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BASIC ACCOUNTING
PROCEDURES-JOURNAL ENTRIES
• Meaning and significance of Double Entry
  Systems.
• Term – ‘Accounts’ and classification of
  accounts into personal, real and nominal.
• Utility of classification and sub-classification.
• Determination of debits and credits from
  transactions and events.
• Recording of transaction in the JOURNAL.
DOUBLE ENTRY SYSTEM

• Double entry system of book-keeping has
  emerged in the process of evolution of
  various accounting techniques.
• It is the only scientific system of accounting.
• Every transaction has two fold effects:
   – Debit
   – Credit.
• Both the aspects are to be recorded in the
  books of accounts.
ADVANTAGES OF DOUBLE ENTRY
         SYSTEM
• Accuracy could be established through Trial
  Balance.
• Profit earned or loss suffered could
  ascertained together with details.
• Financial position of the concern could be
  ascertained at the end of each period by
  preparation of Balance Sheet.
• Results could be compared between two
  periods and reason for the change may be
  ascertained.
• Affords significant information for the
  purposes of control.
ACCOUNT

• The two columns which we referred are put in the form
  of an account, called the ‘T’ form.
• Illustration: CASH
                Increase Rs.                      Decrease Rs.
Opening          10,000                             1,000
balance
                  2,500                               300
                  2,000                               200
                     50                               500
                  1,350
                    400                   TOTAL     2,000
                               New or              14,300
                               closing balance
                  16,300                           16,300
ACCOUNT

•   Increase in asset       -   Debit
•   Increase in liability   -   Credit
•   Decrease in asset       -   Credit
•   Decrease in liability   -   Debit
•   Increase in capital     -   Credit
•   Decrease in capital     -   Debit
•   Increase in expense     -   Debit
•   Decrease in expense     -   Credit
•   Increase in income      -   Credit
•   Decrease in income      -   Debit
ILLUSTRATION

2006                            Rs.
April
1. R. started business        10,000
2. He purchased furniture      2,000
3. Paid salary to his clerk      100
4. Paid rent                      50
5. Received interest              20
SOLUTION

Apr Explanation    Accounts Nature of How       Debit Credit
06 involved        Accounts affected   affected
1. Rs.10,000       Cash & Asset       Increase 10,000
   cash invested   R’s     Proprietor Decrease        10,000
   in business.
1. Purchased       Furniture   Asset     Increase 2,000
   Furniture        Cash        Asset     Decrease       2,000
1. Salary Paid      Salary     Expense   Increase   100
                   Cash        Asset     Decrease          100
4.   Rent paid     Rent        Expense   Increase     50
                   Cash        Asset     Decrease           50
5. Interest        Cash        Asset     Increase     20
   Received        Interest    Income    Decrease           20
ACCOUNTING EQUATION
           APPROACH
• Often Owner’s claim or fund in the business is
  called equity.
• Owner’s claim implies capital invested plus any
  profit earned minus any loss sustained.
       EQUITY + LIABILITIES = ASSETS
                       OR
 EQUITY+LONG-TERM LIABILITIES=FIXED ASSETS+CURRENT
              ASSETS-CURRENT LIABILITIES
CLASSIFICATION OF ACCOUNTS

                    ACCOUNTS



Personal Accounts                  Impersonal Accounts


                                  Real        Nominal



   Natural           Artificial          Representative
                      (legal)
GOLDEN RULES OF ACCOUNTING

• Personal Account
   – Debit the receiver
   – Credit the giver
• Real Account
   – Debit what comes in
   – Credit what goes out
• Nominal Account
   – Debit all expenses and losses
   – Credit all incomes and gains
JOURNALISING PROCESS

• All transactions are first entered in the journal
  as and when they occur; the record is
  Chronological.
                    JOURNAL

  1           2                3     4         5
DATE      PARTICULARS          L.F. DEBIT  CREDIT
                                   AMOUNT AMOUNT
                                     Rs.    Rs.
ADVANTAGES OF JOURNAL

• Chronological order:
   Complete information on time basis
• Narration:
   Precise explanation of transaction
• Posting:
   Journal forms the basis for posting the
   entries in the ledger
LEDGERS

• Concept of Ledgers
• Ledger posting and balancing of accounts
• Opening accounts each year taking closing
  balances of the previous year
• Use of ‘balance c/d’ and ‘balance b/d’.
SPECIMEN OF LEDGER
             ACCOUNTS
• Each ledger account has two sides
  1. Debit (left part of the account)
  2. Credit (right part of the account)
• Each of the debit and credit has four
  columns:
  1. Date
  2. Particulars
  3. Journal folio i.e. page from where the
     entries are taken for posting
  4. Amount
LEDGER ACCOUNT FORMAT

Dr.                                                  Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
POSTING - RULES

• Open separate account

• Use of ‘To’ and ‘By’

• Respective reference.
BALANCING AN ACCOUNT

• It is necessary to ascertain the balance in an
  account on a regular basis. It is not difficult.
• Ascertainment procedures:
   – Total the sides
   – Ascertain the difference
   – The difference is the balance
• If credit side is bigger, then it is credit
  balance. Write on the debit side as, ‘To
  Balance c/d’.
• If debit side is bigger, then it is credit
  balance.
• The totals are written on the two sides
  opposite one another.
TRIAL BALANCE

• Meaning and purpose

• Technique of taking balances from ledger
  accounts to prepare trial balance.
OBJECTIVES

• Establish arithmetical accuracy of the
  books.
• Financial statements are prepared on the basis
  of agreed trial balance.
• Trial balance serves as a summary of what is
  contained in the ledger.
POINTS TO BE NOTED

•   Prepared on a particular date
•   Name of the account in second column
•   Fourth column-debit balance
•   Next column – credit balance
•   Two column are totaled at the end
•   First and third-no explanation
LIMITATIONS

• Transactions has not been entered at all in
  the journal
• A wrong amount has been written in both
  columns of the journal
• A wrong account has been mentioned in the
  journal
• An entry has not at all been posted in the
  ledger
• Entry is posted twice in the ledger.
METHODS OF PREPARATION-1

                  TOTAL METHOD
•   Every ledger account is totaled and that total
    amount is transferred to trial balance.
•   Trial balance can be prepared as soon as
    ledger account is totaled.
•   Time taken to balance the ledger accounts is
    saved.
•   This is not commonly used as it cannot help
    in the preparation of financial statements.
METHODS OF PREPARATION-2

                 BALANCE METHOD
•   Every ledger account is balanced
•   Balances are carried forward to the trial
    balance
•   Commonly used and helps in preparation of
    financial statements
•   Financial statements are prepared on the
    basis of the ledger accounts.
METHODS OF PREPARATION-3

     ADJUSTED TRIAL BALANCE METHOD
• If the trial balance do not agree after
  transferring the ledger accounts including cash
  and bank balance and also errors are not
  located timely, then the trial balance is tallied
  by transferring the difference of debit and
  credit side to an account known as suspense
  account. This is a temporary account opened
  to proceed further and to prepare the financial
  statements timely.
RULES OF PREPAING THE TRIAL
          BALANCE
• The balances of all
  a. Asset accounts
  b. Expenses accounts
  c. Losses
  d. Drawings
  e. Cash and bank balances in the debit side
     of the trial balance.
RULES OF PREPAING THE TRIAL
          BALANCE
• The balances of all
  a. Liabilities accounts
  b. Income accounts
  c. Profits
  d. Capital are placed in the credit column of
     the trial balance.
SUBSIDIARY BOOKS

• Techniques of recording transactions in
  Purchase book, Sales book; Returns Inward
  Book, Returns Outwards Book; Bills Receivable
  and Bills Payable book.
• Posting of subsidiary to ledger books
• Journalisation for many other transactions and
  events
• Difference between Subsidiary books and
  principle books.
PURPOSE

• Cash book – record receipts and payments of cash and
  bank
• Purchase book - record credit purchase
• Purchase returns – record return of goods purchased
• Sales book – record credit sales
• Sales return book – record return of goods sold
• Bills receivable books – receipts of promissory notes,
  etc.
• Bills payable book – issue of promissory notes, etc,
• Journal proper – transactions which cannot be recorded
  in any of the above.
ADVANTAGES

•   Division of work
•   Specialisation and efficiency
•   Saving of the time
•   Availability of the information
•   Facility in checking
CASH BOOK

• It is a type of cash book but treated as
  principal book
• Kinds of cash books
• Technique of preparation of
   – Single column cash book
   – Double column cash book
   – Three column cash book
• Petty cash book
KINDS OF CASH BOOK

• Simple Cash Book

• Two – Column Cash Book

• Three – Column Cash Book
CAPITAL AND REVENUE
    EXPENDITURE & RECEIPTS
• Criteria for identifying and distinguishing
• Deferred Revenue Expenditures
• Distinction between Capital and Revenue
  Receipts
• Linkage of distinction with the preparation of
  final accounts
CONSIDERATION IN DETERMIING
    CAPITAL&REVENUE EXPENDITURE

• Nature of business
• Recurring nature of expenditure
• Purpose of expenses
• Effect on revenue generating capacity of
  business
• Materiality of the amount involved
DEFERRED REVENUE
           EXPENDITURE
• The expenditure for which the payment has
  been made or a liability incurred but which is
  carried forward on the presumption that it will
  be of benefit over a subsequent period or
  periods.
• It refers to that expenditure that is, for the
  time being, charged against income.
• Such suspension of ‘charging of’ operation
  may be due to the nature of expenses and the
  benefits and the benefits expected there from.
• Balance sheet – Miscellaneous Expenditure
CAPITAL AND REVENUE
             RECEIPTS
• Receipts which are obtained in course of
  normal business activities are revenue
  receipts.
• Receipts which are not revenue in nature are
  capital receipts.
• These receipts are recognised on accrual basis
• Revenue receipts should not be equated with
  the actual cash receipts
• Revenue receipts are credited to the Profit and
  Loss Account.
RECTIFICATION OF ERRORS

• Types of errors
• Location of errors
• Nature of one-sided and two-sided errors
• Suspense account is opened for rectification of
  errors
• Correcting errors of one period in the next
  accounting period.
TYPES OF ERRORS

• Errors of principle
• Clerical errors
   – Errors of omission
   – Errors of commission
   – Compensating errors
   – Errors of principle

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Basis accounting procedure

  • 1. BASIC ACCOUNTING PROCEDURES-JOURNAL ENTRIES • Meaning and significance of Double Entry Systems. • Term – ‘Accounts’ and classification of accounts into personal, real and nominal. • Utility of classification and sub-classification. • Determination of debits and credits from transactions and events. • Recording of transaction in the JOURNAL.
  • 2. DOUBLE ENTRY SYSTEM • Double entry system of book-keeping has emerged in the process of evolution of various accounting techniques. • It is the only scientific system of accounting. • Every transaction has two fold effects: – Debit – Credit. • Both the aspects are to be recorded in the books of accounts.
  • 3. ADVANTAGES OF DOUBLE ENTRY SYSTEM • Accuracy could be established through Trial Balance. • Profit earned or loss suffered could ascertained together with details. • Financial position of the concern could be ascertained at the end of each period by preparation of Balance Sheet. • Results could be compared between two periods and reason for the change may be ascertained. • Affords significant information for the purposes of control.
  • 4. ACCOUNT • The two columns which we referred are put in the form of an account, called the ‘T’ form. • Illustration: CASH Increase Rs. Decrease Rs. Opening 10,000 1,000 balance 2,500 300 2,000 200 50 500 1,350 400 TOTAL 2,000 New or 14,300 closing balance 16,300 16,300
  • 5. ACCOUNT • Increase in asset - Debit • Increase in liability - Credit • Decrease in asset - Credit • Decrease in liability - Debit • Increase in capital - Credit • Decrease in capital - Debit • Increase in expense - Debit • Decrease in expense - Credit • Increase in income - Credit • Decrease in income - Debit
  • 6. ILLUSTRATION 2006 Rs. April 1. R. started business 10,000 2. He purchased furniture 2,000 3. Paid salary to his clerk 100 4. Paid rent 50 5. Received interest 20
  • 7. SOLUTION Apr Explanation Accounts Nature of How Debit Credit 06 involved Accounts affected affected 1. Rs.10,000 Cash & Asset Increase 10,000 cash invested R’s Proprietor Decrease 10,000 in business. 1. Purchased Furniture Asset Increase 2,000 Furniture Cash Asset Decrease 2,000 1. Salary Paid Salary Expense Increase 100 Cash Asset Decrease 100 4. Rent paid Rent Expense Increase 50 Cash Asset Decrease 50 5. Interest Cash Asset Increase 20 Received Interest Income Decrease 20
  • 8. ACCOUNTING EQUATION APPROACH • Often Owner’s claim or fund in the business is called equity. • Owner’s claim implies capital invested plus any profit earned minus any loss sustained. EQUITY + LIABILITIES = ASSETS OR EQUITY+LONG-TERM LIABILITIES=FIXED ASSETS+CURRENT ASSETS-CURRENT LIABILITIES
  • 9. CLASSIFICATION OF ACCOUNTS ACCOUNTS Personal Accounts Impersonal Accounts Real Nominal Natural Artificial Representative (legal)
  • 10. GOLDEN RULES OF ACCOUNTING • Personal Account – Debit the receiver – Credit the giver • Real Account – Debit what comes in – Credit what goes out • Nominal Account – Debit all expenses and losses – Credit all incomes and gains
  • 11. JOURNALISING PROCESS • All transactions are first entered in the journal as and when they occur; the record is Chronological. JOURNAL 1 2 3 4 5 DATE PARTICULARS L.F. DEBIT CREDIT AMOUNT AMOUNT Rs. Rs.
  • 12. ADVANTAGES OF JOURNAL • Chronological order: Complete information on time basis • Narration: Precise explanation of transaction • Posting: Journal forms the basis for posting the entries in the ledger
  • 13. LEDGERS • Concept of Ledgers • Ledger posting and balancing of accounts • Opening accounts each year taking closing balances of the previous year • Use of ‘balance c/d’ and ‘balance b/d’.
  • 14. SPECIMEN OF LEDGER ACCOUNTS • Each ledger account has two sides 1. Debit (left part of the account) 2. Credit (right part of the account) • Each of the debit and credit has four columns: 1. Date 2. Particulars 3. Journal folio i.e. page from where the entries are taken for posting 4. Amount
  • 15. LEDGER ACCOUNT FORMAT Dr. Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount
  • 16. POSTING - RULES • Open separate account • Use of ‘To’ and ‘By’ • Respective reference.
  • 17. BALANCING AN ACCOUNT • It is necessary to ascertain the balance in an account on a regular basis. It is not difficult. • Ascertainment procedures: – Total the sides – Ascertain the difference – The difference is the balance • If credit side is bigger, then it is credit balance. Write on the debit side as, ‘To Balance c/d’. • If debit side is bigger, then it is credit balance. • The totals are written on the two sides opposite one another.
  • 18. TRIAL BALANCE • Meaning and purpose • Technique of taking balances from ledger accounts to prepare trial balance.
  • 19. OBJECTIVES • Establish arithmetical accuracy of the books. • Financial statements are prepared on the basis of agreed trial balance. • Trial balance serves as a summary of what is contained in the ledger.
  • 20. POINTS TO BE NOTED • Prepared on a particular date • Name of the account in second column • Fourth column-debit balance • Next column – credit balance • Two column are totaled at the end • First and third-no explanation
  • 21. LIMITATIONS • Transactions has not been entered at all in the journal • A wrong amount has been written in both columns of the journal • A wrong account has been mentioned in the journal • An entry has not at all been posted in the ledger • Entry is posted twice in the ledger.
  • 22. METHODS OF PREPARATION-1 TOTAL METHOD • Every ledger account is totaled and that total amount is transferred to trial balance. • Trial balance can be prepared as soon as ledger account is totaled. • Time taken to balance the ledger accounts is saved. • This is not commonly used as it cannot help in the preparation of financial statements.
  • 23. METHODS OF PREPARATION-2 BALANCE METHOD • Every ledger account is balanced • Balances are carried forward to the trial balance • Commonly used and helps in preparation of financial statements • Financial statements are prepared on the basis of the ledger accounts.
  • 24. METHODS OF PREPARATION-3 ADJUSTED TRIAL BALANCE METHOD • If the trial balance do not agree after transferring the ledger accounts including cash and bank balance and also errors are not located timely, then the trial balance is tallied by transferring the difference of debit and credit side to an account known as suspense account. This is a temporary account opened to proceed further and to prepare the financial statements timely.
  • 25. RULES OF PREPAING THE TRIAL BALANCE • The balances of all a. Asset accounts b. Expenses accounts c. Losses d. Drawings e. Cash and bank balances in the debit side of the trial balance.
  • 26. RULES OF PREPAING THE TRIAL BALANCE • The balances of all a. Liabilities accounts b. Income accounts c. Profits d. Capital are placed in the credit column of the trial balance.
  • 27. SUBSIDIARY BOOKS • Techniques of recording transactions in Purchase book, Sales book; Returns Inward Book, Returns Outwards Book; Bills Receivable and Bills Payable book. • Posting of subsidiary to ledger books • Journalisation for many other transactions and events • Difference between Subsidiary books and principle books.
  • 28. PURPOSE • Cash book – record receipts and payments of cash and bank • Purchase book - record credit purchase • Purchase returns – record return of goods purchased • Sales book – record credit sales • Sales return book – record return of goods sold • Bills receivable books – receipts of promissory notes, etc. • Bills payable book – issue of promissory notes, etc, • Journal proper – transactions which cannot be recorded in any of the above.
  • 29. ADVANTAGES • Division of work • Specialisation and efficiency • Saving of the time • Availability of the information • Facility in checking
  • 30. CASH BOOK • It is a type of cash book but treated as principal book • Kinds of cash books • Technique of preparation of – Single column cash book – Double column cash book – Three column cash book • Petty cash book
  • 31. KINDS OF CASH BOOK • Simple Cash Book • Two – Column Cash Book • Three – Column Cash Book
  • 32. CAPITAL AND REVENUE EXPENDITURE & RECEIPTS • Criteria for identifying and distinguishing • Deferred Revenue Expenditures • Distinction between Capital and Revenue Receipts • Linkage of distinction with the preparation of final accounts
  • 33. CONSIDERATION IN DETERMIING CAPITAL&REVENUE EXPENDITURE • Nature of business • Recurring nature of expenditure • Purpose of expenses • Effect on revenue generating capacity of business • Materiality of the amount involved
  • 34. DEFERRED REVENUE EXPENDITURE • The expenditure for which the payment has been made or a liability incurred but which is carried forward on the presumption that it will be of benefit over a subsequent period or periods. • It refers to that expenditure that is, for the time being, charged against income. • Such suspension of ‘charging of’ operation may be due to the nature of expenses and the benefits and the benefits expected there from. • Balance sheet – Miscellaneous Expenditure
  • 35. CAPITAL AND REVENUE RECEIPTS • Receipts which are obtained in course of normal business activities are revenue receipts. • Receipts which are not revenue in nature are capital receipts. • These receipts are recognised on accrual basis • Revenue receipts should not be equated with the actual cash receipts • Revenue receipts are credited to the Profit and Loss Account.
  • 36. RECTIFICATION OF ERRORS • Types of errors • Location of errors • Nature of one-sided and two-sided errors • Suspense account is opened for rectification of errors • Correcting errors of one period in the next accounting period.
  • 37. TYPES OF ERRORS • Errors of principle • Clerical errors – Errors of omission – Errors of commission – Compensating errors – Errors of principle