BOOK KEEPING: ACCOUNTING PROCEDURES, RECORDS & SYSTEMS

1. INTRODUCTION:

We are not concerned here with record keeping procedures for the purpose of training
bookkeepers. Some knowledge of these procedures is nevertheless useful for at least two
reasons. Firstly, as is the case with many subjects, accounting is best learned by doing -
by actually solving problems. Secondly, the debit and credit mechanism, which is the
principal technique discussed here, provides an analytical framework.

The Account:

An Account is a record of increases and decreases of an item of Asset, Liability,

Revenue/Income, or Expense. A typical account would be like this:

Cash Account

Date Vr. Ref. Particulars LF Debit Credit

(Increases) (Decreases)
10, Jan xx 1 Capital – Partner X 10,000

15, Jan xx 10 Capital – Partner X 1,00,000

15, Jan xx 12 Purchases 25,000

16, Jan xx 15 Rent Advance 50,000

18, Jan xx 25 Sales 30,000

25, Jan xx 29 Cash Deposit into Bank 25,000

31, Jan xx TOTAL 1,40,000 1,00,000

Balance 40,000

The essence of the ‘Account” is that, at any given time we can determine the balance in
an account. For ex. the balance of cash at any given time, the amount due from a
customer (Receivable) the amount payable to a supplier (Trade Payable), the amount
spent on salaries up to a point in time etc.

-1-
 Voucher – Evidence of a transaction

PAYMENT VOUCHER
(Name of Organization) Voucher No.

Date:
Paid to
Amount
Purpose

Supporting Documents

Account and Cost centre

Authorized by Paid by Recipient

2. DEBIT AND CREDIT:

The left hand side of any account is arbitrarily called the debit side, and the right hand
side is called the credit side. The verb ‘To debit’ and ‘To credit’ means to make an entry
in the left-hand side or right-hand side of an account respectively. In the 15th Century, a
Franciscan monk, Lucas Pacioli, described a method of arranging accounts so that the
dual aspect present in every accounting transaction would be expressed by a debit amount
and an equal and offsetting credit amount. This is why book keeping is called double-
entry book keeping.

Following from this system we have the following equations:

1. Assets = Liabilities + Owners’ equity
2. Debits = Credits.

Rules for Debit and Credit

a. To Increase To Decrease
ASSET Accounts DEBIT CREDIT
LIABILITY Accounts CREDIT DEBIT
EXPENSE Accounts DEBIT CREDIT
INCOME/REVENUE
CREDIT DEBIT
Accounts

b. The following rule is an another way of signifying the above.

a) Debit the receiver and credit the giver.

b) Debit what comes in, and credit what goes out.
c) Debit all expenses and losses, and credit all incomes and gains.

-2-
3. THE LEDGER:

A Ledger is a group of accounts, usually, a bound book with the title ‘General Ledger’.

4. THE CHART OF ACCOUNTS:

Prior to setting up an accounting system, a list is usually prepared showing each item for
which a ledger account is to be maintained. This list is called a chart of accounts. In a
manual system, the list should be numbered in a way to facilitate grouping, for the
purposes of preparing the final accounts namely the Balance Sheet and the Profit & Loss
Account.

There is no limit to the number of Accounts and the title of accounts.

The guiding factor in designing a chart of accounts should be -

a) Well thought out so as to be able to provide information that is required for
decision making - Balance between catering to very rarely used - insignificant
data and too general information.
b) Give meaningful titles so that anyone would be able to follow.
c) To the extent possible keep the chart simple.

-3-
5. THE JOURNAL:

This is a chronological record of accounting transactions showing the names of accounts

that are to be debited or credited, amounts of debits and credits, and any useful
supplementary information about the transactions.

JOURNAL
Date Vr. Particulars LF Debit Credit
Ref. (Increases) (Decreases)
10, Jan xx 1 Cash A/c 10,000
Capital – Partner X 10,000
(cash received for Capital
from Partner X)

15, Jan xx 10 Cash A/c 1,00,000

Capital – Partner X 1,00,000
(cash received for Capital
from Partner X)

15, Jan xx 12 Purchases 25,000

Cash A/c 25,000
(purchase of ABC from
XYZ Ltd vide Bill No…….)

16, Jan xx 15 Rent Advance 50,000

Cash A/c 50,000
(cash paid for Rent Advance)

18, Jan 'xx 25 Cash A/c. 30,000

Sales 30,000
(cash received from sale of….)

25, Jan 'xx 29 Bank 25,000

Cash 25,000
(cash deposited into bank)

The basic document evidencing a transaction is called a voucher.

6. POSTING OF LEDGER:

Based on the instruction given by the Journal, entries are made in the ledger. This
process is called posting.

7. TRIAL BALANCE:

The trial balance is simply a list of the account names and the balances in each account as
of a given moment of time, with debit balances in one column and credit balances in
another.

-4-
 HOME MEALS LIMITED,
Trial Balance as on March 31, 20xx
Account
No. Account titles Debit Credit
61,0
101 Cash 00  
80,0
102 Receivables from xyz 00  
50,0
103 Rent Deposit paid 00  
2,00,0
104 Furniture and fixtures 00  
1,50,0
105 Equipments 00  
10,0
106 Stationery 00  
1,0
107 Pre-paid insurance 00  
2,00,00
108 Capital of partners   0
15,00
109 Retained earnings   0
1,60,00
110 Bank borrowings   0
15,00
111 Income tax payable   0
14,00
112 Creditors   0
20,00
113 Accumulated depreciation on furniture and fixtures   0
30,00
114 Accumulated depreciation on equipments   0
3,00,00
115 Sales   0
80,0
116 Purchase of provisions 00  
31,5
117 Salaries and wages 00  
20,0
118 Delivery charges - expense 00  
27,0
119 Interest expense 00  
2,5
120 Miscellaneous expenses 00  
25,0
121 Depreciation expense 00  
1,0
122 Insurance expense 00  
15,0
123 Income tax expense 00  
7,54,0 7,54,00
    00 0

-5-
 Obviously both the debit and the credit side will tally because we have debited and
credited some two accounts for every transaction, with the same amount. The
preparation of the Trial Balance serves two principal purposes, (1) to show the equality of
debits and credits have been maintained and (2) it provides a convenient summary
transcript of the ledger record as a basis for making the adjusting and closing entries that
precede preparation of financial statements.

8. ADJUSTMENT ENTRIES:

The trial balance as on a date is reviewed to ensure that each account in fact reflects the
correct status. For example, if a party’s account shows a certain balance, as on a date,
and it is seen that certain discounts have not been provided for, then an adjustment
journal entry is passed to reflect the actual realizable amount from the party.

After these adjustment entries, and posting the same into the ledger, a fresh trial balance
is drawn up from which the final accounts viz. Balance Sheet & Profit And Loss account
are drawn up.

9. PREPARATION OF PROFIT AND LOSS AND BALANCE SHEET:

From the final trial balance which reflects the balances in each of the accounts as on a
date, we proceed to draw up the Profit and Loss Account and Balance Sheet. All the
accounts can be classified as Assets (A) Liability (L), Income (I) or Expense (E). Hence
Income & Expense accounts are taken into the Profit & Loss and Assets & Liability
accounts are taken into the Balance Sheet. The net of Income & Expense (Profit/Loss) is
then carried to the Balance Sheet as part of the owners’ funds (Retained Profits).

Once the Balance Sheet is drawn up all the closing entries are passed by transferring the
Income and Expense accounts to the Profit & Loss Account in the General Ledger. Then
the next accounting period books are opened with the opening balances which is the same
as the closing balances of the Balance Sheet items of the previous period. The
accounting cycle then continues as shown below:

-6-
THE ACCOUNTING CYCLE

1. Analyze transactions

2. Journalize original entries

Ending balance sheet account
balances from step 6 become
3. Post journal entries to ledger beginning balances for
repetition of the cycle in the
next accounting period.

4. Trial Balance

5. Identify, journalize, and post

Adjusting entries

6. Final Trial balance

7. Prepare financial statements

-7-
Summary of the Accounting Process

1. The first, and most important, part of the accounting process is the analysis of
transactions. This is the process of deciding which account or accounts should be
debited, which should be credited, and with what amounts, in order to reflect events in
the accounting records. This requires knowledge of accounting concepts and judgment.

2. Next is the purely mechanical step of journalizing original entries; recording the results
of the transaction analysis in the journal.

3. Posting is the process of recording changes in the ledger accounts exactly as specified by
the journal entries. This is another purely mechanical step.

4. At the ending of the accounting period, judgment is involved in deciding on the adjusting
entries. These are journalized and posted in the same way as are original entries.

5. The closing entries are journalized and posted. This is a purely mechanical step.

6. Financial statements are prepared. This requires judgment as to the best arrangement and
terminology, but the numbers that are used result from the judgments made in steps 1 and
4.

These six steps are taken sequentially during an accounting period, and are repeated in each
subsequent period. The steps are therefore commonly referred to as the accounting cycle.

-8-