General ledger

The main accounting record of a business which uses double-entry bookkeeping. It will usually include accounts for such items as current assets, fixed assets, liabilities, revenue and expense items, gains and losses. Each General Ledger is divided into debits and credits sections. The left hand side lists debit transactions and the right hand side lists credit transactions. This gives a 'T' shape to each individual general ledger account.

A "T" account showing debits on the left and credits on the right.

Debits Credits            

The general ledger is a collection of the group of accounts that supports the value items shown in the major financial statements. It is built up by posting transactions recorded in the sales daybook, purchases daybook, cash book and general journals daybook. The general ledger can be supported by one or more subsidiary ledgers that provide details for accounts in the general ledger.There are five(seven) basic categories in which all accounts are grouped:

1. Assets 2. Liability 3. Owner's equity 4. Revenue 5. Expense 6. (Gains)7. (Loss)

The balance sheet and the income statement are both derived from the general ledger. Each account in the general ledger consists of one or more pages. The general ledger is where posting to the accounts occurs. Posting is the process of recording amounts as credits, (right side), and amounts as debits, (left side), in the pages of the general ledger. Additional columns to the right hold a running activity total (similar to a checkbook).

The general ledger should include the date, description and balance or total amount for each account. It is usually divided into at least seven main categories. These categories generally include assets, liabilities, owner's equity, revenue, expenses, gains and losses. The main categories of the general ledger may be further subdivided into subledgers to include additional details of such accounts as cash, accounts receivable, accounts payable, etc.

Because each bookkeeping entry debits one account and credits another account in an equal amount, the double-entry bookkeeping system helps ensure that the general ledger is always in balance, thus maintaining the accounting equation:

Assets = Liabilities + (Shareholders or Owners equity)

ledger account   Definition

A separate page in a ledger that records increases and decreases in each balance sheet item, classified under

assets, liabilities, or owners' equity. Also called an account.

Voucher

A voucher is a bond which is worth a certain monetary value and which may be spent only for specific reasons or on specific goods. Examples include (but are not limited to) housing, travel, and food vouchers. The term voucher is also a synonym for receipt and is often used to refer to receipts used as evidence of, for example, the declaration that a service has been performed or that an expenditure has been made.

Vouchers are used in the tourism sector primarily as proof of a named customer's right to take a service at a specific time and place. Service providers collect them to return to the tour operator or travel agent that has sent that customer, to prove they have given the service. So, the life of a voucher is as below:

1. Customer receives vouchers from tour operator or travel agent for the services bought2. Customer goes to vacation site and forwards the voucher to related provider and asks for the

service to be given3. Provider collects the vouchers4. Provider sends collected vouchers to the agent or operator that sends customers from time to

time, and asks for payment for those services5. Uncollected vouchers do not deserve payment

This approach is most suitable for free individual tourist activities where pre-allocation for services are not necessary, feasible or applicable. It was customary before the information era when communication was limited and expensive, but now has been given quite a different role by B2C applications. When a reservation is made through the internet, customers are often provided a voucher through email or a web site that can be printed. Providers customarily require this voucher be presented prior to providing the service.

[edit] Accounts payable

A voucher is an accounting document representing an internal intent to make a payment to an external entity, such as a vendor or service provider. A voucher is produced usually after receiving a vendor invoice, after the invoice is successfully matched to a purchase order. A voucher will contain detailed information regarding the payee, the monetary amount of the payment, a description of the transaction, and more. In Accounts Payable systems, a process called a "payment run" is executed to generate payments corresponding to the unpaid vouchers. These payments can then be released or held at the discretion of an Accounts Payable supervisor or the company Controller. The term can also be used with reference to accounts receivable, where it is also a document representing intent to make an adjustment to an account, and for the general ledger where there is need to adjust accounts within that ledger; in that case it is referred to as a journal voucher...

Petty Cash Book:Learning Objectives:

1. Define and explain petty cash book. 2. What is the imprest system of petty cash? 3. What are the advantages of Imprest system? 4. Prepare a petty cash book.

Definition and Explanation:

In almost all businesses, it is found necessary to keep small sums of ready money with the cashier or petty cashier for the purpose of meeting small expenses such as postage, telegrams, stationary and office sundries etc. The sum of money so kept in hand generally termed as petty cash and book in which the petty cash expenditures are recorded is termed as petty cash book.

In large business houses , the cashier has to handle every day a large number of receipts and payments and if in addition to this he is further saddled with petty cash payments, his position becomes embarrassing. Besides, it is most common to find with large commercial establishments that all receipts and payments are made through bank. Since expenses like postage, telegrams, traveling etc, cannot be made by means of cheques, the maintenance of a small cash balance to meet these petty payments becomes all the more necessary.

A petty cash book is generally maintained on a columnar basis - a separate column being allotted for each type of expenditure. The is only one money column on the debit side and all sum received from time to time by the petty cashier from the chief cashier are entered in it. The credit side consists of several analysis columns. Every payment made by the petty cashier is entered on this side twice - Firstly it is recorded in the total column and then to the appropriate column to which the expense is concerned. The total of the "total column" will naturally agree with the total of all subsidiary columns. The difference between the total of the debit items and that of the "total column" on the credit side at any time will represent the balance of the petty cash in hand and this should tally with the petty cashier's actual holding of cash.

The posting from the petty cash book to the respective accounts in the ledger are made directly in total at the end of every month or any other fixed period.

Matching Concept

The matching concept is an accounting principle that requires the identification and recording of expenses associated with revenue earned and recognized during the same accounting period. Accordingly, under the matching concept the expenses of a particular accounting period are the costs of the assets used to earn the revenue that is recognized in that period. It follows, therefore, that when expenses in a period are matched with the revenues generated for the same period, the result is the net income or loss for that period.

ACCOUNTING TERMS

While in everyday vernacular, the terms "cost," "expenditure," and "expense" are used almost interchangeably; in discussing accounting principles, these terms have distinctly different meanings. A cost is the amount of money, or other resources, used for a specific purpose. When a cost is incurred, it is associated with an expenditure; expenditures can either result in the decrease of an asset, such as cash, or the increase of a liability, such as accounts payable. Thus, expenditures result in either assets or expenses. If the expenditure will benefit future periods, such as the purchase of office equipment, it is an asset. If it will benefit the current period, such as the purchase of supplies needed to fill immediate manufacturing needs, it is an expense of that period. Logically, then, it follows that an expense is a cost item that is specifically applicable to the current accounting period used during that period to earn revenue.

THE CONSERVATISM CONCEPT

Oftentimes, when deciding which revenues and expenses to match in a given accounting period, accountants have a difficult time recognizing which revenues and expenses are certain for that period. Like many people, accountants and other business professionals tend to be overly optimistic concerning the revenues that their companies generate but tend to be more realistic concerning the associated expenses. Thus, certain accounting principles have been developed to offset the tendency toward optimism. These principles recognize that increases in reported net income require stronger proof than do increases in expenses. Therefore, when deciding which expenses and revenues to acknowledge during a given accounting period, accountants are supposed to apply the conservatism concept. This concept has two conditions associated with it—firms can recognize expenses as soon as they are reasonably possible, and firms can recognize revenues as soon as they are reasonably certain.

REVENUE AND EXPENSE RECOGNITION

The best matching of revenues and expenses occurs under the accrual basis of accounting. Under the accrual basis, revenue (as well as expenses, and other changes in assets, liabilities, and equity) is generally recognized in the period in which the economic event takes place, usually at the point of sale—not when the cash actually changes hands. Revenue recognition occurs at this

time because the earnings process is complete and there is evidence supporting the sale price. Earnings, however, can be identified at other times, such as during an item's production, at the end of an item's production but prior to its sale, or when the money is collected, as with payments made on installments. Costs are recognized as expenses in a particular period if (1) there is a direct association between costs and revenues for the period or (2) the costs cannot be assigned to the generation of revenues of any period in the future.

The recognition of revenues and expenses can become more complicated, however, because companies often spend money or assume liabilities for non-monetary assets affecting more than one accounting period. Examples of transactions affecting more than one period are: (1) supplies purchased in a prior accounting period but used for several later periods; (2) insurance premiums paid that cover more than one period; (3) buildings and equipment; and (4) expenses—such as salaries—paid after a service has been rendered. Initially, these expenses are recorded at their original amounts, which represents the future benefit that the company anticipates receiving from these items. As they are used, the related costs must be matched against the revenues earned for the particular period. For example, for equipment and buildings, accountants gradually expense the costs of these assets over their estimated service life, a concept known as depreciation.

Dual Aspect Concept of Accounting

Dual aspect is the foundation or basic principle of accounting. It provides the very basis for recording business transactions into the book of accounts. This concept states that every transaction has a dual or two-fold effect and should therefore be recorded at two places. In other words, at least two accounts will be involved in recording a transaction.

For example Tom started business with a sum of $50000; the amount of money brought in by Tom will result in an increase in the assets (cash) of business by $ 50000. At the same time, the owner’s equity or capital will also increase by an equal amount. It may be seen that the two items that got affected by this transaction are cash and capital account. In the same way suppose tom buy goods of $20000 on credit then at one hand assets will increase by $20000 and on other hand liabilities will increase by $20000

The duality principle can be expressed in terms of fundamental Accounting Equation that can be written as follows: Assets = Liabilities + Capital

PayrollIn a company, payroll is the sum of all financial records of salaries for an employee, wages,

bonuses and deductions. In accounting, payroll refers to the amount paid to employees for services they provided during a certain period of time. Payroll plays a major role in a company for several reasons. From an accounting point of view, payroll is crucial because payroll and payroll taxes considerably affect the net income of most companies and they are subject to laws and regulations (e.g. in the US payroll is subject to federal and state regulations). From an ethics in business viewpoint payroll is a critical department as employees are responsive to payroll errors and irregularities: good employee morale requires payroll to be paid timely and accurately.

The primary mission of the payroll department is to ensure that all employees are paid accurately and timely with the correct withholdings and deductions, and to ensure the withholdings and deductions are remitted in a timely manner. This includes salary payments, tax withholdings, and deductions from a paycheck.

RevenueIn business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover. Some companies receive revenue from interest, dividends or royalties paid to them by other companies.[1] Revenue may refer to business income in general, or it may refer to the amount, in a monetary unit, received during a period of time, as in "Last year, Company X had revenue of $42 million." Profits or net income generally imply total revenue minus total expenses in a given period. In accounting, revenue is often referred to as the "top line" due to its position on the income statement at the very top. This is to be contrasted with the "bottom line" which denotes net income.[2]

For non-profit organizations, annual revenue may be referred to as gross receipts.[3] This revenue includes donations from individuals and corporations, support from government agencies, income from activities related to the organization's mission, and income from fundraising activities, membership dues, and financial investments such as stock shares in companies.

Balance sheetIn financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition".[1] Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business' calendar year.

A standard company balance sheet has three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first, and typically in order of liquidity.[2] Assets are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth or capital of the company and according to the accounting equation, net worth must equal assets minus liabilities.[3]

Another way to look at the same equation is that assets equals liabilities plus owner's equity. Looking at the equation in this way shows how assets were financed: either by borrowing money (liability) or by using the owner's money (owner's equity). Balance sheets are usually presented with assets in one section and liabilities and net worth in the other section with the two sections "balancing."

A business operating entirely in cash can measure its profits by withdrawing the entire bank balance at the end of the period, plus any cash in hand. However, many businesses are not paid immediately; they build up inventories of goods and they acquire buildings and equipment. In other words: businesses have assets and so they can not, even if they want to, immediately turn these into cash at the end of each period. Often, these businesses owe money to suppliers and to tax authorities, and the proprietors do not withdraw all their original capital and profits at the end of each period. In other words businesses also have liabilities.

Trial balanceA trial balance is a list of all the nominal ledger (general ledger) accounts contained in the ledger of a business. This list will contain the name of the nominal ledger account and the value of that nominal ledger account. The value of the nominal ledger will hold either a debit balance value or a credit value balance. The debit balance values will be listed in the debit column of the trial balance and the credit value balance will be listed in the credit column. The profit and loss statement and balance sheet and other financial reports can then be produced using the ledger accounts listed on the trial balance.

The name comes from the purpose of a trial balance which is to prove that the value of all the debit value balances equal the total of all the credit value balances. Trialing, by listing every nominal ledger balance, ensures accurate reporting of the nominal ledgers for use in financial reporting of a business's performance. If the total of the debit column does not equal the total value of the credit column then this would show that there is an error in the nominal ledger accounts. This error must be found before a profit and loss statement and balance sheet can be produced.

[edit] Trial balance limitations

A trial balance only checks the sum of debits against the sum of credits. That is why it does not guarantee that there are no errors. The following are the main classes of error that are not detected by the trial balance:

An error of original entry is when both sides of a transaction include the wrong amount.[1] For example, if a purchase invoice for £21 is entered as £12, this will result in an incorrect debit entry (to purchases), and an incorrect credit entry (to the relevant creditor account), both for £9 less, so the total of both columns will be £9 less, and will thus balance.

An error of omission is when a transaction is completely omitted from the accounting records.[1] As the debits and credits for the transaction would balance, omitting it would still leave the totals balanced. A variation of this error is omitting one of the ledger account totals from the trial balance.[2]

An error of reversal is when entries are made to the correct amount, but with debits instead of credits, and vice versa.[1] For example, if a cash sale for £100 is debited to the Sales account, and credited to the Cash account. Such an error will not affect the totals.

An error of commission is when the entries are made at the correct amount, and the appropriate side (debit or credit), but one or more entries are made to the wrong account of the correct type.[1] For example, if fuel costs are incorrectly debited to the postage account (both expense accounts). This will not affect the totals.

An error of principle is when the entries are made to the correct amount, and the appropriate side (debit or credit), as with an error of commission, but the wrong type of account is used.[1] For example, if fuel costs (an expense account), are debited to stock (an asset account). This will not affect the totals.

Compensating errors are multiple unrelated errors that would individually lead to an imbalance, but together cancel each other out.[1]

A Transposition Error is an error caused by switching the position of two adjacent digits. Since the resulting error is always divisible by 9, accountants use this fact to locate the misentered number. For example, a total is off by 72, dividing it by 9 gives 8 which indicates that one of the switched digit is either more, or less, by 8 than the other digit. Hence the error was caused by switching the digits 8 and 0 or 1 and 9. This will also not affect the totals.

Double-entry bookkeeping systemA double-entry bookkeeping system is a set of rules for recording financial information in a financial accounting system in which every transaction or event changes at least two different nominal ledger accounts.

The name derives from the fact that financial information used to be recorded using pen and ink in paper books - hence "bookkeeping" (whereas now it's recorded mainly in computer systems) and that these books were called journals and ledgers (hence nominal ledger, etc.) - and that each transaction was recorded twice (hence "double-entry"), with the two transactions being called a "debit" and a "credit".

It was first codified in the 15th century by Luca Pacioli. In deciding which account has to be debited and which account has to be credited, the golden rules of accounting are used. In modern accounting this is done using debits and credits within the accounting equation: Equity = Assets - Liabilities. The accounting equation serves as an error detection tool. If at any point the sum of debits does not equal the corresponding sum of credits, an error has occurred. It follows that the sum of debits and the sum of the credits must be equal in value.

Double-entry bookkeeping is not a guarantee that no errors have been made - for example, the wrong ledger account may have been debited or credited, or the entries completely reversed.