MBA BOOK international financial and management accounting

All accounting transactions are recorded through journal entries that show account names amounts, and whether those accounts are recorded in debit or credit side of accounts.. Receiver o

International Financial

and Management Accounting

MBA Second Year (International Business)

Paper 2.4

School of Distance Education

Bharathiar University, Coimbatore - 641 046

Author: M.P Pandikumar Copyright © 2008, Bharathiar University

All Rights Reserved

Produced and Printed

by EXCEL BOOKS PRIVATE LIMITED A-45, Naraina, Phase-I, New Delhi-110028

for

SCHOOL OF DISTANCE EDUCATION

Bharathiar University

Coimbatore-641046

Page No.

UNIT I

UNIT II

UNIT III

UNIT IV

UNIT V

CONTENTS

INTERNATIONAL FINANCIAL AND MANAGEMENT ACCOUNTING

UNIT I

1.2.1 What is Cash System?

1.2.2 What is Accrual System?

1.2.3 Value at which it is to be Recorded?

1.3 Utility of the Financial Statements

1.3.6 To Government and Regulatory Authorities

1.3.7 To Promote Research and Development

1.4 Accounting Principles

1.5 Accounting Concepts

1.5.1 Money Measurement Concept

1.5.2 Business Entity Concept

1.5.3 Going Concern Concept

1.5.4 Matching Concept

1.5.5 Accounting Period Concept

1.5.6 Duality or Double Entry Accounting Concept

1.9 Transactions in between the Real A/c

1.9.1 What is Movement - In?

1.9.2 What is Movement - Out?

Contd

International Financial and

Management Accounting

1.0 AIMS AND OBJECTIVES

In this lesson we shall discuss about financial accounting After going through this lessonyou will be able to:

 Analyse process of accounting and accounting concepts

 Discuss accounting conventions

1.1 INTRODUCTION

Accounting is a business language which elucidates the various kinds of transactionsduring the given period of time Accounting is defined as either recording or recountingthe information of the business enterprise, transpired during the specific period in thesummarized form

What is meant by accounting?

Accounting is broadly classified into three different functions vizRecording

Classifying and Transactions of Financial NatureSummarizing

Is accounting an equivalent function to book keeping?

No, accounting is broader in scope than the book keeping., the earlier cannot be equated

to the later Accounting is a combination of various functions viz

1.17 Questions for Discussion1.18 Suggested Readings

9 Introduction to Accounting

American Institute of Certified Public Accountants Association defines the term

accounting as follows "Accounting is the process of recording, classifying, summarizing

in a significant manner of transactions which are in financial character and finally results

are interpreted."

Qualities of Accounting

 In accounting, transactions which are non-financial in character can not be recorded

 Transactions are recorded either individually or collectively according to their groups

 Users should be able to make use of information

Figure 1.1: Process of Accounting

Financial Accounting is described as origin for the creation of information and the

continuous utility of information

They are as follows:

 What to record: Financial Transaction is only to be recorded

 When to record: Time relevance of the transaction at the moment of recording

 How to record: Methodology of recording - It contains two different systems of

accounting viz cash system and accrual system

1.2.1 What is Cash System?

The revenues are recognized only at the moment of realization but the expenses arerecognized at the moment of payment For example, sale of goods will be consideredunder this method that only at the moment of receipt of cash out of sale of goods Thecharges which were paid only will be taken into consideration but the outstanding, notyet paid will not be considered For example, Rent paid only will be considered but notthe outstanding of rent charges

1.2.2 What is Accrual System?

The revenues are recognized only at the time of occurrence and expenses are recognizedonly at the moment of incurring

Whether the cash is received or not out of the sales, that will be registered/counted astotal value of the sales

The next most important step is to record the transactions For recording, the value ofthe transaction is inevitable, to record values, the classification of values must be recorded

1.2.3 Value at which it is to be Recorded?

There are four different values in the business practices, among the four, which oneshould be followed or recorded in the system of accounting?

Original Value: It is the value of the asset only at the moment of purchase or acquisition Book Value: It is the value of the asset maintained in the books of the account The book

value of the asset could be computed as follows

Book Value = Gross (Original) value of the asset - Accumulated depreciation

Realizable Value: Value at which the assets are realized Present Value: Market value of the asset

Classifying: It is one of the important processes of the accounting in which grouping of

transactions are carried out on the basis of certain segments or divisions It can bedescribed as a method of Rational segregation of the transactions The segregationgenerally into two categories viz cash and non-cash transactions

The preparation of the ledger A/cs and Subsidiary books are prepared on the basis ofrational segregation of accounting transactions For example the preparation of cashbook is involved in the unification of cash transactions

Summarizing: The ledger books are appropriately balanced and listed one after another.

The list of the name of the various ledger book A/cs and their accounting balances isknown as Trial Balance The trial balance is summary of all unadjusted name of theaccounts and their balances

11 Introduction to Accounting

Preparation: After preparing, the summary of various unadjusted A/cs are required to

adjust to the tune of adjustment entries which were not taken into consideration at the

time of preparing the trial balance Immediately after the incorporation of adjustments,

the final statement is readily available for interpretations

Purposes of preparing financial statements

 Financial accounting provides necessary information for decisions to be taken initially

and it facilitates the enterprise to pave way for the implementation of actions

 It exhibits the financial track path and the position of the organization

 Being business in the dynamic environment, it is required to face the ever changing

environment In order to meet the needs of the ever changing environment, the

policies are to be formulated for the smooth conduct of the business

 It equips the management to discharge the obligations at every moment

 Obligations to customers, investors, employees, to renovate/restructure and so on

1.3 UTILITY OF THE FINANCIAL STATEMENTS

The financial statements are found to be more useful to many people immediately after

presentation only in order to study the financial status of the enterprise in the angle of

their own objectives

1.3.1 To Management

The financial statements are most inevitable for the management to take rational decisions

to maintain the sustainability in the business environment among the other competitors

1.3.2 To Shareholders, Security Analysts and Investors

The information extracted from the financial statements are processed by the above

mentioned people to identify not only the financial status but also to determine the qualities

of getting appropriate rate of return out of the prospective investment

1.3.3 To Lenders

The lenders do study about the business enterprise through the available information of

its financial statements normally before lending The aim of the study is to analyse the

status of the firm for the worthiness of lending with reference to the payment of interest

periodicals and the repayment of the principal

1.3.4 To Suppliers

The suppliers are in need of information about the business fleeces before sale of goods

on credit The Suppliers are very cautious in supplying the goods to the business houses

based on the various capacities of themselves The most important capacity required as

well as expected from the buyer firms is that prompt repayment of dues of the credit

purchase from the suppliers This quality of prompt payment could be known through

culling out the information from the balance sheet

It mainly plays pivotal role in answering the status inquiries about the buyer

1.3.5 To Customers

The legal relationship of the transferability of ownership of the products is obviously

understood through financial information available in the statements The agreement of

warranty and guarantee is tested through the financial status of the enterprise

International Financial and

Management Accounting

1.3.6 To Government and Regulatory Authorities

The taxes to be paid to the central and state govts on the revenues only throughpresentation of information

1.3.7 To Promote Research and Development

For research and development, the amount of investment required is voluminous, whichhas to be mobilized from either internally or externally to the requirement of the futureprospects of the enterprise

The following questions should be answered one after the another in meeting raisingneeds of the research and development

 How much to be raised?

 When the required amount to be raised?

 How to raise the required resources?

The above questions could be answered through immense financial planning exercise byway of extracting and utilizing the financial information from the Accounting statements

of the enterprise

1.4 ACCOUNTING PRINCIPLES

The transactions of the business enterprise are recorded in the business language, whichrouted through accounting The entire accounting system is governed by the practice ofaccountancy The accountancy is being practiced through the universal principles whichare wholly led by the concepts and conventions

The entire principles of accounting are on the constructive accounting concepts andconventions

Accounting Principles

Accounting Concepts

Accounting Conventions

1.5 ACCOUNTING CONCEPTS

The following are the most important concepts of accounting:

 Money Measurement concept

 Business Entity concept

 Going Concern concept

 Matching concept

 Accounting Period concept

 Duality or Double Entry concept

 Cost concept

13 Introduction to Accounting

1.5.1 Money Measurement Concept

This is the concept tunes the system of accounting as fruitful in recording the transactions

and events of the enterprise only in terms of money The money is used as well as

expressed as a denominator of the business events and transactions The transactions

which are not in the expression of monetary terms cannot be registered in the book of

accounts as transactions

For example, 5 machines, 1 ton of raw materials, 6 fork lift trucks, 10 lorries and so on

The early mentioned items are not expressed in terms of money instead they are illustrated

only in numbers The worth of the items are getting differed from one to another To

record the above enlisted items in the book of accounts, all the assets should be converted

in to money For example, 5 lathe machines worth Rs 1,00,000; 1 ton of raw materials

worth amounted Rs 15,00,000 and so on

The transactions which are not in financial in character cannot be entered in the book of

accounts

Recording of transactions are only in terms of money in the

process of accounting 1.5.2 Business Entity Concept

This concept treats the owner as totally a different entity from the business To put in to

nutshell "Owner is different and Business is different" The capital which is brought

inside the firm by the owner, at the commencement of the firm is known as capital The

amount of the capital, which was initially invested should be returned to the owner

considered as due to the owner; who was nothing but the contributory of the capital

For example Mr Z has brought a capital of Rs.1 lakh for the commencement of retailing

business of refrigerators The brought capital of Rs 1 lakh has utilized for the purchase

of refrigerators from the Godrej Ltd He finally bought 10 different sized refrigerators

Out of 10 refrigerators, one was taken away by the owner Mr Z

Type of Capital

Real Capital

10 Refrigerators @Rs.1 lakh

Monetary Capital Rs.1lakh provided

by Mr Z

In the angle of the firm

The amount of the capital Rs.1 lakh has to be returned to the owner Mr Z, which

considered to be as due Among the 10 newly bought refrigerators for trading, one was

taken away by the owner for his personal usage The one refrigerator drawn by the

owner for his personal usage led the firm to sell only 9 refrigerators It means that

Rs 90,000 out of Rs 1 Lakh is the volume of real capital and the Rs.10,000 worth of the

refrigerator considered to be as drawings; which illustrates the capital owed by the firm

is only Rs 90,000 not Rs 1 lakh

In the angle of the owner

The refrigerator drawn worth of Rs.10,000 nothing but Rs.10,000 worth of real capital

of the firm was taken for personal use as drawings reduced the total volume of the

capital of the firm from Rs.1 lakh to Rs 90,000, which expected the firm to return the

capital due amounted Rs 90,000

Owner and business organizations are two separate entities

International Financial and

Management Accounting

1.5.3 Going Concern Concept

The concept deals with the quality of long lasting status of the business enterpriseirrespective of the owners' status, whether he is alive or not This concept is known asconcept of long-term assets The fixed assets are bought in the intention to earn profitsduring the season of the business The assets which are idle during the slack season ofthe business retained for future usage, in spite of that those assets are frequently sold out

by the firm immediately after the utility leads to mean that those assets are not fixedassets but tradable assets The fixed assets are retained by the firm even after the usage

is only due to the principle of long lastingness of the business enterprise If the businessdisposes the assets immediately after the current usage by not considering the futureutility of the assets in the firm which will not distinguish in between the long-term assetsand short-term assets known as tradable in categories

Accounting concept for long lastingness of the business enterprise

1.5.4 Matching Concept

This concept only makes the entire accounting system as meaningful to determine thevolume of earnings or losses of the firm at every level of transaction; which is an outcome

of matching in between the revenues and expenses

The worth of the transaction is identified through matching of revenues which are mainlygenerated from the sales volume and the expenses of the firm at every level

For example, the cost of goods sold and selling price of the pen of ABC Ltd are Rs 5and Rs 10 respectively The firm produced 100 ball pens during the first shift and out of

100 pens manufactured 20 pens are considered to be damage which cannot be supplied

to the customers, rejected by the quality circle department There was an order from thefirm XYZ Ltd., which amounted 80 pens to be supplied immediately

The worth of the transaction of the firm at every level of the transaction is being studiedonly through the matching of revenues with the expenses

At first instance, the firm produced 100 pens which incurred the total cost of Rs 500required to match with the expected revenues of Rs 1,000; illustrated the level of profithow much would it accrue if the entire level of production is sold out?

If the entire production capacity is sold out in the market the profit level would be Rs 500.Out of the 100 pens manufactured 20 were identified not ideal for supply as damages,the remaining 80 pens were supplied to the individual retailer The retailer has beendispatched 80 pens amounted Rs 400 which equated to Rs 800 of the expected sales Atthe moment of dispatching, the firm expected to earn a profit of Rs 400 at the level of 80pens supplied After the dispatch, the retailer found that 50 pens are in accordance withthe order placement but the remaining are to the tune of the retailers' specifications.Finally, the retailer has agreed to make the payment of the bill only in accordance withthe order placed which amounted Rs 500 out of the expenses of the manufacturer

Rs 250

This concept facilitates to identify the worth of the transaction at every moment

Concept of fusion in between the expenses and revenues

1.5.5 Accounting Period Concept

Though the life period of the business is longer in span, which is classified into theoperating periods which are smaller in duration The accounting period may be eithercalendar year of Jan-Dec or fiscal year of April-Mar The operating periods are notequivalent among the trading firms, which means that the operating period of one firm

15 Introduction to Accounting

may be shorter than the other one The ultimate aim of the concept is to nullify the

deviations of the operating periods of various traders in the trading practice

According to the Companies Act, 1956, the accounting period should not exceed more

than 15 months

Concept of uniform accounting horizon among the firms to evade deviations

1.5.6 Duality or Double Entry Accounting Concept

It is the only concept which portrays the two sides of a single transaction The law of

entire business revolves around only on mutual agreement sharing policy among the

players How mutual agreement is taking place?

The entire principle of business is mainly conducted on mutual agreement among the

parties from one occasion to another The payment of wages are only made by the firm

out of the services of labourers What kind of mutual agreement in sharing the benefits

is taking place? The services of the labourers are availed by the firm through the payment

of wages Like-wise, the labourers are regularly getting wages for their services in the

firm

Payment of Wages = Labourers' service

In the angle of accounting aspects of a firm, the labourer services are availed through

the payment of wages nothing but the mutual sharing of benefits Availing of services or

taking the services of the labourers only through the cash payment whatever you make

at the end i.e., giving wages

This is being denominated into two different facets of accounting viz Debit and Credit.

Every debit transaction is appropriately equated with the transaction of credit

The entire above sample of transactions are being carried out by the firm through the

raising of financial resources The resources raised were finally deployed in terms of

assets It means that the total funds raised by the firm is equated to the total investments

From the below table illustration, it is clearly evidenced that the entire raised financial

resources are applied in the form of asset applications It means that the total liabilities

are equivalent to the total assets of the firm

Cash at Bank Cash in Hand

Concept of mutual agreement and sharing of benefits

to fluctuations due to demand and supply forces The entry of market value of the assetwill require the frequent update of information to the tune of changes in the market Will

it be possible to record the changes taken place in the market then and there? This is notonly not possible for regular updating of information but also leads to lot of consequences.Though the firm is ready to register the market value; which market value has to betaken into consideration? The market value can be bifurcated into two categories vizRealizable value and Replacement value

Realizable value is the value of the asset at the moment of sale or realization Replacementvalue is the another value which considered at the moment of replacing the old assetwith the new one These two cannot be the same at single point of time and the wearand tear of the asset will play pivotal role in fixing the realization value which has thedemarcation over the later

Check Your Progress 1

(1) Accounting principles are(a) Accounting concepts (b) Accounting conventions(c) Accounting concepts & (d) None of the aboveconventions both

(2) Money measurement concept is(a) Financial transactions only (b) Non financial transactions only(c) Both (a) & (b) (d) None of the above

(3) Total Liabilities = Total Assets is dealt(a) Business entity concept (b) Cost concept(c) Going concern concept (d) Duality concept

The nature of recording the transactions should not be changed at any cause or moment

It should be maintained throughout the life period of the firm If a firm follows thestraight line method of charging the depreciation since its inception should be followed

17 Introduction to Accounting

without any change The firm should not alter the method of charging the depreciation

from one method to another The change cannot be entertained If any change has to be

incorporated, the valid reason for change should be emphasized

1.6.2 Convention of Conservatism

The conservatism wont give any emphasis on the anticipation of the firm, instead it gives

paramount importance to all possible uneventualities of the firm without considering the

To anticipate the future losses due to default in the payments of the customers

Provision is created for bad and doubtful debts of the firm in order to meet the losses

expected out of the defaulters

1.6.3 Convention of Disclosure

According to this convention, the entire status of the firm should be highlighted / presented

in detail without hiding anything; which has to furnish the required information to various

parties involved in the process of the firm

Next stage is to classify the accounts into various categories

1.7 CLASSIFICATION OF ACCOUNTS:

The entire process of accounting brought under three major segments; which are broadly

grouped into two categories

Accounts

Personal Accounts Impersonal Accounts

Real Accounts Nominal

Persons Out of Law Relationship

Figure 1.2: Classification of Accounts

The entire accounts of the enterprise is broadly classified into two categories viz Personal

Accounts and Impersonal Accounts The Impersonal accounts is further classified into

two categories viz Real accounts and Nominal accounts.

1.7.1 Personal Accounts

It is an account which deals with a due balance either to or from these individuals on a

particular period It is an account normally reveals the outstanding balance of the firm to

individuals e.g suppliers or outstanding balance from individuals e.g customers This is

Persons who are nothing but outcome of nature i.e., almighty.

Persons of Artificial Relationship

Persons who are made out of artificial relationship through legal structure is known asorganizations, corporate, partnership firm and so on The companies and partnershipfirm are governed by the Companies Act 1956 and the partnership act The relationshipamong the owners of the company or partners of the firm are totally structured throughrespective laws

E.g.: LIC, SBI, Companies are most important illustrations governed by the artificialrelationship among the members through LIC act, SBI act and the Companies act 1956and so on respectively

Persons of Representations

This classification represents amount outstanding or prepaid in connection with theindividual transactions

(i) Outstanding of electricity charges: Electricity charges outstanding is with

reference to the electricity board TNEB, Rent prepaid refers that rent of the office

is made as an advance payment for the forthcoming month to the owner of thebuilding

The personal account is the account of future relationship; to maintain the relationship offuture in two different angles viz Receiver of the benefits from the firm and giver of thebenefits to the firm

Receiver of the Benefits

For example, The credit sale of the goods worth of Rs 1,500 to Mr X In this transaction

Mr X is the receiver of the benefits through the credit sale of the firm Till the collection

of the sale benefits, the firm should maintain the relationship of business with the Mr X

in the books of accounts

Giver of the Benefits

For example, The credit purchase of the goods worth of Rs 3,000 from Mr Y The giver

of the goods nothing but the supplier of the goods Mr Y should be recorded in the books

of the firm till the payment of dues of the credit purchase The future relationship ismaintained in the books of the accounts till the payment process is over

Debit the ReceiverCredit the Giver

1.8 RULES OF DOUBLE ENTRY

Repetitive transactions may initially be captured in day books (also known as books ofprime entry) e.g , all the sales invoices may be listed in the sales day book (also known

as the sales journal) These day books are not part of the double-entry system but enablethe number of double-entries to be reduced by ascertaining an aggregate

19 Introduction to Accounting

The total of the day book, or the single transaction, is recorded in the double-entry

system by being posted to the accounts Each account (or T account) has two sides, the

left hand side of which is called the debit side (DR) and the right hand side of which is

called the credit side (CR)

A T account looks like this!

The date, the

transaction is

recorded

Stating where the double-entry is posted

This side is the Debit (DR) side This side is the Credit side (CR)

There is no limit to the number of accounts that can be opened or any restriction on their

names Accounts are normally opened for each asset and liability (or class thereof), and

one for each type of expense and income In addition a sole trader will also have an

account for capital Capital represents the proprietary interest in the net assets of the

business It is created when the owner introduces resources into the business entity and

increases when the business generates a profit

Of course, only transactions capable of being measured objectively in monetary terms

can be recorded (this is known as the money measurement concept)

Double-entry rules

To record entries in a double-entry system there are three rules to learn They require

little understanding but by practice should become rote learned so that they can be

automatically applied without thinking

Rule 1 The duality rule

Every transaction has two effects, one of which will be recorded as a debit in one

account and the other which will be recorded as a credit in another account If this rule

is broken, the trial balance will not agree and a suspense account is opened

Rule 2 The when to DR and CR rule

The rules as to when to debit a T account and when to credit a T account can be

summarised in the following table

International Financial and

Management Accounting

The table is logical in its construction Starting from the premise that when the effect of

a transaction is to increase an asset the entry to be posted to the asset account is a DR,

it is appropriate that a decrease is a CR Further as a liability is the opposite of an asset

so it is appropriate that it behaves in the opposite way i.e., that to record an increase in

a liability, the entry to be posted to the liability account is a credit Expenses behave in thesame way as asset accounts as both will be recorded when they are paid for or a liabilityincurred

Rule 3 Debit is on the left and credit is on the right!

Living in the UK where cars always drive on the left hand side of the road, I canremember this rule by the phrase "DRive on the left and CRash on the right"

These three rules can be applied to the following transactions:

1.8.1 Real Accounts

It is a major classification which highlights the real worth of the assets This is theaccount especially deals with the movement of assets It is an account not only revealsthe value and movement of the assets taking place in between the firm and also otherparties due to any transactions

The movement of the assets can be classified into two categories viz the assets whichare coming into the firm and the assets which are going out of the firm

Whenever any movement of the assets taking place with reference to any transactionseither coming into the firm or going out of the firm should be recorded in accordancewith the set golden rules of this account

1.8.2 Nominal Accounts

This is an account deals with the amount of expenses incurred or incomes earned Itincludes all expenses and losses as well as incomes and gains of the enterprise Thisnominal account records the expenses and incomes which are not carried forwarded tonear future

Debit all the expenses and lossesCredit all incomes and gains

The process of the accounting in normal practice as follows:

The practice starts with the journalizing of entries After journalisation, the entries passed

in the journal will be passed into the ledger A/c The immediate next stage is to preparethe trial balance

What is meant by the journal entry?

It is an entry systematically recorded to the tune of golden rules of accounting in thejournal book is known as journal entries

How the journal entries are entered?

The journal entries are recorded in the sequential order The order of recording isconventionally done on the basis of date The journal entry usually contains two differentparts, which are nothing but two different accounts affecting the transactions

21 Introduction to Accounting

Date Particulars Ledger

Journalising the entries are different from one transaction to another The difference is

only due to nature and characteristics of the transactions To journalise as easy as possible,

the systematic approach to be adopted to post the transactions without any ambiguity

Journalising can be generally categorized into following various categories

 Taking place within the same natured accounts

 Taking part in between accounts of two different in categories

First, we will discuss the journalizing of entries of the same natured accounts This can

be classified into various segments

 Transactions only in between the personal accounts

 Transactions only in between the real accounts

Under the category of transactions which affect only the personal accounts are as follows:

 Between the persons of the nature

 Between the persons of the artificial relationship

 Between the persons of Representations

What are the points to observed at the moment of journalizing?

 The nature of the accounts to be identified

 The accounts to be correlated to the golden rules

 Once the accounts are finalized, the next stage is to pass the entry through proper

debiting and crediting of the accounts respectively

The meaning of the transaction should be made explicit for easier understanding through

brief and catchy narration to follow as well as evade the ambiguity in near future

Mr Sundar is a debtor who has paid Rs 1,500, in the bank A/c

Personal A/cs

Persons of Nature

 Transaction is identified which is in between two different persons under the personal

A/c, they are nothing but persons of nature

 The benefits are shared in between two persons viz Mr Sundar and Banker who

are nothing but giver and receiver of the benefits respectively

1.9 TRANSACTIONS IN BETWEEN THE REAL A/C

Real A/c is an account to highlight the movement of the assets If any simultaneousmovement is taking place in between two different assets of the enterprise can be explainedwith the following example:

Purchase of a Plant and Machinery of Rs.15,000

The purchase of a plant and machinery is only through cash payment to the vendor.What are the two different type of assets involved in the movement during the purchase?There are two different type of assets viz Cash and Plant & Machinery

To put in nutshell, among the two assets, Cash is one of the current assets and the Plant

& Machinery is one of the fixed assets In general, these two are brought under thecategory of assets or applications of the firm

If the assets are involved in the transaction, Real account should only be referred.How the movement of assets is taking place at the moment of purchase?

The movement of the assets classified into two segments viz movement in andmovement out

1.9.1 What is Movement - In?

The movement - in is the movement of the assets to the business enterprise With reference

to above cited example which asset is coming into the business enterprise? Plant &Machinery is the asset which comes into the business enterprise only at the moment ofpurchase

1.9.2 What is Movement - Out?

The movement-out is the movement of the assets from the business enterprise Fromthe above illustrated example, which asset is going out of the firm during the purchase?Cash resources are going out of the firm in order to make the payment of the purchase

to the supplier of the assets

Cash Resources

Supplier Business

Enterprise

Plant & Machinery

23 Introduction to Accounting

Next stage is to highlight the movement of the assets during the purchase

Movement - In Plant & Machinery Debit What Comes in

Movement - Out Cash Resources Credit What goes out

What is coming in ?- Plant & Machinery

What is going out ?- Cash Resources

Plant & Machinery A/c Dr Rs.15,000

To Cash resources A/c Cr Rs.15,000(Being Plant & Machinery is purchased)

What is the basic point to be registered?

During the purchase, the plant & machinery worth of Rs.15,000 is coming into the firm,

in turn Rs.15,000 worth of cash resources are going out of the firm During the cash

purchase, the assets are moving from one entity to another viz from business enterprise

to supplier and vice versa

1.10 JOURNAL ENTRIES IN BETWEEN THE

ACCOUNTS OF TWO DIFFERENT CATEGORIES

Journal is a record that keeps accounting transactions is chronological order, i.e., as they

occur Journal entry is an entry to the journal All accounting transactions are recorded

through journal entries that show account names amounts, and whether those accounts

are recorded in debit or credit side of accounts

 Transactions are in between the Real A/c and Personal A/c:

This type of the transaction is mainly governed by one important principle that future

relationship It major focus on the maintenance of future relationship among the parties

involved, till the realization of the transaction is over

Goods sold to Gopal Rs.15,000

Meaning: The goods were sold on credit to Gopal amounted Rs.15,000.

First, what are the various A/cs involved in the transaction?

There are two different A/cs viz Real A/c and Personal A/c

How Real A/c and Personal A/c are considered for journalizing the entries?

During the sales, irrespective of nature, Goods are moving out of the firm, which finally

will reach the individual Gopal The goods, which are sold out to Gopal led to movement

of goods out of the firm Any movement of asset should be referred only to the tune of

Real A/c The goods which are going out of the firm could be recorded as transaction

under the Real A/c i.e."Credit what goes out" While recording the transaction, it should

not be entered as Goods A/c, Why ? Instead of recording as Goods A/c, which are going

out of the firm should be mentioned only with reason of going out The reason for goods

going out of the firm is only due to sales; has to registered in the books of accounts at the

time of entering the journal entries

The second account which gets affected is the personal A/c of representations The

goods sold out on credit led to register the receiver of goods who has not paid at the

moment of sale Gopal is the individual received the goods on credit during the sales

expected to make the payment as per the terms of credit period Till the maturity of the

credit period agreed, the firm should wait and collect the amount from the individual who

is nothing but the receiver of goods

Receiver of benefits- Personal A/c Receiver of the goods on credit

with future relationship

Debit the receiver Gopal A/c

Next step is to record the journal entry

Gopal A/c Dr Rs.15,000

To Sales A/c Cr Rs.15,000(Being goods sold on credit to Gopal)

 Transaction in between the Real A/c and Nominal A/c

 Office Rent paid Rs.10,000What are the two different accounts involved in the above illustrated transaction?First one is the Rent A/c and another is Cash A/c only due to cash payment at themoment of making the payment of rent

What is the nature of Rent A/c?

The Rent which is paid to the owner is an expense out of the benefits derived out of theasset during the previous month In accordance with the Nominal A/c all the expensesare to be recorded, i.e "Debit all the expenses and losses."

The second is in relevance with the cash payment which finally led to the movement ofcash resources from the firm to the owner of the Asset This mobility of the assets leads

to movement - out which in connection with the Real A/c is the account for the assets

Rent paid Expense - Office Rent paid Nominal A/c - Debit All expenses and losses Movement - out Cash – moving out of the firm Real A/c - Credit what goes out

Illustration 1

Pass the following various journal entries

(i) Jan 1, 2006 Mr Sundar has started business with a capital of Rs 50,000(ii) Jan 2,2006 Goods purchased Rs 10,000

(iii) Jan 5, 2006 Goods sold Rs 5,000(iv) Jan 10, 2006 Goods purchased from Mittal & Co Rs 10,000(v) Jan 11, 2006 Goods sold to Ganesh & Co Rs 10,000(vi) Jan 12,2006 Goods returned to Mittal & Co Rs 1,500(vii) Jan 20,2006 Goods returned from Ganesh Rs 2,000(viii) Jan 31,2006 Office Rent paid Rs 500

(ix) Feb 2,2006 Interim Cash Dividend paid Rs 3000(x) Feb 8, 2006 Cash withdrawn from bank Rs 2,000

Solution:

(i) Jan 1, 2006 Mr Sundar has started business with a capital of Rs 50,000

25 Introduction to Accounting

Rs Rs

Jan 1, 2006

To Sundar’s capital A/c Cr 50,000

Being capital brought by sundar as cash

(ii) Jan 2, 2006 Goods purchased Rs 10,000

Rs Rs

Purchase A/c Dr 10,000 Jan 2, 2006

Being cash purchase is made

(iii) Jan 5, 2006 Goods sold Rs 5,000

Rs Rs

CashA/c Dr 5,000 Jan 5, 2006

Being cash sale is made

(iv) Jan 10, 2006 Goods purchased from Mittal & Co Rs 10,000

Rs Rs

Purchase A/c Dr 10,000 Jan 10, 2006

To Mittal A/c Cr 10,000

Being credit purchase from Mittal

(v) Jan 11, 2006 Goods sold to Ganesh & Co Rs 10,000

Rs RsGanesh A/c Dr 10,000

Jan 11, 2006

To SaleA/c Cr 10,000

Being credit sale made to Ganesh

(vi) Jan, 12, 2006 Goods returned to Mittal & Co Rs 1,500

Rs RsMittal &Co A/c Dr 1,500 Jan 12, 2006

To Purchase Return A/c Cr 1,500

(Being the goods returned to supplier Mittal &Co)

(vii) Jan 20, 2006 Goods returned from Ganesh Rs 2,000

Rs Rs

Sales ReturnA/c Dr 2,000 Jan 20, 2006

To Ganesh&co Cr 2,000

Being sales return made by Ganesh & Co

(viii) Jan 31, 2006 Office Rent paid Rs 500

Rs Rs

Office Rent A/c Dr 500 Jan 31, 2006

Being office rent paid

(ix) Feb 2, 2006 Interim Cash Dividend received Rs 3000

Rs Rs

Cash A/c Dr 3,000 Feb 2, 2006

To Interim Dividend Cr 3,000

Being cash interim dividend received

To Bank Cr 2,000

Being cash withdrawn from the bank

Classification of transactions is being done only on the basis of preparing the ledgeraccounts The accounts are classified on the basis of nature and characteristics.How the account transactions are classified?

The accounts are classified through the preparation of ledger

1.11 LEDGER

Ledger is nothing but preliminary book of accounting transactions at which, each account

is separately maintained through the allotment of various pages for exclusive recording.The exclusive allotment of pages for every account to finalize their balances Finally,ledger can be understood that is a document of grouping the transactions under oneheading

It is a fundamental book of accounts which mainly highlights the status of the accounts

Example: Plant & Machinery’s ledger A/c should reveal the transactions of the sale &

purchase of the plant and machinery

How the transactions are recorded in the ledger?

The journal entries which are recorded nothing but posting of the entries in the ledgerbook of accounts Posting/entering the journal entries are routinely carried out immediatelyafter the transactions

Prior to discuss the posting of journal entries into the ledger accounts, every body shouldknow the contents of the ledger The ledger is segmented into two different categories

Proforma of the Ledger Account

Journal entries are divided into two categories viz:

1 Debit item of the transaction

2 Credit item of the transactionOnce the journal entries are identified for classification, the entries should be recorded inaccordance with the date order of the transactions in the respective pages

While recording a transaction, normally a journal entry has got an impact on two or eventhree different accounts

27 Introduction to Accounting

Ledgering

It is a process of recording the transactions under one group from the early process of

journalizing Without journalizing, ledgering is not meaningful The process of ledgering

involves with various steps The process commences from only at the completion of

journalizing and ends at the end of balancing of journal accounts

Process of Ledgering

Identify the transaction

Open the ledger accounts involved in the journal entries

Identify the two accounts involved Krishna started the business with a capital of Rs 50,000

Two accounts - Cash A/c & Krishna Capital A/c

Open Ledger accounts Cash A/c & Krishna Capital A/c

Dr Cash A/c Cr Dr Krishna Capital A/c Cr

To Krishna capital Rs 50,000 By Cash Rs 50,000

Krishna capital A/c debited into cash A/c Cash A/c credited into Krishna capital A/c

Next step is to Balance the individual Ledger A/c:

How to balance the ledger A/c?

The individual ledger A/c may have more than two transactions during the specified

period

 The first step is to find out the totals of debit and credit side of the ledger account

 The second step is to compare the totals of the two different sides

 The third step is to find out the total of which side is greater over the other

D r Cash A/c Cr Dr Krishna Capital A/c Cr

Debit item of the journal transaction

“Cash A/c” to be recorded in the credit side of the remaining A/c i.e

Enter the journal entry in the Ledger A/c Cash A/c Dr Rs 50,000

To Krishna’s capital A/c Rs 50,000

Credit item of the journal transaction

“Krishna capital A/c” to be recorded in

the debit side of the A/c i.e Cash A/c

 The closing balance of one ledger account will become automatically a openingbalance of the same ledger account for next accounting period.

Post the journal entries into respective ledger accounts And list out their accountingbalances

(i) Jan 1, 2006 Mr Sundar has started business with a capital of Rs 50,000

Rs Rs

Cash A/c Dr 50,000 Jan 1, 2006

To Sundar’s capital A/c Cr 50,000

Being capital brought by Sundar as cash

(ii) Jan 2, 2006 Goods purchased Rs 10,000

Rs Rs

Purchase A/c Dr 10,000 Jan 2, 2006

Being cash purchase is made

(iii) Jan 5, 2006 Goods sold Rs 5,000

Rs Rs

CashA/c Dr 5,000 Jan 5, 2006

Being cash sale is made

(iv) Jan, 10, 2006 Goods purchased from Mittal & Co Rs 10,000

Rs Rs

Purchase A/c Dr 10,000 Jan 10, 2006

To Mittal A/c Cr 10,000

Being credit purchase from Mittal

(v) Jan, 11, 2006 Goods sold to Ganesh & Co Rs.10,000

Rs Rs

Ganesh A/c Dr 10,000 Jan 11, 2006

To Sale A/c Cr 10,000

Being credit sale made to Ganesh

(vi) Jan, 12, 2006 Goods returned to Mittal & Co Rs 1,500

Rs Rs

Mittal & Co A/c Dr 1,500 Jan 12, 2006

To Purchase Return A/c Cr 1,500

Being the goods returned to supplier Mittal & Co

(vii) Jan 20, 2006 Goods returned from Ganesh Rs 2,000

Rs Rs

Sales ReturnA/c Dr 2,000 Jan 20, 2006

To Ganesh & co Cr 2,000

Being sales return made by Ganesh & Co

29 Introduction to Accounting

(viii) Jan 31, 2006 Office Rent paid Rs 500

Rs Rs

Office Rent A/c Dr 500 Jan 31, 2006

To Cash A/c Cr 500

Being office rent paid

(ix) Feb 2, 2006 Interim Cash Dividend received Rs 3000

Rs Rs

Cash A/c Dr 3,000 Feb 2, 2006

To Interim Dividend Cr 3,000

Being cash interim dividend received

(x) Feb 8, 2006 Cash withdrawn from bank Rs 2,000

Rs Rs

Cash A/c Dr 2,000 Feb 8, 2006

To Bank Cr 2,000

Being cash withdrawn from the bank

List out the various accounts which are involved in the enterprise during the year?

I Cash Account

II Sundar Capital Account

III Purchase Account

IV Sales Account

V Mittal & Co Account

VI Ganesh & Co Account

VII Sales Return Account

VIII Purchase Return Account

IX Office Rent Account

X Interim Dividend Account

XI Bank Account

By Purchase 10,000

By Office Rent 500

By Balance c/d 49,500 60,000

To balance b/d 49,5000 60,000

Note: Debit side total is greater than the credit side total of the cash account After

determining the difference, the cash account shows Debit Balance

Dr Sundar Capital Account Cr

D ate P articular R s D ate P articulars R s

T o B alance c/d 50,000 Jan 1 B y C ash 50,000

50,000 50,000

B y B alance B /d 50,000

International Financial and

Management Accounting

Note: Sundar capital account is having the greater credit balance over the debit balance

account which led to credit balance account

Dr Purchase Account Cr

Date Particular Rs Date Particulars Rs

Jan 2 Jan 10

By Balance b/d 15,000

Note: Sale account is bearing the credit balance account

Dr Sales Return Account Cr

Date Particulars Rs Date Particulars Rs

Jan 20 To Ganesh 2000 By Balance c/d 2000

2000 2000

To Balance b/d 2000

Note: Sales return account is having the debit balance account

Dr Purchase Return Account Cr

Date Particular Rs Date Particulars Rs

To Balance c/d 1,500 Jan 12 By Mittal & Co 1500

1,500 1500

By Balance b/d 1500

Note: Purchase return account is bearing credit balance account

Dr Mittal & Co Account Cr

Date Particulars Rs Date Particulars Rs

Jan 12 To Purchase Return 1,500

To Balance c/d 8,500

Jan 10 By Purchase 10,000

10,000 10,000

By Balance b/d 8,500

Note: Mittal & Co account is having the greater total in the credit side than the debit side

led to credit balance at the closing

Dr Ganesh & Co Account Cr

Date Particulars Rs Date Particulars Rs

Jan 11 To Sale 10,000 Jan 20 By Sale Return 2,000

By Balance c/d 8,000

10,000 10,000

To Balance b/d 8,000

Note: Ganesh & Co account is bearing a greater debit side total than the credit side total

which led to have debit balance account

31 Introduction to Accounting

Date Particulars Rs Date Particulars Rs

Jan 31 To Cash 500 By Balance c/d 500

500 500

To Balance b/d 500

Note: Office rent account is bearing debit balance

Dr Interim Dividend Account Cr

Date Particular Rs Date Particulars Rs

To Balance c/d 3,000 Feb 2 By Cash 3,000

3,000 3,000

By Balance b/d 3,000

Note: Interim dividend account is having the credit balance

Dr Bank Account Cr

Date Particular Rs Date Particulars Rs

To Balance c/d 2,000 Feb 2 By Cash 2,000

2,000 2,000

By Balance b/d 2,000

Note: Bank account is having the credit balance

1.12 FINANCIAL VS MANAGEMENT ACCOUNTING

Financial accounting and management accounting both prepare and analyze financial

data However, certain aspects of these two fields are very different This article discusses

the various differences between financial accounting and management accounting The

differing characteristics to be discussed include the users of information, the types of

information, regulatory oversight, and frequency of reporting

Users of Information

Financial accounting and management accounting provide information to two different

user groups Financial accounting primarily provides information for external users of

accounting data, such as investors and creditors On the other hand, management

accounting provides information for internal users of accounting data Internal users

include employees, managers, and executives of the company

Types of Information

The type of information required by the different user groups also differs External users

primarily rely on financial information about the company They analyze this information

in conjunction with general economic information, such as information about the industry

in which the company operates External users focus on broad information that reveals

the overall performance of the company as a whole In addition, financial accounting

only reports information on financial transactions that have occurred in the past

Internal users need to review financial information about the company, such as financial

statement information They also use non-financial information about the company, such

as customer satisfaction levels and competitor data Internal users focus on detailed

information that reveals the performance of particular subunits of the company, such as

divisions or departments In addition, management accounting concentrates on past and

present information, as well as the forecasting of future financial transactions

Confidentiality Management Accounting is the branch of Accounting that deals primarily

with confidential financial reports for the exclusive use of top management within an

1 Sales Forecasting reports;

2 Budget analysis and comparative analysis;

3 Feasibility studies;

4 Merger and consolidation reportsFinancial Accounting, on the other hand, concentrates on the production of financialreports, including the basic reporting requirements of profitability, liquidity, solvency andstability Reports of these nature can be accessed by internal and external users

Regulation and Standardization While Financial Accountants follow GAAP (generallyaccepted accounting principles) set by professional bodies in each country, ManagerialAccountants make use of procedures and processes that are not regulated by a standard-setting bodies

However, multinational companies prefer to employ Managerial Accountants who havepassed the CMA certification The CMA (Certified Management Accountant) is anexamination given by the Institute of Management Accountant, a professional organization

of Accounting professionals This certification is different and distinct from the CPA orChartered Accountant certificate

Time Period

Managerial Accounting provides top management with reports that are future-oriented,while Financial Accounting provides reports based on historical information However,Management accountants based their reports on historical values, while employingstatistical methods to arrive at future values

1.13 CASE LET

Singania Chartered Accountants Firm established in the year 1956, having very goodnumber of corporate clients It continuously maintains the quality in audit administrationwith the clients since its early inception The firm is eagerly looking for promising studentswho are having greater aspirations to become auditors The firm is having an objective

to recruit freshers to conduct preliminary auditing process with their corporate clients

For which the firm would like to select the right person who is having conceptual knowledge

as well as application on the subjects It has given the following Balance sheet to theparticipants to study the conceptual applications The participants are required to enlistthe various concepts and conventions of accounting

Balance sheet as on dated 31st Mar, 2006

33 Introduction to Accounting

List out the various accounting concepts dealt in the above balance sheet

Explain the treatment of accounting concepts

Check Your Progress 2

(1) Financial Accounting is:

(a) Accounting of business transactions

(b) Accounting of Financial transactions only

(c) Accounting of Non-financial transactions

(d) Accounting of both financial and non-financial transactions

(2) Accounting concept is:

(a) Theory of accounting (b) Procedures of accounting

(c) Rules of accounting (d) Practice of accounting

(3) Journal is:

(a) Preliminary step of accounting (b) Intermediate step

of accounting(c) Both (a) & (b) (d) Final step of accounting

(4) Ledger account is prepared

(a) On the basis of single entry system of accounting

(b) On the basis of double entry accounting system

(c) Both (a) & (b)

(d) None of the above

1.14 LET US SUM UP

"Accounting is the process of recording, classifying, summarizing in a significant manner

of transactions which are in financial character and finally results are interpreted."

The revenues are recognized only at the moment of realization but the expenses are

recognized at the moment of payment The charges which were paid only will be taken

into consideration but the outstanding, not yet paid will not be considered The revenues

are recognized only at the time of occurrence and expenses are recognized only at the

moment of incurring The financial statements are found to be more useful to many

people immediately after presentation only in order to study the financial status of the

enterprise in the angle of their own objectives The entire accounting system is governed

by the practice of accountancy The accountancy is being practiced through the universal

principles which are wholly led by the concepts and conventions Money measurement

concept tunes the system of accounting as fruitful in recording the transactions and

events of the enterprise only in terms of money Business entity concept treats the

owner as totally a different entity from the business Going concern concept deals with

the quality of long lasting status of the business enterprise irrespective of the owners'

status, whether he is alive or not Matching concept only makes the entire accounting

system as meaningful to determine the volume of earnings or losses of the firm at every

level of transaction Duality or Double entry accounting concept is the only concept

which portrays the two sides of a single transaction The law of entire business revolves

International Financial and

Management Accounting

around only on mutual agreement sharing policy among the players Personal accounts

is an account which deals with a due balance either to or from these individuals on aparticular period Real Accounts is the account especially deals with the movement ofassets Nominal Accounts is an account deals with the amount of expenses incurred orincomes earned It includes all expenses and losses as well as incomes and gains of theenterprise

1.15 LESSON END ACTIVITY

Assume you are a new-appointed Senior Manager of a firm What would you suggest tothe accounting department for better accounting circulation?

1.16 KEYWORDS

Accounting: Accounting is defined as either recording or recounting the information of

the business enterprise, transpired during the specific period in the summarized form

Real Account: It is a major classification which highlights the real worth of the assets Classifying: It is one of the important processes of the accounting in which grouping of

transactions are carried out on the basis of certain segments or divisions

Summarizing: The ledger books are appropriately balanced and listed one after another Business Entity Concept: This concept treats the owner as totally a different entity

from the business

Money Measurement Concept: This is the concept tunes the system of accounting as

fruitful in recording the transactions and events of the enterprise only in terms of money

Going Concern Concept: The concept deals with the quality of long lasting status of

the business enterprise irrespective of the owners' status, whether he is alive or not

Matching Concept: This concept only makes the entire accounting system as meaningful

to determine the volume of earnings or losses of the firm at every level of transaction;which is an outcome of matching in between the revenues and expenses

Duality Concept: It is the only concept which portrays the two sides of a single

transaction

Ledger: Ledger is nothing but preliminary book of accounting transactions at which,

each account is separately maintained through the allotment of various pages for exclusiverecording

1.17 QUESTIONS FOR DISCUSSION

1 Define Accounting

2 Illustrate the Accounting process

3 Classify the various kinds of values in the accounting process

4 Highlight the journalizing process of accounting

5 Explain the process of ledgering of transactions of the business firm

6 Write brief note on the various classification of accounts

7 Explain the golden rules of accounting

35 Introduction to Accounting

Check Your Progress : Model Answers

M.P Pandikumar “Accounting & Finance for Managers”, Excel Books, New Delhi.

R L Gupta and Radhaswamy “Advanced Accountancy”.

V K Goyal, “Financial Accounting”, Excel Books, New Delhi.

Khan and Jain “Management Accounting”.

S.N Maheswari “Management Accounting”.

S Bhat “Financial Management”, Excel Books, New Delhi.

Prasanna Chandra, “Financial Management – Theory and Practice”, Tata McGraw Hill, New

Delhi (1994)

I.M Pandey, “Financial Management”, Vikas Publishing, New Delhi.

Nitin Balwani “Accounting & Finance for Managers”, Excel Books, New Delhi.

2.4 Subsidiary Accounts2.4.1 Purchase Book2.4.2 Purchase Returns Book2.4.3 Sales Book

2.5 Steps Involved in the Sales Book2.5.1 Sales Return Book2.6 Steps Involved in the Sales Return Book2.6.1 Trade Bills Book

2.6.2 Bills Receivable Book2.7 Cash Transaction

2.7.1 Double Columnar Cash Book2.7.2 Three Columnar Cash Book2.7.3 Multi Columnar Cash Book2.7.4 Petty Cash Book

2.8 Let us Sum up2.9 Lesson End Activity2.10 Keywords

2.11 Questions for Discussion2.12 Suggested Readings

2.0 AIMS AND OBJECTIVES

In this lesson we shall discuss about trial balance After going through this lesson you will

be able to:

 Discuss grouping of various accounting transactions

 Analyse preparation of the trial balance

37 Trial Balance

2.1 INTRODUCTION

The next most important stage after ledger account is to prepare the statement (summary)

of accounting balances and their names for the specified accounting period to the tune of

principle of grouping transactions, known as Trial Balance

Trial Balance is a list of accounting balances and their names; of the enterprise during

the specified period which includes debit and credit balances of the various balanced

ledger accounts out of the journal entries

2.2 GROUPING OF VARIOUS ACCOUNTING

There are eleven different ledger accounts involved out of the journal entries which

already transacted are finally balanced The balanced ledger accounts should be prepared

as a summary list of their balances and names The total of both balances are equivalent

to each other The major reason for the equivalent balances on both sides is only due to

posting of entries to the tune of "Double Entry Accounting Concept (Or) Duality Concept"

This is the concept which equates the total amount of resources raised with the total

amount of applications of the enterprise

Purposes of preparing the Trial Balance:

 To prepare a statement of disclosure of final accounting balances of various ledger

accounts on a particular date

 To prepare a statement of cross checking device of accounting while in the

process of posting of entries which mainly on the basis of Double entry accounting

principle It facilitates the accountant to have systematic posting of entries

 It facilitates the enterprise for the preparation of Trading & Profit and Loss Accounts

for the year ended……… and the Balance sheet as on dated ………

 It provides the birds' eye view of accounting balances of various ledger accounts

during the specified period

2.3 PREPARATION OF THE TRIAL BALANCE

The preparation of the trial balance is classified on the basis of three different accounts

viz:

 Real Account (R)

 Nominal Account (N)

 Personal Account (P)

The classification of the transactions not only on the basis of accounts but also on the

basis of payments and receipts These payments and receipts classification further

segmented into following categories

Payments category - Debit Balance

Debit Balance is the source of following golden rules of the three different accounts

Personal Account - Debit the Receiver

Nominal Account-Debit all the expenses and losses

Real Account - Debit what comes in & Debit all assets

 Trading Expense Category (TE)

 Profit and Loss Category (PL)

 Assets- Balance Sheet (BA)

Receipts category-Credit Balance

 Trading Income Category (TI)

 Profit and Loss Category (PL)

 Liabilities - Balance Sheet (BL)The detailed Proforma of the trial balance is given in the Annexure-I for betterunderstanding

The following trial balance of the Sundar firm is prepared from the previous list ofjournal entries and ledger accounting balances

Table 2.1: Trial Balance

Sl No Particulars Debit Balances

9 Office Rent A/c 500

Check Your Progress 1

(1) Trial balance is:

(a) The statement of accounting balances(b) The statement of various account names(c) The statement of accounting balances and their names(d) None of the above

(2) Trial balance contains:

(a) Debit balance only(b) Credit balances only(c) Both Debit and credit balances only(d) None of the above

(3) Trial balance is the statement prepared on the basis of:

(a) Business entity concept(b) Matching concept(c) Double entry accounting concept(d) Realization concept

39 Trial Balance

Prepare trial balance from the following text of information extracted from the book of

accounts of Ms Selvi

Ms Selvi has brought a monetary capital of Rs 1,00,000 for the conduct of business on

1st April, 2007 The brought capital was converted into real capital for the business in

the form of tradable goods and commodities She purchased household articles for trade

which amounted Rs 60,000 She has bought a service vehicle for Rs 1,500 She keeps

Rs 20,000 in the form of deposit at bank for contingencies The remaining balance is

kept in the form of cash in hand for meeting the day today expenses

2.4 SUBSIDIARY ACCOUNTS

If the transactions of the enterprise are voluminous, to ease the process of posting the

transactions, the transactions should be classified into two categories The transactions

are segmented one on the basis of regular and another on the basis of non-regular

occurrence

The regular/frequent occurrence of transactions are recorded only in the separate books

which are known as subsidiary book of accounts or subsidiary journals instead to record

in the regular journal The infrequent transactions are recorded/posted in the original

journal or Journal proper which do not have any specific subsidiary journal or subsidiary

books

The subsidiary journals or books are developed by the firms only based on the occurrence

of the transactions Normally the frequent occurrence of the transactions of the firm are

major formation of the subsidiary books of the accounting system

The following are the subsidiary books on the major frequent occurrence of transactions

Subsidiary Books

Cash

Transaction

Non-Cash Transaction

Sales Book

Bill Payable Book

Bills Receivable Book

Purchase Return Book

Sales Return Book

Purchase Book

Cash

Book

Figure 2.1: Subsidiary Accounts

Subsidiary books are classified on the basis of transactions viz Cash transactions and

Non-cash transactions

First, let us discuss the Non-cash transactions

What is meant by the Non-cash transaction?

The Non-cash transaction is a transaction out of credit terms and conditions of the

enterprise

The Non-cash transactions shall include the following transactions of the enterprise,

which do not involve any cash ; are as follows

 Credit Sales Book

 Credit Purchases Book

International Financial and

Management Accounting

 Credit Sales Return Book

 Credit Purchases Return Book

 Bills Payable Book - Out come of Credit transaction

 Bill Receivable Book - Out come of Credit transaction

2.4.1 Purchase Book

The purchase book is called in other words as purchase journal It is a book meant forcredit purchases only for resale

Proforma of the Purchases Book

Date Name of the Supplier Ledger Folio Inward Invoice No Amount Rs

The purchase book usually contains various components viz

Name of the supplier - From whom the raw material were procured on credit

Ledger folio - It is the number of the page where the journal entry is

transacted

Inward Invoice No - The book contains the invoice number of the credit

purchase of the goods from the supplier

transactions from the supplier

Steps involved in posting the entries:

 Posting the entries pertaining to the individual accounts into the Purchase journal

 The total of the purchase journal is determined on monthly and finally should beposted into debit side of the purchase account- To satisfy the rule of Real Account;which not only contains the cash purchase but also the credit purchase of the firmduring the year

2.4.2 Purchase Returns Book

This is a book of goods returned to the supplier which are out of credit purchases.The return of goods out of the credit purchase is due to non confirmation with thespecification mentioned in the order

Proforma of the Purchase Returns Book

Date Name of the Customer Ledger Folio Out ward Invoice No Amount (Rs)

The purchase returns book consists of various components viz

Name of the supplier - To whom the goods/ raw material purchased, were

returned

Ledger folio - It is the number of the page where the journal entry is

posted

Debit Note No - It is the page number on the original copy of the document

sent to the firm to whom the goods are sent

Amount (Rs) - The book should illustrate the value of goods/raw materials

returned out of credit purchase

41 Trial Balance

Steps involved:

 Posting the entries of the purchase returns to the individual suppliers' account into

the purchase return journal

 The monthly total of the purchase journal is credited into the purchase return account

2.4.3 Sales Book

It is a book maintained by the enterprise only during the moment of selling the goods on

credit It is pronounced in other words as sales journal

Proforma of the Sales Book

Date Name of the Customer Ledger Folio Credit Noted No Amount (Rs.)

The sales normally contains the following components

Name of the customer - The sales book usually records the name of the buyer

who has been sold the goods or raw materials on credit

Ledger Folio - The page number where the journal entry is posted/

transacted

Outward Invoice No - This book registers the invoice number of the goods/raw

materials sold out to the buyers on credit

Amount (Rs) - It is fundamental document to earmark the value of the

goods/raw materials sold out on credit to the variousbuyers It facilitates the firm to identify the amount ofsales transacted on credit as well as to collect theamount of dues from the buyers

2.5 STEPS INVOLVED IN THE SALES BOOK

 Sale of the goods/raw materials to the individual buyers are entered on daily basis

 The monthly total of sales book is credited into the sales account of the firm which

includes both the sale transactions of cash as well as credit

2.5.1 Sales Return Book

It is a book which registers the goods sold on credit and received from the buyers The

sales return from the buyers is due to non confirming to the specifications mentioned at

the moment of placement of the order It is known as sales return journal

Proforma of the Sales Return Book

Date Name of the Supplier Ledger Folio Debit Note No Amount (Rs.)

The following are the various components dealt in the design of the book

Name of the customer - It includes the most important information about the buyer

who returned the goods/raw materials, non-confirming

to specifications of the placed

Ledger folio - It contains the page number of the journal entry posted

Credit Note No - It is a number on the original copy of the document sent

to the firm from whom the goods are received i.e., buyer