The
Series of business transactions which occur from the beginning of an accounting
period to the end of an accounting period is referred any specific period of
time for which a summary of business’s transaction is prepared.
Steps
in Accounting Cycle:-
1.
Journalizing (Recording)
2.
Posting to Ledger (Classifying)
3.
Final Account (Summarizing)
Now
Explain Steps:-
1
Recording:- This is the basic function of accounting. All business
transaction, as evidenced by some documents such as Sale bill, Pass book,
Salary Slip ect are recorded in the books of account. This is called recording
process.
2.
Classifying:-
All entries in the Journal or books of Original Entry should be posted to the
appropriate ledger accounts to find out at a glance the total effect of all
such transactions in a particular account.
3.
Summarizing:-
It is concerned with the preparation and presentation of the classified data in
a manner useful to the Internal a well as the external users of financial
statements. This process leads to the preparation of the following financial
statements:-
a) Trial
Balance
b) Profit
& Loss Account
c) Balance
Sheet
d) Cash
flow Statement.
DIFF.
BETWEEN BOOK KEEPING AND ACCOUNTING
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BOOK KEEPING
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ACCOUNTING
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1.
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It is
a Process concerned
with recording
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1.
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It
is a process concerned with Summarizing of
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of transaction.
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the recorded transaction.
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2.
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It
is the basic of accounting.
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2.
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It is the basic for business language.
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3.
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Person
responsible for book-keeping are called
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3.
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Personal responsible
for accounting are
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book keeper.
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called accountant.
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4.
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It
does not required any special skill or
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4.
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It required special Skill &
knowledge.
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Knowledge.
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5.
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Personal
Judgment of the accountant is
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5.
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Personal
judgment of the book-keeper is not
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essential.
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required.
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6.
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Financial statement
are prepared from
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6.
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Financial
statement are not prepared from
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accounting record.
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7.
It does not give the complete picture of the financial condition
of the business unit.
8.
It does not help complying with legal formalities.
9.
It does not provide any information for talking managerial
decision.
10.
It
has no Branches.
7.
It gives the complete picture of the financial conditions of the
business unit.
8.
Legal formalities can be complied with help of accounting.
9.
It provides Information for talking managerial decision.
10.
It has several branches like Financial accounting, cost
accounting, Management accounting ect.
Under this system a
proper and full record of all transaction is made every transaction has a double or dual aspect. It is based upon
the principal that every receiver implies giver and every giver implies
receiver. This method writhing every transaction in two accounts is given debit
side and the other account is given credit with an equal amount. Thus, on any
date, the total of all debits must be equal to the total of all credit because
every debit entry has a corresponding credit.
For example, ram purchased goods from
Kewal, of Rs.5000. here ram is receiver of goods and hence, debtor of Kewal,
who is the giver of goods, that is, he is the creditor of Ram. Similarly,
Salary paid to manager is in lieu of the benefit received by the business, in
terms of the service rendered ect. Thus, all transaction will have two aspect
and a proper record of the transaction is necessary for this, it has to be
recognized that.
1.) Each transaction is to be dealt with as standing alone
having no preceding ar succeeding connection, and
2.) A business is regarded as a separate entity quite distinct
from its proprietor and the exchange in transaction takes place between the
business and the outsider.
ACCOUNTING CONCEPT
Accounting Concept defines the assumptions
on the basis of which Financial Statements of a business entity are prepared.
Certain concepts are received assumed and accepted in accounting to provide a
unifying structure and internal logic to accounting process. The word concept
means idea or nation, which has universal application. Financial transactions
are interpreted in the light of the concepts, which govern accounting methods.
Concepts are those basis assumption and conditions, which form the basis upon
which the accountancy has been laid. Unlike 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.
Now we shall study in detail the various
concept on which accounting is based. The following are the widely accepted
accounting concepts.
1.)
Entity Concept:-
Entity Concept says that business enterprises is a separate identity apart from
its owner. Business transactions are recorded in the business books of accounts
and owner’s transactions in this personal back of accounts. The concept of
accounting entity for every business or what is to be excluded from the
business books. Therefore, whenever business received cash from the proprietor,
cash a/c is debited as business received cash and capital/c is credited. So the
concept of separate entity is applicable to all forms of business organization.
2.)
Money Measurement Concept:-
As per this concept, only those transactions, which can be measured in terms of
money are recorded. Since money in the medium of exchange and the standard of economic
value, this concept requires that these transactions alone that are capable of
being measured in terms of money be only to be recorded in the books of
accounts. For example, health condition of the chairman of the company, working
conditions of the workers, sale policy ect. do not find place in accounting
because it is not measured in terms of money.
3.) Cost Concept:- By this concept, the value of assets is
to be determined on the basic of historical cost. Transaction are entered in
the books of accounts at the amount actually involved. For example a machine
purchased for Rs. 80000 and may consider it worth Rs. 100000, But the entry in
the books of account will be made with Rs. 80000 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
value be charging depreciation.
Many assets de not have acquisition cost. Human assets of an
enterprises are an example. The cost concept fails to recognize such assets
although it is a very important assets of any organization.
4.)
Going Concern 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 likely to accrue in future from money spent. It
is because of this concept that fixed assets are recorded at their original
cost and depreciation in a systematic manner without reference to their current
realizable value.
5.)
Dual aspect Concept:-
This concept is the care of double entry book- keeping. Every transaction or
event has two aspect. If any event occurs, it is bound to have two effect. For
Rs.50000, on the other hand stock will increase by Rs.50000 and other liability
will increase by Rs.50000. similarly is X starts a business with a capital of
Rs. 50000, while on the other hand the business has to pay Rs. 50000 to the
proprietor which is taken as proprietor’s Capital.
6.) Realization
Concept: - It closely follows the cost concept any change
in value of assets is to be recorded only when the business realize it. i.e.
either cash has been received or a legal obligation to pay has been assumed by
the customer. No Sale can be said to have taken place and no profit can be said
to have arisen. It prevents business firm from inflating their profit by
recording sale and income that are likely to accrue, i.e. expected income or
gain are not recorded.
7.)
Accrual Concept:-
Under accrual concept the effect of transaction and other events are recognized
on mercantile basic. When they accrue and not as cash or a cash equivalent is
received 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 events
involving the payment and receipt of cash but also of obligation to pay cash in
the future and of resources that represent cash to be received in the future.
For Example: - Mr. Raj buy clothing of Rs. 50000,a paying cash Rs. 20000 and
sells at Rs. 60000 of which customer paid only Rs. 40000. So his revenue is Rs.
60000, not Rs. 40000 cash received. Exp. Or Cash is Rs. 50000, not Rs. 20000
cash paid. So the accrual concept based profit is Rs. 10000 (Revenue- Exp.)
8.)
Accounting Period 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 inconvenience to measure performance achieved by the entity in the
ordinary causes of business. Therefore, a small but workable fraction of time
is chosen out of infinite life cycle of the business entity for measure the
performance and loading at the financial position 12 months period is normally
adopted for this purpose accounting to this concept accounts should be prepared
after every period & not t the end of the life of the entity. Usually this
period is one calendar year. In India we follow from 1st
April of a year to 31st March of the immediately following years.
Now a day because of the need of management, final accounts are prepared at
shoter intervals of quarter year or in some cases a month such accounts are
know a interim account.
9.)
Matching Concept:-
In this concept, all exp. Matched with the revenue of that period should only
be taken into consideration. In the financial statements of the organization.
If any revenue is recognized that exp. Related to earn that revenue should also
be recognized. This concept as it considers the occurrence of exp. And income
and do not concentrate on actual inflow or outflow of cash. This leads to
adjustment of certain items like prepaid and outstanding expenses, unearned or
accrued income.
It is not necessary that every exp. Identity every income. Some
exp. Are directly related to the revenue and some are directly related to sale
but rent, salaries etc. are recorded on accrual basis for a particular
accounting period. In other words periodicity concept has also been followed
while applying matching concept.
10.)
Objective Concept:-
As per this concept, all accounting must be based on objective evidence. In
other words, the transactions recorded should be supported by verifiable
documents. Only than auditors can verify information record as true or
otherwise. The evidence should not be biased. It is for this reasons that
assets are recorded at historical cost and shown thereafter at historical lass
depreciation. If the assets are shown on replacement cost basis, the
objectivity is lost and it become difficult for auditors to verify such value,
however, in resent year replacement cost are used for specific purpose as only
they represent relevant costs. For example, to find out intrinsic value of
share, we need replacement cost of assets and not the historical cost of the
assets.
The term “Accounting Conventions” refers to the customs or
traditions which are used as a guide in the preparation of accounting reports
and statements. The conventions are derived by usage and practice. The
accountancy bodies of the world may charge any of the convention to improve the
quality of accounting information accounting conventions need not have
universal application. Following are important accounting conventions in use:
1.)
Convention of consistency:-
According to this convention the accounting practices should remain unchanged
from one period to another. It requires that working rules once chosen should
not be changed arbitrarily and without notice of the effect of change to those
who use the accounts. For example, stock should be valued in the same manner
every year. Similarly depreciation is charged on fixed assets on the same
method year after year. If this assumption is not followed, the fact should be
disclosed together with reasons.
The principle of consistency plays its role particularly when
alternative accounting methods is equally acceptable. Any change from one
method to another method would result in inconsistency; they may seem to be
inconsistent apparently. In case of valuation of stocks if the company applies
the principle “at cost or market price whichever is less” and if this principle
accordingly result in the valuation of stock in one year at cost and the market
price in the other year, there is no inconsistency here. It is only an
application of the principle.
An
Enterprise should change its accounting policy in any of the following
circumstances
only.
(i) To bring
the books of
accounts in
accordance with the
issued accounting
standard.
(ii) To
compliance with the provision of law.
(iii)
When under changed circumstances it is felt that new method will reflect more
true and fair picture in the financial statement.
2.)
Convention of Conservatism:-
This is the policy of playing sale game. It takes into consideration all
prospective losses but leaves all prospective profits financial statements are
usually drawn up on a conservative basis anticipated profit are ignored but
anticipated losses are taken into account while drawing the statements
following are the examples of the application of the convention of
conservatism.
(i) Making
the provision for doubtful debts and discount on debtors.
(ii) Valuation
of the stock at cost price or market price which ever is less. (iii)Charging of
small capital items, like crockery to revenue.
(iv)Showing joint life policy at surrender value as against the
actual amount paid.
(v) Not
providing for discount on creditors.
3.) Convention of Disclosure:- Apart from statutory requirement, 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
convention is to communicate all material and relevant 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 make disclosures of all materials facts compulsory. The practice of
appending notes relative to various facts and items which do not find place in
accounting statements is in pursuance to the convention of full disclosure of
material facts. For example;
(a)
Contingent liability appearing as a note.
(b)
Market value of investments appearing as a
note.
The convention of disclosure also applies to events occurring
after the balance sheet date and the date on which the financial statement are
authorized for issue. Such events include bad debts, destruction of plant and
equipment due to natural calamities’, major acquisition of another enterprises,
etc. such events are likely to have a substantial influence on the earnings and
financial position of the enterprises. Their not-disclosure would affect the
ability of the users for evaluations and decisions.
4.)
Convention of Materiality:-
According to this conventions, the accountant should attach importance to
material detail and ignore insignificant details in the financial statement. In
materiality principle, all the items having significant economics effect on the
business of the enterprises should be disclosed in the financial statement.
The term materiality is the subjective
term. It is on the judgment, common sense and discretion of the accountant that
which item is material and which is not. For example stationery purchased by
the organization though not used fully in the concept. Similarly depreciation
small items like books, calculator is taken as 100% in the year if purchase
through used by company for more than one year. This is because the amount of
books or calculator is very small to be shown in the balance sheet. It is the
assets of the company.
JOURNAL
Introduction:- The word ‘Journal means’ a daily record.
Journal is derived from French word ‘Jour’
which means a day. It is a book of original or prime entry written up from the
various sources documents. Every transaction is recorded in the first instance
and than it is posted to the ledger. The form in which it is recorded is called
journal entry and recording or entering a transaction in the journal is known
as Journalizing.
Rules of Journalizing:- The process of passing an entry in a
journal is called Journalizing. The
rule for Journalizing is same as that of rules of debit and credit. It is based
on two facts. First is accounting equation and other is accounting approach.
1.)
Based on Accounting Equation:-
a) Increases
in assets are debits, decreases are credit.
b) Increased
in liability are credit, decreases are debits.
c) Increases
in capital are credits, decreases are debits.
d) Increases
in profits are credits, decreases are debits.
e) Increases in expenses
are debits, decreases are credits.
2.)
Based on Traditional Approach:-
a) Debit
the receiver, credit the giver
b) Debit
what comes in, credit what goes out.
c) Debit
all expenses and losses, credit all income and gains.
CASH BOOK
Every business activity ultimately result in cash, therefore,
recording of transaction involving cash must be recorded in a separate journal.
This journal is called cash book. It 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 book called the cash book, which later began to be used to record bank
book and discount transaction as well besides cash transaction by doing so
daily checking of cash in hand and periodical checking of cash in hand and
periodical checking of bank balance was rendered quick and easy. Although cash
book is a book of original entry, the use of cash book as a subsidiary book is
often dispensed with. It is an integral part of ledger. But nonetheless, it
serves the dual purpose of journal as well as ledger.
PETTY CASH BOOK
The cash book as seen above is used for
recording all major payments. But, in every business a number of petty (small)
Payment like that for postage, carriage, stationery, entertainment, cartage,
conveyance etc. are paid frequently even in a single day. If all these petty
expenses are to be recorded in the main cash book. It would be come too bulky
and difficult to handle therefore, it is usual for the business units to
maintain a separate cash book to record small payments only. Such a cash book
is known as petty cash book. Petty cash book can be of two types.
a) Simple
petty cash book and
b) Analytical
petty cash book.
1.) SIMPLE PETTY CASH BOOK:- A simple petty cash book is written just
like the cash book.
The amount received by the petty cashier from the head cashier is recorded on
the debit side of the petty cash book and payment on the credit side of the
petty cash book. Expenses account is individually debited in the ledger.
2.) AN ANALYTICAL PETTY CASH BOOK:- An Analytical petty cash book is employed by a large concern having a number of
transactions of petty amount such petty. Cash book contains individual columns
for each expense every small payment is recorded on the credit side. One of the
total payment column and second in one of the analytical amount columns. The
periodic total of expenses column is posted to the expenses accounts concerned
while the total of expenses column is posted to the expenses accounts.
Concerned while the total of payment column serves to find out the balance of
cash with the petty cashier.
The petty cash book is usually maintained on the basis of
imprest system. Under it, a fixed amount, solely determined by the Head
Cashier, is advanced to the Petty Cashier at the beginning of the period, may
be, a week or a fortnight, or a month, by the Head Cashier. The petty cashier
submits his accounts at the end of the period to the Head Cashier and the head
cashier after examining the accounts gives him a fresh advance equivalent to
the amount spent by him during the period. Thus, in the beginning of each
period, the petty cashier has a fixed balance. The amount so advance to him is
termed as “Imprest” or “Float”.
JOURNAL PROPER
It
must have been understood by this time that Journal is used for recording only
those transactions for which there is no special subsidiary book. Moreover, if
the number of transactions of a particular type (say returns inward or outward)
is not large, there is no point in having a separate subsidiary book for such
transactions. These transactions may be journalized. The method of recording
transactions in Journal has already been explained.
Following
transactions are still recorded in the journal:
1. Opening entries:- At the beginning of the year, the opening balances of assets
and liabilities are journalized.
2.
Closing
Entries:- At
the end of the year final accounts are prepared. For preparing these accounts various are to be
transferred to the trading and profit and loss account which is done by means
of journal entries.
3.
Rectification
entries:- When
any error is detected in writing up the books then it is rectified by means of suitable journal
entry.
4.
Adjustment
entries:- Since
accounting follows “accrual concept” therefore adjustment has to be done at the end of the year regarding:
a) Expenses
incurred but not paid,
b) Expenses
paid but benefit to be available in the next period,
c) Income
becoming due but not received,
d) Income
received in advance, and
e) Charging
depreciation on fixed assets, etc.
5.
Transfer
entries:- If
any amount is to transferred from one ledger account to the other, then it is done by means of journal
entries.
6. Miscellaneous entries:-a.)
Purchase and sale of fixed asses on credit,
b.)
Writing off of losses due to bad debt, fire, accidents etc,
c.) Any extra concession to be allowed to any customer or any charge
to be levied after the issue of the invoice, and
d.)
Any other item for which no subsidiary book 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
Principal Book(s). but in actual practice, with hundreds of different accounts
and thousands of transactions occurring every day, such a procedure would
become cumbersome and confusing. Furthermore, after several recordings it world
become difficult to locate a particular transaction. Not only this, the
identity of individual transaction is lost and the purpose of recording it
cannot be easily ascertained. For example, 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.
Need for Subsidiary Books
Ledger, as already noted, is the principal book of account which
contains information relating to all business transaction both as regards
debits and credit aspects. It provides a cumulative analysis of the effect of
business transactions.
The use of ledger alone, though the principal book of accounts,
such procedure usually is inadvisable. It fails to meet all the requirements of
a complete accounting system. Various reasons why ledger is an incomplete
record and why subsidiary books must also be maintained are as follows:
1.) Chronological
history not available:- If business transactions are entered
directly In individual accounts in ledger, the trader
would not have as adequate picture of what occurs in his business. It is
lacking when only ledger is used.
A
business enterprises should keep a chronological record of its transactions in
order to simplify references to its activities according to date.
2.) Complete
transaction not shown at one place:- information disconnected each business
transaction affects more than one account. When the debit and credit aspects of
a transaction are entered in two shown at one place. Consequently, if there are
a large number of accounts in ledger, it would become difficult to trace any
transaction.
3.) Detail
inadequate- ledger too bulky:- only meager information concerning a transaction
can be shown conveniently in the accounts in ledger. If, however complete
information is given in the ledger, it would become too bulky to be handled
efficiently.
4.) Division
of labour hampered:- only one person at a time con efficiently
make entries in the ledger. He must have the entire
ledger available 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 work on the books at the same
time.
5.) Errors difficult
to locate:- Making the entries directly in the ledger
increases the probability that errors will occur and
makes errors mode difficult to locate and correct. The following are a few
examples.
a.)
Omitting one part of a transaction
b.) Entering part of a transaction on the wrong side of an
account.
c.)
Entering the wrong amount in an account. d.) Entering an amount in the wrong
account.
These
five reasons sufficiently explain the desirability of having. Subsidiary books
where the transactions are shown—
a.)
In chronological order
b.)
Complete in one place, and
c.)
With adequate explanations as to their nature.
DIFFERENCE BETWEEN TRADE AND DISCOUNT AND CASH
DISCOUNT
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Trade Discount
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Cash Discount
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1.
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It is offered
at the time
of sale or
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1.
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It is offered at the time of getting quick
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purchase.
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payment.
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2.
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It
is usually offered or allowed on account
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2.
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It
is usually offered or allowed for full or
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of purchases made beyond a prescribed
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part settlement of account at an earlier
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quantity.
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date.
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3.
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It
is deducted from the list price in the
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3.
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It is
not deducted at
the time of
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invoice.
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preparation
of the invoice.
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4. It is duly recorded in the books of the
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4.
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It
is not recorded in the books of account.
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account.
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5.
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It
is usually given in percentage.
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5.
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It may
be given in
percentage or in
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absolute
figure.
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A Debit 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 kept in the office record. It 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 receiving party’s point to view because he credits the account of the party
from whom he received the note along with the goods.
A credit note, as stated above, is like a
debit note. It is sent by the seller to the purchaser for the goods returned by
the latter to the former. It 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 received.
The object of sending a credit note to a
customer is to inform him that he has been credited in our books. A credit note
is also sent to the customer in the following cases:
1.) When he is allowed some discount or allowance in defective,
damaged or unsatisfactory goods.
2.)
When an excessive charge was made by mistake.
3.)
When cartons or containers are returned by the customer.
TRIAL BALANCE
We know that the fundamental principle of Double Entry System id
accounting is that for every debit, there must be a corresponding credit, thus,
for every debit or a series of debits given to one or several accounts, there
is a corresponding credit or a series of credit of n equal amount given to some
other account or accounts and vice versa. It follows, therefore, that the sum
total of debit accounts should equal the credit amounts of the ledger at any
date. But if the various accounts in the ledger are balanced, then the total of
all debit balance must be equal to the total of all credit balances if the
books 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 extracted and
are written up in a statement known as Trial Balance and finally totaled up to
see if the total of debit balances is equal to the total of credit balances. A
Trail Balance may thus be defined as a statement of debit and credit totals or
balance extracted from the various accounts in the ledger with a view to test
the arithmetical accuracy of the books.
The agreement of the Trial Balance reveals that both the aspects
of each transaction have been recorded and that the books are arithmetically accurate.
If the Trial Balance does not agree, it shows that there are some errors which
must be detected and rectified link between the ledger accounts and the final
accounts.
OBJECTIVES OF TRIAL BALANCE
The following
are the main objectives of preparing the trial balance:
(i) To
have balances of all the accounts of the ledger in order to avoid the necessity
of going through the pages of the ledger to find it out.
(ii)
To have a proof that the double entry of
each transaction has been recorded because of its agreement.
(iii) To
have arithmetic accuracy of the books of accounts because of the agreement of
the trial balance.
(iv) To
have 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 very costly and cannot be adopted by the small concerns.
(ii) Through
trial balance gives arithmetic accuracy of the books 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 conclusive proof of the accuracy of the books
of accounts.
(iii)If Trial Balance is not prepared correctly
then the final accounts prepared will not reflect the true and fair view of the
state of affairs of the business. Whatever conclusions and decisions are made
by the various groups of persons will not be correct and will mislead such
persons.
ERROR DISCLOSED BY TRIAL BALANCE
It the two sides of a trial balance are
not equal, it is the proof of the existence of error. There may, of course, be
more than one error.
The
main reasons of such errors are given below;
1.) An item omitted to be posted from a
subsidiary book into the ledger i.e., A purchase of Rs.1000
from Navin omitted to be credited to his account. As a result of this error,
the figure of sundry creditors to be shown in the Trial Balance will reduce by
Rs.1000 and the total of the credit side of the Trial Balance will b Rs.1000
less as compared to the debit side of the Trial Balance.
2.) Posting of wrong amount to a ledger
account i.e., A Credit sale of Rs. 2000 to Aarti wrongly posted to her account as Rs.200.
the effect of this error will be that the figure of sundry debtors will be
reduced by Rs.1800 and the total of the debit side of the Trial Balance will be
Rs.1800 Less than the total of the credit side of the Trial Balance.
3.) Posting an amount to the wrong side of the
ledger account i.e., Rs.50 Discount 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 Balance will exceed by Rs.100 (double the amount of
the error).
4.) Wrong additions or balancing of ledger
accounts i.e., while Balancing Capital account at the end of the financial year, credit
balance of Rs.89000 wrongly taken as Rs.79000. as a result of this error, the
credit total of the Trial Balance will Rs.10000 too short.
5.) Wrong totaling of subsidiary books i.e.,
Sales Book is overcast by Rs.10 as result of this error, credit side of the Trial balance
will be Rs.10 too much because sales account will appear at a higher figure on
the credit side of the Trial Balance.
6.) An item in the subsidiary book posted
twice to a ledger account i.e., Payment of Rs.1000 to a creditor posted twice to his
account.
7.) Omission of Balance of an account in the
Trial Balance Cash and Bank Balance may have been omitted to be included in the
Trial Balance.
8.)
Balance of Some account wrongly entered in the Trial Balance
i.e., A Balance of Rs. 513 in Stationery Account wrong entered as
Rs.315in the Trial balance.
9.)
Balance of some account written to the wrong side of the Trial
Balance i.e., Balance of Commission earned account wrongly shown to
the side instead of the credit side of the Trial Balance.
10.)
An error in the Totaling of the Trial Balance will bring the
disagreement of the Trial Balance.
ERROR NOT DISCLOSED BY A TRIAL BALANCE
It
is certain that the error exists of the debits of trial balance are not equal
to its credits. But the fact that trial balance is in balance does not prove
the accuracy of accounts. There is a possibility of mistakes which will not
upset the equilibrium of the equality 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.) Omission
of an entry in a subsidiary book:- if an entry has not been recorded in a subsidiary
book 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.
2.)
A wrong entry in a subsidiary book: -
If a Credit purchase of Rs.465 from Annu is Wrongly written as Rs.564 in the Purchase
book, 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 Rs.564, so the trial balance will agree.
3.)
Posting an item to the correct side but in the
wrong account:- If a purchase of Rs.500
from Vasant Desai has been credited to Himanshu Desai in stead of Vasant Desai,
it will not affect the agreement of the Trial Balance, so the Trial Balance
will not detect such an error.
4.)
Compensating error:- These
are errors which compensate themselves in the net result, i.e., over-debits or under-debits
of various accounts being neutralized by the over-credits or under-credits to
the same extent of some other accounts. For example under-posting of Rs.500 on
the debit side of a certain account would be compensated by under-posting of
Rs.100 on the credit side of another account and an omission of credit posting
of Rs.400 to a third account. It is quite possible that this error may also be
neutralized by over-posting of Rs.500 on the debit side in some other account
or accounts or accounts.
5.) Errors
of Principle:- 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. For Example Rs.6550 spent in extension
of building wrongly debited to repairs account instead of building account will
not affect the agreement of the Trial balance. Thus, such errors arise whenever
an asset is treated as an expense or vise versa or a liability is treated as an
income or vise versa.
METHOD OF PREPARATION OF TRIAL BALANCE
Preparation
of Trial Balance is the third step in accounting process. It is preceded by
recording of transaction in subsidiary nooks and posting of the accounts in the
ledger, and succeeded by preparation of final accounts.
A
Trial Balance 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 have been closed.
There are three methods of preparing the Trial balance.
1.
TOTAL
METHOD:-Under this method, every ledger account is
totaled and that total amount
(both of debit side and credit side) is transferred to trial balance. In this
method, trial balance can be prepared as soon as ledger account is totaled.
Time taken to balance the ledger accounts is saved 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.
2.
BALANCE
METHOD:- Under this method every 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.
Financial statements are prepared on the basis of the balance of the ledger
accounts.
3.
TOTAL
AND BALANCE METHOD:- Under this method, the above two
explained methods
are combined. Under this method statement of trial balance contains seven
columns instead of five columns. This has been explained with the help of the
following example:
|
S.No.
|
Heads
of Account
|
Debit
Total
|
Credit Total
|
|
|
|
|
|
|
1.
|
Cash
Account
|
30000
|
19800
|
|
2.
|
Furniture
Account
|
3000
|
|
|
3.
|
Salaries
Account
|
2500
|
|
|
4.
|
Shyam’s
Account
|
21500
|
25000
|
|
5.
|
Purchase
Account
|
26000
|
|
|
6.
|
Purchase
Return Account
|
|
500
|
|
7.
|
Ram’s
Account
|
30000
|
25100
|
|
8.
|
Sales
Account
|
|
30500
|
|
9.
|
Sale
Return Account
|
100
|
|
|
10.
|
Capital
Account
|
500
|
1000
|
|
11.
|
Bank
Account
|
5000
|
8200
|
|
|
TOTAL
|
|
|
|
|
119100
|
191100
|
|
|
|
|
|
|
|
|
DEPARTMENTAL
ACCOUNTING
INTRODUCTION: - When a business
deals in different finds of articles or services under one roof, it is divided into number of divisions which are known as departments.
This is generally done to have smooth and efficient running of business. A
department is a physical part of the rest of the business. It is like
decentralization of business activities. Each department is given freedom to
take decision relation to purchases, pricing, adding of new products ect. The
accounting system is so devised as to enable the management to find out
turnover, expenses and profit of each department separately.
OBJECTIVES:- When all the
divisions of a business are located under one roof and separate trading, profit and loss accounts of various departments of an
organization are prepared, the information available there from is helpful to
the management to find out relative performance of departments. The following
are the objectives of departmental accounting.
2)
To determine the profitability of each department and compare it
with previous year’s result and also with the other departments of the same
concern.
3)
To provide information regarding which department has high
operation expenses so that policy may be formulated to control such expenses.
4)
To help the management in deciding which department shall be
expanded to maximize profitability of the business.
5)
To
provide information regarding improving efficiency of departments with lower
profit or losses.
6)
Which
departments are to be closed because of lower sales volume and high operating
costs.
7)
When departmental manager’s are to be paid commission on the
basis of profit achieved by their department.
8)
To generate information which may be helpful for planning,
control, evaluation of their departments.
9)
To help the proprietor in formulating policy to expend the
business on proper lines so as to optimize the profits of the concern.
10)
When a business is dealing in different types of goods or
services, it is not enough to prepare one trading profit and loss account for
the entries business. It may show profit made by the whole business but still
there may be loss in some of the departments which reduces the overall profits
of the business. Such departments must be closed down. Because of this reason
separate trading profit and loss account of each department shall be prepared.
ADVANTAGES OF DEPARTMENTAL ACCOUNT
1)
The trading results of each department may help to evaluate the
performance of each department. The sales of that department which fives
maximum profit may be pushed up by special efforts.
2)
The profitability of each department may help the management for
taking decision whether to drop a department or add a new one.
3)
The growth potentials of a department can be evaluated by having
comparison with the other departments.
4)
The users of accounting information can be provide mode detailed
information like the shareholder, investors, creditors etc.
5)
The overall profits of the organization can be increased by
having friendly rivalries between different departments.
6)
The departmental managers and staff can be suitably rewarded on
the basis of the departmental results.
7)
It helps the management to determine the justification of proper
use of capital invested in each department.
8)
It helps to have comparison of various expenses of each
department with the previous period or with other departments of the same
concern.
9)
It helps to know he efficiency of each department by calculating
stock turnover ratio of each department to reveal the fast or slow moment of
various items of stock.
10)
The information provided by departmental accounts may be helpful
to the management for future intelligent planning and control.
ALLOCATION
OF DEPARTMENTAL EXPENSES
The
problems arise only in indirect expenses 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. Direct expenses
are easily indentified with a particular department is known as direct expenses
like purchase, wages, salary, carriage etc. these expenses are directly charged
to respective department. Such expenses which cannot be directly related to a
particular department or cannot have precise allocation may be divided among
the different departments as follows:
1.) Selling Expenses:- These expenses
include discount allowed, bad debts, selling commission, carriage on
sales and should be divided among the different departments on the basis of
sales. It must be noted carefully that sales for this purpose also include
transfers to other departments.
2.) Building Expenses:- Rent and rates,
insurance on building, repairs, etc. are expenses which are relating to
building premises and should be distributed among the different departments
according to the space occupied by each department. It any department is
enjoying any special benefit then charge for these expenses must be adjusted
according to the special benefit enjoyed by a particular department.
Departments having front location must bear more charges than the departments
in rear part of the building.
3.) Heating and lighting:- if there are no
separate meters, these may be apportioned among the different
departments on the basis of points, lamps used, area or inversely to the number
of windows.
4.) Power:- It should be
apportioned on the basis of probable usage as determined by numbers and types of
machines adjusted where necessary according to running hours in absence of
separate meters for each department.
5.)
Advertising:-It should be
apportioned on the basis of advertising space used by the different departments or
on the basis of advertisement for the benefit of all departments must be
apportioned equally among the departments.
6.)
Insurance Premium:- It must be seen
whether the insurance premium has been paid for stock, premises or
loss of profit or workmen’s compensation and should be apportioned on the basis
of stock carried, proportion of premises occupied, profits earned in the
preceding years and wages respectively but if there exists any abnormal feature
relating to any department, that may be considered while apportioning such
expenses.
7.) Depreciation:- it should be
allocated among the different departments on the basis of assets employed in
each department.
8.)
Labour Welfare expenses:- These should be
apportioned among the different departments on the basis of number of employees working
in each department.
9.) Carriage inward:- Carriage Inward
are related to the purchases so these exp. Should be apportioned
among the different departments on the basis of Purchases of each department.
10.) Works manager’s salary:- works manager’s
salary should be allocated among the different departments on the basis of time spent in
each department.
EXPENSES WHICH CANNOT BE
ALLOCATED
There are
Certain expenses which cannot be allocated on some equitable basis such as
director fees, managerial remuneration, debenture interest, share transfer,
income tax, office expenses, general manager’s salary, dividend paid etc., are
cannot be allocated or apportioned. These expenses shall be charged to general
or combined profit and loss account. Profit of all departments should be
brought down in one total and such expenses should be debited and
non-departmental profits credited to this profit without making any effort for
its apportionment among different departments in combined income account.
HIRE PURCHASE & INSTALMENT PURCHASE
INTRODUCTION:- With an Increasing demand for better life, the consumption of
goods has been on the expending
sale. There are different ways by which goods can be sold. First is goods can
be sold for cash, Second is goods can sold for Hire-Purchase and third is sold
from Installment.
Under
Cash Sale the ownership and possession is immediately passed from seller
to buyer and buyer makes the payment in cash at the time of taking the delivery
of Goods.
Under
Hire-Purchase System the buyer acquires the possession of the goods immediately and
agrees to pay the total price in installment. Each installment treated as hire
charges until the payment of the payment of the last Installment when the
ownership of goods passes. The ownership of goods is transferred to the buyer
when the last Installment is paid. I the buyer default in the payment of the
Installment (Even last Installment) the Hire-Vendor has right to repossess the
goods without compensation the buyer. But buyer pays Installments regularly,
the Seller has no right to repossess the goods.
Under
Installment Purchase System the buyer acquires the possession & Ownership
of the goods immediately and payment of the total price will be made in
Installment if the buyer is any default in the payment of any Installment, the
Seller has no right to repossess the goods. Because the ownership of the goods
is transfer immediately from Seller to Buyer at the time of signing the
contract. He can only go to the court and sue the purchaser for unpaid balance.
FEATURE
OF HIRE-PURCHASES
1)
The
hire vendor transfer possession of goods immediately to the Purchaser
2)
The
Buyer will make Payment in Installment over a period of time.
3)
The Ownership of the goods will remain with the seller and
passed to the buyer on the payment of the last Installment.
4)
Each
Installment is treated as hire-Charges until the last Installment is paid.
5)
The
hire purchaser generally makes a down payment on signing the agreement.
6)
In case of default in respect of even the last Installment, the
hire vendor has the right to takes the goods back without making any
compensation.
FEATURE
OF INSTALLMENT PURCHASES
1)
The
buyer acquires possessions of the goods immediately at the time of agreement.
2)
The
Buyer will make Payment in Installment over a period of time.
3)
Each
Installment pay with some Interest.
4)
The
Ownership of the goods transfer of the goods at the time of agreement.
5)
The
hire purchaser generally makes a down payment on signing the agreement.
6)
In case of default in respect of even the last Installment, the
seller has no right to possess the goods. The Can only sues for unpaid balance.
DIFF. BETWEEN HIRE-PURCHASE
AND INSTALLEMNT
|
HIRE-PURCHASE
|
INSTALLMENT
|
1.
The ownership of the goods passes to the 1. The ownership of the goods passes to the
|
Hire-vendor on the payment of last
Installment.
|
buyer immediately when the agreement is
signed.
|
|
|
2.
|
It
is a agreement of Hiring.
|
2.
|
It is a agreement of Sale.
|
|
|
3.
|
The
hires can return the goods if he does not
|
3.
|
The buyer cannot return the goods to the
|
|
|
want to continue with the agreement.
|
seller.
|
|
|
4.
|
The
hires cannot sell transfer or pledge the
|
|
|
|
|
|
|
goods.
|
4.
|
The buyer can do all such thing.
|
|
|
5.
|
If
the hires make default in payment of
|
|
|
5.
|
In case of default seller can only sue
the in
|
|
|
Installment or any other terms of
agreement the
|
|
|
seller can repossess the goods.
|
the court of law and cannot repossess
the goods.
|
|
