Basic of Accouting

ACCOUNTING CYCLE ACCOUNTING CYCLE  The Series of business transactions which occur from the

 The Series of business transactions which occur from the beginning of an accounting periodbeginning of an accounting period to the end of an accounting period is referred any specific period of time for which a to the end of an accounting period is referred any specific period of time for which a summary of business’s transaction is

summary of business’s transaction is prepared.prepared. Steps in Accounting

Steps in Accounting Cycle:-1.

1. Journaliing Journaliing !"ecording#!"ecording# $.

$. %osting %osting to to &edger &edger !Classifying#!Classifying# '.

'. (inal (inal Account Account !Summarii!Summariing#ng#

)ow *+plain )ow *+plain Steps:-1

1 "ec"ecordordinging:- :- ThiThis is the basis is the basic funcc functiotion of n of acaccoucountintingng. All busi. All businesness trans transacsactiotion, asn, as eidenced by some documents such as Sale bill, %ass boo, Salary Slip ect are recorded in eidenced by some documents such as Sale bill, %ass boo, Salary Slip ect are recorded in the boos of

the boos of account. This is called recording process.account. This is called recording process. $.

$. ClassifyingClassifying:- :- All enAll entries in tries in the Journathe Journal or l or boos of boos of /riginal /riginal *ntry sh*ntry should be ould be posted to posted to thethe appropriat

appropriate ledger accounts to find out at a glance the total effect of all e ledger accounts to find out at a glance the total effect of all such transactisuch transactions inons in a particular account.

a particular account. '.

'. SummariingSummariing:- 0t :- 0t is is concerned concerned with with the the preparation preparation and and presentation presentation of tof the che classifiedlassified data in a manner useful to the 0nternal a well as the e+ternal users of financial statements. data in a manner useful to the 0nternal a well as the e+ternal users of financial statements.  This process

 This process leads to the leads to the preparatipreparation of the following on of the following financial sfinancial statements:- tatements:-a# Trial

a# Trial alancealance b#

b# %rofit %rofit 2 2 &oss &oss AccountAccount c#

c# alance alance SheetSheet d#

d# Cash Cash flow flow Statement.Statement.

DIFF. BETWEEN BOOK KEEPING AND

DIFF. BETWEEN BOOK KEEPING AND ACCOUNTINGACCOUNTING

B

BOOOOK K KKEEEEPPIINNGG AACCCCOOUUNNTTIINNGG

1.

1. 0t i0t is a s a %rocess %rocess concernconcerned wed with ith recordinrecordingg of transaction.

of transaction. $.

$. 0t 0t is is the the basic basic of of accounting.accounting. '.

'. %erson resp%erson responsible fonsible for boo-eeor boo-eeping are cping are calledalled boo eeper.

boo eeper. 3.

3. 0t 0t dodoes es nonot t rere4u4uireired d any any spespeciacial l sisill ll oror 5nowledge.

5nowledge. 6.

6. %ersonal %ersonal 7udgment 7udgment of of the the boo-eeper boo-eeper is is notnot re4uired.

re4uired. 8.

8. (ina(inancincial al statestatement ment are are not not prepprepared ared frofromm 1.

1. 0t is 0t is a pra process ocess concerned concerned with with SummariinSummariing ofg of the recorded transaction.

the recorded transaction. $.

$. 0t 0t is is the the basic basic for for business business language.language. '.

'. %ers%ersonal responsonal responsiblible e for for accaccountounting ing areare called accountant.

called accountant. 3.

3. 0t 0t re4uired re4uired special special Sill Sill 2 2 nowledge.nowledge. 6.

6. %erso%ersonal nal JudJudgmengment t of of the the accoaccountuntant ant isis essential.

essential. 8.

8. (inanci(inancial al statement statement are are prepared prepared fromfrom accounting record.

boo-eeping record. boo-eeping record. 9.

9. 0t 0t does does not not gigie the the ce complomplete ete picpicture ture of of thethe financial condition of the business unit.

financial condition of the business unit. .

. 0t 0t dodoes es not not helhelp p comcomplyplyining g wiwith th leglegalal formalities.

formalities. ;.

;. 0t 0t does does not not proide proide any any information for information for talingtaling managerial decision.

managerial decision. 1<.

1<. 0t has 0t has no ranno ranches.ches.

9.

9. 0t 0t gies gies the the complete complete picture picture of of the the financiafinanciall conditions of the business unit.

conditions of the business unit. .

. &egal &egal formalities formalities can can be be complied complied with with help help ofof accounting.

accounting. ;.

;. 0t 0t proides proides 0nformatio0nformation n for for taling taling managerialmanagerial decision.

decision.

1<

1<. . 0t h0t has sas seeereral bal brarancnchehes lis lie (e (ininanancicialal ac

accocoununtitingng, , cocost st acaccocoununtitingng, , =a=ananagegemementnt accounting ect.

DOBULE ENTRY SYSTEM

Under this system a proper and full record of all transaction is made eery transaction has a double or dual aspect. 0t is based upon the principal that eery receier implies gier and eery gier implies receier. This method writhing eery transaction in two accounts is gien debit side and the other account is gien credit with an e4ual amount. Thus, on any date, the total of all debits must be e4ual to the total of all credit because eery debit entry has a corresponding credit.

(or e+ample, ram purchased goods from 5ewal, of "s.6<<<. here ram is receier of goods and hence, debtor of 5ewal, who is the gier of goods, that is, he is the creditor of "am. Similarly, Salary paid to manager is in lieu of the benefit receied by the business, in terms of the serice rendered ect. Thus, all transaction will hae two aspect and a proper record of the transaction is necessary for this, it has to be recognied that.

1.# *ach transaction is to be dealt with as standing alone haing no preceding ar succeeding connection, and

$.# A business is regarded as a separate entity 4uite distinct from its proprietor and the e+change in transaction taes place between the business and the outsider.

ACCOUNTING CONCEPT

Accounting Concept defines the assumptions on the basis of which (inancial Statements of a business entity are prepared. Certain concepts are receied assumed and accepted in accounting to proide a unifying structure and internal logic to accounting process. The word concept means idea or nation, which has uniersal application. (inancial transactions are interpreted in the light of the concepts, which goern accounting methods. Concepts are those basis assumption and conditions, which form the basis upon which the accountancy has been laid. >nlie physical science, Accounting concepts are only results of broad consensus. These accounting concepts lay the foundation on the basis of which the accounting principals are formulated.

)ow we shall study in detail the arious concept on which accounting is based. The following are the widely accepted accounting concepts.

1.# Entity Concept: *ntity Concept says that business enterprises is a separate identity apart from its owner. usiness transactions are recorded in the business boos of accounts and owner’s transactions in this personal bac of accounts. The concept of accounting entity for eery business or what is to be e+cluded from the business boos. Therefore, wheneer business receied cash from the proprietor, cash a?c is debited as business receied cash and capital?c is credited. So the concept of separate entity is applicable to all forms of business organiation.

$.# Money Me!"#$e%ent Concept: As per this concept, only those transactions, which can be measured in terms of money are recorded. Since money in the medium of e+change and the standard of economic alue, this concept re4uires that these transactions alone that are capable of being measured in terms of money be only to be recorded in the boos of accounts. (or e+ample, health condition of the chairman of the company, woring conditions of the worers, sale policy ect. do not find place in accounting because it is not measured in terms of money.

'.# Co"t Concept: y this concept, the alue of assets is to be determined on the basic of historical cost. Transaction are entered in the boos of accounts at the amount actually inoled. (or e+ample a machine purchased for "s. <<<< and may consider it worth "s. 1<<<<<, ut the entry in the boos of account will be made with "s. <<<< or the amount actually paid. The cost concept does not mean that the assets will always be shown at cost.  The assets may be recorded at the time of purchase but it may be reduced its alue be

charging depreciation.

=any assets de not hae ac4uisition cost. @uman assets of an enterprises are an e+ample. The cost concept fails to recognie such assets although it is a ery important assets of any organiation.

3.# Goin& Conce$n Concept: According to this concept the financial statements are normally prepared on the assumption that an enterprises is a going concern and will continue in operation for the foreseeable future. Transaction are therefore recorded in such a manner that the benefits liely to accrue in future from money spent. 0t is because of this concept that fi+ed assets are recorded at their original cost and depreciation in a systematic manner without reference to their current realiable alue.

6.# D#!' !"pect Concept: This concept is the care of double entry boo-eeping. *ery transaction or eent has two aspect. 0f any eent occurs, it is bound to hae two effect. (or "s.6<<<<, on the other hand stoc will increase by "s.6<<<< and other liability will increase by "s.6<<<<. similarly is  starts a business with a capital of "s. 6<<<<, while on the other hand the business has to pay "s. 6<<<< to the proprietor which is taen as proprietor’s Capital.

8.# Re!'i(!tion Concept:   0t closely follows the cost concept any change in alue of assets is to be recorded only when the business realie it. i.e. either cash has been receied or a legal obligation to pay has been assumed by the customer. )o Sale can be said to hae taen place and no profit can be said to hae arisen. 0t preents business firm from inflating their profit by recording sale and income that are liely to accrue, i.e. e+pected income or gain are not recorded.

9.# Acc$#!' Concept: >nder accrual concept the effect of transaction and other eents are recognied on mercantile basic. Bhen they accrue and not as cash or a cash e4uialent is receied or paid and they are recorded in the accounting record and reported in the financial statements of the periods to which they relate financial statement prepared on the accrual basic inform users not only of past eents inoling the payment and receipt of cash but also of obligation to pay cash in the future and of resources that represent cash to be receied in the future. (or *+ample:- =r. "a7 buy clothing of "s. 6<<<<,a paying cash "s. $<<<< and sells at "s. 8<<<< of which customer paid only "s. 3<<<<. So his reenue is "s. 8<<<<, not "s. 3<<<< cash receied. *+p. /r Cash is "s. 6<<<<, not "s. $<<<< cash paid. So the accrual concept based profit is "s. 1<<<< !"eenue- *+p.#

.# Acco#ntin& Pe$io) Concept: This is also called the concept of definite periodicity concept as per going concept on indefinite life of the entity is assumed for a business entity

it causes inconenience to measure performance achieed by the entity in the ordinary causes of business. Therefore, a small but worable fraction of time is chosen out of infinite life cycle of the business entity for measure the performance and loading at the financial position 1$ months period is normally adopted for this purpose accounting to this concept accounts should be prepared after eery period 2 not t the end of the life of the entity. >sually this period is one calendar year. 0n 0ndia we follow from 1st _{April of a year to '1}st =arch of the immediately following years. )ow a day because of the need of management, final accounts are prepared at shoter interals of 4uarter year or in some cases a month such accounts are now a interim account.

;.# M!tc*in& Concept: 0n this concept, all e+p. =atched with the reenue of that period should only be taen into consideration. 0n the financial statements of the organiation. 0f any reenue is recognied that e+p. "elated to earn that reenue should also be recognied.  This concept as it considers the occurrence of e+p. And income and do not concentrate on actual inflow or outflow of cash. This leads to ad7ustment of certain items lie prepaid and outstanding e+penses, unearned or accrued income.

0t is not necessary that eery e+p. 0dentity eery income. Some e+p. Are directly related to the reenue and some are directly related to sale but rent, salaries etc. are recorded on accrual basis for a particular accounting period. 0n other words periodicity concept has also been followed while applying matching concept.

1<.# O+,ecti-e Concept: As per this concept, all accounting must be based on ob7ectie eidence. 0n other words, the transactions recorded should be supported by erifiable documents. /nly than auditors can erify information record as true or otherwise. The eidence should not be biased. 0t is for this reasons that assets are recorded at historical cost and shown thereafter at historical lass depreciation. 0f the assets are shown on replacement cost basis, the ob7ectiity is lost and it become difficult for auditors to erify such alue, howeer, in resent year replacement cost are used for specific purpose as only they represent releant costs. (or e+ample, to find out intrinsic alue of share, we need replacement cost of assets and not the historical cost of the assets.

ACCOUNTING CONENTIONS

 The term Accounting ConentionsD refers to the customs or traditions which are used as a guide in the preparation of accounting reports and statements. The conentions are deried by usage and practice. The accountancy bodies of the world may charge any of the conention to improe the 4uality of accounting information accounting conentions need not hae uniersal application. (ollowing are important accounting conentions in use:

1.# Con-ention o/ con"i"tency: According to this conention the accounting practices should remain unchanged from one period to another. 0t re4uires that woring rules once chosen should not be changed arbitrarily and without notice of the effect of change to those who use the accounts. (or e+ample, stoc should be alued in the same manner eery year. Similarly depreciation is charged on fi+ed assets on the same method year after year. 0f this assumption is not followed, the fact should be disclosed together with reasons.

 The principle of consistency plays its role particularly when alternatie accounting methods is e4ually acceptable. Any change from one method to another method would result in inconsistencyE they may seem to be inconsistent apparently. 0n case of aluation of stocs if the company applies the principle at cost or maret price whicheer is lessD and if this principle accordingly result in the aluation of stoc in one year at cost and the maret price in the other year, there is no inconsistency here. 0t is only an application of the principle.

An *nterprise should change its accounting policy in any of the following circumstances only.

!i# To bring the boos of accounts in accordance with the issued accounting standard.

!ii# To compliance with the proision of law. !iii# Bhen under changed circumstances it is felt that new method will reflect more true

and fair picture in the financial statement.

$.# Con-ention o/ Con"e$-!ti"%:  This is the policy of playing sale game. 0t taes into consideration all prospectie losses but leaes all prospectie profits financial statements are usually drawn up on a conseratie basis anticipated profit are ignored but anticipated losses are taen into account while drawing the statements following are the e+amples of the application of the conention of conseratism.

!i# =aing the proision for doubtful debts and discount on debtors. !ii# Faluation of the stoc at cost price or maret price which eer is less. !iii# Charging of small capital items, lie crocery to reenue.

!i#Showing 7oint life policy at surrender alue as against the actual amount paid. !# )ot proiding for discount on creditors.

'.# Con-ention o/ Di"c'o"#$e: Apart from statutory re4uirement, good accounting practice also demands that significant information should be disclosed in financial

statements. Such disclosures can also be made through footnotes. The purpose of this conention is to communicate all material and releant facts concerning financial position and results of operations to the users. The contents of balance sheet and profit and loss account are prescribed by law. These are designed to mae disclosures of all materials facts compulsory. The practice of appending notes relatie to arious facts and items which do not find place in accounting statements is in pursuance to the conention of full disclosure of material facts. (or e+ampleE

!a# Contingent liability appearing as a note.

!b# =aret alue of inestments appearing as a note.

 The conention of disclosure also applies to eents occurring after the balance sheet date and the date on which the financial statement are authoried for issue. Such eents include bad debts, destruction of plant and e4uipment due to natural calamities’, ma7or ac4uisition of another enterprises, etc. such eents are liely to hae a substantial influence on the earnings and financial position of the enterprises. Their not-disclosure would affect the ability of the users for ealuations and decisions.

3.# Con-ention o/ M!te$i!'ity: According to this conentions, the accountant should attach importance to material detail and ignore insignificant details in the financial statement. 0n materiality principle, all the items haing significant economics effect on the business of the enterprises should be disclosed in the financial statement.

 The term materiality is the sub7ectie term. 0t is on the 7udgment, common sense and discretion of the accountant that which item is material and which is not. (or e+ample stationery purchased by the organiation though not used fully in the concept. Similarly depreciation small items lie boos, calculator is taen as 1<<G in the year if purchase through used by company for more than one year. This is because the amount of boos or calculator is ery small to be shown in the balance sheet. 0t is the assets of the company.

 0OURNAL

Int$o)#ction: The word HJournal means’ a daily record. Journal is deried from (rench word HJour’ which means a day. 0t is a boo of original or prime entry written up from the arious sources documents. *ery transaction is recorded in the first instance and than it is posted to the ledger. The form in which it is recorded is called 7ournal entry and recording or entering a transaction in the 7ournal is nown as Journaliing.

R#'e" o/ 0o#$n!'i(in&:  The process of passing an entry in a 7ournal is called Journaliing.  The rule for Journaliing is same as that of rules of debit and credit. 0t is based on two facts.

(irst is accounting e4uation and other is accounting approach. 1.# ased on Accounting

*4uation:-a# 0ncreases in assets are debits, decreases are credit. b# 0ncreased in liability are credit, decreases are debits. c# 0ncreases in capital are credits, decreases are debits. d# 0ncreases in profits are credits, decreases are debits.

e# 0ncreases in e+penses are debits, decreases are credits.

$.# ased on Traditional Approach:-a# Iebit the receier, credit the gier

b# Iebit what comes in, credit what goes out.

c# Iebit all e+penses and losses, credit all income and gains.

CAS1 BOOK 

*ery business actiity ultimately result in cash, therefore, recording of transaction inoling cash must be recorded in a separate 7ournal. This 7ournal is called cash boo. 0t may be defined as the record of transaction relating to receipt of and payment in cash.

 Therefore, all cash transaction began to be recorded separately in a boo called the cash boo, which later began to be used to record ban boo and discount transaction as well besides cash transaction by doing so daily checing of cash in hand and periodical checing of cash in hand and periodical checing of ban balance was rendered 4uic and easy. Although cash boo is a boo of original entry, the use of cash boo as a subsidiary boo is often dispensed with. 0t is an integral part of ledger. ut nonetheless, it seres the dual purpose of 7ournal as well as ledger.

PETTY CAS1 BOOK 

 The cash boo as seen aboe is used for recording all ma7or payments. ut, in eery business a number of petty !small# %ayment lie that for postage, carriage, stationery, entertainment, cartage, coneyance etc. are paid fre4uently een in a single day. 0f all these petty e+penses are to be recorded in the main cash boo. 0t would be come too buly and difficult to handle therefore, it is usual for the business units to maintain a separate cash boo to record small payments only. Such a cash boo is nown as petty cash boo. %etty cash boo can be of two types.

a# Simple petty cash boo and b# Analytical petty cash boo.

1.#

SIMPLE PETTY CAS1 BOOK:A simple petty cash boo is written 7ust lie the cash boo. The amount receied by the petty cashier from the head cashier is recorded on the debit side of the petty cash boo and payment on the credit side of the petty cash boo. *+penses account is indiidually debited in the ledger.

$.#

AN ANALYTICAL PETTY CAS1 BOOK: An Analytical petty cash boo is employed by a large concern haing a number of transactions of petty amount such petty. Cash boo contains indiidual columns for each e+pense eery small payment is recorded on the credit side. /ne of the total payment column and second in one of the analytical amount columns. The periodic total of e+penses column is posted to the e+penses accounts concerned while the total of e+penses column is posted to the e+penses accounts. Concerned while the total of payment column seres to find out the balance of cash with the petty cashier.

IMPREST SYSTEM

 The petty cash boo is usually maintained on the basis of imprest system. >nder it, a fi+ed amount, solely determined by the @ead Cashier, is adanced to the %etty Cashier at the beginning of the period, may be, a wee or a fortnight, or a month, by the @ead Cashier.  The petty cashier submits his accounts at the end of the period to the @ead Cashier and the head cashier after e+amining the accounts gies him a fresh adance e4uialent to the amount spent by him during the period. Thus, in the beginning of each period, the petty cashier has a fi+ed balance. The amount so adance to him is termed as 0mprestD or (loatD.

 0OURNAL PROPER

0t must hae been understood by this time that Journal is used for recording only those transactions for which there is no special subsidiary boo. =oreoer, if the number of transactions of a particular type !say returns inward or outward# is not large, there is no point in haing a separate subsidiary boo for such transactions. These transactions may be  7ournalied. The method of recording transactions in Journal has already been e+plained.

(ollowing transactions are still recorded in the 7ournal:

1.

Openin& ent$ie": At the beginning of the year, the opening balances of assets and liabilities are 7ournalied.

$.

C'o"in& Ent$ie": At the end of the year final accounts are prepared. (or preparing these accounts arious are to be transferred to the trading and profit and loss account which is done by means of 7ournal entries.

'.

Recti/ic!tion ent$ie": Bhen any error is detected in writing up the boos then it is rectified by means of suitable 7ournal entry.

3.

A),#"t%ent ent$ie":

Since accounting follows accrual conceptD therefore

ad7ustment has to be done at the end of the year regarding:

a# *+penses incurred but not paid,

b# *+penses paid but benefit to be aailable in the ne+t period, c# 0ncome becoming due but not receied,

d# 0ncome receied in adance, and

e# Charging depreciation on fi+ed assets, etc.

6.

T$!n"/e$ ent$ie": 0f any amount is to transferred from one ledger account to the other, then it is done by means of 7ournal entries.

2. Mi"ce''!neo#" ent$ie": a.# %urchase and sale of fi+ed asses on credit,

c.# Any e+tra concession to be allowed to any customer or any charge to be leied after the issue of the inoice, and

d.# Any other item for which no subsidiary boo has been maintained.

SUBSIDIARY BOOKS

As transactions occur, it is possible, at least in theory, to record them from source documents directly to the proper accounts in the %rincipal oo!s#. but in actual practice, with hundreds of different accounts and thousands of transactions occurring eery day, such a procedure would become cumbersome and confusing. (urthermore, after seeral recordings it world become difficult to locate a particular transaction. )ot only this, the identity of indiidual transaction is lost and the purpose of recording it cannot be easily ascertained. (or e+ample, if the cash account, he might not succeed in his efforts unless he goes through the entire general ledger. A separate record of each transaction is therefore, necessary.

Nee) /o$ S#+"i)i!$y Boo3"

&edger, as already noted, is the principal boo of account which contains information relating to all business transaction both as regards debits and credit aspects. 0t proides a cumulatie analysis of the effect of business transactions.

 The use of ledger alone, though the principal boo of accounts, such procedure usually is inadisable. 0t fails to meet all the re4uirements of a complete accounting system. Farious reasons why ledger is an incomplete record and why subsidiary boos must also be maintained are as follows:

1.#

C*$ono'o&ic!' *i"to$y not !-!i'!+'e: 0f business transactions are entered directly 0n indiidual accounts in ledger, the trader would not hae as ade4uate picture of what occurs in his business. 0t is lacing when only ledger is used.

A business enterprises should eep a chronological record of its transactions in order to simplify references to its actiities according to date.

$.#

Co%p'ete t$!n"!ction not "*o4n !t one p'!ce: information disconnected each business transaction affects more than one account. Bhen the debit and credit aspects of a transaction are entered in two shown at one place. Conse4uently, if there are a large number of accounts in ledger, it would become difficult to trace any transaction.

'.#

Det!i' in!)e5#!te 'e)&e$ too +#'3y: only meager information concerning a transaction can be shown coneniently in the accounts in ledger. 0f, howeer complete information is gien in the ledger, it would become too buly to be handled efficiently.

3.#

Di-i"ion o/ '!+o#$ *!%pe$e): only one person at a time con efficiently mae entries in the ledger. @e must hae the entire ledger aailable in order to record the transaction in each account affected. A large enterprise, with a multitude of transactions to record, must use a more efficient system which permits many employees to wor on the boos at the same time.

6.#

E$$o$" )i//ic#'t to 'oc!te: =aing the entries directly in the ledger increases the probability that errors will occur and maes errors mode difficult to locate and correct.  The following are a few e+amples.

b.# *ntering part of a transaction on the wrong side of an account. c.# *ntering the wrong amount in an account.

d.# *ntering an amount in the wrong account.

 These fie reasons sufficiently e+plain the desirability of haing. Subsidiary boos where the transactions are shown

a.# 0n chronological order b.# Complete in one place, and

c.# Bith ade4uate e+planations as to their nature.

DIFFERENCE BETWEEN TRADE AND DISCOUNT AND CAS1 DISCOUNT T$!)e Di"co#nt C!"* Di"co#nt

1. 0t is offered at the time of sale or purchase.

$. 0t is usually offered or allowed on account of purchases made beyond a prescribed 4uantity.

'. 0t is deducted from the list price in the inoice.

3. 0t is not recorded in the boos of account. 6. 0t is usually gien in percentage.

1. 0t is offered at the time of getting 4uic payment.

$. 0t is usually offered or allowed for full or part settlement of account at an earlier date.

'. 0t is not deducted at the time of preparation of the inoice.

3.

0t is duly recorded in the boos of the account.

6. 0t may be gien in percentage or in absolute figure.

DEBIT 6 CREDIT NOTE

A Iebit note is prepared when goods are returned by the purchaser due to some reason. Two copies of this note are prepared. The original copy is sent to the party !i.e. Seller of goods# to whom goods are returned and the duplicate copy is ept in the office record. 0t is called a debit note because the party’s account is debited with the amount written in this note for the goods returned. The same debit note becomes credit note from the receiing party’s point to iew because he credits the account of the party from whom he receied the note along with the goods.

A credit note, as stated aboe, is lie a debit note. 0t is sent by the seller to the purchaser for the goods returned by the latter to the former. 0t is called a credit note because the party’s account is credited with the amount written in this note for the goods returned by the party. The same credit note becomes debit note for the party sending this for the goods receied.

 The ob7ect of sending a credit note to a customer is to inform him that he has been credited in our boos. A credit note is also sent to the customer in the following cases:

1.# Bhen he is allowed some discount or allowance in defectie, damaged or unsatisfactory goods.

$.# Bhen an e+cessie charge was made by mistae.

'.# Bhen cartons or containers are returned by the customer.

TRIAL BALANCE

Be now that the fundamental principle of Iouble *ntry System id accounting is that for eery debit, there must be a corresponding credit, thus, for eery debit or a series of debits gien to one or seeral accounts, there is a corresponding credit or a series of credit of n e4ual amount gien to some other account or accounts and ice ersa. 0t follows, therefore, that the sum total of debit accounts should e4ual the credit amounts of the ledger at any date. ut if the arious accounts in the ledger are balanced, then the total of all debit balance must be e4ual to the total of all credit balances if the boos of accounts are arithmetically accurate.

 Thus, at the end of the financial year o at any other time, the balances of all the ledger accounts are e+tracted and are written up in a statement nown as Trial alance and finally totaled up to see if the total of debit balances is e4ual to the total of credit balances. A Trail alance may thus be defined as a statement of debit and credit totals or balance e+tracted from the arious accounts in the ledger with a iew to test the arithmetical accuracy of the boos.

 The agreement of the Trial alance reeals that both the aspects of each transaction hae been recorded and that the boos are arithmetically accurate. 0f the Trial alance does not agree, it shows that there are some errors which must be detected and rectified lin between the ledger accounts and the final accounts.

OB0ECTIES OF TRIAL BALANCE

 The following are the main ob7ecties of preparing the trial balance:

!i# To hae balances of all the accounts of the ledger in order to aoid the necessity of going through the pages of the ledger to find it out.

!ii# To hae a proof that the double entry of each transaction has been recorded because of its agreement.

!iii# To hae arithmetic accuracy of the boos of accounts because of the agreement of the trial balance.

!i#To hae material for preparing the profit and loss account and balance sheet of the business.

LIMITATIONS OF TRIAL BALANCE

 The following are the main limitations of the trial balance:

!i#

 Trial balance can be prepared only in those concerns where double entry system of accounting is adopted. This system is ery costly and cannot be adopted by the small concerns.

!ii# Through trial balance gies arithmetic accuracy of the boos of accounts but there are certain errors which are not disclosed by the trial balance. That is why it is said that trial balance is not a conclusie proof of the accuracy of the boos of accounts.

!iii#

0f Trial alance is not prepared correctly then the final accounts prepared will not

reflect the true and fair iew of the state of affairs of the business. Bhateer conclusions and decisions are made by the arious groups of persons will not be correct and will mislead such persons.

ERROR DISCLOSED BY TRIAL BALANCE

0t the two sides of a trial balance are not e4ual, it is the proof of the e+istence of error.  There may, of course, be more than one error.

 The main reasons of such errors are gien belowE

1.#

An item omitted to be posted from a subsidiary boo into the ledger i.e., A purchase of "s.1<<< from )ain omitted to be credited to his account. As a result of this error, the figure of sundry creditors to be shown in the Trial alance will reduce by "s.1<<< and the total of the credit side of the Trial alance will b "s.1<<< less as compared to the debit side of the Trial alance.

$.#

%osting of wrong amount to a ledger account i.e., A Credit sale of "s. $<<< to Aarti wrongly posted to her account as "s.$<<. the effect of this error will be that the figure of sundry debtors will be reduced by "s.1<< and the total of the debit side of the Trial alance will be "s.1<< &ess than the total of the credit side of the Trial alance.

'.#

%osting an amount to the wrong side of the ledger account i.e., "s.6< Iiscount allowed to a Customer wrongly posted to the credit instead of the debit side of the discount account. As a result to this error, the credit side of the Trial alance will e+ceed by "s.1<< !double the amount of the error#.

3.#

Brong additions or balancing of ledger accounts i.e., while alancing Capital account at the end of the financial year, credit balance of "s.;<<< wrongly taen as "s.9;<<<. as a result of this error, the credit total of the Trial alance will "s.1<<<< too short.

6.#

Brong totaling of subsidiary boos i.e., Sales oo is oercast by "s.1< as result of this error, credit side of the Trial balance will be "s.1< too much because sales account will appear at a higher figure on the credit side of the Trial alance.

8.#

An item in the subsidiary boo posted twice to a ledger account i.e., %ayment of "s.1<<< to a creditor posted twice to his account.

9.#

/mission of alance of an account in the Trial alance Cash and an alance may hae been omitted to be included in the Trial alance.

.#

alance of Some account wrongly entered in the Trial alance i.e., A alance of "s. 61' in Stationery Account wrong entered as "s.'16in the Trial balance.

;.#

alance of some account written to the wrong side of the Trial alance i.e., alance of Commission earned account wrongly shown to the side instead of the credit side of the  Trial alance.

1<.#

An error in the Totaling of the Trial alance will bring the disagreement of the Trial

alance.

ERROR NOT DISCLOSED BY A TRIAL BALANCE

0t is certain that the error e+ists of the debits of trial balance are not e4ual to its credits. ut the fact that trial balance is in balance does not proe the accuracy of accounts. There is a possibility of mistaes which will not upset the e4uilibrium of the e4uality of debits and credits and thus is a proof only of arithmetic accuracy of posting.  The following are the cases of such error which are not disclosed by a trail balance:

1.#

O%i""ion o/ !n ent$y in ! "#+"i)i!$y +oo3: if an entry has not been recorded in a subsidiary boo both the debit and credit of that transaction would be omitted and the agreement of the trial balance will not be affected in any way.

$.#

A 4$on& ent$y in ! "#+"i)i!$y +oo3: - 0f a Credit purchase of "s.386 from Annu is Brongly written as "s.683 in the %urchase boo, such an error will not be disclosed by the trial balance. As the posting on both the debit side of purchases account and credit side annu’s account will be with the wrong amount of "s.683, so the trial balance will agree.

'.#

Po"tin& !n ite% to t*e co$$ect "i)e +#t in t*e 4$on& !cco#nt: 0f a purchase of "s.6<< from Fasant Iesai has been credited to @imanshu Iesai in stead of Fasant Iesai, it will not affect the agreement of the Trial alance, so the Trial alance will not detect such an error.

3.#

Co%pen"!tin& e$$o$:  These are errors which compensate themseles in the net result, i.e., oer-debits or under-debits of arious accounts being neutralied by the oer-credits or under-credits to the same e+tent of some other accounts. (or e+ample under-posting of "s.6<< on the debit side of a certain account would be compensated by under-posting of "s.1<< on the credit side of another account and an omission of credit posting of "s.3<< to a third account. 0t is 4uite possible that this error may also be neutralied by oer-posting of "s.6<< on the debit side in some other account or accounts or accounts.

6.#

E$$o$" o/ P$incip'e: These errors will not affect the agreement of the trial balance as they arise from the debiting or crediting of wrong heads of accounts as would be

inconsistent with the fundamental principles of double entry accounting. (or *+ample "s.866< spent in e+tension of building wrongly debited to repairs account instead of building account will not affect the agreement of the Trial balance. Thus, such errors arise wheneer an asset is treated as an e+pense or ise ersa or a liability is treated as an income or ise ersa.

MET1OD OF PREPARATION OF TRIAL BALANCE

%reparation of Trial alance is the third step in accounting process. 0t is preceded by recording of transaction in subsidiary noos and posting of the accounts in the ledger, and succeeded by preparation of final accounts.

A Trial alance can be prepared at ant time as and when desired, but it must be prepared at the end of each financial year after the accounts hae been closed. There are three methods of preparing the Trial balance.

1.

TOTAL MET1OD:>nder this method, eery ledger account is totaled and that total amount !both of debit side and credit side# is transferred to trial balance. 0n this method, trial balance can be prepared as soon as ledger account is totaled. Time taen to balance the ledger accounts is saed under this method as balance can be found out in the trial balance itself. The difference of totals of each ledger account is the balance of that particular account. This method is no commonly used as it cannot help in the preparation of the financial statements.

$.

BALANCE MET1OD:- >nder this method eery ledger account is balanced and those balances only are carry forward to the trial balance. This method is used commonly by the accountants and helps in the preparation of the financial statements. (inancial statements are prepared on the basis of the balance of the ledger accounts.

'.

TOTAL AND BALANCE MET1OD:- >nder this method, the aboe two e+plained methods are combined. >nder this method statement of trial balance contains seen columns instead of fie columns. This has been e+plained with the help of the following e+ample:

1. $. '. 3. 6. 8. 9. . ;. 1<. 11. Cash Account (urniture Account Salaries Account Shyam’s Account %urchase Account

%urchase "eturn Account "am’s Account

Sales Account

Sale "eturn Account Capital Account an Account  T/TA& '<<<< '<<< $6<< $16<< $8<<< '<<<< 1<< 6<< 6<<< 1;<< $6<<< 6<< $61<< '<6<< 1<<< $<< 11;1<< 1;11<< DEPARTMENTAL ACCOUNTING

INTRODUCTION:  Bhen a business deals in different finds of articles or serices under one roof, it is diided into number of diisions which are nown as departments. This is generally done to hae smooth and efficient running of business. A department is a physical part of the rest of the business. 0t is lie decentraliation of business actiities. *ach department is gien freedom to tae decision relation to purchases, pricing, adding of new products ect. The accounting system is so deised as to enable the management to find out turnoer, e+penses and profit of each department separately. OB0ECTIES:  Bhen all the diisions of a business are located under one roof and separate trading, profit and loss accounts of arious departments of an organiation are prepared, the information aailable there from is helpful to the management to find out relatie performance of departments.  The following are the ob7ecties of departmental accounting.

$# To determine the profitability of each department and compare it with preious year’s result and also with the other departments of the same concern.

'# To proide information regarding which department has high operation e+penses so that policy may be formulated to control such e+penses.

3# To help the management in deciding which department shall be e+panded to ma+imie profitability of the business.

6# To proide information regarding improing efficiency of departments with lower profit or losses. 8# Bhich departments are to be closed because of lower sales olume and high operating costs. 9# Bhen departmental manager’s are to be paid commission on the basis of profit achieed by their

department.

# To generate information which may be helpful for planning, control, ealuation of their departments.

;# To help the proprietor in formulating policy to e+pend the business on proper lines so as to optimie the profits of the concern.

1<# Bhen a business is dealing in different types of goods or serices, it is not enough to prepare one trading profit and loss account for the entries business. 0t may show profit made by the whole business but still there may be loss in some of the departments which reduces the oerall profits of the business. Such departments must be closed down. ecause of this reason separate trading profit and loss account of each department shall be prepared.

ADANTAGES OF DEPARTMENTAL ACCOUNT

1# The trading results of each department may help to ealuate the performance of each department. The sales of that department which fies ma+imum profit may be pushed up by special efforts.

$# The profitability of each department may help the management for taing decision whether to drop a department or add a new one.

'# The growth potentials of a department can be ealuated by haing comparison with the other departments.

3# The users of accounting information can be proide mode detailed information lie the shareholder, inestors, creditors etc.

6# The oerall profits of the organiation can be increased by haing friendly rialries between different departments.

8# The departmental managers and staff can be suitably rewarded on the basis of the departmental results.

9# 0t helps the management to determine the 7ustification of proper use of capital inested in each department.

# 0t helps to hae comparison of arious e+penses of each department with the preious period or with other departments of the same concern.

;# 0t helps to now he efficiency of each department by calculating stoc turnoer ratio of each department to reeal the fast or slow moment of arious items of stoc.

1<# The information proided by departmental accounts may be helpful to the management for future intelligent planning and control.

ALLOCATION OF DEPARTMENTAL E7PENSES

 The problems arise only in indirect e+penses which are common for the concern as a whole and may be relating to sales, distribution, administration, finance and till these are distributed among the departments on same suitable basis, the net profits of difference departments cannot be ascertained. Iirect e+penses are easily indentified with a particular department is nown as direct e+penses lie purchase, wages, salary, carriage etc. these e+penses are directly charged to respectie department. Such e+penses which cannot be directly related to a particular department or cannot hae precise allocation may be diided among the different departments as follows:

1.#

Se''in& E8pen"e":  These e+penses include discount allowed, bad debts, selling commission, carriage on sales and should be diided among the different departments on the basis of sales. 0t must be noted carefully that sales for this purpose also include transfers to other departments.

$.#

B#i')in& E8pen"e": "ent and rates, insurance on building, repairs, etc. are e+penses which are relating to building premises and should be distributed among the different departments according to the space occupied by each department. 0t any department is en7oying any special benefit then charge for these e+penses must be ad7usted according to the special benefit en7oyed by a particular department. Iepartments haing front location must bear more charges than the departments in rear part of the building.

'.#

1e!tin& !n) 'i&*tin&: if there are no separate meters, these may be apportioned among the different departments on the basis of points, lamps used, area or inersely to the number of windows.

3.#

Po4e$: 0t should be apportioned on the basis of probable usage as determined by numbers and types of machines ad7usted where necessary according to running hours in absence of separate meters for each department.

6.#

A)-e$ti"in&:0t should be apportioned on the basis of adertising space used by the different departments or on the basis of adertisement for the benefit of all departments must be apportioned e4ually among the departments.

8.#

In"#$!nce P$e%i#%: 0t must be seen whether the insurance premium has been paid for stoc, premises or loss of profit or wormen’s compensation and should be apportioned on the basis of stoc carried, proportion of premises occupied, profits earned in the preceding years and wages respectiely but if there e+ists any abnormal feature relating to any department, that may be considered while apportioning such e+penses.

9.#

Dep$eci!tion: it should be allocated among the different departments on the basis of assets employed in each department.

.#

L!+o#$ We'/!$e e8pen"e": These should be apportioned among the different departments on the basis of number of employees woring in each department.

;.#

C!$$i!&e in4!$): Carriage 0nward are related to the purchases so these e+p. Should be apportioned among the different departments on the basis of %urchases of each department.

1<.#

Wo$3" %!n!&e$9" "!'!$y: wors manager’s salary should be allocated among the different departments on the basis of time spent in each department.

E7PENSES W1IC1 CANNOT BE ALLOCATED

 There are Certain e+penses which cannot be allocated on some e4uitable basis such as director fees, managerial remuneration, debenture interest, share transfer, income ta+, office e+penses, general manager’s salary, diidend paid etc., are cannot be allocated or apportioned. These e+penses shall be charged to general or combined profit and loss account. %rofit of all departments should be brought down in one total and such e+penses should be debited and non-departmental profits credited to this profit without maing any effort for its apportionment among different departments in combined income account.

1IRE PURC1ASE 6 INSTALMENT PURC1ASE

INTRODUCTION: Bith an 0ncreasing demand for better life, the consumption of goods has been on the e+pending sale. There are different ways by which goods can be sold. (irst is goods can be sold for cash, Second is goods can sold for @ire-%urchase and third is sold from 0nstallment.

>nder Cash Sale the ownership and possession is immediately passed from seller to buyer and buyer maes the payment in cash at the time of taing the deliery of Koods.

>nder @ire-%urchase System the buyer ac4uires the possession of the goods immediately and agrees to pay the total price in installment. *ach installment treated as hire charges until the payment of the payment of the last 0nstallment when the ownership of goods passes. The ownership of goods is transferred to the buyer when the last 0nstallment is paid. 0 the buyer default in the payment of the 0nstallment !*en last 0nstallment# the @ire-Fendor has right to repossess the goods without compensation the buyer. ut buyer pays 0nstallments regularly, the Seller has no right to repossess the goods.

>nder 0nstallment %urchase System the buyer ac4uires the possession 2 /wnership of the goods immediately and payment of the total price will be made in 0nstallment if the buyer is any default in the payment of any 0nstallment, the Seller has no right to repossess the goods. ecause the ownership of the goods is transfer immediately from Seller to uyer at the time of signing the contract. @e can only go to the court and sue the purchaser for unpaid balance.

FEATURE OF 1IREPURC1ASES

1# The hire endor transfer possession of goods immediately to the %urchaser $# The uyer will mae %ayment in 0nstallment oer a period of time.

'# The /wnership of the goods will remain with the seller and passed to the buyer on the payment of the last 0nstallment.

3# *ach 0nstallment is treated as hire-Charges until the last 0nstallment is paid. 6# The hire purchaser generally maes a down payment on signing the agreement.

8# 0n case of default in respect of een the last 0nstallment, the hire endor has the right to taes the goods bac without maing any compensation.

FEATURE OF INSTALLMENT PURC1ASES

1# The buyer ac4uires possessions of the goods immediately at the time of agreement. $# The uyer will mae %ayment in 0nstallment oer a period of time.

'# *ach 0nstallment pay with some 0nterest.

3# The /wnership of the goods transfer of the goods at the time of agreement. 6# The hire purchaser generally maes a down payment on signing the agreement.

8# 0n case of default in respect of een the last 0nstallment, the seller has no right to possess the goods. The Can only sues for unpaid balance.

DIFF. BETWEEN 1IREPURC1ASE AND INSTALLEMNT

1. The ownership of the goods passes to the @ire-endor on the payment of last 0nstallment. $. 0t is a agreement of @iring.

'. The hires can return the goods if he does not want to continue with the agreement.

3. The hires cannot sell transfer or pledge the goods.

6. 0f the hires mae default in payment of 0nstallment or any other terms of agreement the seller can repossess the goods.

1. The ownership of the goods passes to the buyer immediately when the agreement is signed. $. 0t is a agreement of Sale.

'. The buyer cannot return the goods to the seller.

3. The buyer can do all such thing.

6. 0n case of default seller can only sue the in the court of law and cannot repossess the goods.