Unit-1: Accounting: Introduction

Notes
Structure
1.1 Introduction
1.2 What is Accounting ?
1.4 Financial Accounting Steps
1.5 Double Entry System of Accounting
1.6 Generally Accepted Accounting Principles, Conventions And Concepts
1.7 Accounting Concepts
1.8 Conventions
1.9 Accounting Principles in India
1.10 Usefulness of Accounting
1.11 Various users of Financial Statements
1.12 Branches of Accounting
1.13 Limitation of Financial Accounting
1.14 Summary

Objectives
Objective of this unit of the study material is to familiarize the students
basics of accounting terms and expressions. In this explanation of
accounting basics, and throughout the study material , these notes will often
omit some accounting details and complexities in order to present clear and
concise explanations

1.1 Introduction
This explanation of accounting basics will introduce you to some basic accounting
principles, accounting concepts, and accounting terminology. Once you become familiar
with some of these terms and concepts, you will feel comfortable navigating through
these notes and other notes as well. Some of the basic accounting terms that you will
learn include revenues, expenses, assets, liabilities, income statement, balance sheet,
and statement of cash flows. You will become familiar with accounting debits and
credits as we show you how to record transactions. You will also see why two basic
accounting principles, the revenue recognition principle and the matching principle,
assure that a income statement reports profitability.

The first printed treatise of bookkeeping in the world is the "Summa de Arithmetica,
Geometria, Proportioni et Proportionalita" written by Luca Pacioli. The treatise was
published in Venice in 1494, and was reprinted at Toscolano in 1523. This work is one
of the most important books on mathematics and has had an enormous impact on the
field of accounting ever since.

1.2 What Is Accounting ?

1. All of us do some accounting, often without realizing it. It is a part of out life.
Let us say you realize suddenly, one morning, that you needed to buy a book
urgently. You ask one of your parents for the money. 'But' the parent says, "What
happened to the money I gave last week?" You either recollect how you spent it or
if you believe in being systematic and have noted it in your diary you explain how
the money was spent. You are 'accounting' for the money given to you. When
a housewife tries to note down her household expenses, strike the balance she

Amity Directorate of Distance and Online Education

10 Accounting for Managers
has on hand at the end of the month, or determines how much she needs for the
expenses which would arise, she is 'accounting' for the money she withdrew or was
Notes given to run the household.

2. In business, however, it is a more urgent matter. The student may not be

questioned by his parents or the housewife may just meet her expenses as and when
they come without bothering to find out how much she spent, but in business it is a
must. You cannot run a business unless you know how much you owe outsiders and
how much outsiders owe you. And when you invest money in a business as an
owner wouldn't you like to know whether you've recovered it, increased it or lost it?

1.3 Definition of Accounting

Accounting has been defined bythe american accounting association committee as:
"the process of identifying, measuring and communicating economic information to
permit informed judgments and decisions by users of the information". This maybe
consideredasagooddefinitionbecauseofits focus on accounting as an aid to decision
making.

The american institute of certified and public accountants committee on terminology

definedaccountingas:
"Accounting is the art of recording, classifying and summarizing, in a significant
manner and in terms of money, transactions and events which are, in part at least,
of a financial character and interpreting the results thereof". ofalldefinitionsavailable,
this is the most acceptable one because it encompasses all the functions which the
modernaccounting system performs.

Objectives and Scope of Accounting

Let us go through the main objectives of Accounting:

To keep systematic records: Accounting is done to keep systematic record of

financial transactions. The primary objective of accounting is to help us collect financial data
and to record it systematically to derive correct and useful results of financial statements.

To ascertain profitability: With the help of accounting, we can evaluate the profits
and losses incurred during a specific accounting period. With the help of a Trading and Profit
& Loss Account, we can easily determine the profit or loss of a firm.

To ascertain the financial position of the business: A balance sheet or a

statement of affairs indicates the financial position of a company as on a particular date. A
properly drawn balance sheet gives us an indication of the class and value of assets, the
nature and value of liability, and also the capital position of the firm. With the help of that, we
can easily ascertain the soundness of any business entity.

To assist in decision-making: To take decisions for the future, one requires

accurate financial statements. One of the main objectives of accounting is to take right
decisions at right time. Thus, accounting gives you the platform to plan for the future with the
help of past records.

To fulfill compliance of Law: Business entities such as companies, trusts, and

societies are being run and governed according to different legislative acts. Similarly, different
taxation laws (direct indirect tax) are also applicable to every business house. Everyone has
to keep and maintain different types of accounts and records as prescribed by corresponding
laws of the land. Accounting helps in running a business in compliance with the law.

Amity Directorate of Distance and Online Education

In simple words, 'Accounting' merely means, 'reckoning'. In an organisational
context too, 'Accounting' has more or less the same meaning. In technical terms,
the process of accounting involves recording, classifying and summarizing of past
events and transactions of financial nature, with a view to enabling the user of
accounts to interpret the resulting summary.

Difference between Accounting and Book-keeping: There exists a difference

between the terms 'accounting' and 'bookkeeping'. Accounting is broader in scope than
bookkeeping, which is merely concerned with orderly record keeping. Going beyond
the narrow confines of bookkeeping, accounting involves analysis and judgment at different
stages such as recording of transactions, classification, summarization and interpretations

Accounting vs. Accountancy: Body of knowledge (consisting of principles,

postulates, assumptions, conventions, concepts and rules) governing the science of
recording classifying and analyzing financial transactions is accounting. Whereas the
practice and art of the science of accounting is termed as accountancy.

1.4 Financial Accounting- Steps

Accounting in business can be referred as Financial Accounting , consists of
creation of financial information and the consequent use of such information.

1. Creation. It entails three steps namely Recording, Classifying and Summarizing

which are dealt below:

(a) Recording: Commences when a business transaction occurs and it has been
quantified. Records of all these transactions are maintained in the order in
which they occur. Recording is based on four fundamental questions:

(i) What to record: All the events and transactions which effect the business
have to be recorded in accordance with the principal of accountancy. As money is
the common unit of measurement all such events are to be expressed in monetary
terms, and thus those which do not facilitate such transaction will not be recorded.

(ii) When to record: Accounting is historical in nature because of which the recording
is to be effected only after the occurrence of the subject transaction. Therefore,
sale of goods cannot be registered in the Books of Account of a shop when
the goods are merely intended to be sold on receipt of order for firm demand
items but only after such sale is complete and the property in the goods have been
transferred to the buyer. There are a few exceptions to this rule like the instance of
Provisions etc. which will be discussed later.

Amity Directorate of Distance and Online Education

Accounting for Managers 11
(iii) How to record: As mentioned above, the Double Entry Book-keeping System
is the practical base of accountancy. Entries are passed in the Journal Book
and the entries are called Journal Entries. Some of the business firms may not Notes
follow the Journal Entry System. They may follow the subsidiary book system .

(iv) Value at which it is to be recorded: All the ingredients of the financial

statements are to be assigned appropriate values. Money is the scale of
measurement in accounting and we can measure only those which can be
translated into monetary terms.

(b) _Classifying: Refers to the rational segregation of the recorded information

into related groups so as to make the record useful. The Book containing
such classified information is called the Ledger Book consisting of a number
of accounts. For example, all the receipts forming inflows and the payments
forming outflows are grouped to ascertain the net cash/bank position of the
business. The arrangement in this case is better known as the Cash Book.
The mechanism for classification is to open accounts called ledger accounts.

(c) Summarizing: After the Recording and Classification phases are complete
the accounts containing relevant information in the Ledger Book are to be
balanced and the balances listed. The Statement giving names of theses
accounts and their respective balances is called the Trial balance. On the basis
of the Trail Balance the summaries are generated to provide information about
the Profit/Loss and the Position of the Business.

(d) Reporting: The reporting of these summaries is done through Financial

Statements. Financial Statements can be defined to include the Balance Sheet,
the Profit and Loss Account etc.

1.5 Do ubIe Entry System Of Accounting

Earlier, organisations used to maintain accounts in the single entry system which
recognizes only cash transactions. But now, accounts are invariably maintained in the
double entry system which recognizes both cash and credit transactions. Accounts are
maintained on accrual basis under this system. Accrual System means a cost incurred
(i.e. accrued) is duly accounted for irrespective of whether it is paid or not during that
period. In addition, all transaction are supposed to have dual aspect- debit aspect and a
credit aspect. Each monetary happening is referred as Transaction. We will see more of
debits and credits later. Since the system records both the debit and credit aspects of a
transaction. It is known as double entry system.

1.6 Generally Accepted Accounting Principles, Conventions And

Concepts
There are general rules and concepts that govern the field of accounting. These
general rules-referred to as basic accounting principles and guidelines-form the
groundwork on which more detailed, complicated, and legalistic accounting rules are
based:
The phrase "generally accepted accounting principles" (or "GAAP") consists of
three important sets of rules: (1) the basic accounting principles and guidelines, (2)
the detailed rules and standards issued by FASB(Financial Accounting Standards
Bureau) and its predecessor the Accounting Principles Board (APB), and (3) the
generally accepted industry practices. If a company distributes its financial statements
to the public, it is required to follow generally accepted accounting principles in the
preparation of those statements. Further, if a company's stock is publicly traded, federal
law requires the company's financial statements be audited by independent public
Amity Directorate of Distance and Online Education
12 Accounting for Managers
accountants. Both the company's management and the independent accountants must
certify that the financial statements and the related notes to the financial statements
Notes have been prepared in accordance with GAAP GAAP is exceedingly useful because
it attempts to standardize and regulate accounting definitions, assumptions, and
methods. Because of generally accepted accounting principles we are able to assume
that there is consistency from year to year in the methods used to prepare a company's
financial statements. And although variations may exist, we can make reasonably
confident conclusions when comparing one company to another, or comparing
one company's financial statistics to the statistics for its industry. Over the years the
generally accepted accounting principles have become more complex because financial
transactions have become more complex. In India , Institute of Chartered Accountants
of India (ICAI) is entrusted with responsibility of preparing and issuing accounting
standards. Accounting principals can be classified as accounting concepts and
conventions. Important conventions and concepts are discussed below

1.7 Accounting Concepts

Some of concepts which are very important from the point of view of understanding
are discussed below:

1. Money Measurement Concept. In financial accountancy, a record is made only of

information that can be expressed in monetary terms. Recording, classification and
summarization of business transactions requires a common unit of measurement
which is taken as money. Thus, if a certain event, no matter how significant for the
health or even existence of the business, cannot be measured in monetary terms,
such an event is not recorded in accounting. For example, the posting out of
the CEO of the company, even though it has far reaching consequences for the
business, is not accounted for, since no monetary measurement of the event is
feasible.

2. Cost Concept. Cost Concept implies that in accounting, all transactions are
generally recorded at cost, and not at market value. For example, if a piece of land
is acquired for Rs.01 lakh, it would continue to be shown in the balance sheet at Rs.
01 lakh, even when the market value of the land rises to say Rs. 02 lakh.

3. Going Concern Concept

The concept deals with the quality of long lasting status of the business enterprise irrespective
of the owners' status, whether he is alive or not. This concept is known as concept of longterm
assets. The fixed assets are bought in the intention to earn profits during the season of
the business. The assets which are idle during the slack season of the business retained for
future usage, in spite of that those assets are frequently sold out by the firm immediately
after the utility leads to mean that those assets are not fixed assets but tradable assets.

4. Business Entity Concept. Less understood however is the accounting entity of a

business as distinct from its owners. It is in accordance with this concept that when
owner brings capital into the business, the business in turn is deemed to owe the
capital to the owner.

5. Accounting period Concept.

The life period of the business is of a long span which is classified into the operating
periods which are smaller in duration. The accounting period may be either calendar
year of Jan.-Dec. or fiscal year of April-Mar. The operating periods are not equivalent
among the trading firms. This means that the operating period of one firm may be
shorter than the other one. The ultimate aim of the concept is to nullify the deviations of
the operating periods of various traders in the trading practice. According to the
Companies Act, 1956, the accounting period should not exceed more than 15 months.

Amity Directorate of Distance and Online Education

Accounting for Managers 13
6. Realization Concept. Realization concept deals with the point in time at which
revenue may be deemed to be realized or when a sale can be said to have taken Notes
place. For example in bakery , orders may be obtained at time 01 , which may be
accepted at time 02, the work towards the production of the order may commence
at time 03, the production process completed at time 04, the goods dispatched at
time 05, and the cash received at time6 and so on. At which time can one say
that the revenue is realized, or a sale is made? Normally revenue is said to be
realized when efforts rendered are rewarded either in cash (or kind) or in the form
of a promise of reward some time in future. Thus, in the above case , revenue is
normally recognized only when breads are transferred and a reward or promise of
reward is forthcoming.

7. Cost Concept. From an accountant's point of view, the term "cost" refers to the
amount spent (cash or the cash equivalent) when an item was originally obtained,
whether that purchase happened last year or thirty years ago. For this reason, the
amounts shown on financial statements are referred to as historical cost amounts.
Because of this accounting principle asset amounts are not adjusted upward for
inflation. In fact, as a general rule, asset amounts are not adjusted to reflect any
type of increase in value. Hence, an asset amount does not reflect the amount of
money a company would receive if it were to sell the asset at today's market value.
(An exception is certain investments in stocks and bonds that are actively traded on
a stock exchange.) If you want to know the current value of a company's long-term
assets, you will not get this information from a company's financial statements you
need to look elsewhere, perhaps to a third-party appraiser.

1.8 Conventions

Following are important conventions.

1. Full Disclosure. If certain information is important to an investor or lender using
the financial statements, that information should be disclosed within the statement
or in the notes to the statement. It is because of this basic accounting principle
that numerous pages of "footnotes" are often attached to financial statements. As
an example, let's say a company is named in a lawsuit that demands a significant
amount of money. When the financial statements are prepared it is not clear
whether the company will be able to defend itself or whether it might lose the
lawsuit. As a result of these conditions and because of the full disclosure principle
the lawsuit will be described in the notes to the financial statements. A company
usually lists its significant accounting policies as the first note to its financial
statements.

2. Conservatism. This principle emphasizes that revenues are to be recognized only

when they are reasonably certain and expenses are to be recognized as soon as
they are reasonably possible. If a situation arises where there are two acceptable
alternatives for reporting an item, conservatism directs the accountant to choose
the alternative that will result in less net income and/or less asset amount.
Conservatism helps the accountant to "break a tie." It does not direct accountants
to be conservative. Accountants are expected to be unbiased and objective.

3 Consistency. There are several ways of treating an event that may be recorded in
the accounts. The consistency concept requires that once an business organisation
has decided on one method, it will treat all subsequent events of the same
character in the same fashion unless it has a sound reason to change the method
of treatment of that event. For an example in a club , if the expenditure on account
of salary to the barman is being debited to bar account, next year , just assuming
that bar will not have sufficient profit such expenditure should not be debited to
messing account.

Amity Directorate of Distance and Online Education

14 Accounting for Managers

4 Materiality. Because of this basic accounting principle or guideline, an

Notes accountant might be allowed to violate another accounting principle if an amount
is insignificant. Professional judgment is needed to decide whether an amount
is insignificant or immaterial. An example of an obviously immaterial item is the
purchase of a Rs 150 printer by a highly profitable multi-million dollar company.
Because the printer will be used for five years, the matching principle directs the
accountant to expense the cost over the five-year period. The materiality guideline
allows this company to violate the matching principle and to expense the entire cost
of Rs 150 in the year it is purchased. The justification is that no one would consider
it misleading if Rs 150 is expensed in the first year instead of Rs 30 being expensed
in each of the five years that it is used. Because of materiality, financial statements
usually show amounts rounded to the nearest rupee, to the nearest thousand, or to
the nearest lakhs depending on the size of the company.

1.9 Accounting Principles In India

In order to bring uniformity in terminology, approach and presentation of accounting
results, the Institute of Chartered Accountants of India has been entrusted with the
task of issuance of accounting standards in India. The institute has issued about 29
accounting standards till date and now is on the task of convergence of accounting
standards with other accounting bodies in the world.

Because the material covered here is considered an introduction to the topic of

accounting principles, there are many complexities not presented.

1.10 Usefulness Of Accounting

Usefulness of Accounting Information To Users General speaking, 'Accounting is
concerned with the collection, analysis and communication of economic information' .
People need economic information to help them to make decision and judgment about
business. Operating an accounting system is to recognize and record transaction
implies that all economic events in the business, from payment of wage to the purchase
of a subsidiary company, are entered into the system, which is organised to minimize
the possibility of resources being misused. Accounting can be seen as an important
part of the total information system within a business. User, both inside and outside
the business require to ensure that resources are allocated in an efficient and effective
manner and require economic information to make base decision. Following are
important uses of accounting.

1. How good or bad is the financial condition of the business?

2. Has the business activity resulted in a profit or loss?

3. How well the different departments of the business have performed in the past?

4. Which activities or products have been profitable?

5. Out of the existing products which should be discontinued and the production of
which commodities should be increased.

6. Whether to buy a component from the market or to manufacture the same?

7. Whether the cost of production is reasonable or excessive?

8. What has been the impact of existing policies on the profitability of the business?

Amity Directorate of Distance and Online Education

Accounting for Managers 15
9. What are the likely results of new policy decisions on future earning capacity of the
business? Notes
10. In the light of past performance of the business how it should plan for future to
ensure desired results ?

11. Above mentioned are few examples of the types of questions faced by the users
of accounting information. These can be satisfactorily answered with the help of
suitable and necessary information provided by accounting.

12 Besides, accounting is also useful in the following respects:-

(a) Increased volume of business results in large number of transactions and
no businessman can remember everything. Accounting records obviate the
necessity of remembering various transactions.
(b) Accounting record, prepared on the basis of uniform practices, will enable a
business to compare results of one period with another period.
(c) Taxation authorities (both income tax and sales tax) are likely to believe the
facts contained in the set of accounting books if maintained according to
generally accepted accounting principles.
(d) Cocooning records, backed up by proper and authenticated vouchers are good
evidence in a court of law.
(e) If a business is to be sold as a going concern then the values of different
assets as shown by the balance sheet helps in bargaining proper price for the
business.

1.11 Various Users Of Financial Statements

There are many interested parties in accounting documents and statements such as
owners, management, creditors, taxation authorities etc as discussed below. Various
Accounting statements such as Income Statements, Balance Sheet and Cash flow etc
provide such information.

1. Shareholders or owners: They are interested in knowing the probability of the

business and the assets and liabilities of business to be calculated in their capital
wealth.

2. Management: They are interested in all information relating to business to frame

future policies and strategies.

3. Potential investors: They are interested in knowing the past and current
performances of the firm so that they can conclude about their investment in the
firm.

4. Creditors: They are always interested in the accounting information on day to day
activities of the business and its constant progress.

5. Employees: They are interested in the good running of the business, its
probability and prosperity.

6. Government: Government keeps a watch in its business to collect tax, to know the
fulfillment of social obligations of the business, etc.

7. Researchers: They acquire the information to do academic research.

Amity Directorate of Distance and Online Education

16 Accounting for Managers

1.12 Branches Of Accounting

Notes To meet the ever increasing demands made on accounting by different interested the
various branches have come into existence. These are being discussed below :

1. Financial Accounting. The object of financial accounting is to ascertain the result

(profit or loss) of business operations during the particular period and to state the
financial position (Balance Sheet) as on a date at the end of the period. Financial
accounting refers to accounting refers to accounting for revenues, expenses,
assets, and liabilities. It involves the basic accounting processes of recording,
classifying, and summarizing transactions of financial nature.

2. Cost accounting. is the branch of accounting dealing with the recording,

classification, allocation, and reporting of current and prospective costs. The object
of cost accounting is to find out the cost of goods produced or services rendered by
a business. It also helps the business in controlling the costs by indicating avoidable
losses and wastes.

3. Management Accounting. The object of management accounting is to supply

relevant information at appropriate time to the management to enable it to take
decision and effect control. Managerial accounting is the branch of accounting
designed to provide information to various management levels in the hospitality
operation for the purpose of enhancing controls.

Are Tax Prepares Accountants?

Although We often hear tax preparers being called Accountants, technically
speaking they are not. In the early 1900s accountants usually filled out the relatively
simple forms as one of their duties. Today, with the tax preparation industry becoming a
specialty all its own and the tax laws becoming increasingly complex, tax preparation is
a totally different field populated by thousands of individuals that have never performed
bookkeeping or accounting. Most are educated individuals who know how to organise
tax data and how to enter it on the tax forms. Their title is "Tax Preparer". Of course,
there are those, including a fraction of CA's, who do perform all three tasks. Again,
because "Accountant" is the most recognized title, it's the one of choice by most such
professionals

1.13 Limitations Of Financial Accounting

Advantages of accounting discussed in this section do not suggest that accounting is
free from limitations. Following are the limitations:

1. Financial accounting permits alternative treatments. Accounting is based on

concepts and it follows " generally accepted principles" but there exist more than
one principle for the treatment of any one item. This permits alternative treatments
with in the framework of generally accepted principles. For example, the closing
stock of a business may be valued by anyone of the following methods: FIFO (First-
in- First-out), LIFO (Last-in-First-out), Average Price, Standard Price etc., but the
results are not comparable.

2. Financial accounting does not provide timely information. It is not a limitation

when high powered software application like HiTech Financial Accenting are used
to keep online and concurrent accounts where the balance sheet is made available
almost instantaneously. However, manual accounting does have this shortcoming.

3. Historical Information. Financial accounting is designed to supply information

in the form of statements (Balance Sheet and Profit and Loss Account) for a
period normally one year. So the information is, at best, of historical interest and

Amity Directorate of Distance and Online Education

Accounting for Managers 17
only 'post-mortem' analysis of the past can be conducted. The business requires
timely information at frequent intervals to enable the management to plan and take Notes
corrective action. For example, if a business has budgeted that during the current
year sales should be Rs 12,00,000 then it requires information whether the sales
in the first month of the year amounted toRs 10,00,000 or less or more?

4. Time Interval. Traditionally, financial accounting is not supposed to supply

information at shorter interval less than one year. With the advent of computerized
accounting now a software like HiTech Financial Accounting displays monthly profit
and loss account and balance sheet to overcome this limitation.

5. Subjectivity. Financial accounting is influenced by personal judgments'

Convention of objectivity' is respected in accounting but to record certain events
estimates have to be made which requires personal judgment. It is very difficult to
expect accuracy in future estimates and objectivity suffers. For example, in order
to determine the amount of depreciation to be charged every year for the use of
fixed asset it is required estimation and the income disclosed by accounting is not
authoritative but 'approximation'.

6. Financial accounting ignores important non-monetary information.

Financial accounting does not consider those transactions of non- monetary
in nature. For example, extent of competition faced by the business,
technical innovations possessed by the business, loyalty and efficiency of the
employees; changes in the value of money etc. are the important matters in
which management of the business is highly interested but accounting is not
tailored to take note of such matters. Thus any user of financial information
is, naturally, deprived of vital information which is of non-monetary character.
In modern times a good accounting software with MIS and CRM can be most
useful to overcome this limitation partially.

7. Financial Accounting does not provide detailed analysis. The information

supplied by the financial accounting is in reality aggregates of the financial
transactions during the course of the year. Of course, it enables to study the overall
results of the business the information is required regarding the cost, revenue
and profit of each product but financial accounting does not provide such detailed
information product- wise. For example, if business has earned a total profit of say,
Rs 5,00,000 during the accounting year and it sells three products namely petrol.
diesel and mobile oil and wants to know profit earned by each product Financial
accounting is not likely to help him unless he uses a computerized accounting
system capable of handling such complex queries. Many reports in a computer
accounting software like Hi-Tech Financial Accounting which are explained
with graphs and customized reports as per need of the business overcome this
limitation.

8. Financial Accounting does not disclose the present value of the business. In
financial accounting the position of the business as on a particular date is shown
by a statement known as 'Balance Sheet'. In Balance Sheet the assets are shown
on the basis of "Continuing Entity Concept. Thus it is presumed that business has
relatively longer life and will continue to exist indefinitely, hence the asset values
are 'going concern values. ' The 'realized value' of each asset if sold to-day can't be
known by studying the balance sheet.

1.14Summary
Accounting is a process of recording, classifying, summarizing and interpreting
business transaction. The primary purpose of accounting is to provide relevant financial

Amity Directorate of Distance and Online Education

18 Accounting for Managers

information to owners, investors, creditors, employees and other stakeholders. Financial

Notes statements are systematic and meaningful summarization of underlying data recorded
and classified through accounting process. For recording the transactions one must be
aware of accounting principles and rules of recording. While principles are discussed in
this chapter, rules of recording transactions will be discussed in the subsequent chapter.
Principles may include various accounting concepts , conventions and Generally
Accepted Accounting Principles (GAAP). Accountancy has various branches such as
Financial Accounting, Management Accounting and Cost Accounting. Most important
accounting concepts are Money Measurement, Cost, Time Period , Separate Entity
, Realisation, Duality etc to name a few GAAP when enforced by statutory body
can be known by name as Accounting Standards. Accountancy is useful for various
reasons such as performance, comparison and financial position etc but also suffers
from various limitations such as historical , subjective and can disclose only monetary
transactions etc.

Check Your Progress

1. The process of accounting involves,------, classifying and summarizing of
past occurrences of financial nature.

2. Cost concept implies that in accounting, all transactions are generally recorded
----and not at-------

3. Total Liabilities=------ + External Liability.

4. issues accounting standards in India.

State True or False

5 Cost concept implies that all transactions are recorded at market cost.
6. Business Entity concept states that the accounting entity of a business is separate
from its owner .
7. The Institute of standards of India issues the Accounting Standards

Questions and Exercises

1. Define Accounting. How it is different from Accountancy and Book-keeping?
2. Explain various steps in the process of Accounting.
3. What do you understand by Accounting Principles? Explain some of them under
various categories.
4. Explain the usefulness of accounting process and its limitations.
5. Explain in brief about various branches of accounting.

Further Readings
1. Accounting for Managers. Maheshwari and Maheshwari. Vikas publication.
2. Financial Accounting . Meigs and Meigs. Mcgraw Hills Inc.
3. Introduction to Accountancy. T S Grewal. S Chamd & Co Ltd
4. Advanced Accounting, Sehgal Ashok, Sehgal Deepak .Taxman Allied Services (P)
Ltd., New Delhi
5. Advanced Accountancy, Jain S.P., Narang K. L..Kalyani Publishers, Ludhiana.
6. Advanced Accounts, Shukla M.C., Grewal T.S.: S. Chand & Company Ltd., New
Delhi.
7. Advanced Accountancy, Gupta R.L., M. Radhaswamy: Sultan Chand & Sons, New
Delhi.
8. Financial Accounting, Tulsian. Tata McGraw-Hill, New Delhi.

Amity Directorate of Distance and Online Education

Unit-2: Double Entry System And Journalizing
Structure
2.1 Introduction
2.2 Double Entry System of Financial Accounting
2.3 Rules for Transaction Recording
2.4 Types of Accounts
2.5 Rules for Transaction
2.6 Alternate Rule
2.7 Types of Transaction
2.8 Recording of Transaction
2.8.1 Steps for Recording
2.9 Journalising
2.9.1 Journal
2.9.2 Journal Entry
2.9.3 Simple and Compound Entry
2.10 Summary

Objectives
Objective of this chapter is to introduce the students about double entry system and also familiaristhem with
process of journali sing.

2.1. Introduction
The books of accounts of Business are to be maintained as per "Double Entry System". Which means for every
monetary transaction which is to be recorded , will be two aspects. One needs to be debited and the other one
needs to be credited. The double Entry System and the different terms used therein are briefly described in this unit.

2.2 Double Entry System Of Financial Accounting

1. Earlier, organizations used to maintain accounts in the single entry system which recognizes only cash
transactions. But now, accounts are invariably maintained in the double entry system which recognizes both
cash and credit transactions. Accounts are maintained on accrual basis under this system. Accrual System means
a cost incurred (i.e. accrued) is duly accounted for irrespective of whether it is paid or not during that period. In
addition, all transaction are supposed to have dual aspect- debit aspect and a credit aspect. Each monetary
happening is referred as Transaction. We will see more of debits and credits later. Since the system records
both the debit and credit aspects of a transaction. It is known as double entry system. Business transactions
have twofold effect. Recording of both aspects of a transaction is called Double Entry system of Accounting.

2. Accounting Equation. In last unit, It was stated that, under the duality concept that sources of funds must always
Liabilities + Owners' Equity = Assets
equal to uses of funds and from this equality was derived the fundamental accounting equation:

Amity Directorate of Distance and Online Education

20 Accounting for Managers

Total Liabilities= Total Assets (or)

Owners' Equity + Outside Liability = Assets

3. You may have heard someone say "the books are in balance" referring to a
business concern's accounting records. This refers to the use of the double-
entry system of accounting, which uses equal entries in two or more accounts to
record each business transaction. Because the rupee amounts are equal we say
the transaction is "in balance." Double-entry accounting follows one simple rule,
called the accounting equation. It is a simple algebraic equation, expressed as an
equality. E = MC2 OOPS! That's not it. It is reproduced again.

Liabilities+ Owners' Equity = Assets

Another way to think about it

everything we own = who provided the financing

4. Where assets refer to resources which are owned by business enterprises,
liabilities are debts payable to parties external to business and capital means the
amount payable to owner of the business enterprise. Revenues are the receipts in
general course of the business and expenditure are the outflow of cash incurred
to generate the revenue or purchase the fixed asset. Any expenditure not able to
generate the revenue or any reduction in value of fixed assets is referred as loss.
Profit is the excess of revenue over expenditure or increase in value of an asset or
some other benefit accruing to the business.

5. Sources of Fund. It was also evident from the earlier discussions that any of the
following is a source of funds

(a) Incurring Liability (including owners' equity).

(b) Earning Revenue.

(c) Making Profits.

It stands to reason that a decrease in liability, revenue or profit must be a use of

funds being the opposite of a source.

6. Uses of Fund. Similarly, any of the following is a use of funds:

(a) Acquiring Assts.

(b) Incurring Expenses.

(c) Incurring Losses.

7. Also a decrease in assets, expenses or losses must be a source of funds, being the
opposite of a use.

8. Thus, no matter what event transpires in the business , it must be possible to

capture that event in the balance sheet in such a way that the liabilities (sources)
and assets (uses) remain equal. For instance, consider the following examples in
isolation. You will see after each transaction if Balance Sheet is prepared it will have
Assets = Liabilities. Though Balance sheet is prepared at the end of the accounting
period but each transaction during the period will have the perennial effect on the

Amity Directorate of Distance and Online Education

Accounting for Managers 21
Assets and Liabilities. In nut shell , if balance sheet is prepared even after each
transaction it will tally. Following are some transactions which will prove the equation
right.

Transaction 1
A Business is started with a capital of Rs. 10,000 brought in cash. The above event
gives rise to a cash balance of Rs. 10,000 which being an increase in an asset (namely cash),
is a use. At the same time, the business now owes Rs. 10,000 to the owner who invests
the capital in it, so that the owners' equity in the business is Rs.
10,000. This being a liability of the business towards owner becomes a source. Thus, the
balance sheet of the business (if prepared after the transaction) at the end of the above
event would look as follows:

Liabilities (Source) Assets (Uses)

ONners' Equity Rs. 10,000 Cash Rs. 10,000

Transaction 2
Now assume that in the above business concern, Fixed Assets worth Rs. 8000 are
bought for cash. The above event would make the balance sheet look as follows:

Liabilities (Sources) Rs Assets (Uses)

Owners' Equity 10,000 Fixed Assets 8,000
10,000 Cash 2,000
10,000

It is clear from the above that the purchase of fixed assets is the use (being an
increase on an asset), whereas the decrease in the cash balance is a source (being a
decrease in an asset).

Transaction 3
Machinery is purchased for Rs.4, 000 by taking a loan from bank for the purpose.
The balance sheet would now look as follows:

Liabilities (Sources) Rs Assets (Uses)

Owners' Equity 10,000 Fixed Assets 8,000
Loan 4,000 Cash 2,000
Furniture 4,000
14,000 14,000
Transaction 4
Goods worth Rs.1, 500 are purchased for cash. The balance sheet gets modified to:

Liabilities (Sources) Rs Assets (Uses)

Owners' Equity 10,000 Fixed Assets 8,000
Loan 4,000 Cash 500
Furniture 4,000
Stock (Inventory) 1500
14,000 14,000

In this case, the inventory build-up is the use, whereas the cash depletion is the
source.

Transaction 5
Now assume that Rs.1, 000 worth of goods from the inventory are sold for Rs. 1, 200
on cash. On account of the sale made, revenue worth Rs. 1, 200 is realized. Whatever

Amity Directorate of Distance and Online Education

22 Accounting for Managers

revenue is earned by the business, it must owe that revenue to the owners. Thus
Notes revenue may be regarded as increasing the owners' equity. Similarly, the cost of the
goods sold in this case is Rs.1, 000. This expense must ultimately be borne by the
business concern, so that the expense may be viewed as decreasing the owners' equity

Liabilities (Sources) Rs Assets (Uses)

Owners' Equity 10,000 Fixed Assets 8,000
Add: Revenue 1,200 Cash 1,700
Less: Expenses- 1,000 Furniture 4,000
10,200 Stock (Inventory) 500
Loan 4,000
14,000 14,000
Also, it can be observed that following the above sale, the owners' equity (Capital)
has gone up from Rs.10, 000 at the time of inception of the business, to Rs.10, 200
after the above sale was made. This increase in owners' equity is clearly the profit
made by the business during the period (similarly in the above case, had Rs.1, 000
worth of goods been sold for Rs.800 instead, the balance sheet would indicate an
owners' equity (Capital) of Rs.9, 800 indicating thereby a loss of Rs.200).

2.3 Rules For Transaction Recording

Since 'Source' and 'Uses' are relatively longer words, as in Chemistry, they can
be replaced by short symbols. The accepted symbol for sources is Cr. and that for
uses is Dr. These symbols are purely incidental and could well have been switched or
entirely changed without any loss in generality whatsoever. However, the symbol Cr. is
commonly pronounced as 'CREDIT' and the symbol Dr as 'DEBIT'. In accounting, the
terms CREDIT and DEBIT are merely two different sounds and do not have the same
implications as they have in English Language.

Thus increase in liabilities, revenue or profits being sources of funds are all called
'Cr' items. Similarly, increase in assets, expenses and losses being uses of funds are
called 'Dr' items. This may be expressed by the following matrix.

Increase Decrease
Liability, revenue and Profit CR= Source DR= Use
Asset, Expense and Loss DR= Use CR= Source

A funny accounting story (yes, there are accountant jokes)

A young accountant often asked his boss for advice in writing journal entries. The
boss would always open his desk drawer, look at something for a moment and then tell
the young accountant how the make the correct journal entry. This went on for many
years. Finally the old accountant was ready to retire. The younger accountant asked the
old man, "I don't know what I'm going to do without you. Whenever I've had a question
you always knew the answer. What will I do when you're gone? And what's in your desk
drawer? Every time I ask for advice you look in there?"

The old accountant took the younger one into his office and opened his desk drawer.
There was a 3" x 5" index card. It said: "Debits on the Left, Credits on the Right".

2.4 Types Of Accounts

22. As explained earlier, grouping of similar transaction is known as classification
and the format in which the information is captured is called Accounts. The book in

Amity Directorate of Distance and Online Education

Accounting for Managers 23
which various account are maintained is called ledger book.
Notes
1. Classification of Accounts. Accounts can be classified into personal, real and
nominal accounts.

(a) Personal Account These include the accounts of the persons with whom the
organization deals. These can be further classified into the following categories:

(i) Natural personal account. Means Accounts of living persons. (E.g., Ram a/c,
Vijay a/c).

(ii) _Artificial personal account Accounts of corporate bodies or institutions

created under low like account of a company, society, firm etc.

(iii) _Representative personal account These are the accounts, which represent
dues to certain person or group of persons. E.g., when rent is due to landlord,
an outstanding rent account is opened in the books.

(b) Real accounts

(i) Tangible Real Account. These are those which relate to such things which can
be touched, felt and measured e.g. cash account, building account etc.

(ii) Intangible Real Account. These accounts represent the things that can not
be touched. However they can be measured in terms of money e.g. patent,
goodwill etc.

(c) Nominal Account These accounts are opened in the books of account to
record transactions relating to income and expenses under various categories
like interest ale, salary a/c, TAIDA, telephone rental etc.

2. Various types of accounts are explained here by means of a diagram also.

r
l
Accounts
}

Impersonal

[ Personal
Accounts ] Accounts
I

!' "\ Accounts

Eg:
Individuals, Real Accounts
Firms,
Companies,
Banks, etc.

' ./ Relate to
Assets like cash, land, losses or
machinery, patents, goodwill, incomes or
etc profits.

2.5. Rules For Accounting

1. Personal Account Debit the receiver, credit the giver.

2. Real Account Debit what comes in, credit what goes out.

Amity Directorate of Distance and Online Education

24 Accounting for Managers

3. Nominal Account. Debit all expenses & losses and credit all incomes & gains.
Notes
2.6 Alternate Rule
From the matrix at Para 2.3 above, the simplified rule of Debit and Credit can be
derived from there. That is:

1. All Assets, Expenses and Losses are debited when they increase; they are credited
when they decrease.

2. All Liabilities, revenues and Profits are credited when they increase; they are
debited when they decrease.

Example -1

Identify the elements affected by the transaction given below and also state the
nature of the elements

1. Ibrahim a sole proprietor Commenced business with a capital of Rs. 2,00,000.

2. Bought Furniture for cash Rs. 20,000.
3. Paid Rent to the shop owner Mr. Murugan Rs. 5,000.
4. Paid cash into bank Rs. 1,50,000
5. Bought Goods for cash Rs. 10,000 from M/s Shamir Jain & Co.,
6. Bought Goods on credit from M/s Ramdas & Bros. for Rs. 10,000.
7. Sold goods for cash Rs. 12,000 to Mr. Naryan Tiwari
8. Bought Machinery from M/s Boolani Machinery and paid by cheque Rs.
25,000.
9. Sold goods on credit to Mr. Natekar for Rs. 8,000
10. Paid weekly wages to workers Rs. 5,000
11. Paid M/s Ramdas and Brothers by cheque Rs. 5,000
12. Received from Mr. Natekar Rs. 2,000

13. Received commission from M/s Orion Traders for giving a trade lead Rs. 500.

Solution
1. Commenced Business with a Capital of Rs. 2,00,000.

Capital a/c Cash a/c

t t
Person Tangible aspect/Asset
t t
Personal a/c Real a/c

2. Bought Furniture for cash Rs. 20,000.

Furniture a/c Cash a/c
t t
Tangible aspect/Asset Tangible aspect/Asset
t t
Real a/c Real a/c

Amity Directorate of Distance and Online Education

Accounting for Managers 25
3. Paid Rent to the shop owner Mr. Murugan Rs. 5,000.
Notes
Rent Paid a/c Cash a/c

Expenditure Tangible aspect/Asset

Nominal a/c Real a/c

Payee name irrelevant in Recording Expenses Incurred

The amount paid to Mr. Murugan is towards the rent of the shop and therefore it
would result in the organisational expenditure on rent increasing by Rs. 2,000. Though
it is given to Mr. Murugan, the shop owner, it should not be interpreted as cash paid to
Mr. Murugan. The information relating to the expenditure on account of rent is normally
recorded using the account head Rent Paid a/c. However, the payee name would be
considered where an outstanding amount has been recorded earlier

4. Paid cash into bank Rs. 1,50,000

Cash a/c Bank a/c

Tangible aspect/Asset Organisation

Real a/c Personal a/c

5. Bought Goods for cash Rs. 10,000 from M/s Shamir Jain & Co.,
Cash a/c Goods/Stock a/c

Tangible aspect/Asset Tangible aspect/Asset

Real a/c Real a/c

6. Bought Goods on credit from M/s Ramdas & Bros. for Rs. 10,000.
M/s Ramdas & Bros. a/c Goods/Stock a/c

Organisation Tangible aspect/Asset

Personal a/c Real a/c

7. Sold goods for cash Rs. 12,000 to Mr. Naryan Tiwari.

Cash a/c Goods/Stock a/c

Tangible aspect/Asset Tangible aspect/Asset

Real a/c Real a/c

8. Bought Machinery from Mls Boolani Machinery and paid by cheque Rs.
25,000.
Bank a/c Machinery a/c

Organisation Tangible aspect/Asset

Personal a/c Real a/c

Amity Directorate of Distance and Online Education

26 Accounting for Managers

Cash Purchase of Machinery

Notes Machinery being a tangible aspect is an asset. The information relating to machinery
is identified using the account head Machinery a/c. Since it is an asset/tangible aspect
it is a Real account. The fact that Machinery has been purchased from M/s Boolani
Machinery is irrelevant here since there is no time gap between the transactions
of purchase of machinery and payment for it. Since a cheque is issued, the amount
available in the bank is reduced and not cash. Therefore Bank a/c is affected by the
transaction.

9. Sold goods on credit to Mr. Natekar for Rs. 8,000.

Goods/Stock a/c Mr. Natekar a/c
t t
Tangible aspect/Asset Person
t t
Real a/c Personal a/c

10. Paid weekly wages to workers Rs. 5,000

Cash a/c Wages Paid a/c
t t
Tangible aspect/Asset Expenditure
t t
Real a/c Nominal a/c
Wages Paid - Recording the Expenditure
Wages paid is expenditure. Generally, the information relating to this expenditure is
maintained using the accounting head Wages Paid a/c.

11. Paid M/s Ramdas and Brothers by cheque Rs. 5,000.

M/s Ramdas & Bros. a/c Bank a/c
t t
Organisation Organisation
t t
Personal a/c Personal a/c
Cheque Payment
Since the payment is made by cheque the amount available in the bank would be
reduced i.e. Bank a/c would be affected and not Cash a/c.

12. Received from Mr. Natekar Rs. 2,000

Mr. Natekar a/c Cash a/c
t t
Person Tangible aspect/Asset
t t
Personal a/c Real a/c
13. Received commission from M/s Orion Traders for giving a trade lead Rs. 500.
Commission Received a/c Cash a/c
t t
Income Tangible aspect/Asset
t t
Nominal a/c Real a/c
Recording Income Received-
Commission received is income. Generally, the information relating to this income is
maintained using the accounting head Commission Received a/c.

Amity Directorate of Distance and Online Education

Accounting for Managers 27
2.7 Typpe Of Transactions
There are three general types of transactions and entries. Notes
1. Routine, daily operating events - represents over 99% of all transactions.

2. Occasional events involving major assets, liabilities and owners' equity

transactions.

3. Adjusting and Closing entries - made to prepare statements and close the
books at the end of the year.

2.8 Recording Of Transaction

As explained earlier, in business organization two methods are being followed for
recording the transactions. In first method, daily business transactions are recorded in a
book called Journal. The journal is called 'Book of original entry'. All the transactions are
first entered in the journal in the order of their occurrence. Recording of entries in the
journal is known as journalizing. With the growth in business, and consequent increase
in the number of transactions, it became difficult to record all the transactions in the
journal. Therefore, to facilitate recording of similar transactions, large concerns maintain
special journal also known as subsidiary books. The method of recording through
subsidiary book is explained diagrammatically

2.8.1 Steps in Recording Transaction

It involves two steps analyze the transaction and identity the two accounts that are
being affected by the transaction.

1. Ascertain the nature of the accounts involved as real, personal or nominal. If

alternate rule is to be applied than it is to be identified whether they are assets/
liabilities or profit/loss as the case may be.

2. Determine which rule of debit and credit is applicable for each of accounts involved.
If alternate rule is to be applied than matrix to be referred.

3. Ascertain the account to be debited and the account to be credited.

Example 2:
1. M/S X & Co received Rs. 1,000 from Y as advance for purchase of items on
05-01-2008. Recording the transaction in the books of M/s X & Co will involve
following steps.

Amity Directorate of Distance and Online Education

28 Accounting for Managers
(a) Step1 The two accounts involved in the above transaction are (i) money being
received and (ii) the person paying the amount Y.
Notes
(b) Step2: The natures of the accounts are (i) Real account and (ii) Personal
account respectively. As per alternate rule (i) is asset and (ii) is liability

(c) Step3: First Method.

(i) The rule applicable to real account is debit what comes in and credit what goes
out'. In the given transaction, cash is coming in, therefore debit cash account.

(ii) The rule applicable for personal account is 'debit the receiver and credit the
giver'. In the above transaction, Y is the giver, therefore it has been credited in
the books of accounts of M/S X & Co.

(d) Step3: Alternate Method

(i) The rule applicable to assets as per matrix is assets are debited when they
increase. In the case, cash in getting increased so 'Cash Account' is debited.
(ii) The rule for liabilities is they are credited when they increase. In this case,
advance payment from Y is a liability till the time the good or services is no
delivered. The liability is getting created (increased) hence it is credited.

Example3:
1. Let us apply the rules of debit and credit for a few sample transactions afte
ascertaining dual aspects. Transactions and their duality aspects are enumerated
on the next page.
These are entered in the books of accounts of MIS Harish Ltd.

Translations Aspects Ac- Reason for the Debit Ac- Reason for the Credit
count count
Debit- Credit-
ed ed

M/S Harish Aspect 1: Bank Bank 1. Bank ale is personal Capital 1. Capital ale is personal
Kumar account has ale ale. The rule 'debit the ale ale. it represents Mr
started with been cred- ited receiver and credit the Harish as owner. The rule
capital of Rs with Rs giver' applies. Since 'debit the receiver and
50,000 at 50,000 Aspect bank is receiver from credit the giver' applies.
Baroda. 2 : M/S Harish M/S Harish Kumar, it Since Mr Harish Kumar
Kumar has will be debited in M/S is giver to M/S Harish
become liable Harish Kumar's books of Kumar, it will be credited
to pay to the accounts. in M/S Harish Kumar 's
owner Harish 2. If alternate rule is to be books.
Kumar Rs applied then Bank is an 2. If alternate rule is to be
50,000 known Asset. Increase in As- set applied then capital is Li-
as Capital will be debited in M/S ability. Increase in Liability
Harish Kumar's books. will be credited
M/S Harish Aspect 1 C ash 1. Cash ale is a Real M/S X 1. M/S X's ale is a
Kumar cash of Rs. ale ale. The rule of 'Debit ale Personal a/c. It is giver
Received 5,000 is what comes in' applies. to M/S Harish Kumar
Rs. 5,000 received. 2. Cash ale is an Asset The rule of Credit the giver
from Mr X Aspect 2 The ale. If alternate rule is to applies.
on account amount is be applied then increase 2. If alternate rule is to
of advance given in Asset will be debited. be applied then advance
payment for by M/S X. from M/S X is a Liability
goods. till the commitment is met.
Increase in Liability will be
credited.

Amity Directorate of Distance and Online Education

Accounting for Managers 29
M/S Harish Aspect 1 lnven- 1. Inventory a/c or pur- M/S Va- 1. M/S Varieties a/c is a
Kumar Pur- Goods of Rs. t o r chases a/c is a Real a/c. r ie ties Personal a/c. The rule of
chased Rs. 6,000 are re- a I c The rule of 'Debit what a/c Credit the giver applies. Notes
6,000 worth ceived. Aspect ( P u r- comes in applies. 2. If alternate rule is to
of goods from 2 The goods c has - 2. Increase in stock is be applied then purchase
M/S Varieties are purchased es a/c) an increase in Asset. If from depot is a Liability
Faridabad on from M/S alternate rule is to be till the time payment is
credit Varieties on applied then increase in made. Increase in Liability
credit. Asset will be debited. will be credited. Hence
M/S Varieties a/c will be
credited.

M/S Harish Aspect 1 S a I 1. Salaries a/c is a Nom- Bank 1. Bank a/c is personal
Kumar has payment of an aries inal a/c. The rule of Deb- a/c a/c, the rule of Credit the
paid the expense of Rs. a/c it all expenses' applies giver applies.
salaries of 15,500 .2. Increase in expen- 2. If alternate rule is to be
Rs. 1,500 to Aspect 2 Bank diture will amount to in- applied then decrease in
its staff for balance is crease in expenditure. Bank will amount to reduc-
the month reduced by As per alternate rule in- tion in asset. Decrease in
through bank Rs. 15,500 crease in expenditure is asset will be credited.
transfer. to be debited as it will re-
duce the owner's equity.

Note: These transactions are entered in the books of accounts of M/S Harish Kumar

2.9 Journalising/Recording
By analysing a transaction (i.e. its proof), we identify the two elements affected by
the transaction and then the nature of the elements. We then decide which element is
to be debited and which is to be credited by applying the rules of debit and credit. In
actual practice, accounting starts with writing the journal. This act of writing the Journal
is called RECORDING or JOURNALISING. Journalising (or Recording) is writing down
the information relating to an accounting transaction that is relevant in accounting into
the accounting records (generally in a specific format) based on the principles of debit
and credit.

2.9.1 Journal
The General Journal is called the book of original entry. A journal is a
chronological record of transactions - they are in date order. Each entry is called
a journal entry, and represents a different business transaction. Each transaction is
recorded once, and only once. All journal entries follow the rules of debit and credit.
Format of Journal is given below :

Journal of-----------------------

Date VIR No. Particulars LIF Debit Amount Credit Amount

(in Rs) (in Rs)

Information in Journal

Heading

The heading gives the following information:

The organisation whose accounting transactions are being recorded

The period relating to which the journal entries are recorded.

Date

Amity Directorate of Distance and Online Education

30 Accounting for Managers

Date of recording the transaction.

Notes
To ensure that the accounting system is functional and useful, transactions are
recorded as and when they happen (at least on the date on which they occur).

Therefore assume that the date here is the date of the transaction and not the date
of recording the transaction.

VIR No Voucher/Receipt Number

A Voucher is a document which is made when a payment is made

A Receipt is a document which is made when an amount is received.

Vouchers and receipts form proof of transactions. [There may be other forms of
documents like sales invoices, debit notes, credit notes etc., which also form proof of
transactions. Please ignore them for now.]

They are generally numbered and have identifications like voucher number, receipt
number etc., on them. These numbers are entered in this column to have a cross
reference to the proof of the transaction based on which that journal entry is being
recorded.

Note that we do not find statements like "Paid cash to Mr. Shyam" etc. in the
accounting records. The documents which form proofs of transactions are the ones
which enable to interpret the transactions in such a way.

Particulars

This is the column where the actual account heads (the one to be credited and the
one to be debited) are written.

Debit Account :

The account to be debited is shown on the first line and is aligned to the left of
the column. The element name i.e Account Head starts with a Capital Letter and is
succeeded by the letters "a/c".

The word "Dr" (read as detor {debtor- b silent}) is written on the same line, aligned
to the right.

Credit Account:

The account to be credited is shown on the second line preceded by the word "To"
and is succeeded by the letters "a/c".

The line starting with "To" is indented (i.e. the first letter of the name of the Account
that is Debited and the letter "T" do not fall in the same vertical line). "T" always lies to
the right of the first letter of the account head that is debited.

We do not find the use of the letters "Cr" on this line or anywhere in the entry.

Narration

[Being the amount .... ]

Amity Directorate of Distance and Online Education

Accounting for Managers 31
The sentence that appears below the lines containing the Account Heads that are
Debited and Credited is called the narration for the journal entry. Notes
The narration is a brief explanation for the entry. It includes certain details in relation
to the transaction. The purpose of the narration is to enable anyone who reads it to get
a preliminary idea of why the entry is being recorded. If the information in the narration
does not provide the required detail, one can always refer the Voucher/Receipt (which
is the actual proof for the transaction journalised through that entry) using the relevant
voucher/receipt number recorded relating to that entry.

L/F Ledger Folio

The Ledger is a record that follows the journal. Each element (Account Head) has its
own distinct page (folio) in the ledger.

"Ledger Folio" is the page number in the ledger record, where the information shown
in the journal entry has been carried to. This information is distinct for each account
head.

The Ledger Folio information will enable tracking of flow of information from the
journal to the ledger.

Debit amount

This is the amount relating to the element (account head) that is being debited. This
generally is the transaction value. The amount is written in the same line as Debit entry
i.e. in vertical alignment with it. The currency related to the amounts is written in the
column header itself.

Credit amount

This is the amount relating to the element (account head) that is being credited. This
generally is the transaction value. The amount is written in the same line as Credit entry
i.e. in vertical alignment with it.

2.9.2 Journal entries

1. These should be made contemporaneously with the event they are recording,
or reasonably soon after the event. Keep in mind that a journal is a chronological record
of events. A contemporaneous writing is one that takes place at the same time as the
event. This is the best time to record an event, because the facts and details are still
fresh in our minds. Necessary documents, conversations, calculations, etc., are readily
available to create a correct record of the event. If we wait too long, the event will be
much more difficult to reconstruct. In a legal sense, a contemporaneous writing carries
much more weight than a writing made at a later date. And a writing carries much more
weight than a mere recollection of events, months or years after the event has taken
place. The courts recognize that people's memories about events are much clearer
right after the event has taken place. As to the sale of real estate, state laws require
a contemporaneous writing, to establish the exact terms and conditions of the sale. In
contract law, this is called a "meeting of the minds," and must be present for a valid
contract to exist.

2. We will use verifiable, tangible evidence whenever it exists. Tangible evidence

has physical existence - we can touch it, fold, staple, copy and file the document. We
will look for a check, invoice, purchase order, contract or other business document that
is a record of the event, a confirmation of payment received and goods delivered, etc.
These documents become the back-up documentation for our journal entry.

Amity Directorate of Distance and Online Education

32 Accounting for Managers

2.9.3 Simple Vs Compound Journal Entry

Notes
1. A journal entry involving only 2 Account Heads (elements) is called a simple
journal entry. One of the elements/accounting heads is debited and the other credited.
We have till now seen the simple journal entries. A journal entry involving more than 2
Account Heads (Elements) is called a compound/combined journal entry. Example of
compound journal entry is as follows :

Journal in the books of M/s for the period from to

Date VIR Particulars UF Debit Credit
No. Amount Amount
(in Rs) (in Rs)
Jl!ne - Machinery (Old) ale Dr - 84,000
15ih Bank ale - 2,46,000
To Machinery Dr - 3,24,000
(New) ale - 6,000
To Profit and
Loss ale
[Towards the value of
old machinery
exchanged for a new
machine and the
balance being paid by
a cheque and the
profit on disposal of
the old machine1

2. The compound/combined entries should not be interpreted to mean that more

than 2 elements are effected in a single/simple accounting transaction. A compound/
combined entry is a journal entry derived by combining two or more simple journal
entries. Theoretically a compound/combined entry can always be broken down into the
constituent simple journal entries. However such a breakdown would be a bit difficult in
case of complex compound entries. Writing a compound/combined entry in place of two
or more simple entries reduces the task involved in recording the transactions.

3. More about Combined Journal Entry. A complex compound/combined Journal

Entry is a journal entry involving more than 3 Account Heads (elements) in which there
are multiple debits and multiple credits.

Example -4
1. Consider a person starting business by bringing in his personal assets and
liabilities into the business. [The separate entity concept says that the owner is alien
to business. Thereby the owner can give or take from the business.] .Mrs. Raju
Commenced business by bringing in the following assets and liabilities of hers as her
capital contribution.
(a) Cash Rs. 50,000.
(b) Motor Car Rs. 1,00,000
(c) Furniture Rs. 20,000
(d) Bank Loan (payable) Rs. 50,000

Based on the value of assets and liabilities contributed, we would be able to assess
his capital contribution.

Value of Assets brought in

= Rs. 50,000 (Cash)+ Rs. 1,00,000 (Motor Car) + Rs. 20,000 (Furniture)

Amity Directorate of Distance and Online Education

Accounting for Managers 33
= Rs. Rs. 1,70,000
Notes
Value of Liabilities brought in

= Rs. 50,000 (Bank Loan)

Value of Net Assets brought in

= Value of Assets brought in " Value of Liabilities brought in

= Rs. 1,70,000" Rs. 50,000

Solution
1. The amount of Capital contributed by Mrs. Raju is nothing but the value of Net
Assets brought in by her. The transaction relating to the assets and liabilities brought in
by Mrs. Raju can be broken up into 4 simple transactions.

Brought in Cash Rs. 50,000 towards Capital.

[Cash a/c and Capital a/c are the two elements effected]

Contributed Motor Car worth Rs. 1,00,000 towards Capital

[Motor Car a/c and Capital a/c are the two elements effected]

Contributed Furniture worth Rs. 20,000 towards Capital

[Furniture a/c and Capital a/care the two elements effected]

The business accepted to take over the responsibility of paying up Mrs. Rajus
Bank Loan Rs. 50,000

[Capital a/c and Bank Loan a/c are the two elements effected]

2. In the first three transactions, Mrs. Raju stands in the position of benefit giver.
Therefore, Capital a/c (which represents the owner i.e. Mrs. Raju) is to be credit. In
case of Bank Loan, which is a liability, the benefit is derived by Mrs. Raju, since the
responsibility of her liability is being taken over by the organisation. Therefore, Capital
a/c (which represents the owner i.e. Mrs. Raju) is to be debited.

3. In analysing a transaction to arrive at the simple journal entry, it should be

possible to support both the debit as well as credit with reasoning. However in some
cases, the reasoning trying to support both the debit and credit becomes too complex a
thought. Even in such cases explaining one (either the debit or credit) would be simple.
In such situations, after identifying the two elements (Account Heads) effected by the
transaction, we analyse only the element whose analysis is simple and decide whether
it should be debited or credited. What should be done with the second element is
thereafter decided automatically without thinking of analysis.

4. The above transaction can be recorded using simple journal entries as given
under

Amity Directorate of Distance and Online Education

34 Accounting for Managers

Journal of M/S ...........................

Notes Date Particulars LF Vr Amol!ni Amol!ni
No Dr Cr
Jl!na Cash ale Dr 50,000
15lh To Capital ale 50,000
[For the cash
brought in by Mrs.
Raju towards her
capital contribution
l
Motor Car ale Dr
To Capital ale 1,00,000
[For the value of 1,00,000
Motor Car brought
in by Mrs. Raju
Jl!na towards her Capital
15lh contribution. ]
Furniture ale Dr
To Capital ale
[For the value of
Furniture brought 20,000
in by Mrs. Raju 20,000
towards her Capital
contribution. ]
Capital ale Dr
To Bank Loan
ale
[Being the value of
personal Bank 50,000
Loan of Mrs. Raju 50,000
June taken over]
1sih -

Jl!na
15 ih

4. The same transactions can be recorded using a complex compound/combined

journal entry as

Journal of M/S -------------

Amity Directorate of Distance and Online Education

Accounting for Managers 35

Date Particulars u Vr Debit Credit Notes

F No Amount Amount
(in Rs) (in Rs)
JL!ne Cash ale Dr 50,000
15ih Motor Car ale 1,00,000
Furniture ale 20,000
To Bank Loan 50,000
ale 1,20,000
To Capital ale
[Being the value of
assets and liabilities
of Mrs.Raju brought
into the business
towards her capital
contribution. 1

Example- 5
Journalise the following transaction

Jun Acquired the running business of Max, for cash Rs. 50, 000 by taking over
5th: the following assets and liabilities at values stated against them:
stock of Goods Rs. 15,000; Cash 25,000; Furniture Rs. 10,000; Debtors
Rs. 7,000;
6th: Machinery Rs. 8,000 & Creditors Rs. 15,000.
7th: Opened a bank account with Rs. 5,000
8th: Bought goods worth Rs. 6, 000 from Usha & Co. & paid half the amount in
cash.
14th: Sold to Bee & Co. goods worth Rs.5,000 and a cheque received for the due
16th: Sold private car for Rs. 4,000 and bought a new one with the proceeds for
business plus Rs. 5,000 from office cash.
18th: Bought furniture worth Rs. 4,000 of which, those worth Rs. 1,000 are for
office decoration and the balance for stock.
19th: Sold goods toArial & Co. Rs. 8,000 and to Wheel & Co. 7,000
20th: Payment made to Credtiors Rs. 4,500
25th: Cash received from Debtors Rs. 5,800
30th: Paid Rent by cheque Rs. 2,500
Commission received Rs. 3,000

Amity Directorate of Distance and Online Education

36 Accounting for Managers

Notes Vr Debit Credit

Date Particulars UF No Amount Amount
(In Rs) (In Rs)

June Goods/Stock ale Dr 15,00(

5th Fumiture ale Dr 10,00(
Debtors ale Dr 7,00(
Machinery ale Dr 8,00(
Cash ale Dr 25,000
To Creditors ale 15,000
To Capital ale 50,000
[Being the amount of assets and
liabilities acquired from Mr. Max,
ide bill no:_ dated:_]
Note:Capital =Assets - Liabilities

6th Bank ale Dr 5,000

To Cash ale 5,000
[Being the amount of cash deposited
into bank vide bill no _ dated: ]

7th Goods/Stock ale Dr 6,000

To Cash ale 3,000
To Usha & Co. ale 3,000
[Being the value of stock purchased
rom M/s. Usha & Co on credit and
paid half the amount in cash vide bill
no:_ dated:_]

8th Bank ale Dr 5,000

To Goods/Stock ale 5,000
[Being the value of stock sold to M/s
Bee & Co. and received amount du
by cheque no:_ dated:_J

14th Carafe Dr 9,000

To Capitl ale 4,000
To Cash ale 5,000
[Being the amount of car purchased
lfrom private cash and business cash
ide vocher no:_ dated:_]

16th Goods/Stock ale Dr 3,000

Fumiture ale Dr 1,00(
To Cash ale 4,000
[Being the amount of fumiture
purchased for office decoration and
or stock vide bill no:_ dated: ]

18th rial & Co. ale Dr 8,000

heei&Co. ale

Amity Dir ec torate of Distance and Online Educatim

Accounting for Managers 37

To Goods/Stock ale Dr - 7,000 15,000

Notes
[Being the Value of stock sold to M/s
Arial & Co. and M/s Wheel & Co. on
credit vide bill no:-dated:_]

19th Creditors ale Dr - 4,500

To Cash ale - 4,500
[Being the amount paid to creditors
vide bill no:- dated:_]

20th Cash ale Dr - 5,800

To Debtors ale - 5,800
[Being the amount of cash received
from debtors vide cash receipt
no:- dated:_]
25th Rent ale Dr - 2,500
To Bank ale - 2,500
[Being the amount paid tor rent vide
cheque no:_ dated:_]

30th Cash ale Dr - 3,000

To Commission ale - 3,000
[Being the amount of cash received
for commission vide cash receipt
no:- dated:_]

2.10 Summary
45. Financial Accounting is based on the double entry system of accounting
which recognizes dual aspects of a transaction, known as debit and credit. It follows
the principle that" every debit has corresponding credit". Debit items represent use of
fund and credit item represent use of fund. Transactions can be recoded in two ways
. In the first method every transaction is recoded in the journal . The process is called
Journalising. The process follows certain rules and ultimate outcome of these rules is
every debit has corresponding credit. Alternatively, instead of passing journal entry for
each transaction , they are grouped on the basis of their nature in one of the various
books : Cash Book, Sales Book , Purchases Book, etc and only residual transactions
are recoded in the Journal Proper.

Check Your Progress

1. The basic accounting equation is Assets= Liabilities+

2. A business's net income is eventually recorded in the following account:

3. The financial statement with a structure that is similar to the accounting equation is
the-------------

4. The financial statement that reports the portion of change in owner's equity
resulting from revenues and expenses during a specified time interval is the

5. Books of accounts of business are to be maintained as per ------

system.

Amity Directorate of Distance and Online Education

38 Accounting for Managers

6. Double Entry system recognises both -----and ---------

Notes - transactions.

True/False
7 Interest a/c, salary a/c, TA/DA etc. are examples of real a/c.

8. Normally revenue is said to be realised when efforts rendered are rewarded either
in cash or in the form of promise

9. Drawing account is nominal a/c.

10 Wages paid on installation of machinery should be debited to Machinery account.

Questions and Exercises_

1. Describe the alternate rule of 'Credit' and 'Debit' as per matrix of increase and
decrease of fund.

2. Explain steps in recording transaction

3. Explain equation of duality concept

4. Recognize two side of double entry in following transactions along with account
name which is required to be debited/credited.( in the books of accounts of M/S
XYZ):

(a) Paid Rent in cash Rs.5000/-.

(b) Sold goods on credit to M/S ABC

5. Mrs. Raju Commenced business by bringing in the following assets and liabilities
of hers as her capital contribution. Journalise the transaction in simple entry format
and complex entry format.

(c) Cash Rs. 50,000.

(d) Motor Car Rs. 1,00,000

(e) Furniture Rs. 20,000

(f) Bank Loan (payable) Rs. 50,000 .

6 Mr. Nirmal has the following transactions in the month of April. Write Journal Entries
for the transactions . You can date in logical manner.

(a) Commenced business with a capital of Rs. 1,00,000.

(b) Purchased goods from Veeru for Rs. 20,000 .

(c) Purchased Goods for Cash Rs. 15,000 .

(d) Purchased Goods from Abhiram for cash Rs. 9,000.

(e) Bought Goods from Shyam on credit Rs. 12,000.

(f) Sold goods worth Rs. 15,000 to Tarun .

Amity Dir ec torate of Distance and Online Educatim

Accounting for Managers 39
(g) Sold goods for cash Rs. 20,000.
Notes
(h) Sold goods to Utsav for cash Rs. 6,000 .

(i) Sold goods to Pranav on credit Rs. 17,000 .

(j) Returned goods to Veeru Rs.3,000 .

(k) Goods returned from Tarun Rs. 1,000 .

(I) Goods taken by the proprietor for personal useRs. 1,000.

(m) Bought Land for Rs. 50,000 .

(n) Purchased machinery for cash Rs. 45,000 .

(o) Bought computer from Intel Computers for Rs. 25,000.

(p) Cash sales Rs. 15,000.

(q) Cash purchases Rs. 22,000 .

(r) Bought furniture for proprietor's residence and paid cash Rs. 10,000.

Further Readings
1. Accounting Principles . Robert N Anthony.

2. Accounting For Managers. Maheshwari and Maheshwari.

3 Introduction to Accountancy.T S Grewal. S Chand & CO.

4. Advanced Accountancy, Gupta R.L., M. Radhaswamy: Sultan Chand & Sons, New
Delhi.

5. Financial Accounting, Tulsian. Tata McGraw-Hill, New Delhi

Amity Directorate of Distance and Online Education

 Unit-3: Preparation of Ledger
Notes
Structure
3.1 Introduction
3.2 Ledger Account : Balance
3.3 Ledger Posting
3.3.1 Steps in Ledger Posting
3.4 Balancing the Account
3.4.1 Sub Totals
3.4.2 It is debit Balance or Credit Balance?
3.5 When to Balance?
3.6 What idea does the Ledger Balance give?
3.7 Balancing Frequency
3.8 Carried Forvvard and Brought Forward
3.8.1 Carried Forvvard
3.8.2 Brought Forward
3.9 Comprehensive Example On Journal And Ledger Preparation
3.10 Summary

Objectives
The objective of this unit is make student aware of the classification process
from Journal. And also make them aware of how to balance the accounts in
ledger and how to interpret the account balances

3.11ntroduction
1. The basic purpose of Accounting is derivation of information. The target to be
achieved through the whole process of accounting is to collect all the information
relating to an element at a single place. This is achieved by preparing the ledger.
Each Ledger Account provides information relating to an element. By information
we mean the accounting information. The ledger account provides all the
accounting information relating to an element at a single place and is called king of
all the accounting books. Apart from this there is some other information that can
be derived from the ledger account.

2. Ledger contains a classified summary of all transaction recorded in Cash Book and
subsidiary books or Journal. It is the main book of account. Ledger is also called
principal book as final information pertaining to the financial position of a business
emerges only from the accounts. Other books like the Cash Book, Purchases Book
etc facilitate the preparation of accounts or the ledger and hence are known as
subsidiary books or books of original entry. Though the cash book has a unique
position, it contains the two accounts of cash and bank itself and hence it is a part
and parcel of the ledger also. The cash book therefore, is both a book of original
entry as well as a principal book. Ledger looks like the following:
Account
Dr Cr
Date Particular Folio Amt Rs. Date Particular Folio Amt Rs.

Amity Directorate of Distance and Online Education

Accounting for Managers 41
3. An alternative to the above ruling is the following:
Notes
Date Particulars Folio Dr. Amount Rs. Cr. Amount Rs. Balance Rs.

4. In an account, a reference is made to the original entry in the Cash Book/

Purchase/Sales Book or Journal etc, by entering the relevant page number in the "
Folio" column.

3.2 Ledger Account : Balance

The ledger account collects all the debits and credits made in relating to an account
head at a single place. From this information another key information called the ledger
account balance can be obtained. Debit and credit are two actions of opposing nature.
A debit in an account and a credit in the same account result in the amounts getting set
off against each other. What would be left in the account is the difference (balance) of
the two amounts after set off. This difference is what we call the balance of the ledger
account.

3.3 Ledger Posting

The process of transferring entries from the Cash Book/ subsidiary books to the
ledger is called ledger posting. A separate account is opened in ledger for each
account. All the debit entries and credit entries are duly entered.

3.4.1 Steps in Ledger Posting

1. Debit Side Posting. First of all the opening entry has to be posted. The opening
entry for various assets/expenditures should be posted by writing 'To Balance b/f'
on the debit side of the relevant account. Enter the date of the transaction on the
debit side of the relevant account.

(a) The title of the account to be credited proceeded by the word "To" is entered in
the particulars column.

(b) In 'Folio' column, page number of the subsidiary book /Cash Book/Journal on
which the transaction is written.

(c) Amount column records the amount mentioned in the subsidiary book/Cash
Book/Journal against title of the account under consideration.

(d) It is to be noted that due to dual aspect of accounting the account debited in
cash/bank column will result in crediting the other account by writing 'by cash/
bank'. Similarity, for all credit expenditures, purchase of assets the respective
expenditure/asset a/c will be debited after writing the same in respective
subsidiary book.

2. Credit Side Posting. Similarly, liabilities/incomes/revenues accounts should be

posted by writing 'By Balance b/f 'on the credit side of the relevant account. For
posting of the account to be credited, above mentioned steps are followed but with
one difference. Now the recording is done on the credit side of the account and
in the particulars column title of the amount to be debited is preceded by the word
"By".

Amity Directorate of Distance and Online Education

42 Accounting for Managers

Example 1:
Notes 7. Suppose one NPF purchased Furniture of Rs 600/- on credit from X Ltd.
(a) In this case, Furniture will be debited stating,
"To X Ltd 600"
(b) The account of X Ltd will be credited saying,
"By Furniture Account 600"

3.4 Balancing The Accounts

After the posting has been completed, accounts are balanced. That is to say the
difference in the total of the two sides is ascertained. If the debit side is bigger than
credit side, the difference is known as "debit balance" and likewise, if the credit side is
bigger, the difference is "credit balance". The difference is inserted in the shorter side,
saying, "To (or By) Balance carried down or (c/d)" and then the two sides comes equal.
The total then is written on both the sides opposite each other and the account is ruled
off. Then the balance is written on its side (debit balance on the debit side and credit
balance on credit side) as to (or By Balance) at the beginning of new period. In setting
off, we always assume that the greater sum is being set off from the smaller one. Thus
the ledger account balance is also interpreted as
1. Debit side total " Credit side total (if debit side total is greater) .
2. Credit side total " Debit side total (if Credit side total is greater).

Mathematically, the balance is the absolute difference between the credit side total
and the debit side total.

Ledger Account Balance = [Debit side total " Credit side total]

3.5.1 Sub Totals

Conventionally, the totals of the postings on the debit side (sum of debit side item
values) or on the credit side (sum of credit side item values) are not shown in a ledger
account. To enable a student to understand the concept of balancing a ledger account,
we have shown them and named them sub-totals. Till you get accustomed to the
concept of ledger account balancing, add up the items and show the total as sub-totals
(at least with a pencil). It makes things easier for you. Following example will make this
aspect more clear.

Example -2
Dr CashAIC Cr
J
J/ Amount Amount
Date Partlc&,!lars
F (In Rs)
Date Partlc&,!lars I (In Rs)
F
15/0B/05 - 2,00,000 17/06/05 -
To Capital a/c By Furniture
- 20,000
To ale
Goods/Stock
- By Rent Paid
-
19/06/05 12,000 17/06/05 5,000
ale - ale -
To Mr. By Bank a/c
24/06/05 18/06/05 1,50,000
Natekar ale By
To
2,000
Goods/Stock
-
18/06/05 10,000
Commission ale
24/0B/05 500 -
Received By Wages Paid.
21/06/05
ale ale 5,000
su.b- oial 2,14,500 su.b-ioial 1,90,000

Amity Directorate of Distance and Online Education

Accounting for Managers 43
3.4.2 It is debit Balance or Credit Balance?
Since the balance is obtained by setting off the sum of debit side amounts and sum Notes
of credit side amounts, we can say that what remains is related to the greater sum. The
nature of the balance is related to the greater sum.
1. If the total of the debit side is greater, the ledger account has a debit balance
2. If the total of the credit side is greater the ledger has a credit balance.

In the example given above, the total of the debit side is 2,14,500 and that of credit
side is 1,90,000. The balance in this Ledger account is 24,500 (2,14,500 " 1,90,000).
Since the debit side total is greater than the credit side total , the balance in this
Ledger account is a debit balance. .This ledger account has a debit balance of 24,500.

3.5 When To Balance ?

The ledger account is balanced periodically. In general, there are ledger accounts
that are balanced daily, weekly, monthly, annually. There is no cut right rule or principle
to specify the period for which a particular ledger account should be balanced. For
what period a ledger account is to be balanced is something that is dependent on the
information that we wish to derive from the account and the frequency at which we wish
to derive it. The period for which balancing should be done can be better understood by
looking at the information that the balance itself represents.

3.6What Idea Does The Ledger Balance Give?

1. Explanation for the information provided by the ledger account balance of some
accounts.

(a) Cash a/c. Cash a/c being a real account, is debited whenever cash comes
into the organisation (receipts) and is credited whenever cash goes out of
the organisation (payments). Thus, the amount of balance in Cash a/c should
give an idea of the amount of cash available with the organisation. [Since
you cannot pay cash without having it, let us assume that receipts are always
greater than payments.] Cash balance is an information that may be needed
frequently. So, we find it a general practice that businesses assesses the
amount of cash on a daily basis at the end of the day at least. Amount of cash
balance can be known by balancing the Cash a/c. Thus we can say that Cash
a/c is balanced daily (at the end of the day).

(b) Wages Paid a/c Wages paid a/c is a nominal account. It is debited whenever
Wages are paid. Assume that wages are being paid daily. Say, the organisation
needs the information relating to the weekly expenditure on wages. What
should it do? Balance the Wages Paid a/c on a weekly basis. The balance at
the end of the first week indicates the first weeks expenditure. The balance at
the end of the second week indicates the cumulative expenditure for the first
two weeks. Deducting the balance at the end of the first week from this would
give the expenditure for the second week.

(c) Furniture ale Furniture a/c being a Real account, is debited whenever
Furniture comes in (bought) and is credited whenever Furniture goes
out (scrapped, sold, damaged etc). Assume that Furniture is purchased
occasionally. Organisations wish to know the value of their assets at least once
a year, generally towards the end of the year. What should be done to obtain
this information annually? Balance the Furniture a/c at the end of the year.

Amity Directorate of Distance and Online Education

44 Accounting for Managers

(d) Mr. Ibrahim a/c. Mr. Ibrahim a/c being a personal account, is debited whenever
Notes he receives some benefit (buys goods on credit) from the organisation and
is credited whenever he gives some benefit (pays money, returns goods
purchased etc) to the organisation. Say the organisation needs the information
relating to the balance due from Mr. Ibrahim (debtor) on a monthly basis. What
should be done? Balance Mr. Ibrahim's a/c at the end of every month. [The
ledger balance gives the amount due and the nature of balance lets us know
whether the amount is due to him or due from him.]

The information may also be obtained as and when needed by balancing the
account at that point when the information is needed

3.7 Balancing Frequency

Frequency means number of occurrences within a given time period. The frequency
of balancing (i.e. how many times a ledger account is balanced in a time period [say a
year]) is dependent on the information needs of the organisation

3.8 Carried Forward And Brought Forward

3.8.1 Carried Forward
It means transfer from one time period to the next. It is Synonym to Carried Down.
Consider Cash a/c and assume that it is being balanced on a daily basis. At the end
of a day, the cashier would be left with a certain amount of cash (how much is what
is indicated by the balance in the Cash a/c). What would he do with that cash?. He
would take it over to the next working day. This explains the use of the phrase Carried
Forward or Down. We say that the balance is carried forward to the next day or the
balance is carried down to the next day. (Or) more specifically,

We say that the balance is carried forward from the end of a day to the beginning of
the next day.

Where do we use/show this (appear) in the Ledger Account

1. Following are important points

(a) The phrase "Balance c/d" or "Balance c/f" is written immediately after the sub-
total.
(b) It is written on the side with the lesser total.
(c) It is prefixed by "To" or "By" depending on which side it is being written
(d) After writing down the balance being carried down or carried forward, if you
add up the two sides starting from the sub-totals, the totals on the two sides
would be the same. This is identified as the total for each side of the ledger
account.
(e) The higher of the two totals (sub-totals) is written (in the amount column) as
the final total of the two columns.
(f) The difference between the two sub-totals (i.e. the balance) is then written on
the side having the shorter total.
(g) This would make the total of the two sides equal to the higher amount.
(h) Against the balance that is recorded, write the phrase "Balance c/d", prefixed
with
(i) "By" if it falls on the credit side (making it By Balance c/d)
(Or)

(ii) "To" if it falls on the debit side (making it To Balance c/d).

Amity Directorate of Distance and Online Education
Accounting for Managers 45
3.8.2. Brought Forward.
it means transfer from the past time period to the current It is Synonym to Brought Notes
Down. Consider Cash ale and assume that it is being balanced on a daily basis. At the
end of a day, the cashier would be left with a certain amount of cash (how much is what
is indicated by the balance in the Cash a/c). What would he do with that cash?. He
would take it over to the next working day. At the beginning of the next day, what would
the cashier say? I have brought down yesterdays cash balance. This explains the use
of the phrase Brought Forward or Down. We say that the balance is brought forward
from the previous day or the balance is brought down from the previous day.

(Or) more specifically, We say that the balance is brought forward to the beginning of
the day from the end of the previous day

3. Where do we use/show this (appear) in the Ledger Account

(a) The phrase "Balance b/d" or "Balance b/f' is written immediately after the
Totals.
(b) It is written on the side with the higher sub-total.
(c) It is prefixed by "To" or "By" depending on which side it is being written.
(d) Sub totals are optional.

Following example will make all the aspects discussed above more clear.

Example- 3

Dr Cash ale Cr

Amount Amount
Date Particl!lars JJF Date Particl!lars JJF
(in Rs) (in Rs)
15/06/05
To Capital ale
- 2,00,000 17/06/05
By Furniture ale - 20,000
19/06/05
To Goods/Stock ale
- 12,000 17/06/05
By Rent Paid ale - 5,000
To Mr. Natekar ale
- 18/06/05
By Bank ale - 1,50,000
24/06/05 2,000 18/06/05 - 10,000

24/06/05
To Commission
Received ale - 500 21/06/05
By
By
Goods/Stock ale
Wages Paid ale - 5,000
sl.!tHoia 2,14,500 sl.!tHoia 1,90,000
25/06/05 By Balance c/d - 24,500
Toial 2,14,500 Toial 2,14,500
25/06/05 To Balance b/d - 24,500

3.9 Comprehensive Example On Journal And Ledger Preparation

Example -4

1. Record the following transactions in a Journal and then post the entries into
the ledger.
(a) 15th June: Ibrahim a sole proprietor Commenced business with a capital of
Rs. 2,00,000.
(b) 17th June: Bought Furniture for cash Rs. 20,000.
(c) 17th June: Paid Rent to the shop owner Mr. Murugan Rs. 5,000.
(d) 18th June: Paid cash into bank Rs. 1,50,000
(e) 18th June: Bought Goods for cash Rs. 10,000 from M/s Shamir Jain & Co.,
(f) 18th June: Bought Goods on credit from M/s Ramdas & Bros. for Rs. 10,000.
(g) 19th June: Sold goods for cash Rs. 12,000 to Mr. Naryan Tiwari

Amity Directorate of Distance and Online Education

46 Accounting for Managers
(h) 2oth June: Bought Machinery from M/s Boolani Machinery and paid by cheque
Rs. 25,000.
Notes
(i) 21st June: Sold goods on credit to Mr. Natekar for Rs. 8,000
U) 21st June: Paid weekly wages to workers Rs. 5,000
(k) 24th June: Paid M/s Ramdas and Brothers by cheque Rs. 5,000
(I) 24th June: Received from Mr. Natekar Rs. 2,000
(m) 24th June: Received commission from M/s Orion Traders for giving a trade
lead Rs. 500.
Solution
Journal in the books of M/s for the period from to
Debit Credit
Date
VIR PartieI.!Iars UF Amount Amount
No. (in Rs) nn Ral
Ju.ne - Cash ale Dr - 2,00,000
15'h To Capital ale - 2,00,000
[Being the amount received from Mr.Ibrahim,the
I proprietor as his capital contribution 1

17ih - Furniture ale Dr - 20,000

To Cash ale - 20,000
[Being the amount paid towards Furniture
purchased]
17th - Rent Paid ale Dr- 5,000
To Cash ale - 5,000
[For the amount paid towards rent for the shop for
the month of May ]
HUh - Bank ale Dr - 1,50,000
To Cash ale - 1,50,000
[For the amount of cash paid into bank]
1S.h - Goods/Stock ale Dr- 10,000
To Cash ale - 10,000
[Being the value of stock purchased for cash ]
18th - Goods/Stock ale Dr- 10,000
To M/s Ramdas & Bros ale - 10,000
[Being the value of stock purchased from M/s
Ramdas & Bros., on credit]
19'h - Cash ale Dr - 12,000
To Goods/Stock ale - 12,000
[Being the value of stock sold for cash ]
2 h - Machinery ale Dr - 25,000
To Bank ale - 25,000
[Being the amount paid by cheque towards
purchase of machinery]
2Hh - Mr. Natekar ale Dr- 8,000
To Goods/Stock ale - 8,000
[Being the value of stock sold on credit to Mr.
Natekar]
2Hh - Wages paid ale Dr - 5,000
To Cash ale - 5,000
[For the amount paid towards weekly wages for the
workers]
24:h - M/s Ramdas & Bros ale Dr - 5,000
To Bank ale - 5,000
[For the amount paid by cheque to M/s Ramdas &
Bros., on account]
24:h - Cash ale Dr - 2,000
To Mr. Natekar ale - 2,000
[For the amount received in cash from Mr.Natekar
on account]
24:h - @9% W. Dr -
Th io o \ w. -
500
tm"'a w m\ \1 9% m f.. tfa l' 500
009

Amity Directorate of Distance and Online Education

Accounting for Managers 47
Ledger
[Books of Mr. Ibrahim] Notes
Dr Cash ale Cr

Date Particulars J/F Amount Date Particulars J/F

Amount
(In Rs) (In Rs)
15/06/05 To Capital ale By Furniture a/c
19/06/05 To Goods/Stock 2,00,000 17/06/05 By Rent Paid
24/06/05 ale - ale - 20,000
24/06/05 To Mr. Natekar -
-
12,000 17/06/05 By Bank a/c - 5, 000
ale 2,000 18/06/05 By Goods/Stock - 1,50,000
18/06/05 - 10,000
To Commission - 500 21106/05 ale - 5,000
Received By Wages Paid
ale ale
sub-total 2,14,500 sub-total 1,90,000
25/06/05 By Balance c/d - 24,500
Total 2,14,500 Total 2,14,500
25/06/05 To Balance b/d - 24,500

Capital ale
Amount Amount
Date Particulars J/F Date Particulars J/F
(In Rs) (In Rs)
15/06/05 By Cash a/c - 2,00,000
sub-total 0 sub-total 2,00,000
25/06/05 To Balance c/d - 2,00,000
Total 2,00,000 Total 2,00,000
25/06/05 By Balance b/d - 2,00, 000
Furniture ale
Amount Amount
Data Particulars J/F Data Particulars J/F
(in Rs) (in Rs)
17/06/05 lfo Cash ale - 20,000
sub-total 20,000 sub-total 0
25/06/05 By Balance c/d - 20,000
Total 20,000 Total 20,000
25/06/05 lfo Balance b/d - 20,000
Rent Paid a/c
Amount Amount
Date Particulars J/F Date Particulars J/F
(in Rs) (in Rs)
17/06/05 lfo Cash ale - 5,000
sub-total 5,000 sub-total 0
25/06/05 By Balance c/d - 5,000
Total 5,000 Total 5,000
25/06/05 lfo Balance b/d - 5,000
Bank a/c
Amount Amount
Date Particulars J/F (In Rs) Date Particulars J/F (In Rs)
18/06/05 To Cash ale - 1 ,50,000 20/06/05 By Machinery ale - 25,000
24/06/05 By M/s Ramdas
& Bros. ale - 5,000
sub-total 1,50,000 sub-total 30,000
25/06/05 By Balance c/d - 1,20,000
Total 1,50,000 Total 1,50,000
25/06/05 To Balance b/d - 1 ,20,000

Amity Directorate of Distance and Online Education

48 Accounting for Managers

Goods/Stock ale
Notes
Amount
Date Particulars J/F (In Rs)
Date Particulars J/F Amount
(In Rs)
18/06/05 To Cash ale - 10,000 19/06/05 By Cash ale - 12,000
1 B/06/05 By M/s
-
21106/05 BlMr. Natekar - 8,000
Ramdas 10,000 ae
& Bros. ale
sub-total 20,000 sub-total 20, 000
Total 20,000 Total 20, 000

M/s Ramdas & Bros. a/c

Date Particulars J/F Amount

(in Rs)
Date Particulars J/F Amount
(in Rs)

24/06/05 To Bank a/c - 5,000 18/06/05 By Goods/Stock - 10, 000

ale
sub-total 5,000 sub-total 10,000

25/06/05 To Balance - 5,000

c/d
Total 10,000 Total 10,000
25/06/05 By Balance b/d - 5,000

Machinery a/c,
Amount Amount
Date ParticuIars J/F (In Rs) Date Particulars J/F (In Rs)
20106105 To Bank a/c - 25,000
sub-total 25, 000 sub-total 0
25106105 By Balance c/d - 25,000
Total 25,000 Total 25,000
25106105 To Balance b/d - 25,000
r Natekar a/c
Amount Amount
Date ParticuIars J/F Date Particulars J/F
(in Rs) (in Rs)
21106/05 To Goods/Stock ale - 8,000 24/06/05 By Cash a/c - 2,000
sub-total 8,000 sub-total 2, 000
25106105 By Balance c/d - 6, 000
Total 8,000 Total 8, 000
25/06/05 To Balance b/d - 6,000

Wages Paid a/c

Date Particulars J/F Amount

(In Rs)
Date Particulars J/F Amount
(In Rs)
21106/05 To Cash a/c - 5,000
sub-total 5,000 sub-total 0
25/06/05 By Balance c/d - 5,000
Total 5,000 Total 5,000
25106105 To Balance b/d - 5,000

Amity Directorate of Distance and Online Education

Accounting for Managers 49
Commission Received a/c
Notes
Amol!nt Amol!nt
Date Particulars J/F Date Particulars J/F
(in Rs) (in Rs)
24/06/05 By Cash a/c - 500
s b-ioial 0 s b-ioial 500
25/06/05 To Balance c/d - 500
Toial 500 Toial 500
25/06/05 By Balance b/d - 500

3.10Summary
The ledger, sometimes known as the nominal ledger, is 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 in two 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 accounting. 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.

Check Your Progress

1. The wrtiting of balance at the end of the month as " By Balance c/d" denotes
.................... Balance.

2. Ledger is also called ... Principal Book.

3. The process of transferring entries from the Cash Book/ subsidiary books to the
ledger is called .

4. Balances of the various accounts are used in preparing

Questions and Excercises

1. What is Ledger? how it is balanced.

2. Distinguish the ledger from Journal.

2. Do the ledger posting of all examples and questions of the last chapter from
journalised transactions.

Further Readings
1. Accounting Principles. Robert N Anthony.

2. Accounting For Managers. Maheshwari and Maheshwari.

3. Introduction to Accountancy.T S Grewal. S Chand & CO.

4. Advanced Accountancy, Gupta R.L., M. Radhaswamy: Sultan Chand & Sons, New
Delhi.

5. Financial Accounting, Tulsian. Tata McGraw-Hill, New Delhi

Amity Directorate of Distance and Online Education

 Unit-4: Practical System- Preparing Cash Book And
Notes Bank Reconciliation Statement

Structure
4.1 Introduction- Cash Book
4.2 Format of Cash Book
4.3 More about Cash Book
4.3.1 Special Book
4.3.2 Contra Entries
4.4 Balancing the Cash Book
4.5 What is Bank Reconciliation Statement
4.6 Reasons of difference between Bank Balance as per Cash Book and Pass
Book
4.7 The Reconciliation Statement
4.7.1 Advantage of preparing BRS
4.7.2 Steps in Preparing BRS
4.7.3 Format of BRS
4.8 Summary

Objectives
The Objectives of this unit is to give fair idea about
How to prepare the Cash Book.
How to reconcile the balance of Cash Book and Pass Book and to know the
importance of reconciliation process.

4.1 Introduction - Cash Book

The cash book is meant to record all cash/bank transactions whatever be their
nature if subsidiary book system is followed. It is divided into two sides, the left hand
side (called debit side) for receipts of cash and the right hand side (called credit) for
payments. All receipts are debited and payments are credited in cash column. This is
done because cash is real ale and the rule 'debit what comes in and credit what goes
out' applies. Since in today's Business Concern, transactions with or through Bank are
even more numerous than strictly cash transaction, each side has two columns one
to record cash transactions and the other to record Bank transactions. Payments into
the Bank are entered on the left hand side (debit side) , payments out of Bank a/c are
entered on the right hand side(credit side). This is because bank ale is personal ale and
the rule 'debit the receiver and credit the giver' applies.

4.2 Format Of Cash Book

Ruling of a typical two column Cash Book is given here under:-

Dr Cr
Date Particular's Ledger Foli Cash Bank Date Particulars Ledger Folio Cash Bank

Note : Cash and Bank B alances will be shown in two different coumns both the sides.

Amity Directorate of Distance and Online Education

Accounting for Managers 53
The opening balance of cash in hand and at Bank is written first of all as "To Balance
brought down" or just "To Balance b/d". At the end of the period concerned the two Notes
columns on both the sides are totalled. The debit side cash column will always be
higher than the credit side cash column. The difference represents actual cash in hand
and should tally with the amount in the cashier's hand. Usually, the debit side bank
column is always bigger than the credit side bank column. The difference will mean so
much balance at the Bank. But sometimes a Bank allows a person an Overdraft (OD)
i.e., he can draw more than he has deposited. In such a case, the credit side Bank
column will total more than the debit side Bank column. (If the debit side is heavier,
the difference is a debit balance and if the credit side is heavier, the difference is a
credit balance). Difference is put on the shorter side (opposite side) by writing:" To (or
by) balance carried down (c/d)". Then the two sides are totalled, same figure appearing
on both the sides. In the cash book of the new period, one will begin with the closing
balance of the previous period which would become the opening balance of the new
period.

4.3 More About Cash Book

4.3.1 Special Book.
Cash Book is special Journal in which all cash and bank transaction are recorded
directly. Cash Book shows the cash receipts and the cash payments and it should not
be confused with profitability. The Cash Book resembles a ledger with the debit and
credit sides, and the balance represents cash on hand at the end of the accounting
period/sub-period or any particular occasion. Cash account is not opened separately,
when a Cash Book is maintained because Cashbook serves the purpose of the ledger
also. In other words, Cashbook is the book of first entry for all such transactions and the
ledger accounts for cash in hand and cash at bank.

4.3.2 Contra Entries.

1. If a transaction affects cash account and bank account only, entry for recording the
transaction is called a contra entry. Contra entries are corresponding entries made
on the opposite sides (both) of the cash book. They have to be written on both sides
as both sides (cash and bank a/c) are in the book itself. They are made on the
following occasions:

(a) When a cheque is presented to Bank and money is collected-payment entry in

the bank column and receipt entry in the cash column.

(b) When a cheque held as cash is sent for deposit to Bank-Payment entry in the
cash column and receipt entry in the Bank column.

(c) Cheques issued are returned and fresh cheques issued in lieu - Receipt entry
in the Bank column and payment entry in the Bank column.

(d) When cash is given in lieu of cheque - payment entry in cash column and
receipt entry in cash column.

(e) The sign used for contra entry C/.... is made red ink in the ledger folio column
and serially numbered during the month.

4.4 Balancing of Cash Book.

Cash book is to be ruled off and balanced on the occasions and the balance carried
forward to the next month and on the next page in the similar way what has been
discussed about balancing the account in the ledger. Cash and Bank balances are to be
separately balanced. Discount column is not to be balanced.

Amity Directorate of Distance and Online Education

52 Accounting for Managers

Example 1 - Cash Book-

Notes B. A example of preparing Cash Book from cash/bank transactions is given below :

The following transactions of M/s Kempapura Ltd Bangalore for the month of Jan
05 in the Cash Book. The Cash Book is required to be balanced for on 11Jan 05 on the
occasion of knowing the cash balance.

Date Transactions Amount

1 2 3
01 Opening Balance Cash Rs 950
Bank Rs. 65,000
Withdrew from Bank Rs. 2,000
Advance to Maanger, KP Singh Cash for Petty Exps Rs. 1,000
02 Purchase of Stationery For cash Rs. 1,000
03 Bought Sofa set for the Business Concern and paid by Rs. 10,000
Cheque
04 Bought Music System and Paid by Cheque Rs. 10,000
05 KP Singh cleared his advance by Submitting a bill for
Rs. 900/- and Cash Refund Rs. 100/-
07 Purchased manure, seeds, pots etc for garden for Cash Rs. Rs. 500
08 Purchased Bath-room Requisites for Cash Rs. 250
10 Purchased goods Rs. 8,000
11. Withdrawn from Bank Rs. 4,000
Note. Use imaginary receipt numbers, vouchers numbers, cheque numbers and
ledger folios.

Amity Directorate of Distance and Online Education

Accounting for Managers 53
.II! C> C> C> II)

ffi\ 1!1
C>
C>
0
C>
C>
C>
C>
C>
C>
0
C>
0
0
C> CD Notes
0 0 0
ID 0>
eli v" C\1

.c 0 0 C>
11111111 0 0 C>
IIIII: 0 0- 0 0 0 !"")
u 0 0
II)
ll)
'<to
0> C\1

U"l r-.m ...

C\1 ll)
.... C>
C\1

..
> (.) Cllt"") CD

'C
u
G)
u
r::
10
10
[JJ
>o
[JJ

J.l r: ::T""" . CI IC', ' <t ll) .... CX) 0 ,.. g

IIIII II)
0 CD

.II! C>
C:llll 0
a:
C> Ill
Ill II)
Ill coo

.c
11111111
a: 0
C>
0
C>
0
C>
0
u II) 0 0 0
'"
0> C\1

II)

-
(.)
)''"
C>
0
"" ...N
(.)

ill u CD
0 CDC
i'il - :3
CD
u E z u
c:
r::: a!ECT
oCD
u
::11
Ill
r::
al
-
0
:3
CD
>-uCD
IIJ::lCD"-
r:::-ug
..!lll::-.s::.-
m
CT
)-
'O C:Cl
<( Ill -; -
IIIII ..C::::: Cl
Cllr:::..c:U"l >r::: C'll r::: .
a. 0 asas 0 o 0 "0111 oo C'll 0
1-..C om_ .... 1-alal::il z
1- D J

J,J '
c; ,.. II)
C> C>
IIIII b ..
""
Q N ..1
''I

4.5 What is Bank Reconcilation Statement

The Bank Reconciliation Statement (BRS) is an aid used to ensure the accuracy
of transactions appearing in the bank columns of the cashbook. Such transactions
can be verified through an external record, namely, the bank statement or pass book
received periodically from the banker. While the Business Concern keeps a record of
its transactions through the bank column in the Cashbook, the banker in turn maintains
the bank's trans action with the Business Conce rn in his ledger. An extract from this
Amity Directorate of Distance and Online Education
52 Accounting for Managers

ledger showing details of the transactions during a specified period is sent at frequent
Notes intervals by the bank of the Business Concern and this extract is referred to as a bank
statement or pass book. Ideally speaking if both the side transactions are happening
instantly, then the balances in Cash Book and Bank's Pass Book for the same Business
Concern should be in agreement but it normally does not happen. Let's see why?

4.5 Reasons For Difference Between Bank Balance as Per

Cashbook and Passbook
1. The relationship between the customer and the banker is that of a creditor and
a debtor. So, if the bank column of the Cashbook shows a debit balance as on a
specified date the bank statement should show an equal amount of credit balance
as on that date vice versa. However, the balances shown by the two independent
records may not always agree due to the following:

(a) Cheques issued by the Business Concern to its suppliers or other parties may
not have been presented for payment.

(b) Cheques received from customers and deposited may not have been collected
and credited by the banker.

(c) Deposits may have been directly made into the bank account of the Business.

(d) Collection charges, service charges and interest on overdraft charged by the
banker.

(e) Interest and other incomes directly credited by the bank.

(f) Wrong entries made by the Business Concern in the Cash Book or errors
committed by the bank in its ledger.

(g) Omission of entries in the two sets of books.

(h) Dishonour of cheques deposited in the bank.

The effect of one of these entries is explained below.

Example2

1. Cheques 1ssued but not presented for payment When a cheque is issued
to a third party, it is entered in the Cash Book by crediting the Bank account
resulting in reducing the bank balance in the business's books. But bank
debits the business concern's account only when the cheque is presented by
that third party. So, till it is presented and paid for, the bank passbook shows
more balance than shown by the depositor's Cashbook.

Amity Directorate of Distance and Online Education

Accounting for Managers 55
Date Parllcu_lars Amou_nt Daie Pari1 c u_la rs Amou_nt
Dr Cr
As. As. Notes
0403.2005 -10 Balance 15,000 05.03.2005 By Rajan 2,000
b/d Trade rs ale
05.03.2005 By Balance c/d 13,000
15,000 15,000

Passbook

Date Pari1cu_lars Amou.niDr Amou.ni Cr Balance (As)

As. As.
0403.2005 -10 Balance 15,000
b/d

2. So, balance as per bank statement or passbook is Rs 2, 000 less than the
balance in the Cashbook.

4.7 The Reconciliation Statement

1. On receipt of the bank statement or on updating the passbook, a comparison
of the entries in the Cashbook with those appearing in the bank statement will help in
identifying the items causing the difference in the two balances. While the difference
due to the reasons enumerated in para 2 (a) and (b) above will be eliminated in the
near future (that is, creditors will soon present their cheques for payment and Business
Concern's cheques will be collected by the bank in due course), the difference due
to items 2 (c) and (h) can be eliminated only if such items are recorded in the cash
Book. After these adjustments have been recorded a statement will be prepared to
reconcile the balance as shown by the Cashbook with that shown by the passbook.
This statement is referred to a BRS. The BRS is thus an additional tool available to
check the accuracy of the bank columns of the Cash Book.

4.7.1 Advantages of Bank Reconciliation Statement (BRS)

1. Following are the steps for preparing BRS:
(a) Error Detection.
(b) Delay in collection gets revealed in time.
(c) Completion of Cash Book as BUSINESS CONCERNs gets information about
bank charges, cheques dishonoured, direct payments and direct receipts etc.
(d) Chances of embezzlement are reduced.
4.7.2 Steps in preparation of BRS
1. steps of preparing BRS can be as follows:
(a) Take the Cashbook and passbook balance as starting point.
(b) Adjust the start point amount as per information given and analyse its impact
on the other balances.
(c) After adjusting all the difference or errors, the balance as per the other book
is obtained. If the final balance is positive, it denotes favourable balance (Dr.
Balance as per Cashbook or credit balance as per the passbook). However, if
the final balance is negative, it denotes the unfavourable balance or overdraft.
(Cr. Balance as per Cashbook or debit balance as per passbook).

4.7.3 Format of BRS

The following table summarizes the impact of various difference and errors on the
starting balance. This template will help you in practicing preparing BRS by following
steps as enumerated above.

Amity Directorate of Distance and Online Education

56 Accounting for Managers

Item Rs. Rs.

Notes Bank Balance as par Cash book
Or
Overdraft balance as per Pass Book
xxxx
Add:
Tchaques issuebuinoclears .
xxxx
2. Direct paymenis made by
customers. XXXX
3. Amount collected by bank (rent,
dividend, interest on investments, etc. XXXX
4. Cheques deposited but not omitted
to be recorded in cashbook.
5. Wrong credit on the crediside o+ XXXX
passbook.
xxxx
Less:
1. Cheques eposii.e bu no XXXXXX
collected.
2. Cheques paid in o i.he bank bu xxxx
dishonoured.
3. Bank charges and interest charges. xxxx
4. Payment made by the banker on
behalf of the trader. xxxx
5. Cheques issued buinorecorded in
the cashbook. xxxx
6. Wrong entry on he debii. side o+
the passbook. xxxx
xxxx
Bank Balance as per Pass Book
Or xxxxxxx
Credit balance as per Cash Book

xxxx
Example- 3.
1. DLF Golf Course, New Delhi shown an overdrawn position of Rs 3732 on 31
March 2005. Detailed examination of two records revealed following. Analyse the
following and prepare BRS.
(a) A cheque of Rs. 1,560 received from R Bhatia had been credited in the name
of another customer's a/c ( R K Parashar).
(b) The debit side of his own book had been undercast by Rs.300.
(c) A cheque for Rs. 182 drawn in payment of electricity charges had been
entered in Cashbook as Rs. 128 but was shown correctly in bank statement.
(d) A cheque for Rs.210 from Deepinder Singh having been paid into bank, was
dishonoured and shown as such in Bank Statement, although no entry relating
to dishonouring of the cheque had been made in the Cashbook.
(e) The bank had debited a cheque for Rs. 126 to Golf Course a/c. It should have
been debited to one customer a/c (A K Bassy).
(f) An interest credit of Rs. 90 on Golf Course has been directly collected by the
bank, but no entry has been made in the Cash Book.
(g) A cheque for Rs.1, 080 deposited in the bank on 31.3.2001 had not been
credited by the bank.
Amity Directorate of Distance and Online Education
Accounting for Managers 57
(h) Interest of Rs. 228 had been directly debited by bank but the same was not
recorded in Cashbook.
Notes
Prepare a Bank Reconciliation Statement after necessary amendments in the
Cashbook as on 31st March, 2001.

Solution
Bank Reconciliation Statement On 31 St March 2005

Overdraft Bank Balance as per Cashbook (amen e (-)3,732

balance).

126
Ad. d. : Cheque wrongly debited by Bank
1,080
Cheque deposited but not audited by Bank 1,060
4,938
Less: Cheque noiebiieby ihe bank 1,560

Over raH Bank Balance as per Passbook 3,378

4.8 Summary
Knowing about the Cash Book is very important as cash and Bank Balance is the
life blood of the business. Even the Business is not following subsidiary book system
a hybrid system is followed and Cash Book is maintained. Similarly, Knowing about
BRS is important for the benefits mentioned. After you adjust the balance per bank to
be the true balance and after you adjust the balance per books to also be the same true
balance, you have reconciled the bank statement. Most accountants would simply say
that you have done the bank reconciliation .

Check Your Progress

1. The cash book is meant to record all ...............transactions whatever be their
nature.

2. Cashbook is the book of first entry for ........... transactions and the ledger accounts
for .............. and .................

3. In three column Cash Book the ........................ column is not balanced.

4. The ...................column of the cash book can only have the debit balance.

5. Contra entries are ...............to be recorded in the ledger.

True or False
6. The cash book can only be balanced at the month end.

7. All receipts are written on the credit side of the cash book.

8. Bank Statement and Bank Reconciliation statement are the same.

9. BRS helps in detecting/ruling out the frauds beside facilitating the follow up actions.

Amity Directorate of Distance and Online Education

58 Accounting for Managers

10. BRS is prepared by only profit making organisations.

Notes
Questions and Excercises
1. What is Cash Book ? What is its Format? How it is Prepared?

2. What are the Contra Entries? Are they posted to Ledger?

3. Enter the following transactions in Cash Book of M/s Barkat & Co

2008 April1 Cash in hand Rs 237 ; Balance at Bank Rs 200.
April2 Received from KK Ent cash Rs 590.
April4 Cash Sales Rs 134
Paid salaries for March by cash Rs 200.
April5 Paid BK Bose by cheque Rs 300.
Cash Purchases Rs 60
AprilS Cash Sales Rs 112
Paid Cartage Rs 12
April10 Paid rent Rs 10
April14 Deposited into Bank Rs 300.
April 30 Paid Wages Rs 72.

4. From the following particulars prepare a Bank Reconciliation Statement as on 31st

March, 2007 of CD & Associates.

Rs.
(a) Balance as per Cash Book 11,600
(b) Cheques issued but not presented for payment upto 31st March, 2007 4,000
(c) Cheques sent for collection but not collected upto 31st March, 2007 3,000
(d) The Bank had wrongly debited the firm's account by Rs. 400
which was rectified by them in April, 2007
(e) Interest on securities Rs. 800 collected by the Bank direct credited by the
Bank to the firm's Account within 31st March, 2007 but not entered in the Cash
Book.
5. The Bank Balance as per Bank Statement of Sen & Co. as on 31st March, 2003
showed a Credit Balance of Rs. 19,500. On comparison with the Cash Book the
following points were noted: 8+8=16 (a) Cheques of Rs. 15,900 deposited on
29.03.2003 but cheque of Rs. 9,500 credited by the Bank on 3.4.2003. (b) Cheque
of Rs. 5,900 deposited with the Bank on 24.3.2003 but not recorded in the Cash
Book. (c) As per out standing order Bank paid on our Account Telephone Bill Rs.
2,500 and Electric Bill of Rs. 1, 200 for the month of February, 2003, intimation
for the same cam on 2.4.2003. (d) Cheque of Rs. 16,000 issued to creditors by
31.3.2003 but cheque of Rs. 6,200 was presented by 31.3.2003. (e) Bank has
debited our account Rs. 500 for issuing cheque books from time to time but not
recorded in the Cash Book. (f) A cheque of Rs. 2,000 deposited with the Bank on
12.2.2003 but the Bank has credited Rs. 1,970 on 16.3.2003. (g) Bank has credited
out Account by Rs. 1,200 on account of interest on Fixed Deposit but not recorded
in the Cash Book. Make necessary corrections in the Cash Book and prepare Bank
Reconciliation Statement.

Amity Directorate of Distance and Online Education

Accounting for Managers 59
Further Readings
1. Accounting Principles. Robert N Anthony. Notes
2. Accounting For Managers. Maheshwari and Maheshwari..

3. Introduction to Accountancy.T S Grewal. S Chand & CO.

4. Advanced Accountancy, Gupta R.L., M. Radhaswamy: Sultan Chand & Sons, New
Delhi.

5. Financial Accounting, Tulsian. Tata McGraw-Hill, New Delhi.

Amity Directorate of Distance and Online Education

 Unit-5: Preparing The Trial Balance
Notes
Structure
5.1 Introduction
5.2 How to Prepare a Trial Balance
5.3 Format of Trial Balance
5.5 Trial Balance : Errors and Their Rectifications
5.5.1 Errors Located by Trial Balance
5.5.2 Errors not Located by Trial Balance
5.6 Steps to Locate an Error/Mistake in the Trial Balance
5.7 Summary

Objectives
Objective of this unit is give comprehensive idea of summarising process i.e
preparing the Trial Balance from Ledger. And also to make student awarE
of that tallying trial balance is not the conclusive proof of everything is right
There is also brief explanation about how to locate the error.

5.1 Introduction
1. A Trial Balance is a summary of all the ledger balances outstanding as on a
particular date. All the debit balances from the Ledger are shown on one side and
all the credit balances are shown on the other side. You are aware that a debit
balance in a ledger account indicates an excess of debit side over the credit side
of the account. Similarly, a credit balance in a ledger account indicated the excess
of credit side over the debit side. Now, if all the debit and credit balances were
recorded on the two sides of the Trial Balance, it stands to reason that the two sides
should be equal, since each item of debit, there was a credit item.

5.2 How to Prepare a Trial Balance

1. A Trial Balance is usually prepared in a register with debit and credit columns. The
debit and credit sides of each ledger account (including cash and bank balances)
would be totalled up as at the date of the Trial Balance (at the end of the month) in
order to ascertain whether there is any balance and, if so, whether such balance is
a debit or credit balance. The balance of each such account would then be entered
in the Trial Balance.

5.3 Format of Trial Balance

Ruling of a Trial Balance is given below:

Trial Balance As On 31 December

Serial No. Name of Account L.F Debit Rs. Credit Rs.

Example 1
1. Given below is a Trial Balance prepared as on January 31, 2005 for Unit Run
Canteen of a Station by placing the debit and credit ledger balances appropriately.

Amity Directorate of Distance and Online Education

Accounting for Managers 61
Sl Name of Account L.F. Debit Rs. Credit Rs.
No. Notes
1. Cash 34,750
2. Capital 40,000
3. PM/s Smitahases 32,000
4. Sales 10,750
5. Sales return 500
6. PM/s Smitahases 200
returns
7. M/S X 29,800
8. M/S Y 2 000
9. Smita & Co 3 000
10. Marketable Securities 3,000
11 . Wages 500
12. Interest received 600
13. Sundry Debtors 9 500
14. Posting and 200
TeleQrams
15. Stationery 200
16. Bank 500
17. Salaries 700
18. Rent 500
84,350 84,350

5.5 Trial Balance: Errors and Their Rectification

1. The Trial Balance is prepared to ensure the arithmetical accuracy of the records
of a business and also to ensure that for every debit entry a credit of an equal
amount has been recorded. Thus, a Trial Balance in which the total of the debits
does not equal the total of credits can be taken as an evidence for the existence
of some errors in the records. On the other hand, a Trial Balance in which the total
of the debits equals the total of credits is not a conclusive proof of the accuracy of
the records. Certain errors may not affect the agreement of a Trial Balance as the
erroneous entries may not violate the dual aspect concept. It means that even if
the Trial Balance agrees, steps should be taken to ensure that the records are free
from the errors.

2. To understand the nature of errors and their rectification we may classify them into:
(a) Errors disclosed by a Trial Balance and
(b) Errors not disclosed by a Trial Balance.

5.5.1 Errors disclosed by a Trial Balance

1. The errors which cause a mismatch in the Trial Balance totals are frequently
referred to as errors disclosed by a Trial Balance. However, the mismatch does
not automatically point to the actual errors. It is only the diligence and ingenuity of
the person preparing the accounts which would help in the location of the errors.
The various errors which would cause a mismatch in the Trial Balance totals are as
follows:

(a) Wrong Totalling In A Subsidiarv Book. For example, if the total of the M/s Smita
for a month is struck as Rs. 26,150 instead of Rs. 26,250 then the debit in the
M/s Smita account would be Rs. 26,150. The total of the credits posted in the

Amity Directorate of Distance and Online Education

62 Accounting for Managers

individual suppliers' account would be Rs. 26,250 and in the Trial Balance the
Notes total credits will exceed total debits by Rs .100.

(b) Wrong Calculation Of Balances In A Ledger Account. For example, if the debit
balance in the furniture account has been taken as Rs. 5,650 instead of Rs.
5,850 then the Trial Balance will show the total credits exceeding the total
debits by Rs.200

(c) Partial Omission Of An Entrv. If the debit or credit aspect of a transaction has
been omitted to be recorded, the Trial Balance will disagree. For example, if
a cash sale of Rs. 800 is omitted to be recorded in the Sales account then the
total debits will exceed the total credits by Rs. 800.

(d) Posting an Aspect Of A Transaction More Than Once. For example, if an

amount of Rs. 2,000 paid to Smita & Co has been posted to the debit of Smita
& Co account twice in the books of M/S Smita & Co., then the debits will
exceed the credits by Rs. 2,000.

(e) Debit Entnes Wronalv Recorded As Credit Entnes Or V1ce Versa For example,
if an amount of Rs. 3,500 received from M/s Y is posted to the debit of it in the
books of M/s X, then the total debits will exceed the credits by Rs. 7,000.

(f) Errors In Totalling The Debit Column Or The Credit Column Of The Trial
Balance. Obviously, if a total mistake occurs which casting either the debit side
or credit side of the Trial Balance, it will not tally.

(g) Balances Of Ledger Accounts Are Wrongly Transferred To The Trail Balance.
For example, the balance of Rs. 46,945 in Fixed Assets account is transferred
to the Trial Balance as Rs. 46,945. This will cause the credits to exceed the
debits by Rs. 450.

(h) Omitting To Include An Account's Balance In The Trial Balance: When an

account which is outstanding in the ledger accounts is omitted to be included in
the Trial Balance, it will not tally.

2. Suspense Account. When a combination of the various errors mentioned above

have been committed, the mismatch in the totals of the Trial Balance will be
totally different for the amounts of the individual transactions and only a thorough
scrutiny and checking of the books of accounts will help in detecting the errors. For
instance, if the total of the credits in a Trial Balance exceeds the debits by Rs.2, 550
then a Suspense account with a debit balance of Rs. 2,550 will be included in the
Trial Balance. At a later date, the books may be scrutinized to detect the errors and
the rectification entries be passed to clear the balance in the Suspense account.

5.5.2 Errors Not Disclosed By Trial Balance

9. Even though a Trial Balance may be in agreement, certain errors might have been
committed while recording the transactions. Such errors are referred to as errors
not disclosed by Trial Balance. The errors, which will not cause a mismatch in the
totals of a Trial Balance, are as follows:

(a) Omission Of The Recording Of A Transaction From The Books Of Accounts. If

the cash withdrawal of Rs. 1,200 by the business organisation is omitted to be
recorded in the books, the Trial Balance will still agree as both the debit and the
credit aspects have been omitted to be recorded.

Amity Directorate of Distance and Online Education

Accounting for Managers 63
(b) Recording A Transaction At An Amount Which Is Totallv Different From The
Actual Amount. If the M/s Smita of goods worth Rs. 7,500 is recorded in the M/s Notes
Smita book as Rs. 5,700 the error will not cause the Trial Balance to disagree.

(c) Compensating Errors. These are quite difficult to detect. If a rebate of Rs. 215
allowed to a debtor has been posted to the credit of his account as Rs. 251
and a cash sale of Rs. 2,851 has been posted to sales account as Rs. 2,815,
then the excess credit caused by the first error would be exactly compensated
by the lower credit recorded by the second error and the trail balance will be in
agreement.

(d) Posting Of An Aspect Of A Transaction On The Correct Side Of A Wrong

Account. If in the books of M/S Smita , the amount of Rs. 800 received form
Gas Agency, a debtor, is posted to the credit of DLF Golf Course, also a debtor,
the Trial Balance totals will still agree, because both are debit accounts and the
total effect is the same.

(e) Recording Both Aspects Of A Transactions More Than Once In The Books Of
Accounts. If a sales made is entered in the sales account twice, the error will
not cause a mismatch in the totals of the Trial Balance.

(f) Errors Of Principle. If the properties account is debited for an amount of repair
charges incurred for the properties, the error will not be disclosed by the Trial
Balance. This is because that both machinery account and repairs account are
debit accounts and it is a question of principle that repair charges should not be
debited to the properties account.

(g) Omission/mistake of extension and carrv forward. When an item is omitted or

wrong figure is taken while carrying forward to the next pages Trial Balance will
not tally.

5.6 Steps to Locate a Mistake

1. Whenever a Trial Balance disagrees even by the smallest amount, the mistakes
involved must be unearthed. A small amount may be the net result of a number of
mistakes and it is not safe to ignore a difference in Trial Balance, however small.
The following steps are suggested to find out errors:-

(a) Total the Dr. and Cr. Columns of the Trial Balance again. If one amount has
been shown for a group of accounts (for example, in place of all customers
individually, only one amount against "Sunday debtors" may be shown),
recheck the total of the list of such accounts.

(b) See that the balances of all accounts, including the cash and Bank balance
have been written in the Trial Balance.

(c) Find out the exact difference in the Trial Balance. Look for such accounts,
which show this amount. It is possible that the balance of the particular
account has been omitted from the Trial Balance. Accounts showing a balance
equal to half the difference should also be checked. The amount may have
been written twice or on wrong side of the Trial Balance.

(d) See that there is no mistake in the balancing of the various accounts.

(e) Recheck the totals of the subsidiary books, especially if the mistake is of 1,
10,100 and so on.

Amity Directorate of Distance and Online Education

64 Accounting for Managers

(f) If the difference is a large one, compare the figures with the Trial Balance of the
Notes corresponding date of the previous period. Any account showing a rather large
difference over the figures of the corresponding Trial Balance of the previous
years should be rechecked.

(g) Posting of all amounts corresponding to the difference should be checked.

(h) If the difference is still not traced, posting of all accounts will have to be
checked. The subsidiary books should be gone through to see if any items
have been left un-posted. It should also be checked whether the various
accounts have been opened with correct balances. Nominal accounts should
be checked first then real account and then personal accounts should be taken
up.

5.7 Summary
Trial Balance is the one which the management is more interested and therefore it
should be error free. It is bird eye view of the position of various accounts at the point
of time. The error should be located without fail. It may be pointed out that the above
steps indicate a general outline of procedure as has been proved by experience to be
most helpful and need not necessarily be followed in similar order in each case. Those
acquainted with the books must know best the weak spots of their work and it must be
left to them to formulate the plan of action. The location of clerical errors sometimes
proves to be the most difficult task but, at the same time, it is not impossible to detect
provided the search is conducted intelligently and assiduously. The Trial Balance
having been agreed, the preparation of the final accounts may be proceeded with after
adjustments, if any.

Check Your Progress

1. Trial Balance is prepared in the step called ..........

2. There are two popularly used methods of preparing Trial Balance

and.

3. Partial omission of an entry is an example of error which will be ....................... by

Trial Balance.

4. Trial Balance is normally prepared ................ month.

True or False
5. Errors of Principle do not affect the trial balance.

6. Trial Balance is left unaffected by compensating errors.

7. The suspense account shows the effect of only those errors that affect the trial
balance.

8. All errors of commission will cause a difference in the trial balance

Questions and Excercises

1. What is Trial Balance ? How it is prepared?

2. What are the mistakes located by Trial Balance?

3. Is the tallying of TB is conclusive proof of its being error free? If not, What kind of
mistakes can remain hidden even after Tral Balance agrees?

Amity Directorate of Distance and Online Education

Accounting for Managers 65
4. What are steps to locate the errors?
Notes
5. An accountant could not tally trial balance. The difference was temporarily placed to
a suspense account for preparing the final accounts. The following errors were later
discovered:

(a) The sales book was undercast by Rs. 750.

(b) Entertainment expenses Rs. 195, through entered in the Cash Book, were
omitted to be posted in the ledger.

(c) Discount column of the receipt side of the Cash Book was wrongly added Rs.
140 instead of Rs. 120.

(d) A purchase from Sachin of Rs. 192, though correctly entered in the purchases
book, was wrongly debited to his personal account.

(e) Commission of Rs. 25 paid was posted twice. Once to discount amount and
once to commission account.

Your are required to: Pass the necessary rectifying entries.

Further Readings
1. Accounting Principles . Robert N Anthony.

2. Accounting For Managers. Maheshwari and Maheshwari.

3. Introduction to Accountancy.T S Grewal. S Chand & CO.

4. Advanced Accountancy, Gupta R.L., M. Radhaswamy: Sultan Chand & Sons, New
Delhi.

5. Financial Accounting, Tulsian. Tata McGraw-Hill, New Delhi.

Amity Directorate of Distance and Online Education