Unit-2 ACCOUNTING PROCESS

Book Keeping and Record Maintenance, Fundamental Principles and Double Entry, Journal format -
Ledger format Trial Balance format - balance sheets, Final accounts-cash books and subsidiary books -
Introduction to Capital Expenditure and Capital Revenue.
 ACCOUNTING PROCESS

• The accounting cycle is the holistic process of

recording and processing all financial transactions of a
company, from when the transaction occurs, to its
representation on the financial statements, to closing
the accounts.
• The cycle repeats itself every fiscal year as long as a
company remains in business.
• One of the main duties of a bookkeeper is to keep track
of the full accounting cycle from start to finish.
 Accounting Cycle
8 steps
1. Identification of transactions(Financial transaction)
2. Preparation of documents
3. Recording of transactions in Journal
4. Posting Journal entries into individual ledgers
5. Preparation of Trial balance
6. Final Accounts preparation- Balance Sheet, Trading
and Profit & Loss Account, Cash Flow Statement,
Changes in Equity
Book-keeping-An introduction

• The first step in the accounting process is identifying and recording of transactions in the books of accounts.
• This is necessary for any business as the transactions happening in a business entity must be recorded so that the
information is available for further analysis.
• Book-keeping forms the base for the preparation of financial statements and interpretation which are the important
functions of accounting.
• In a small business, the entire accounting work may be performed by a single accountant.
• In a large firm, there may be a separate person or department for book-keeping work.
• Bookkeeping means recording the financial transactions and information concerning the business of a company regularly.
• It ensures that the records of each financial transaction are up-to-date, correct and comprehensive.
• Bookkeeping helps companies to make important investing, operating and financing decisions.
• It includes recording the transactions and classifying the same under proper heads. Book-keeping work is of routine
nature.
• Transactions may be recorded in the accounting note books and ledgers or may be recorded in a computer.
•“Book-keeping is an art of recording business dealings in a set of books”. - J.R.Batliboi.
•“Book-keeping is the science and art of recording correctly in the books of account all those business
transactions of money or money’s worth”. -R.N.Carter.

Features of book-keeping
(i) It is the process of recording transactions in the books of accounts.
(ii) Monetary transactions only are recorded in the accounts.
(iii) Book-keeping is the primary stage in the accounting process.
(iv) Book-keeping includes journalising and ledger posting.
Following are the objectives of book-keeping: Book-keeping has the following advantages:

(i) To have a complete and permanent record of all (i) Transactions are recorded systematically in

business transactions in chronological order and chronological order in the book of accounts. Thus,

under appropriate headings. book-keeping provides a permanent and reliable record for

(ii) To facilitate ascertainment of the profit or loss of all business transactions.

the business during a specific period. (ii) Book-keeping is useful to get the financial information.

(iii) To facilitate ascertainment of financial position. (iii) It helps to have control over various business activities.

(iv) To know the progress of the business. (iv) Records provided by business serve as a legal evidence

(v) To find out the tax liabilities. in case of any dispute.

(vi) To fulfil the legal requirements. (v) Comparison of financial information over the years is
possible. Also comparison of financial information of
different business units is facilitated.
(vi) Book-keeping is useful to find out the tax liability
Book-keeping has the following limitations:
•(i) Only monetary transactions are recorded in the books of accounts.
•(ii) Effects of price level changes are not considered.
•(iii) Financial data recorded are historical in nature, i.e., only past data are recorded.
Following are the differences between book-keeping and accounting
Relationship among Book-keeping, Accounting and Accountancy

Book-keeping is part of Accounting. It is the primary stage in accounting. It is the

process of recording transactions in the books of accounts.
Accounting is part of Accountancy. Accounting is the process of recording,
classifying, analysing and interpreting of financial data.
Accountancy is the systematic knowledge of accounting process and contains the
standards, principles, policies and procedures to be followed in accounting.
Record Keeping/Record maintennance
Examples for record maintenance
Example #1
ABC Limited is a sole proprietor firm operating small shops in Atlanta. It is trading in clothes and has its main
inflow and outflow as follows:
• Inflows: Sale proceeds from Customer
•Outflows: Material Purchase from vendors and payment of related expenses
•For recordkeeping purposes, ABC Limited will have to maintain daily cash books for maintaining the petty cash
and bank balances. At the end of the year, they have to prepare a profit and loss account and Balance sheet to
verify the profitability during the year. It is one of the simplest ways of maintaining business transaction records.
•Accounting principles are the basic norms and assumptions developed and established as the basis
for accounting system. These principles are adopted by the accountants universally. These accounting
principles provide uniformity and consistency in the accounting methods and process. Such
accounting principles are known as Generally Accepted Accounting Principles (GAAP).

•Accounting principles provide the basic framework within which the accounting records and
accounting reports are to be prepared. Accounting standards have been issued by national and
international regulatory authorities to ensure uniformity of accounting procedure and accounting
results.
BOOKS OF PRIME ENTRY

• Accounting process starts with identifying transactions involving money or money’s worth and
recording these financial transactions in the books of accounts. Transactions are recorded as and
when they take place based on authentic documents or proofs or evidences. The authentic proofs
are called as the source documents.
• Source documents
• Source documents are the authentic evidences of financial transactions. These documents show
the nature of transaction, the date, the amount and the parties involved.
• Source documents include cash receipt, pay-in-slip,
invoice, salary bills,
debit note, wage bills,
credit note cheque record slips,
etc.
• CASH RECEIPT OR VOCHER
It is a document that shows the date, amount and details of cash purchases and cash sales or
other cash transactions. Business persons receive cash receipt for cash purchases and issue cash
receipt for cash sales.
 Invoice
• Invoice is used for credit purchases and
credit sales. The date, amount and details of
credit purchases and credit sales are given in
the invoices.
• Invoice is generally prepared by the seller in
three copies.
• The first copy - purchaser,
• the second copy -goods for checking and
• the third is retained by the seller and
• used as the source document for recording
the transaction.
 Debit note
• A buyer may return the goods to the seller in various situations such as
when goods are defective or damaged, goods do not meet the
specifications, etc. When goods are returned by a buyer, the buyer
prepares a debit note and sends it to the seller. It contains details such as
the description of the goods, quantity returned and also their value. Two
copies are prepared in general, one copy is sent to the seller and another
one is retained by the buyer. It is a document issued by a buyer stating
the amount owed by the seller. A debit note is also called as debit memo.
 Credit note
• It is a statement prepared by the
seller who receives back from his
customer the goods sold. It contains
details such as the description of the
goods, quantity returned and also
their value. It is a document sent by
a seller to the buyer, stating that a
certain amount is owed to the buyer.
It is also called as credit memo.
Pay-in slip
• When cash or cheque is deposited in bank, a
form is to be filled by a customer and submitted
to the banker along with cash or cheque.
• This is called as pay-in slip or deposit slip. The
main part of this will be retained by the bank and
the counterfoil duly stamped and signed by the
banker is returned to the customer.
•
 Cheque
• Cheque is a negotiable
instrument.

• Cheque book is issued by a bank

to its customers for withdrawing
money for own use or for making
payment to others
 Double entry
system
• According to this system, every transaction has a two fold effect. That is, there are two aspects involved, namely,
receiving aspect and giving aspect.
• It is denoted by debit (Dr.) and credit (Cr.).
• Debit denotes an increase in assets or expenses or a decrease in liabilities, income or capital.
• Credit denotes an increase in liabilities, income or capital or a decrease in assets or expenses.
• Definition
• “Every transaction involving money or money’s worth has two fold aspects, the receiving of a value on the one hand
and the giving of the same value on the other. This two fold nature in all transactions must be recorded in the books
and this gives rise to the term Double Entry Book keeping”.
-Munro and Palmer
Types of Bookkeeping System

•There are two types of bookkeeping systems. The business entities can choose any one of the types of
bookkeeping system. Some entities use a combination of both types.
•The following are the two types of bookkeeping system:
Single-entry system of bookkeeping
•The single-entry system of bookkeeping is a basic system to record daily receipts or generate a weekly or daily
report of a company’s cash flow. In the single-entry system of bookkeeping, the bookkeeper records one entry
for each financial transaction or activity.
•The single-entry system of bookkeeping involves recording only one side of the transaction or activity. It
maintains only the purchases, cash receipts and payments and sales. It is used mainly by small businesses, which
have minimal transactions.
•Example:Cash book
Date Particulars Income
Xxx Sales 30,000
Xxx Bank deposit 15,000
Double-entry system of bookkeeping
•The double-entry system of bookkeeping records a double entry for each financial activity or transaction- it records the
corresponding credit entry for every debit entry.
•The double-entry system of bookkeeping is based on the duality concept, i.e. every financial transaction affects two
accounts. It means that every debit entry to an account has a corresponding credit entry in another account and vice
versa. This system is universally adopted and is considered accurate for recording business/financial transactions.
Definition
“Every transaction involving money or money’s worth has two fold aspects, the receiving of a value on the one
hand and the giving of the same value on the other. This two fold nature in all transactions must be recorded in
the books and this gives rise to the term Double Entry Book keeping”.

•It works on the basic accounting equation

Assets= Liabilities +Owners Equity
•Assets- The money the company owns
•Liabilities- Anything that the business owns
•Owners equity-owners investment in the company
• Two aspects involved, namely, receiving aspect and giving aspect.
• It is denoted by debit (Dr.) and credit (Cr.).
• The basic principle of double entry system is that for every debit there must be an equivalent and
corresponding credit.
• Debit denotes an increase in assets or expenses or a decrease in liabilities, income or capital.
• Credit denotes an increase in liabilities, income or capital or a decrease in assets or expenses.

Account Debit Credit

Furniture $1500
Cash $1500
Following are the principles of double entry system:
•(i) In every business transaction, there are two aspects.
•(ii) The two aspects involved are the benefit or value receiving aspect and benefit or value giving
aspect.
•(iii) These two aspects involve minimum two accounts; at least one debit and at least one credit.
•(iv) For every debit, there is a corresponding and equivalent credit. If one account is debited the
other account must be credited.
• Advantages of double entry system
• Following are the advantages of double entry system:
• (i) Accuracy
• In this system, the two aspects of each transaction are recorded in the books of accounts. This
helps in checking the accuracy in accounting.
• Ii)Ascertainment of business results
• Details regarding expenses, losses, incomes, gains, assets, liabilities, debtors, creditors, etc., are
readily available. This helps to ascertain the net profit earned or loss incurred during an
accounting period and also to know the financial position as on a particular date.
• (iii) Comparative study
• The business results of the current year can be compared with those of the previous years
and also with other business firms. It facilitates business planning for future.
• (iv) Common acceptance
• The business records maintained under this system are accepted by financial institutions,
government and others, because it is a systematic and scientific system.
• Transaction
• Transaction involves transfer of money or money’s worth (goods or services or ideas) from one
person to another. Transaction can be classified into cash transaction, bank transaction and credit
transaction.
• (a) Cash transaction
• When immediate cash is involved in a transaction, it is called cash transaction. For example, goods
are sold for cash ` 5,000. In this case, cash ` 5,000 comes into the business and goods worth `
5,000 go out of the business
• (b) Bank transaction
• In a transaction, if bank is involved, it is a bank transaction. Bank transaction includes the
following:
• (i) Cash deposited into the bank
• (ii) Income of the business directly received by the bank
• (iii) Receipts through Cash Deposit Machine (CDM)
• (iv) Payment made by the customers of the business through debit card, credit card, net banking,
National Electronic Funds Transfer (NEFT), Real Time Gross Settlement (RTGS), etc.
• (v) Cash withdrawn from the bank
• (vi) Bank charges levied by the bank
• (vii) Payments made by the bank as per standing instructions
• (viii) Payments made by cheque
• (ix) Payments made by the business through debit card, net banking, NEFT and RTGS
• (c) Credit transaction
• When settlement is not made by cash or through bank immediately in
a transaction, it is called credit transaction. But, the amount is to be
settled within a specified period. For example, purchase of goods on
credit for ` 3,000. In this case, goods worth ` 3,000 come into the
business and a liability of creditors worth ` 3,000 arises.
 POINTS TO KNOW
• Automated Teller Machine (ATM): ATM is a computerised machine that provides the customers of banks
the facility of accessing their account for dispensing cash and to carry out other financial and non-financial
transactions without the need to actually visit their bank branch.
• Cash Deposit Machine (CDM): It is an ATM like machine that allows depositing cash directly into a
customer’s account without any manual intervention of the bank employee. There is no need to fill deposit
slips.
• Debit card: The debit cards are used to withdraw cash from an ATM, to purchase goods and services at Point
of Sale (POS) and in E-commerce (online purchase). A customer can use debit card for the money he has in
the bank account with some restrictions.
• Credit card: The credit cards are used to purchase goods and services at Point of Sale (POS) and in
E-commerce (online purchase). A customer can use credit card within the limit specified by the bank even if
there is inadequate balance in the account The bank may charge interest and other charges for credit card
usage.
POINTS TO KNOW

• NEFT: National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating one-to-one
funds transfer. Under this scheme, any person can electronically transfer funds from any bank branch to any
person having an account with any other bank branch in the country.
• RTGS: The acronym ‘RTGS’ stands for Real Time Gross Settlement, which can be defined as the continuous
(real-time) settlement of funds transfers individually on an order by order basis.
 Account
• Every transaction has two aspects and each aspect affects minimum one
account. An account is the basic unit of identification in accounting. A
ledger account is a summary of relevant transactions at one place
relating to a particular head. Account is the systematic presentation of all
material information regarding a particular person or item at one place,
under one head.
• Approaches of recording transactions
• There are two approaches for recording transactions, namely, i)
Accounting equation approach and ii) Traditional approach.
 Accounting equation
approach
• The relationship of assets with that of liabilities to outsiders and to
owners in the equation form is known as accounting equation.
• Under the double entry system of book keeping, every transaction has
two fold effect, which causes the changes in assets and liabilities or
capital in such a way that an accounting equation is completed and
equated.
Capital + Liabilities = Assets
• Capital can also be called as owner’s equity and liabilities as outsider’s
equity.
• Accounting equation is a mathematical expression which shows that the
total of assets is equal to the total of liabilities and capital. This is based
on the dual aspect concept of accounting. This means that total claims of
outsiders and the proprietor against a business enterprise will always be
equal to the total assets of the business enterprise.
 CONT…
• Account
• Asset Liability Capital Revenue Expense
• As the revenues and expenses will affect capital, the expanded
equation may be given as under:
• Assets = Liabilities + Capital + Revenues – Expenses
• Therefore, under this approach, accounts are classified into five
categories: (i) Asset account, (ii) Liability account, (iii) Capital
account, (iv) Revenue account and (v) Expense account as follows:
• Asset account
• Any physical thing or right owned that has a monetary value is called asset. The assets are grouped and shown separately; for example,
Land and Buildings account, Plant and Machinery account.
• Liability account
• Financial obligations of the enterprise towards outsiders are shown under separate heads as liabilities; for example, creditors account,
expenses outstanding account.
• Capital account
• Financial obligations of a business enterprise towards its owners are grouped under this category; for example, capital contributed by
owner.
• Revenue account
• Accounts relating to revenues of an enterprise are grouped under this category, for example; revenues from sale of goods, rent received.
• Expense account
• Expenses incurred and losses suffered for earning revenue are grouped under this category; for example, purchase of goods, salaries paid.
• A transaction may have the effect on either side of the equation by the same amount or it may have the effect on one side of the equation
only, by both increasing and decreasing it by an equal amount.
BASIC CONCEPTS OF ACCOUNTS
• Recording of transactions as per accounting equation approach is explained below:

• Increase in capital and increase in asset Commenced business with cash `

1,00,000 Effects: (i) Cash comes in → Increase in asset

• Capital provided by the owner → Increase in capital of owner

• Capital = Assets

• Capital = Cash

• (+) ` 1, 00,000 = (+) ` 1, 00,000

• (b) Decrease in liability and decrease in asset

• Paid creditors ` 10,000

• Effects: (i) Cash goes out → Decrease in asset

• (ii) Creditors are paid → Decrease in liability

Liabilities = Assets

Creditors = Cash

(–) ` 10,000 = (–) ` 10,000

• (c) Decrease in one asset and increase in another asset

• Bought furniture costing ` 5,000 by paying cash

• Effects: (i) Furniture comes in → Increase in asset

• (ii) Cash goes out → Decrease in asset

• Liabilities = Assets

• Liabilities = Cash + Furniture

• = (–) ` 5,000 (+) ` 5,000

• (d) Decrease in one liability and increase in another liability

• Accepted a bill drawn by creditors for ` 10,000

• Effects: (i) Bills payable arises → Increase in liability

• (ii) Reduction in creditors → Decrease in liability

Liabilities = Assets

+ Bills payable – Creditors = Assets

(+) ` 10,000 (–) ` 10,000 = Assets

• (e) Transactions affecting more than two accounts:

• Goods costing ` 30,000 sold for ` 40,000

• Effects: (i) Goods go out → Decrease in assets

• (ii) Cash comes in → Increase in assets

• (iii) Sold goods at a profit → Increase in capital

Liabilities + Capital = Assets

Capital = Cash – Stock

(+) ` 10,000 = (+) ` 40,000 (–) ` 30,000

 Types of Accounts under Accounting System
Under the rule of accounting, one of the essential aspects to know is the types of accounts coming under the
system rule of accounting. With the help of account classification, you will be in a better position to understand
the rules effectively.
The three types of accounts coming under the accounting system are as follows:
1.Personal Account
2.Real Account
3.Nominal Account
Personal account

A personal account is a general ledger account related to the person, firms, and associations. Under
personal account, there are three subcategories:
Natural Personal Account connected to human beings. For example, Debtors Capital account,
∙

Creditors, Drawings account.

Artificial Personal Account who are not human beings but act as a separate legal entity in the eyes
∙

of the law. They can enter into agreements and operate the functions in the name itself—for example,
companies, cooperatives, partnerships, hospitals, banks, and government bodies.
Representative Personal Account represents the accounts of natural or artificial people. In this
∙

account, the transactions either belong to the previous year or the following year. Hence, they are in a
position to represent something.
For example, an outstanding salary represents the salary due from last year. In the same way, prepaid
rent represents the rent paid in advance for the following year.
 Real Account

A real account is a ledger account that represents accounts of all assets possessed by the organization.
The real account appears in the balance sheet and assesses the financial position of the business.
Further, the assets can be divided into two parts,
Tangible Assets
•Tangible assets consist of those assets and properties that can be touched, seen, and measured. These
assets have their physical appearance and existence—land, building furniture, fixtures, machinery,
and a cash account.
Intangible Assets
•Intangible assets consist of those assets and properties that can't be touched but can be felt. These
assets don't have a physical experience but possess a monetary value.
•For example, Goodwill, Patents Copyrights, Trademarks.
Nominal Account

•A nominal account is a ledger account that relates to expenses, losses, incomes, and gains. All of the
nominal account adjustments are made through the Trading and Profit and Loss Account at the end of
the accounting year.
•For example, Interest A/c, Rent A/c, Salary A/c, Commission Received
 Golden rules of accounting

•The golden rules of accounting apply to the types of accounts related to a financial
transaction.
•The rules of accounting are set differently for the different types of accounts discussed
above.
•All of these rules are applicable for organizations and businesses

Type of Golden Rule

Account
Personal Debit the receiver,
Account Credit the giver
Real Account Debit what comes in,
Credit what goes out
Nominal Debit all expenses and losses,
Account Credit all incomes and gains
Journals

• Journal is the book of original entry in which

business transactions are recorded in
chronological order
• There are a variety of journals like the sales
journal, purchases journal, cash receipts journal,
cash disbursements journal, and general journal.
• Record of business transactions in the journal is
known as Journal entry.
• The process of recording the transactions in
journal is called as journalising.

Features of Journals
• A journal is referred to as a digital document or
physical record which is kept as a spreadsheet or
data within the accounting software and used
only for accounting.
Journal Format
A journal contains five columns; Date, Particulars, L.F., Debit and Credit.
Date column: In this column the date of the transaction is recorded.
Particulars column: The accounts involved in the transaction are recorded
in this column. The account debited is recorded first with the word ‘Dr.’ Date Particulars L.F Debit ( Rs.) Credit(Rs.)
entered towards the end of the row and the account credited is entered in the Account Name Dr. xxx
next line after leaving a little space on the left and preceded by the word To account name xxx
‘To’. ( Transaction Description)

Leder Folio column (L.F.): The page number of ledger in which the
accounts debited and credited are maintained is recorded here. Folio means
page and ledger folio means page number of ledger. This L.F. helps in cross
verification of accounts in the ledger and helps in audit of accounts.
Debit column: The amount to be debited is recorded in this column. The unit
of measurement, that is, amount expressed in the currency of the country is
recorded in this column. For example, in India amount is recorded in rupees
(`).
Credit column: The amount to be credited is recorded in this column. The
unit of measurement, that is, the currency of the country is written in this
column. For example, in India amount is recorded in rupees (`).
Narration: A short description of each transaction is written under each
entry which is called narration.
Tutorial note
(i) While entering the date, the year may be written at the top, then the month and then the particular date.
(ii) The narration must be simple and complete. The words ‘Being’ or ‘For’ may also be prefixed before the
narration.
(iii) It is customary to write ‘Dr’ and ‘To’ in the journal entries.
(iv) L.F. column is filled when the transaction is posted to the ledger. In computerised accounting, it is the
reference number.
(v) The amount columns of a journal may be totalled at the end of the each page and the grand total may be
given at the end of the month.
(vi) To show each journal entry separately, a line may be drawn after narration in particulars column.
(vii) When transactions of similar nature take place on the same date, they may be combined while they are
journalised.
Steps in journalising

The process of analysing the business transactions under the heads of debit and credit and recording them in the
journal is called journalising. An entry made in the journal is called a journal entry. The following steps are
followed in journalising:
(1) Analyse the transactions and identify the accounts (based on aspects) which are involved in the transaction.
(2) Classify the above accounts under Personal account, Real account or Nominal account
(3) Apply the rules of debit and credit for the above two accounts.
(4) Find which account is to be debited and which account is to be credited by the application of rules of double
entry system
(5) Record the date of transaction in the date column.
(6) Enter the name of the account to be debited in the particulars column very close to the left hand side of the
particulars column followed by the abbreviation ‘Dr.’ at the end in the same line. Against this, the amount to be
debited is entered in the debit amount column in the same line.
(7) Write the name of the account to be credited in the second line starting with the word ‘To’ prefixed a few spaces
away from the margin in the particulars column. Against this, the amount to be credited is entered in the credit
amount column in the same line.
(8) Write the narration within brackets in the next line in the particulars column.
Example: In the books of Jayaseeli’s Provision store
Journal
Jayaseeli is a sole proprietor having a provision store.
Following are the transactions during the month of Date Particulars L.F Debit ( Rs.) Credit(Rs.)
January, 2018. Journalise them 2018
January 1 Cash A/C Dr. 80,000
January To Jayaseeli’s Capital A/C 80,000
1. Commenced business with cash Rs.80,000 (Jayaseeli commenced business with
cash)
2 .Deposited cash with bank Rs. 40,000 January 2 Bank A/C Dr. 40,000
3. Purchased goods by paying cash 5,000 To cash A/C 40,000
(Deposited cash into Bank)
4 Purchased goods from Lipton & Co. on credit January 3 Purchase A/C Dr. 5,000
10,000 To Cash A/C 5,000
(Goods purchased for cash)
5 Sold goods to Joy and received cash 11,000 January 4 Purchase A/C Dr. 10,000
To Lipton & Co 10,000
( Goods purchased from Lipton & Co
on credit)
January 5 Cash A/C Dr. 11,000
To Sales A/C 11,000
( Cash sales made)
Journal Vs Ledger

• Comparison of Journal and Ledger

LEDGER
After passing the entries in the journal-register, the transactions are classified and
grouped for the preparation of accounts. The principal book which contains all set of
accounts (viz. nominal, personal and real accounts), is known as Ledger. It is also known
as principal books of account in which the account-wise balance of each account is
determined.
POSTING
The process of Entering the Journal entries in the respective accounts in Ledger is known
as Posting in Ledgers
What is general ledger?
•General Ledger is a process of summarizing all the financial transaction of an account for
a given period in a prescribed format with the objective to ascertain the closing balance at
the end of the given period.
•A separate ledger account is prepared that summarizes the closing balance for a given
period.
•Some of the most common ledger accounts are: bank account, bank cash, debtors,
creditors, fixed assets, and more.
What is ledger accounting?
•A ledger accounting is an account or record utilized to keep bookkeeping entries for balance-sheet and income-statement
transactions. Some of the entries for the accounting ledger includes cash, accounts receivable, investments, inventory,
accounts payable and more.
Format ( Specimen) of a Ledger
•A general ledger account has two sides debit (left part of the account) and credit (right part of the account). Each of the
general ledgers debit and credit side has four columns.

Dr. Cr.
Date Particulars J.F Amount(Rs.) Date Particulars J.F Amount(Rs
.)
To Account Name xxx By Account xxx
Name

•Date : Date of the transaction is recorded in this column.

•Particulars : The account debited or credited is recorded in this column. On the debit side, the entries are made starting
with ‘To’ and on the credit side, entries are made starting with ‘By’.
•Journal Folio (J.F.): In this column, the page number of the journal or subsidiary books from which the entry has been
posted to the ledger is noted.
•Amount : The amount of the transaction is recorded in this column
Procedure for posting
•The process of transferring the debit and credit items from the journal to the ledger accounts is called posting.
The procedure of posting from journal to ledger is as follows:
•(a) Locate the ledger account that is debited in the journal entry. Open the respective account in the ledger, if
already not opened. Write the name of the account in the top middle. If already opened, locate the account from
the ledger index. Now entries are to be made on the debit side of the account.
•(b) Record the date of the transaction in the date column on the debit side of that account.
•(c) Record the name of the account credited in the journal with the prefix ‘To’ in particulars column.
•(d) Record the amount of the debit in the ‘amount column’.
•(e) Locate the ledger account that is credited in the journal entry. Open the respective account in the ledger, if
already not opened. Write the name of the account in the top middle. If already opened, locate the account from
the ledger index. Now entries are to be made on the credit side of the account. Record the date of the transaction
in the date column. Record the name of the account debited in the journal entry in the particulars column with
the prefix ‘By’ and write the amount in the amount column.
 Balancing of ledger accounts

•After posting the transactions, the business person is interested to know the position of various accounts. For
this purpose, the accounts are balanced at the end of the accounting period or after a certain period to ascertain
the net balance in each account. Balancing means that the debit side and credit side amounts are totalled and the
difference between the total of the two sides is placed in the amount column as ‘Balance c/d’ on the side having
lesser total, so that the total of both debit and credit columns are equal.
•When the total of the debit side is more than the total of credit side the difference is debit balance and is placed
on the credit side as ‘By Balance c/d’. If the credit side total is more than the total of debit side, the difference is
credit balance and is placed on the debit side as ‘To Balance c/d’.
•Following is the procedure for balancing an account:
•(i) The debit and credit columns of an account are to be totalled separately.
•(ii) The difference between the two totals is to be ascertained.
•(iii) The difference is to be placed in the amount column of the side having lesser total. ‘Balance c/d’ is to be entered
in the particulars column against the difference and in the date column the last day of the accounting period is entered.
•(iv) Now both the debit and credit columns are to be totalled and the totals will be equal. The totals of both sides are
to be recorded in the same line horizontally. The total is to be distinguished from other figures by drawing lines above
and below the amount.
•(v) The difference has to be brought down to the opposite side below the total. ‘Balance b/d’ is to be entered in the
particulars column against the difference brought down and in the date column, the first day of the next accounting
period is entered.
•(vi) If the total on the debit side of an account is higher, the balancing figure is debit balance and if the credit side of
an account has higher total, the balancing figure is credit balance. If the two sides are equal, that account will show nil
balance.
Sample Illustrations
Trial Balance
•The fundament principle of double entry book keeping is that debit
must be equal to credit. In other words, debit aspect of any
transaction is always equal to its credit aspect.
• A trial balance is a summary of all the ledger balances outstanding
as on particular date.
Trial balance is a statement containing the debit and credit balances
of all ledger accounts on a particular date.
• List of debit balances and credit balances should be equal. It said
that Trial balance is tallied.
• When trial balance tallies it establishes the arithmetical accuracy
of record.
• It is a statement prepared before preparing the final accounts.
• It is a link between books of account and final accounts i.e. the
Trading & Profit & Loss A/c and Balance Sheet.
• “A trial balance is a statement, prepared with the debit
and credit balances of the ledger accounts to test the
arithmetical accuracy of the books”.– J.R. Batliboi
• After all transactions have been posted from the journal
to the ledger, it is a good practice to prepare a trial
balance.
• A trial balance is simply a listing of the ledger accounts
along with their respective debit or credit balances.
• The trial balance is not a formal financial statement, but
rather a self-check to determine that debits equal credits.
 Methods of preparing trial balance

• Balance method

• Total method

• Total and Balance method

Trial balance format

Features of trial balance

(a) Trial balance contains the balances of all ledger accounts.

(b) It is prepared on a specific date. That is why, the word, “as on…” is used at the top.
(c) When double entry system is followed, the totals of the debit and the credit columns of the trial balance must
be equal. Thus, trial balance helps to check the arithmetical accuracy of entries made in the books of accounts.
(d) If there is a difference between the totals of debit column and credit column of the trial balance, it is an
indication of errors being committed somewhere.
(e) If both the debit column and the credit column of the trial balance have the same total, it does not mean that
there is no mistake in accounting, since some errors are not disclosed by the trial balance.
Objectives of preparing trial balance

Trial balance is prepared with the following objectives:

(i) Test of arithmetical accuracy
•Trial balance is the means by which the arithmetical accuracy of the book-keeping work is checked. When the totals of debit column and
credit column in the trial balance are equal, it is assumed that posting from subsidiary books, balancing of ledger accounts, etc. are
arithmetically correct. However, there may be some errors which are not disclosed by trial balance.
(ii) Basis for preparing final accounts
•Financial statements, namely, trading and profit and loss account and balance sheet are prepared on the basis of summary of ledger
balances obtained from the trial balance.
(iii) Location of errors
•When the trial balance does not tally, it is an indication that certain errors have occurred. The errors may have occurred at one or more of
the stages of accounting process, namely, journalising or recording in subsidiary books, totalling subsidiary books, posting in ledger
accounts, balancing the ledger accounts, carrying ledger account balances to the trial balance, totalling the trial balance columns, etc.
Hence, the errors should be located and rectified before preparing the financial statements.
(iv) Summarised information of ledger accounts
•The summary of ledger accounts is shown in the trial balance. Ledger accounts have to be seen only when details are required in respect of
an account.
Limitations of trial balance

(a) It is possible to prepare trial balance of an organisation, only if the double entry system is followed.
(b) Even if some transactions are omitted, the trial balance will tally.
(c) Trial balance may tally even though errors are committed in the books of account.
(d) If trial balance is not prepared in a systematic way, the final accounts prepared on the basis of trial balance
may not depict the actual state of affairs of the concern.
(e) Agreement of trial balance is not a conclusive proof of arithmetical accuracy of entries made in the
accounting records. This is because there are certain errors which are not disclosed by trial balance such as
complete omission of a transaction, compensating errors and error of principle.
FINAL ACCOUNTS
•Final Accounts are the accounts, which are prepared at the end of a fiscal year. It gives a precise idea of the
financial position of the business/organization to the owners, management, or other interested parties. Financial
statements are primarily recorded in a journal; then transferred to a ledger; and thereafter, the final account is
prepared.
•Final Accounts is the ultimate stage of the accounting process where the different ledgers maintained in the
Trial Balance (Books of Accounts) of the business organization are presented in the specified way to provide the
profitability and financial position of the entity for a specified period to the stakeholders and other interested
parties, i.e., Trading Account, Statement of Profit & Loss, Balance Sheet.
•Final account preparation involves preparing a set of accounts and statements at the end of an accounting year.
The final account consists of the following accounts:
∙Trading and Profit and Loss Account
∙Balance Sheet
Objectives of Final Account preparation

To determine profit or loss incurred by a company in a given financial period

To determine the financial position of the company
To act as a source of information to convey the users of accounting information (owners, creditors, investors
and other stakeholders) about the solvency of the company.

Usually, a final account includes the following components −

• Trading Account
• Manufacturing Account
• Profit and Loss Account
• Balance Sheet
• Trading accounts represents the Gross Profit/Gross Loss of the concern out of sale and purchase for the
particular accounting period.
Study of Debit side of Trading Account
•Opening Stock − Unsold closing stock of the last financial year is appeared
in debit side of the Trading Account as “To Opening Stock“ of the current
financial year.
•Purchases − Total purchases (net of purchase return) including cash purchase
and credit purchase of traded goods during the current financial year appeared
as “To Purchases” in the debit side of Trading Account.
•Direct Expenses − Expenses incurred to bring traded goods at business
premises/warehouse called direct expenses. Freight charges, cartage or
carriage charges, custom and import duty in case of import, gas, electricity
fuel, water, packing material, wages, and any other expenses incurred in this
regards comes under the debit side of Trading Account and appeared as “To
Particular Name of the Expenses”.
•Sales Account − Total Sale of the traded goods including cash and credit
sales will appear at outer column of the credit side of Trading Account as “By
Sales.” Sales should be on net releasable value excluding Central Sales Tax,
Vat, Custom, and Excise Duty.
•Closing Stock − Total Value of unsold stock of the current financial year is
called as closing stock and will appear at the credit side of Trading Account.
•closing Stock = Opening Stock + Net Purchases - Net Sale
•Gross Profit − Gross profit is the difference of revenue and the
cost of providing services or making products. However, it is
calculated before deducting payroll, taxation, overhead, and
other interest payments. Gross Margin is used in the US English
and carries same meaning as the Gross Profit.
•Gross Profit = Sales - Cost of Goods Sold
•Operating Profit − Operating profit is the difference of revenue
and the costs generated by ordinary operations. However, it is
calculated before deducting taxes, interest payments,
investment gains/losses, and many other non-recurring items.
•Operating Profit = Gross Profit - Total Operating Expenses
•Net Profit − Net profit is the difference of total revenue and
the total expenses of the company. It is also known as net
income or net earnings.
•Net Profit = Operating Profit - (Taxes + Interest)
Manufacturing Account

•Manufacturing account prepared in a case where goods are manufactured by the firm itself. Manufacturing accounts represent cost of
production. Cost of production then transferred to Trading account where other traded goods also treated in a same manner as Trading
account.
Important Point Related to Manufacturing Account
•Apart from the points discussed under the section of Trading account, there are a few additional important points that need to be discuss
here −
•Raw Material − Raw material is used to produce products and there may be opening stock, purchases, and closing stock of Raw
material. Raw material is the main and basic material to produce items.
•Work-in-Progress − Work-in-progress means the products, which are still partially finished, but they are important parts of the opening
and closing stock. To know the correct value of the cost of production, it is necessary to calculate the correct cost of it.
•Finished Product − Finished product is the final product, which is manufactured by the concerned business and transferred to trading
account for sale.
•Raw Material Consumed (RMC) − It is calculated as.
•RMC = Opening Stock of Raw Material + Purchases - Closing Stock

•Cost of Production − Cost of production is the balancing figure of Manufacturing account as per the format given below.
Profit and Loss Account

•Profit & Loss account represents the Gross profit as transferred from Trading Account on the credit side of it
along with any other income received by the firm like interest, Commission, etc.
•Debit side of profit and loss account is a summary of all the indirect expenses as incurred by the firm during
that particular accounting year.
•For example, Administrative Expenses, Personal Expenses, Financial Expenses, Selling, and Distribution
Expenses, Depreciation, Bad Debts, Interest, Discount, etc.
•Balancing figure of profit and loss accounts represents the true and net profit as earned at the end of the
accounting period and transferred to the Balance Sheet.
 Balance Sheet
•A balance sheet reflects the financial position of a business for the
specific period of time. The balance sheet is prepared by tabulating the
assets (fixed assets + current assets) and the liabilities (long term
liability + current liability) on a specific date.
Assets
•Assets are the economic resources for the businesses. It can be
categorized as −
•Fixed Assets − Fixed assets are the purchased/constructed assets, used
to earn profit not only in current year, but also in next coming years.
However, it also depends upon the life and utility of the assets. Fixed
assets may be tangible or intangible. Plant & machinery, land &
building, furniture, and fixture are the examples of a few Fixed Assets.
•Current Assets − The assets, which are easily available to discharge
current liabilities of the firm called as Current Assets. Cash at bank,
stock, and sundry debtors are the examples of current assets.
•Fictitious Assets − Accumulated losses and expenses, which are not actually any virtual assets called as
Fictitious Assets. Discount on issue of shares, Profit & Loss account, and capitalized expenditure for time being
are the main examples of fictitious assets.
•Cash & Cash Equivalents − Cash balance, cash at bank, and securities which are redeemable in next three
months are called as Cash & Cash equivalents.
•Wasting Assets − The assets, which are reduce or exhausted in value because of their use are called as Wasting
Assets. For example, mines, queries, etc.
•Tangible Assets − The assets, which can be touched, seen, and have volume such as cash, stock, building, etc.
are called as Tangible Assets.
•Intangible Assets − The assets, which are valuable in nature, but cannot be seen, touched, and not have any
volume such as patents, goodwill, and trademarks are the important examples of intangible assets.
•Accounts Receivables − The bills receivables and sundry debtors come under the category of Accounts
Receivables.
•Working Capital − Difference between the Current Assets and the Current Liabilities are called as Working
Capital.
Liability
•A liability is the obligation of a business/firm/company arises because of the past transactions/events. Its
settlement/repayments is expected to result in an outflow from the resources of respective firm.
There are two major types of Liability −
•Current Liabilities − The liabilities which are expected to be liquidated by the end of current year are called as
Current Liabilities. For example, taxes, accounts payable, wages, partial payments of long term loans, etc.
•Long-term Liabilities − The liabilities which are expected to be liquidated in more than a year are called as
Long-term Liabilities. For example, mortgages, long-term loan, long-term bonds, pension obligations, etc.
CASH BOOK
•The word “cash” represents the monetary instruments (currency etc.)
and the word “book” represents the record available in written format.
Thus, a cash book can be defined as the record of business transactions in
a particular period.
•Cash book is divided into two parts namely, cash payments and cash
receipts.
•Examples include: expenses paid in cash, revenue collected in cash,
payments made to creditors, payments received from debtors, cash
deposited in bank, withdrawn of cash for office use, etc.
•A cash book can be defined as a financial journal which contains all the
cash receipts and disbursements. Cash Book also includes bank deposits
and bank withdrawals. The entries that come in the cash book are then
posted into the general ledger.
•A cash book records all the cash receipts on the debit side and all the
cash payments of the organisation on the credit side.
Features of Cash book

Acts as both a journal and a ledger.

Can be used as an alternative to a cash account for recording transactions.
It follows the dual entry system of accounting (i,e. Debit and credit side in cash book).
The debit side should be identical to the credit side.
Cash book should always have a debit balance.

•Cash book as journal

∙Just like a journal, it records transactions in chronological order (as it happens).
∙Follows the same procedure in posting transactions to ledger from cash book.
∙Maintains special cash books for cash transactions.
∙Records cash transactions according to debit and credit.

•Cash book as ledger

∙Same format as ledger.
∙Follows the same T format as ledger.
∙Cash book balances are transferred to trial balance.
∙Serve purpose of cash account.
Advantages of Cash Book
1.It offers easy verification of cash by matching the balance in the cash book with actual cash in hand and is
therefore helpful in identifying mistakes in the entry.
2.It helps in creating a regular record of transactions date wise for the convenience of accounting personnel.
3. As it is maintained date wise, any cash payments or the transaction can be correctly traced back in the cash
book.
4. It is helpful in detecting any cash frauds in the organisation.
5.It helps in saving time and labour by reducing the workload.
Types of Cash Book
 Single Column Cash Book
•Cash book is just like a ledger account. The balance of cash book is directly posted to the trial balance. Since cash
account is a real account, ruling is followed, i.e. what comes in – debit, and what goes out – credit. All the received cash
is posted in the debit side and all payments and expenses are posted in the credit side of the cash book.
Double Column Cash Book
•Here, we have an additional Discount column on each side of the cash book. The debit side column of discount
represents the discount to debtors of the company and the credit side of discount column means the discount received
from our suppliers or creditors while making payments.
•The below format of double column cash book has six columns on both debit and credit sides. The purpose of cash
and bank columns has been explained at the start of this article and the purpose of date, description, voucher number
(VN) and posting reference (PR) columns.
Triple Column Cash Book
•The triple column cash book (also referred to as three column cash book) is the most exhaustive form of cash book which has
three money columns on both receipt (Dr) and payment (Cr) sides to record transactions involving cash, bank and discounts. A
triple column cash book is usually maintained by large firms which make and receive payments in cash as well as by bank and
which frequently receive and allow cash discounts.
The triple column cash book has 7 columns on both debit and credit sides. The purpose of each column is briefly explained below:
•Date: The date column is used to enter the transaction date.
•Description: The description column is used to write the name of the account to be debited or credited in the ledger as a result of
cash or bank transaction.
•Voucher number (VN): A voucher is a document in support of a transaction. The serial number of the voucher is entered in this
column.
•Posting reference (PR): Each account in the ledger is assigned a unique numbered. The number each ledger account that is written in
description column is entered in PR column.
•Discount: The amount of discount allowed is recorded on debit side and the amount of discount received is recorded on credit side
in discount column. The totals of debit column and credit column are posted to discount allowed account and discount received
account respectively.
•Cash: The amount of cash received (net of any discount allowed) is entered on the debit side and the amount of cash paid (net of any
discount received) is entered on the credit side in cash column. This column is totaled and balanced like a ledger account.
•Bank: The amount of all receipts and payments made by the bank account are entered in bank column of the cash book. This column
is also totaled and balanced like a ledger account.
SUBSIDIARY BOOKS

•The Subsidiary books are known as the books of original entry. They are also known as Day Book or special
journals.
•In daily business transactions, a majority of the transactions are either related to sales, or to purchases or to
cash. We record transactions of similar nature are in Subsidiary Books. They are helpful in overcoming the
limitations of journal book or journal entries.
•Thus, we record the transactions of the same or similar nature in one place, that place is a subsidiary book. We
record the transactions chronologically to facilitate the accountant.
Types of Subsidiary Books

• The subsidiary books are of various types which suit the needs of an organization. The types are as follows:
The advantages of the subsidiary book are as follows:
1. Proper With Systematic Record of the Business Transactions
The business transactions are classified and grouped properly in cash and non-cash transactions, these are further
classified as credit purchases, credit sales, and returns, etc. The books facilitate individual transactions, as they
can be properly and systematically recorded in the subsidiary books.
2. Convenience While Posting
The transactions of a nature are recorded at a single place, in one of the subsidiary books. Example, all the credit
purchases of the goods are recorded in the purchases book while all the credit sales of goods are recorded in the
sales book.
3. Efficiency
The work is being divided here which gives the advantage of specialization. When the same work is done by a
person repeatedly and continuously the person becomes efficient in handling it.
4. Helpful in Decision Making
Subsidiary books provide accurate and complete details about each type of transaction separately. Thus, the
management can use the information as the basis for deciding the future actions.
5. Errors and Frauds are Prevented
The Internal check becomes more effective as now the work can be divided in such a manner, where the work of
one person is automatically checked by another person. With this internal check, the possibility of occurrence of
the errors or fraud may be avoided and to the least minimized.
6. Availability of Requisite Information at a Glance
The transactions are entered in only one journal thus, it becomes difficult to locate the information about a
particular item. When the subsidiary books are maintained, the details about a particular type of transaction can
be easily obtained from the subsidiary books. The maintenance of these subsidiary books helps in obtaining the
necessary information at a single glance.
What Are Capital Expenditures (CapEx)?

• Capital expenditures (CapEx) are funds used by a

company to acquire, upgrade, and maintain
physical assets such as property, plants, buildings,
technology, or equipment.
• CapEx is often used to undertake new projects
or investments by a company.
• Making capital expenditures on fixed assets can
include repairing a roof (if the useful life of the
roof is extended), purchasing a piece of
equipment, or building a new factory.
• This type of financial outlay is made by companies
to increase the scope of their operations or add
some future economic benefit to the operation.
• CapEx can tell you how much a company invests in
existing and new fixed assets to maintain or grow
its business.
 •The amount of capital expenditures a company is likely
to have depends on the industry. Some of the most
capital-intensive industries have the highest levels of
capital expenditures, including oil exploration and
production, telecommunications, manufacturing, and
utility industries.
•CapEx can be found in the cash flow from investing
activities in a company's cash flow statementCapEx can be
found in the cash flow from investing activities in a
company's cash flow statement. Different companies
highlight CapEx in a number of ways, and an analyst or
investor may see it listed as capital spending, purchases
of property, plant, and equipment (PP&E), or acquisition
expense.
Types of CapEx

• Many different types of assets can attribute long-term value to a company. Therefore, there are several types of
purchases that may be considered CapEx.

∙ Buildings may be used for office space, manufacturing of goods, storage of inventory, or other purposes.
∙ Land may be used for further development. Accounting treatment may different for land specifically held as a
speculative long-term investment.
∙ Equipment and machinery may be used to manufacture goods and convert raw materials into final products for sale.
∙ Computers or servers may be used to support the operational aspects of a company including the logistics, reporting,
and communication of operations. Software may also be treated as CapEx in certain circumstances.
∙ Furniture may be used to furnish an office building to make the space usable by staff and customers.
∙ Vehicles may be used to transport goods, pick up clients, or used by staff for business purposes.
∙ Patents may hold long-term value should the right to own an idea come to fruition through product development.
Formula and Calculation of CapEx

CapEx= ΔPP & E+Current Depreciation

•where: CapEx=Capital expenditures
•ΔPP & E=Change in property, plant, and equipment

Capital expenditures are also used in calculating free cash flow to

equity (FCFE). FCFE is the amount of cash available to equity
shareholders. The formula FCFE is:
FCFE=EP−(CE−D)×(1−DR)−ΔC×(1−DR)
•where: FCFE=Free cash flow to equity
•EP=Earnings per share
•CE=CapEx
•D=Depreciation
•DR=Debt ratio
•ΔC=ΔNet capital, change in net working capital

The Going Concern Assumption allows the accountant to

classify the expenditure as Capital Expenditures and
Revenue Expenditures, capital receipts and capital
revenues.
Capital revenue

•Capital revenues are a non-recurring incoming cash flow into the business that leads to the creation
of liability and a decrease in company assets.
•Capital Receipts are those receipts which are non-recurring in nature and generate benefits for many
years in the future.
•We show these receipts on the liabilities side of the balance sheet.
•Examples of capital receipts are the sale of fixed assets, capital contribution, loan receipts, a loan
from bank etc.
Examples Revenue Expenditure and Capital Expenditures

• Capital Expenditure the amount which a company spends for possessing any long-term capital asset or to enhance the
working capacity of an existing capital asset, or to increase its lifespan to generate future cash flows is known as Capital
expenditure.
• Examples of capital expenditures include the cost of land and building, plant and machinery, furniture and fixtures, etc.
Such capital expenditures normally yield benefits which extend beyond the current accounting year.
• Revenue Expenditure is that expenditure which a firm incurs for maintaining the productivity or earning capacity of a
business. In other words, we need to incur it on a regular basis for conducting the operational activities of the business.

• Examples of revenue expenditure are –office and administration expenses, Wages & Salary, Printing & Stationery,
Electricity Expenses, Repairs and Maintenance Expenses, Postage, Insurance, taxes, travel expenses, etc. Some
Non-operating expenses and losses such as interest on loan taken, loss by theft, etc. The revenue expenditure generates
benefits for the current accounting year.
Capital Receipt
•Capital Receipts are those receipts which are non-recurring in nature and generate benefits for many years in the
future. We show these receipts on the liabilities side of the balance sheet.

•Examples of capital receipts are the sale of fixed assets, capital contribution, loan receipts, a loan from bank etc.

Revenue Receipt
•Revenue receipts are those receipts which are recurring in nature and are available to meet day to day expenses of
the business. We show these receipts on the credit side of profit and loss account. Its effect is nil i.e., it neither
increases nor decreases the value of asset or liability.

•Examples of Revenue Receipts are the sale of stock-in-trade, revenue from services rendered in the normal course of
business, revenue from permitting others to use the assets of the enterprise, such as interest, rent, loyalty, etc.