BE OBTAINED AND THE CLOSE OF TRANSACTIONS OF THE DAY PRIOR TO THAT ON WHICH CASH CHECK IS CARRIED OUT.

BALANCE SHOWN IN THE BANK BALANCE CERTIFICATE MAY NOT AGREE WITH THE BANK BALANCE AS PER CASH BOOK

TO CHECK CORRECTNESS A BANK RECONCILIATION STATEMENT HAS TO BE PREPARED.

MARSHALLING OF ENTRIES RELATING TO A PERSON, OR ASSET OR ITEMS OF EXPENSE OR INCOME FOR A PARTICULAR PERIOD IS KNOWN AS AN ACCOUNT.

AN ACCOUNT HAS TWO SIDES/COLUMNS --- THE DEBIT SIDE/COLUMN AND THE CREDIT SIDE/COLUMN

THE BOOK WHICH CONTAINS ACCOUNTS IS KNOWN AS THE LEDGER WHICH IS ALSO KNOWN AS THE PRINCIPAL BOOK.

LEDGER ACCOUNTS

1. PERSONAL ACCOUNT. IT DEALS WITH ACCOUNTS OF INDIVIDUALS LIKE CREDITORS, DEBTORS, BANK ETC. IT SHOWS THE BALANCE DUE TO THESE INDIVIDUALS OR DUE FROM THEM ON A PARTICULARF DATE.

2. REAL ACCOUNT. IT REPRESENTS ASSETS LIKE PLANT AND MACHINERY, LAND AND BUILDINGS, GOODWILL ETC. AS ON A PARTICULAR DATE, THIS ACCOUNT SHOWS THE WORTH OF THE ASSET.

3. NOMINAL ACCOUNT. IT CONSISTS OF DIFFERENT TYPES OF EXPENSES OR INCOMES OR LOSS OR PROFIT. THESE ACCOUNT SHOW THE AMOUNT OF INCOME EARNED OR EXPENSES INCURRED FOR A PARTICUALR PERIOD SAY A MONTH, A YEAR ETC.

TYPES OF LEDGER ACCOUNTS

LEDGER POSTINGS

WITH THE EXCEPTION OF CONTRA

ENTRIES ALL RECEIPTS AND

PAYMENTS ARE TO BE POSTED TO

THE LEDGER ACCOUNTS.

• PERSONAL ACCOUNTS :-–DEBIT THE RECEIVER.

–CREDIT THE GIVER.

• REAL ACCOUNTS :-–DEBIT WHAT COMES IN.

–CREDIT WHAT GOES OUT.

• NOMINAL ACCOUNTS :-–DEBIT ALL EXPENSES AND LOSSES.

–CREDIT ALL INCOMES AND GAINS.

SIX BASIC RULES OF DEBIT AND CREDIT

BALANCING THE ACCOUNTS THIS REFERS TO THE PROCESS OF ESTABLISHING THE NET VALUE OF A PARTICULAR ACCOUNT. THIS IS DONE BY FINDING OUT THE DIFFERENCE BETWEEN THE TOTAL OF THE DEBIT ENTRIES AND CREDIT ENTRIES IN A PARTICULAR ACCOUNT.

THE ACCOUNT WHICH HAS A GREATER DEBIT TOTAL IS SAID TO HAVE A ‘DEBITDEBIT BALANCE’BALANCE’ AND THAT WITH A GREATER CREDIT TOTAL A ‘CREDIT BALANCE’CREDIT BALANCE’