1 Financial Accounting Module 1 An Overview. 2 Module 1 (6 Hours) Financial Accounting An overview, Accounting concepts, principles, accounting standards

1

Financial Accounting

Module 1

An Overview

2

Module 1(6 Hours)


An overview, Accounting concepts, principles, accounting standards. Ledger posting, Trial Balance.

3

Definition And Meaning Of Accounting

The American Institute of Certified Public Accountants (1941) defines ‘Accounting is the art of recording, classifying and summarising in significant manner and in terms of money, transactions and events which are in part, at least of a financial character and interpreting the results thereof.

Accounting As An Information Cycle

Input Process Output

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Accountancy, Accounting And Book-keeping

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IMPORTANCE OF ACCOUNTING

1. Facilitates to replace memory and comply with

legal requirements

2. Facilitates to ascertain net result of operations

and also to know the financial position

3. Facilitates the users to take effective decisions

4. It is helpful in a comparative study

5. It assists the management

6. It facilitates to have control over assets

7. It facilitates the settlement of tax liability

8. It facilitates raising of loans

9. It acts as a legal evidence

10. It facilitates ascertainment of value of business.

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SCOPE OF ACCOUNTING

• Identifying• Measuring• Recording• Classifying• Summarising• Analysing• Interpreting• Communication

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Accounting Principles

Accounting principles are a body of doctrines commonly associated with the theory and procedures and as a guide for selection of conventions or procedures where alternatives exist.

These principles are classified into two categories: 1. Accounting Concepts

2. Accounting Conventions

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TYPES OF ACCOUNTING

Accounting


Cost Accounting

Management Accounting

Social Responsibility

Accounting

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ACCOUNTING CONCEPTS

Concept means a general notion, a theory or belief held by person or group of persons. The term ‘concepts’ includes those basic assumptions or conditions upon which the science of accounting is based.

1. Business entity concept2. Money measurement concept3. Cost concept4. Going concern concept5. Dual aspect concept6. Realisation concept7. Accrual concept

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ACCOUNTING CONVENTIONS

A convention means a custom or an established usage formed or adopted by an agreement. The term ‘conventions’ includes those customs or traditions which guide the accountant while preparing the accounting statements. 1. Convention of consistency2. Convention of full disclosure3. Convention of conservatism4. Convention of materiality

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Accounting StandardsThe Accounting standards bring uniformity in the preparation and presentation of financial statements and aids in comparison of different financial statements of companies in the same or different industries.

Procedure for framing Accounting Standards

• The International Accounting Standards are issued by the IASC • These Standards are received by ICAI assigned to ASB• The Accounting standards are issued under the authority of the council of ICAI.So far the ASB of ICAI has issued 28 Accounting standards as shown below:

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Accounting

Standard Title Mandatory for

Accounting period beginning on or after

AS-1 Disclosure of Accounting Policies 1.4.1991

AS-2(Revised)

Valuation of inventories 1.4.1999

AS-3(Revised)

Cash Flow Statements 1.4.2001

AS-4(Revised)

Contingencies and Events occurring after Balance Sheet Date

1.4.1995

AS-5(Revised)

Net Profit or Loss, prior period items and changes in Accounting policies

1.4.1996

AS-6(Revised)

Depreciation Accounting 1.4.1995

AS-7(Revised)

Accounting for construction contracts 1.4.2003

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AS-8 Accounting for Research and Development

1.4.1991

AS-9 Revenue Recognition 1.4.1991

AS-10 Accounting of Fixed Assets 1.4.1991

AS-11(Revised) Accounting for the effect of changes in foreign exchange rates

1.4.1995

AS-12 Accounting for Government Grants 1.4.1994

AS-13 Accounting for Investments 1.4.1995

AS-14 Accounting for Amalgamations 1.4.1994

AS-15 Accounting for retirement benefits in the financial statements of employers

1.4.1995

AS-16 Borrowing costs 1.4.2000

AS-17 Segment reporting 1.4.2001

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AS-18 Related Party Disclosures 1.4.2001

AS-19 Leases 1.4.2001

AS-20 Consolidated Financial Statements 1.4.2001

AS-21 Earnings per share 1.4.2001

AS-22 Accounting for taxes on income 1.4.2001

AS-23 Accounting for investments in consolidated finance statements

1.4.2002

AS-24 Discounting operations 1.4.2004

AS-25 Interim financial reporting 1.4.2002

AS-26 Intangible assets 1.4.2003

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AS-27 Financial reporting of interest in joint ventures 1.4.2002

AS-28 Impairment of Assets 1.4.2004

AS-29 Provisions, Contingent Liabilities and Contingent Assets

1-4-2004

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USERS OF FINANCIAL STATEMENTS 1. Creditors (short term & long term) 2. Investors (present & potential) 3. Management 4. Employees 5. Tax Authorities 6. Customers 7. Government and their agencies 8. Public

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Double Entry System Of Book-keeping

The main principle involved in Double Entry system is the duality transactions i.e., for every debit, there is an equal and opposite credit.

Total Debits = Total Credits

Personal Accounts Real Accounts

Nominal Accounts

Names of individuals, firms, companies and

other entities

Expenses, losses and incomes and gains

Assets And Liabilities

Principles Of Double Entry System

Classifications of accounts under double entry system

Traditional classification of Accounts

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Assets: Resources, things or rights or value owned by a businessLiability: Claims of others against a business / Assets owned by the business to

the outsidersExpenses:An expenditure in return for which a benefit is received.Loss: An expenditure in return for which no benefit is received.Income: Refers to the earnings of a business for the expenses incurredProfit: Refers to the earnings of a business for no expenses incurred or

proportionally meagre expenses incurred

Type of Account Debit Credit

Personal Account The receiver The giver

Real Account What comes in What goes out

Nominal Account All expenses and losses All incomes and gains

Rules for debit and credit under traditional classification

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ACCOUNTING CYCLEACCOUNTING CYCLE

Final Final AccountsAccounts

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Records Maintained By An Organisation

The books of accounts maintained by an organisation may be classified into two as

a. Books of Prime / Original Entry

b. Books of Second entry / Final entry

Books of Prime / Original Entry

1. Journal

2. Cash Book

3. Subsidiary Books

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JOURNAL / DAY BOOK

Journal is a daily record of each business transaction. It is also called a day book and it is used for recording all day to day transactions in the order in which they occur.

Format of a JournalFormat of a Journal

……………. Dr To………….(Being…………)

Credit

Rs.

DebitRs.

Ledger Folio

ParticularsDate

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C A S H B O O K

Debit: All Cash receipts and Bank receipts and Discount Allowed

Credit: All Cash payments and Bank payments and Discount Received.

The cashbook is classified into 4 types viz.,

1. Single column cash book

2. Two columnar cash book

3. Three columnar cash book

4. Petty cash book

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Tips to decide whether a cash

transaction or not

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In a purchase or a sale:

If there is no mention about the payment made, No name of the party given, but the amount is given, then It is a cash transaction

Ex: If there is the name of the party and no mention about the payment, then it is a credit transactionIf name of the party given and payment in cash or credit then it is a cash transaction.

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LEDGER

Also called as General Ledger, this is a principal book that contains all the accounts i.e., accounts of Assets liabilities, capital, revenue and expenses. The entries from the books of original entry are transferred to this book. Hence it is also called as a book of final entry. There are a number of accounts in a general ledger. All similar transactions are grouped under one account.

The opening and closing balances will appear only in case of assets, liabilities and capital accounts but not in case of incomes and expenditures.

Date Particulars Folio Amount

Rs.

Date Particulars Folio Amount

Rs.

To Balance b/d

(Opening balance)

--------

By Balance c/d

(Closing balance) --------

Dr Cr

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Format of a single column cash book

Date Particulars L.F. Amount

Rs.

Date Particulars L.F. Amount

Rs.

To Balance b/d

(Opening balance)

-------

By Balance c/d

(Closing balance) -------

Dr Cr

27

Illustration:Illustration:

I. Single column cash bookI. Single column cash book

2007 June2007 June

1. Balance as on 31/5 42,0001. Balance as on 31/5 42,000

2. Purchases made 12,0002. Purchases made 12,000

3. Cash drawn from Bank 5,0003. Cash drawn from Bank 5,000

4. Cash paid towards salary 8,0004. Cash paid towards salary 8,000

5. Purchased goods from Kishan & co. on credit 8,0005. Purchased goods from Kishan & co. on credit 8,000

6. Rent payable 5,0006. Rent payable 5,000

7. Cash deposited into Bank 20,0007. Cash deposited into Bank 20,000

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DateDate ParticularsParticulars LFLF AmountAmount DateDate ParticularsParticulars LFLF AmounAmountt

1/6/071/6/073/6/073/6/07

To balance b/dTo balance b/dTo BankTo Bank

42,00042,000 5,0005,000

2/6/072/6/074/6/074/6/077/6/077/6/07

By PurchasesBy PurchasesBy SalaryBy SalaryBy BankBy BankBy balance c/dBy balance c/d

12,00012,000 8,0008,00020,00020,000 7,0007,000

47,00047,000 47,00047,000

Soln:Soln: Single Column Cash BookSingle Column Cash Book

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JAN 1 : Opening cash balance Rs 5,000

JAN 4 : Rent paid Rs 2,000

JAN 6 : Interest received Rs 3,000

JAN 15 : Cash purchases Rs 4,000

JAN 25 : Cash sales Rs 8,000

JAN 31 : Salaries paid Rs 2,000

PROBLEM

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Format of a single column cash book

DateDate ParticularsParticulars L.FL.F..

AmounAmountt

Rs.Rs.

DateDate ParticularsParticulars L.L.F.F.

AmounAmountt

Rs.Rs.

JAN 1JAN 1

JAN 2JAN 2

JAN JAN 2525

To Balance To Balance b/db/d

To InterestTo Interest

To SalesTo Sales


5,0005,000

3,0003,000

8,0008,000

----------------------

16,00016,000

----------------------

8,0008,000

JAN 4JAN 4

JAN JAN 1515

JAN JAN 3131

JAN JAN 3131

By RentBy Rent

By Purchase By Purchase a/ca/c

By Salaries By Salaries a/ca/c

By Balance By Balance c/dc/d

2,0002,000

4,0004,000

2,0002,000

8,0008,000

----------------------

16,00016,000

----------------------

Dr Cr

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Format of a double column cash book

Date Particulars L.F

Discount

Rs.

Cash

Rs.


Discount

Rs. Cash

Rs.

To Balance b/d

(Opening balance)

------

By Balance c/d

(Closing balance)

------

Dr Cr

OR

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Discount

Rs. Bank

Rs.


Discount

Rs. Bank

Rs.

To Balance b/d

(Opening balance)

------

By Balance c/d

(Closing balance)

------

Dr Cr

OR

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Cash

Rs.

Bank

Rs.


Cash

Rs.

Bank

Rs.

To Balance b/d

(Opening balance)

------

By Balance c/d

(Closing balance)

------

Dr Cr

34

Two Columnar Cash Book with discount and cash columns:Two Columnar Cash Book with discount and cash columns:

2006 October2006 OctoberOpening balance 80,000Opening balance 80,000Paid salary 10,000Paid salary 10,000Purchased goods 12,000Purchased goods 12,000Purchases made from Shreya & co. 25,000 Purchases made from Shreya & co. 25,000 Cash sales 1,15,000Cash sales 1,15,000Sales made to Rajinikanth & co. 60,000Sales made to Rajinikanth & co. 60,000To Shreya returned 20% of goods due to damage, paid to 18,000/- in To Shreya returned 20% of goods due to damage, paid to 18,000/- in full Settlement of the account.full Settlement of the account.Received from Rajinikanth 48,000/- in full settlement after he madeReceived from Rajinikanth 48,000/- in full settlement after he madereturns 10,000/-returns 10,000/-Deposited into Bank 3,000Deposited into Bank 3,000

PROBLEM

35

Date Particulars LF

Discountallowed

Cash Date Particulars LF

Discountreceived

Cash

To balance b/dTo salesTo Rajinikanth & co.

2,000

80,0001,15,000 48,000

By SalaryBy PurchasesBy Shreya & co.By BankBy balance c/d

2,000

10,000 12,000

18,000

3,000 2,00,000

2,000 2,43,000 2,000 2,43,000

Working Note:Shreya & co. Rajinikanth & co. Puchases 25,000 Sales 60,000(-)Returns 20% 5,000 (-)Returns 10,000Payable 20,000 Receivable 50,000(-)Paid 18,000 (-)Received 48,000Discount received 2,000 Discount allowed 2,000

Solution:Solution:

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JAN 1 : Cash Balance Rs 5,000

JAN 6 : Sold Goods to Mahesh Rs 4,000

JAN 8 : Purchased Goods from Mukesh Rs 3,000

JAN 15 : Cash Received from Mahesh Rs 3,900 in full settlement

JAN 20 : Paid to Mukesh Rs 2,850 in full settlement

JAN 25 : Sold Goods to Suresh Rs 3,000

JAN 31 : Received Cash from Suresh Rs 2,900

PROBLEM

37

double column cash book

DatDatee

ParticularsParticulars LL..FF

DiscoDiscountunt

Rs.Rs.

CashCash

Rs.Rs. DatDatee

ParticularsParticulars L.L.FF

DiscoDiscountunt

Rs.Rs.

CashCash

Rs.Rs.


To MaheshTo Mahesh

To SureshTo Suresh

100100

100100

--------------

200200

--------------

5,0005,000

3,9003,900

2,9002,900

------------------

11,80011,800

------------------

By MukeshBy Mukesh

By Balance By Balance c/dc/d

150150 2,8502,850

8,9508,950

------------------

11,80011,800

------------------

Dr Cr

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Format of a three columnar cash book


Discount

Rs.

Cash Bank

Rs. Date Particulars L.

F Disco-unt

Rs.

Cash

Rs.

Bank

Rs.

To Balance b/d

(Opening balance)

------

By Balance c/d

(Closing balance)

------

Dr Cr

OR

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• It is an accounting transaction that involves both CASH account and BANK account

• No posting will be done from the CASH BOOK to the LEDGER in case of a contra entry

• A contra entry is indicated by the letter C which gives a hint to the ledger keeper that no posting is required

CONTRA ENTRY

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Ex : Cash deposited to bank

Credit side of cash book : Amount will be entered in cash column against the words “ By Bank”

Debit side of cash book: Amount will be entered in bank column against the words “To Cash”

Ledger folio column : C which represents a contra entry is entered

CONTRA ENTRY

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Ex : Cash withdrawn from bank

Credit side of cash book : Amount will be entered in bank column against the words “ By Cash”

Debit side of cash book: Amount will be entered in cash column against the words “To Bank”

Ledger folio column : C which represents a contra entry is entered

CONTRA ENTRY

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JAN 1 : Paid into Bank Rs 6,000

JAN 2 : Withdrew for private expenses Rs 1,000

JAN 3 : Withdrew from bank Rs 3,000

JAN 4 : Withdrew from bank for private use Rs 1,500

PROBLEM

43

Format of a three columnar cash book

DDaattee


DiscDisco-o-

untunt

Rs.Rs.

CashCash BankBank

Rs.Rs. DatDatee


DiscDisco-o-

untunt

Rs.Rs.

CashCash

Rs.Rs.BankBank

Rs.Rs.

11

33To Cash a/cTo Cash a/c

To Bank a/c To Bank a/c CC

CC 30030000

60060000

11

22

33

44

By Bank By Bank a/ca/c

By By DrawingsDrawings

By Cash a/c By Cash a/c

By By DrawingsDrawings

CC

CC

60060000

10010000

30030000

15015000

Dr Cr

44

III. Three Columnar Cash BookIII. Three Columnar Cash Book

On 1On 1stst Jan 2001 Raj Opened a Bank account by depositing 6,000/- in cash. Jan 2001 Raj Opened a Bank account by depositing 6,000/- in cash.

All remittances are to be paid to the BankAll remittances are to be paid to the Bank

Date Date ParticularsParticulars

Jan 2 Goods sold to Mohan for cash 9,250/-Jan 2 Goods sold to Mohan for cash 9,250/-

Jan 5 Settled Harish’s account of 200/- at a discount of 5%Jan 5 Settled Harish’s account of 200/- at a discount of 5%

Jan 7 Received from Shyam a cheque of 725/- discount allowed 25/- Jan 7 Received from Shyam a cheque of 725/- discount allowed 25/-

Jan 10 Purchased Typewriter for 200/- and spent 50/- on its repairsJan 10 Purchased Typewriter for 200/- and spent 50/- on its repairs

Jan 12 Shyam’s cheque was returned as dishonouredJan 12 Shyam’s cheque was returned as dishonoured

Jan 15 Received a money order for 25/- from HarishJan 15 Received a money order for 25/- from Harish

Jan 20 Shyam settled his accounts by means of a cheque for 755/-, 5/- Jan 20 Shyam settled his accounts by means of a cheque for 755/-, 5/-

for being Interest charge.for being Interest charge.

Jan 27 Purchased Machinery from Rajeev for 5,000/- and paid him by Jan 27 Purchased Machinery from Rajeev for 5,000/- and paid him by

means of a Bank draft purchased from a Bank for 5,005/-means of a Bank draft purchased from a Bank for 5,005/-

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Date Particulars

LF

Disallowed

Cash Bank Date Particulars LF

Disreceived

Cash Bank

1/12/17/115/120/120/1

To CashTo SalesTo ShyamTo HarishTo ShyamTo Intt charge

c

259,250

25

6,000

725

750

5

1/15/110/1

10/112/127/1

31/1

By BankBy HarishBy TypewriterBy RepairsBy ShyamBy MachineryBy balance c/d

c10

6,000 190

200

50

2,835

725

5,0051,750

25 9,275 7,480 10 9,275 7,480

SolutionSolution::

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Petty cash bookPetty cash bookPetty cash bookPetty cash book

It is a cash book in which all the petty cash It is a cash book in which all the petty cash expenses incurred daily by an organisation is expenses incurred daily by an organisation is

recorded. Such as postage, cartage, recorded. Such as postage, cartage, stationery, cleaning charges, etc.stationery, cleaning charges, etc.

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A petty cashier is appointed to make payments of all such types, he works under the supervision of chief cashier, who advances money in the beginning

of every period to meet such expenses.

At the end of the period the petty cashier submits a statement of

accounts of the expenses incurred by him during the period and gets a fresh

advance.

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Petty Cash Book

It is a cash book in which all the petty cash expenses incurred daily by an organisation is recorded.

Dt Particulars CBF Total

Rs.

Dt Particulars Vr.

No

Postage Conveyance Wages Business

Promotion

Total

Rs.

Dr Cr

49

PETTY CASH BOOK PETTY CASH BOOK

Record the following petty cash book maintained on the Record the following petty cash book maintained on the imprest system imprest system

1-10-2007 cash received from cashier 1-10-2007 cash received from cashier Rs 10000 Rs 100002-10-2007 paid for coffee and tea for staff 2-10-2007 paid for coffee and tea for staff Rs 125 Rs 1253-10-2007 travelling expense by the sales manager 3-10-2007 travelling expense by the sales manager Rs 1200Rs 12004-10-2007 subscription for the newspaper 4-10-2007 subscription for the newspaper Rs 100 Rs 1005-10-2007 purchase of paper and other stationery 5-10-2007 purchase of paper and other stationery Rs 250Rs 2506-10-2007 expenses for taking employees for an outing 6-10-2007 expenses for taking employees for an outing Rs 4200Rs 4200

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PETTY CASH BOOK

Dt10/07

Particulars

CBF

Total

Rs.

Dt10/07

Particulars

Vr.No

Employees welfare exp

Travelling exp

Newspapers & stationery

postage

Total

Rs.

1 To cash from head cashier

10000

2

3

4

5

6

7

By coffee & tea

By travelling exp of manager

By newspaper

By stationery

By staff outing

By postage

By balance c/d

1

2

3

4

5

6

125

4200

1200

100

250

75

125

1200

100

250

4200

75

4050

10000

4325 1200 350 75 10000

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Problem: Enter the following transactions in petty cash book for the month of Problem: Enter the following transactions in petty cash book for the month of JanuaryJanuary, 1999., 1999.

Problem: Enter the following transactions in petty cash book for the month of Problem: Enter the following transactions in petty cash book for the month of JanuaryJanuary, 1999., 1999.

Jan 1, cash received from the chief cashier Rs.200Jan 1, cash received from the chief cashier Rs.200Jan 3, typing papers Rs. 8Jan 3, typing papers Rs. 8Jan 6, office cleaning Rs.4Jan 6, office cleaning Rs.4Jan 8, postage Rs. 2Jan 8, postage Rs. 2Jan 10, cartage Rs. 2Jan 10, cartage Rs. 2Jan 15, postage Rs. 6Jan 15, postage Rs. 6Jan 18, ink Rs 3, typing paper Rs. 10Jan 18, ink Rs 3, typing paper Rs. 10Jan 20, type writer ribbon Rs. 10Jan 20, type writer ribbon Rs. 10Jan 22, telephone charges Rs. 7Jan 22, telephone charges Rs. 7Jan 24, office cleaning Rs. 2Jan 24, office cleaning Rs. 2Jan 25, nail polish Rs. 27Jan 25, nail polish Rs. 27Jan 27, telegrams Rs. 25Jan 27, telegrams Rs. 25Jan 29, typing paper Rs. 30Jan 29, typing paper Rs. 30

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DtDt PartiParticularcularss

CBCBFF

ToTotaltal

RsRs..

DDtt

ParticParticularsulars

Vr.Vr.

NoNoStatStationeioneryry

PostaPostage ge charchargesges

CarCartagtagee

CleaninCleaningg

miscmiscellanellaneouseous

totaltotal

JanJan11

to to cash cash

From From chief chief cashiecashierr

202000

33

66

88

1100

1155

1188

2200

TypingTyping

CleanClean

Post n Post n off off cleanclean

CartagCartagee

PostagPostagee

Ink, Ink, typing typing paperpaper

Typ Typ ribbonribbon

1,21,2

33

4,54,5

66

77

8,98,9

1010

88

1313

1010

44

22

6622

44

22

1212

44

44

22

66

1313

1010

Dr Cr

53

DtDt PartiParticularcularss

CCBBFF

TotTotalal

Rs.Rs.

DDtt

ParticParticularsulars

Vr.Vr.

NoNoStatStationeioneryry

PostaPostage ge charchargesges

CarCartagtagee

CleaninCleaningg

miscmiscellanellaneouseous

totaltotal

Fe Fe 11

Fe Fe 11

To bal To bal b/db/d

Cash Cash from from chief chief cashiecashierr

200200

5858

142142

2222

2244

2255

2277

2299

TelephTelephone one chargechargess

CleaninCleaningg

Nail Nail polishpolish

TelegraTelegramsms

Typing Typing paperpaper

Lf bal Lf bal c/dc/d

1111

1212

1313

1414

1515 3030

6161

22

77

2525

4444

3322

44

22

88

55

2727

2727

66

77

22

2727

2525

3030

142142

5858

200200

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PURCHASES BOOK

This is a subsidiary book in which all the credit purchases made by the organisation is recorded. The monthly total from the purchase book is transferred to the General Ledger to the Purchases Account.

Date Purchase invoice

no.

Name of the supplier LF

Details Total Amount

Rs. Ps. Rs. Ps.

55

PURCHASE RETURNS BOOK

A book in which all the purchase returns (returns outwards) are recorded.

Date Debit Note No.

Name of the supplier LF


Rs. Ps. Rs. Ps.

56

SALES BOOK

The credit sales are recorded in this book. The monthly totals are transferred to the sales account in the General Ledger.

Date Sales invoice

no.

Name of the purchaser LF


Rs. Ps. Rs. Ps.

57

Date Credit Note No.

Name of the Purchaser LF


Rs. Ps. Rs. Ps.

SALES RETURNS BOOK

A book of account in which all the sales returns (returns inwards) made by the organisation are recorded.

58

Enter the following in subsidiary books.Jan 1: Purchased goods from Sudarshan paid by cheque Rs.15000 3: Sold goods to Bimal Rs.11000. 6: Purchased goods from Satish & co Rs. 12000. Returned goods to him Rs. 700 . 8: Purchased stock worth Rs.42000 from Reliance industries of which only 40% is on cash basis. 10: Sold goods worth Rs.38000 to Karimlal & co allows him a trade discount of 1% . 11: Murugeshan & co supplies stock worth Rs. 64000 and allowed us a trade discount of 1.5% . 12: Returns out of the previous 2 transactions amount to

5% each.

59

Purchases Book

Date Purchase Invoice No.

Name of the supplier LF Amount

(Rs)

Total (Rs)

Amount

Jan 6

Jan 8

Jan 11

Satish & Co

Reliance & Co.

Murugesh & Co.

21

23

25

12000

25200

63040

100240

12000

25200

63040

100240

60

Purchases Returns Book

Date Debit Note No.

Name of the Party LF Amount

(Rs)

Total (Rs)

Amount

Jan 6

Jan 12

Satish & Co

Murugesh & Co.

21

25

700

3152

3852

700

3152

3852

61

Sales Book

Date Invoice No.


(Rs)

Total (Rs)

Amount

Jan 3

Jan 10

Bimal & Co.

Karimlal & Co. ( -1%)

32

35

11000

37620

48620

11000

37620

48620

62

Sales Returns Book

Date Credit Note No.


(Rs)

Total (Rs)

Amount

Jan 12

Karimlal & Co. ( -1%) 35 1881

1881

1881

1881

63

JOURNAL PROPER

Those journal entries that cannot be recorded in any of the subsidiary books are recorded in the journal proper. The following are recorded in the journal proper:

a. Opening Entries

b. Closing Entries

c. Transfer Entries

d. Adjustment Entries

e. Rectification Entries

64

TRAIL BALANCE

A trail balance may be simply defined as a statement prepared by putting all debits on one side and all credits on the other side to check the arithmetical accuracy of the ledger balances.

In otherwords,the trail balance is a connecting link between the ledger accounts and final accounts.

65

TRIAL BALANCE

It is a statement that shows the balance in all the accounts in a ledger. It contains all the debit and credit balances. A trial balance is a list of debit and credit balances of all the ledger accounts prepared on any particular date to verify whether the entries in the books of accounts are arithmetically correct or not.

Sl.No.

Head of Account LF Debit Balance Credit Balance

Rs. Ps. Rs. Ps.

66

characteristics

basically trial balance is a statement or list.It contains all the debit and credit

balances.The trail balance is the only base for the

preparation of final accounts.Trail balance can be prepared at any time

and not necessarily at the end of a calendar or accounting year.

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Importance

• Before preparing the final accounts, the accountant should prove/satisfy the arithmetical accuracy and correctness on which the entire final accounts were prepared. The net profit/balance sheet does not resemble true and fair picture which which was prepared from a trail balance which lacks the quality of arithmetical accuracy.

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Advantages

To examine the implementation of a double entry book keeping and its principles.

To know the arithmetical accuracy. To find the profit of the firm. To find out the errors and mistakes in passing

journal entries and their posting. To facilitate the process of the preparation of

final accounts.

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Preparation of Trail balance

• Debit side

• Assets accounts: land, building, machinery, furniture, debtors, stock, bills receivables etc.

• Accounts relating to expenses and losses: salaries, wages, rent, carriage, discount, bad debts, depreciation, purchases, return inward.

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• Credit side

• Liabilities accounts: creditors, loan, mortgage, bills payable, bank overdraft, reserves and funds.

• Incomes and gain account: interest realised, rent collected, discount received, sales account, returns outward.

• Capital Account

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Trail balance methods

• Trail balance can be prepared in two methods. They are total balances method and net balances method.

• Total balances method: in this method, debit as well as credit sides of all accounts will be summed up and with this totals the trail balance will be prepared. This method is called “gross trail balance method”. This method is now out of use.

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• Net balances method: this is the most commonly used trail balance. In this method the net balance of the accounts were ascertained on a particular date and arranged in the proforma of trail balance. If these totals of debit and credit agree, we can say the trail balance has arithmetical accuracy.

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Example:

Prepare a trial balance from the following balances of the year 2002. (Dec 05/ Jan 06- 10M)

Capital 28,000 Purchases 15,000Stock of goods 4000 plant 15,000Motor car 8000 furniture 5000Discount received 400 wages 8200Bad-debts 400 creditors 6500Sales 40,000 salaries 2800Cash-at-bank 4000 commission (cr) 600Return inwards 2000 return outwards 1000Cash in hand 600 debtors 5600Rent 3500 general expenses 300Discount allowed 300 interest received 200Carriage 1500 advertisement 500

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dt Name of the account LF Debit credit

1 Capital 28,000

2 Stock of goods 4000

3 Motor car 8000

4 Discount received 400

5 Bad-debts 400

6 Sales 40,000

7 Cash-at-bank 4000

8 Return inwards 2000

9 Cash in hand 600

10 Rent 3500

11 Discount allowed 300

SOLUTION: DEBIT(ASSETS & EXPENSES) CREDIT (LIABILITIES & REVENUES)

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12 Carriage 1500

13 Purchases 15,000

14 plant 15,000

15 furniture 5000

16 wages 8200

17 creditors 6500

18 salaries 2800

19 commission (cr) 600

20 return outwards 1000

21 debtors 5600

22 general expenses 300

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23 Interest received 200

24 Advertisement 500

TOTAL 76,700 76,700

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End of the Module

Documents

1 Financial Accounting Module 1 An Overview. 2 Module 1 (6 Hours) Financial Accounting An overview, Accounting concepts, principles, accounting standards