BOOK KEEPING & ACCOUNTANCY

Book Keeping Book keeping is the part of accountancy. It consists of the 1 st four steps of accounting
cycle:

 Transaction
 Journalizing
 Ledgers
 Trial Balance

Accounting It is the whole system of accountancy. In other words accountancy is the language of
the business.

Traditional Definition

Accounting is defined as the art of recording, classifying, summarizing and interpretation of financial
character in a significant manner.

Difference between Accounting and Book Keeping

 Accounting deals with the principles that underlie book keeping whereas book keeping is the
part of accountancy.

 Accounting is a wider field but book keeping is concerned only with systematic recording.

 Accounting is concerned with designing and improvement of book keeping while book
keeping is concerned with recording of transactions.

 Accounting is concerned with preparation and analysis of financial statements whereas book
keeping covers the gathering of data for these statements.

 Accounting is concerned with the interpretation of financial statements and records while
booking keeping is concerning with only preparation of records.

The Account: The account is a technical or physical device used by accountants to record
transactions. Separate account for each asset, liability and proprietorship is to be maintained.

Account Title: Means a head for which the account is maintained e.g. following are called account
titles:

 Cash Account
 Bailing Account
 Loan Account
 Payable Account
 Capital Account

Kinds or Nature of Accounts

 Personal Accounts
 Nominal Accounts
 Real Accounts

CLASSIFICATION OF ACCOUNTS

 Assets Account
 Liability Accounts
 Capital Accounts
 Revenue Accounts
 Expense Accounts

Assets Accounts means the resources of the business. Following are included in the
assets account:

Cash Increase or decrease in cash are recorded in this account

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Notes Receivable Promissory notes from customers are included.
Deposits Deposits with companies for utility services
Prepaid Expenses Separate account of each prepaid expense i.e. rent, insurance
Office Supplies Stationery Items and Increase or decrease in office supplies
Store Supplies Packing material and Increase or decrease in store supplies
Land To maintain record of land purchased for use in business
Building To maintain record of building purchased for use in business
Equipment To have record of equipment required for business operation
Furniture For recording acquisition of different types of furniture to use

Liability Accounts means the claims of suppliers of cash, commodities on credit.

Following are included in the liability account:

Account Payable This account is used to record outstanding amounts to suppliers for goods
and services on credit in the ordinary course of business

Notes Payable For recording short term promissory notes given to creditors

Taxes Payable This account is maintained for recording of taxes payable to various
governmental authorities.

Accrued Expenses This group of account is maintained for the amounts payable for
expenses incurred at or near the end of an accounting period. This
also includes accrued salaries, accrued utilities, accrued interest and
accrued rent.

Unearned Revenue When a firm collects cash for its products or services before delivery
are unearned revenue, and it falls in the category of liability.

Capital Accounts Following are included in the capital accounts:

Proprietorship Accounts This account shows the proprietor’s net worth in the business

Drawing Accounts A drawing account is operated to record withdraw of meager

amounts by owner for his private use.

Revenue Accounts These are the accounts of any type of income directly or indirectly
required of the business e.g. sales, commission earned or interest
received from bank.

Expense Accounts These are the accounts of any type of expense directly or indirectly
incurred of the business e.g. cost of products sold, payroll, rent,
electricity and telephone.

BUSINESS Any activity in which a person engages with the hope of making a profit is a
business.

Business Entity Any business activity individually controlled or by a group of people

constitutes a business or enterprise.

Business Organizations To operate business there must be an organization and it should be

owned and operated by someone. The organization may be owned individually or otherwise.
Individual owner is called ‘Sole Proprietor’ and the group of persons may take two forms ‘Partners’ or
‘Company’:

 Sole Proprietorship When a firm is owned by one person, this form of organization is
called a sole proprietorship.

 Partnership When a firm is owned by more than one person, it is graded as a partnership
and the owners are called partners. Partnership is normally constituted by 2-20 partners. It is
tax less business activity.

 Company When the firm is owned by large members and is registered under the
company act. This form of organization is referred to as a company and the owners are
called share holders or stack holders. It is constituted by 2-50 members and it is tax paid
business activity.

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Classification of Business An activity undertakes with the objective of earning profits is called
business for example a grocer’s business, a banking business, a manufacturing business. Business
may be classified as:

 Trading It is a business which is engaged in buying and selling goods like a grocery
shop, a motor car dealer, a petrol pump etc.

 Manufacturing A business is engaged in manufacturing goods and then selling it like

Industries, sugar mills, textile mills, steel mills. Etc.

 Services A business which is engaged in providing services like a charted

accountant’s firm, a lawyer’s firm, a dry cleaner’s firm.

Drawing The money withdrawn by the owner is called drawing. There are two types of
drawing:

 Personal Drawings The amount which an owner draws for his personal use is called
personal drawing. Personal drawings should be detected from capital.

 Business Drawings The amount which an owner draws for business use is called
business drawings.

TRANSACTION The simplest definition of transaction is “Any exchange of value is called

transaction” e.g.

 When a building is purchased against cash, an exchange of building and cash takes place.

 When salaries are paid to employees, there is an exchanged of services and cash.

Above examples have value and their exchange is a transaction. Different forms of transaction are as
follows:

 Cash Transaction In a transaction where cash is paid or received as a result of an

exchange, is called cash transaction.

 Credit Transaction In a transaction where the payment or receipt of cash is deferred, is

called credit transaction.

TYPE OF LIABILITIES There are two types of liabilities:

 Current Liabilities These are the liabilities which is payable within one accounting
period (which is normal one year). These are:

o Notes Payable
o Accounts payable
o Accused Liabilities
o Unearned Revenues
o Dividend Payable

 Long Term Liabilities These are the business debits which are payable after one
accounting period (which is normally more than one year). These are:

o Bonds Payable
o Long Term Debits
o Deferred Income Task
o Mortgage Payable

CAPITAL The initial or additional investment by the owner of the business. It is also known as
sources of business.

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ASSETS Resources required to operate a business are technically called assets i.e. cash,
building, furniture, merchandise etc.

Types of Assets There are two types of assets:

 Current Assets Converted into cash in one accounting period (one year):

o Cash
o Account Receivable
o Notes Receivable
o Prepayments

 Fixed Assets Converted into cash after one accounting period (after one
year):

o Machinery
o Building
o Vehicle
o Furniture
o Land

Owner’s or Insider’s Equity The assets or resources are obtained from different sources. The
owner himself is a source of assets by making investment and requires a claim or interest from the
business. The amount of claim or interest of the owner is known as ‘Proprietorship’, ‘Capital’,
‘Owner’s equity’, ‘Proprietary equity’ or ‘Insider’s Equity’.

Creditor’s or Outsider’s Equity The parties lending cash or supplying assets on credit are
called creditors. They acquire a claim or interest against the total assets. Their claim or interest is
technically called ‘Liabilities’, ‘Creditor’s Equity’, ‘Outsider’s Equity’.

Equity Equities are the sources from which those assets have been acquired.

Creditors The person who provides loan or goods to the business on credit is called creditor.

Proprietor The person who is owner of the sole proprietorship business is called proprietor.

Merchandises The goods bought and sold are called “Merchandise”. Such as in a grocery business,
the flour, rice, cooking oil, salt, sugar etc are the merchandise of the firm.

Purchases The merchandise being purchased for sold are called Purchases.

Cash Purchases If the purchases are done on immediately cash payment, they are called cash
purchases

Credit Purchases If the payment of purchases is to be made later, also called ‘Purchases on
Account’.

Purchases Return If the merchandise purchased is found defective, not as per sample,
damaged or in excess of ordered quantity, and are returned to the supplier. These are called
“Purchases Return”.

Purchases Allowance When the purchaser informs the seller that some merchandise is
defective or damage. The supplier may agree to reduce the price of those items. The purchaser
retains the defective or damaged merchandize and gets some concession in price. This price
reduction or concession in price is known as “Purchases Allowance” or “Purchases Discount”.

Sales Merchandise sold or services rendered to customers are called ‘Sales’. It is also called ‘Cash
Sales’ or ‘Simply Revenue’.

Cash Sale If cash is received immediately

Credit Sales If it is agreed that the amount will be collected later, also called ‘Sales on Account’.

Sales Return If the customer returns some merchandise due to its defect, damage or some other
reason, it is called “Sales Return”.

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Sales Allowance The concession in price granted to customers for defective or damaged
merchandise is called “Sales Allowance” or “Sales Discount”.

Cash Discount The difference between the gross amounts due and the amount collected is called
cash discount. The seller calls it sales discount and customer or purchases calls it purchase discount.

Accounts Receivable The total amount outstanding from customers on account of credit
sales is called ‘Accounts Receivable’. It is also termed as ‘Debtor’ or ‘Sundry Debtors’.

Accounts Payable Total amount payable to suppliers on account of credit purchases is called
Accounts payable. It is also called as ‘Creditors’.

Bad Debts Business and risk go together. A debt due from a person may not be
collected because he has become insolvent, or has disappeared or for any other reason. Such
irrecoverable amounts are called bad debts.

Revenue Revenue is the gross increase in proprietorship that results when merchandise is sold
or services rendered. It is measured by the cash or the cash value of other assets received.

Expense Expense is the cost of services and assets that have been used or given up in the
production of revenue during a particular period.

Merchandise Inventory Merchandise in hand, that is goods remaining unsold is called

‘Merchandise Inventory’, ‘Stock in Trade’, ‘Inventory’ or ‘Stock’.

Debit Note or Debit Memorandum When a customer returns goods, he informs the seller
through a business paper called debit memorandum or debit note.

Credit Note Or Credit Memorandum The seller confirms or acknowledges the returns by a letter is
called credit note or credit memorandum. When the customer claims price reduction (allowance) the
seller allows the same by sending a credit note.

Controlling Account A controlling account is a general ledger account containing information in

the form of totals, the details of which are shown in a subsidiary ledger.

Subsidiary Ledger Account of a similar nature which is large in number is maintained in separate
ledger. The separate ledger is known as a subsidiary ledger.

Contra Entries When cash from the cash box is deposited into bank account or when cash
withdrawn from the bank account is placed in the cash box, contra entries are made in the cash book.
The work ‘c’ is to be placed in ref columns of both sides which stand for contra.

Petty Cash Fund Major Payments are made by cheques. Sometimes, the amount to be paid is
so small for which cheque is not deemed necessary. In such situations the payments are made in
cash. In order to control such payments, a petty cash fund is established. Such a petty cash system
is called imprest cash system.

Balance Balance is the difference between the total of Debit and Credit of an account.

Trial Balance A trial balance is a list of the accounts in a ledger at a given date with the debit a
credit balance of cash account. It is prepared to know or test the accuracy of book keeping record.

Ledger All the accounts comprise the ledger. The accounts are maintained in different forms. A
bound register, in loose-leaf from held together in a binder or on cards in a filing tray. Regardless of
physical form of the accounts, the ledger is name of the entire group of accounts.

General Journal The general journal is a book of original entry, contained sequential
record of all transactions and analysis of each transaction into debts and credits. It has a objective of
journalizing & analyzing.

Promissory Notes A promissory note is an unconditional promise in writing, by a person

promising to pay a certain sum of money, on demand or at a fixed or variable future time.

Notes Payable A promissory note from the viewpoint of the borrower is a note payable.

Notes Receivable A promissory note from the viewpoint of the lender is a note receivable.

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Bills of Exchange A bill of exchange is an unconditional order in writing, addressed by a person
to another person to whom it is addressed, to pay a certain sum of money on demand or at a fixed or
variable future time.

Footing The process of taking columnar total is called footing.

Debit A debit may be defined as an amount of money recorded on the left hand side of an account.

Credit A credit may be defined as an amount of money recorded on the right hand side of an
account.

Rules of Debit & Credits

Debit Increase assets accounts

Decrease liability accounts
Decrease proprietorship
Decrease revenue accounts
Increase expense accounts

Credit Decrease assets accounts

Increase liability accounts
Increase proprietorship
Increase revenue accounts
Decrease expense accounts

Work Sheet Worksheet is a form used for preparation of statement in more efficient manners.

CHEQUES Withdrawals from bank accounts are made by cheques. There are two types
of cheques:

 Bearer Cheques If someone crosses out the words “Or Order” the cheque
becomes bearer cheque. Bearer cheques are paid on counter.

 Order (Cross) Cheque If someone crosses out the words “Or Bearer” the cheque becomes
order cheque. Order cheques are paid into the account of the payee.

BANK ACCOUNTS Following are the kinds of bank accounts:

 Saving Account A saving account may be opened by depositing a minimum amount

of rupees five. Cash may be withdrawn by writing a cheque. It is also called as Profit Loss
Sharing Account. The bank gives interest on the balance held in the account.

 Current Account A current account may be opened individually or generally by the

business firms. Some banks give interest and some do not. If the balance in the account is
below the limit charges are levied for carrying the account. Cash may be withdrawn by writing
a cheque.

 Fixed Deposit Account An account in which a sum of money is deposited for a fixed
period of time is called Fixed Deposit. A higher rate of interest is allowed by banks on such
deposits. Cash may be withdrawn on completion of period.

Pass Book When a saving or current account is opened in a bank, the bank issued a
pass book. A pass book is a copy of the customer’s account in the bank ledger. It shows the date of
the transaction, amount deposited or withdrawn, balance and the supporting documents. However,
some banks do not issue a pass book for current accounts.

Pay-in-Slips The details of the amount to be deposited are written on a pay-in-slip. Separate types
of pay slips are used to deposit cash and cheques. It has two parts. Customer’s part is known as
counterfoil.

Interest & Bank Charges The banks earn profit on the deposited amount and give some profit
to the depositors is called interest. Banks are deducting some amount for rendering services is called
bank charges.

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Overdraft A current account holder may be allowed by the bank to draw beyond the
balance held in his account. The excess amount withdrawn is called overdraft.

Bank Statement Periodically a copy of the account of the account holder is sent by the
bank. This is called a bank statement.

Drawer The person who signs the cheque for payment is known as the drawer.

DraweeThe bank for which the cheque is written is known as the Drawee or Drawer.

Payee The person or party to whom the payment is to be made is known as the payee. Drawer and
payee are the same when you desire to take the payment from the bank yourself.

Cash Book All cash transactions are recorded in the bash book, appropriate amounts being
written in the appropriate column. Contra entries are identified immediately by writing the letter ‘C’ in
the post column.

Net Profit If total revenue is greater than total expense, the net result is called ‘Net Profit’.

Net Loss If total revenue is lesser than total expense, the net result is called ‘Net Loss’.

ADVANTAGES OF DOUBLE ENTRY SYSTEM

 It keeps the record twice in the books which is a more secure system for out record.

 The chances of frauds are minimized.

 Accounts can be detected easily.

 It is a record of debit and credit transaction, which prove accuracy of each and every time.

 It is easy to understand.

 Checking system is very easier if there is any doubt in any kind of entry.

 Re-conciliation of balances is very easier.

 Preparation of trial balance is also very easier.

REASONS FOR BOUNCE BACK OF CHEQUE

Following are the reasons for bouncing back of cheque:

 Drawer’s signature differs from specimen supplied.

 Cheque is out of date (Stale).
 Cheque is post date.
 Amount is wrong and or a figure differs.
 Cheque mutilated.
 Payment stopped by the drawer.
 Funds insufficient.
 Not arranged for.
 Exceeds arrangement.
 Crossed Cheque should be presented through a bank.
 Clearing house stamp required.
 Cheque not signed in presence or attested by an officer of bank.
 Payee identification required.
 Bank discharge irregular.
 Effects not cleared may be presented again.
 Not draw on us.
 Payee’s endorsement required.
 Payee’s endorsement irregular.
 Payee’s endorsement requires bank confirmation.

Business Transactions or Accounting Transactions

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Any exchange of values brings about on immediate change in the amount, nature or composition of a
firm’s asset or equities is called business or accounting transactions.

 Analyzing of Transactions This is a mental process:

 Firstly, ascertain the accounts involved cash sales, accounts receivable, loans etc.
 Secondly, ascertain the nature of the accounts involved asset, liability, proprietorship,
revenue, or expense.
 Thirdly, determine the effects in terms of increase and decrease,
 Fourthly, apply the debit and credit rules to determine whether each of the account
should be debited or credited.

 Recording of Transactions The analyzing is put in a book of original entry in a

systematic manner. Each transaction is analyzed and recorded separately. Record of
each transaction in the general journal is called journal entry.

 External Transactions Transactions in which an outside party is involved are called

“External Transactions”.

 Internal Transactions The transactions in which no outside party is involved but a

transaction has taken place are called “Internal Transaction”.

Basic Characteristics of Transactions Transaction is not only an exchange of values but it

also brings about an immediate change in assets or equities of the unit for which we are accounting.

Basic Accounting/Business Transactions: Most accounting transactions fall into one of the
following nine basic groups:

 Investment of assets by owners

 Withdrawal of assets by owners
 The borrowing of funds
 Repayment of borrowed funds
 Purchase of assets, services or facilities
 Payment of liability incurred in the purchase of services or facilities or assets.
 Sale of goods or services to customers, either for cash or on credit.
 Collection of receivables from customers or others
 Internal transactions that is the use or consumption of assets, services, or facilities and the
like.

Journalizing The process of analyzing and recording transactions in the general journal is called
journalizing. Two steps are involved in this process.

 Analyzing
 Recording

Skeleton Journal Entry A journal entry without columnar rulings and explanations is called a
skeleton journal entry.

Compound Journal Entry In the minimum one account is to be debited and one account is to
be credited. Sometimes the analysis of a transaction will show that more than two accounts are
involved and then more than one account are either to be debited or credited.

Account Number Accounts are assigned numbers according to a set plan. These numbers are
called account numbers.

Chart of Accounts An orderly list of accounts together with the assigned number is prepared
which is called the chart of accounts.

T-ACCOUNT

 Skeleton form of a T-Account Skeleton of the standard form of T-Accounts is used the
broad structure of the standard form. It looks like a bit T with the account title and account
number if found useful. This form is used to economize time, space and efforts. It is
preferably used for classroom demonstrations, practice and rough works.

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  Standard (or Complete) Form of a T-Account The title of account is written in the center
and the account number on the extreme right hand corner. Two horizontal double lines are
drawn across the page immediately below the account title. The space below is divided into
two vertical columns by drawing a thick vertical line in the center. The structure so far
resembles the capital letter ‘T’ which gives the name of T-Account to this form of an account.
The left hand column is used to record relevant information about debits and credit and the
right hand column to record credit. The date column is divided into two. The first to write the
year and the month and the second to write day. The item or plantation column is not used
frequently. Posting reference column is after the explanation column.

Self Balancing Account T-Account fails to give a balance (net result) after each transaction.
If this information is frequently, the self-balancing form of account illustrated is found useful. Date
item and credit entries amount columns are separate; an additional column is added to show the
balance after each transaction.

Posting Posting is the process of transferring into ledger accounts the debits and credits
which have been entered in the journal.

Accounts Period Each period is known as accounting period. This period is generally of one
year. A shorter period of time may also be selected as an accounting period. It is a matter of choice
and purpose.

Footing and Balancing the Ledger Accounts Many accounts in the ledger contain entries of
amounts on both the debit and credit sides. Depending upon the transaction, an account gets debited
and or credited several times. These debits or credits mean increase and or decrease in the amounts
of the account.

Frequently we want to know the net result of all increases and decreases in the account. The net
result is known as balance.

The act of totaling a money column is known as footing.

The Balance Sheet The asset, liability and proprietary accounts alongwith their balances are
engaged in a systematic manner on a separate sheet. This sheet is known as balance sheet.

Income Statement Income statement shows the amount of revenue resulting from the sale of
goods or performance of service during a specific period of time and the amount of expenses that
were incurred in getting those revenues. Income statement is also called a ‘Profit & Loss Statement’,
a Trading Profit & Loss Statement or a ‘Statement of Operation’.

Titles Generally Used on the Income Statement. Generally following titles are used on the
income statement:

 Revenue Titles

o Sales It is the total amount of sales made during the accounting period. This title is
used in retail, wholesale or manufacturing business i.e business which sells merchandise.

o Revenue From Fee or Income It is the total amount charged to customers for
services performed for them during accounting period. This title is used by service
business.

o Dividends Income It is the total of dividends received on investments in shares of joint

stocks companies. When a company distributes its income amount its shareholders, the
total amount is called dividends declared paid, and the amount received by each
shareholder is dividend income to him.

o Interest Revenue or Interest Earned It is the amount of interest received or to be

received during the accounting period.

o Rental Revenue or Rental Income It is the total rent (of a building) received or to be
received ruing the accounting period.

 Expenses Titles

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 o Cost of Goods Sold or Cost of Sales It is the cost of all products sold during the
accounting period. This title is found on the income statements of business which sale
merchandise.

o Sales Services It is the total amount of salaries paid or to be paid to salesmen during
the accounting period.

o Sales Commission It is the total amount of commission earned by salesmen during the
accounting period.

o Traveling Expenses It is the total cost incurred by the proprietor and employees of
the firm which traveling on business.

o Advertising It is the cost incurred on advertisements of the business, its products

or services.

o Office Salaries The total amount earned by employees engaged in non-selling

activities of the business like accounting and general management.

o Supplies Expenses The cost of office stationery used on the office, sales,
delivery and other departments during the accounting period.

o Insurance Expenses or Expired Insurance It is the portion of the total premiums

paid for insurance which applies the current accounting period.

o Depreciation Expense It is a portion of fixed asset cost that must be considered as

an expense of the accounting period. Separate account titles may be used for each kind
of depreciable fixed asset. Depreciation of machinery, depreciation of buildings,
depreciation of furniture, and like is some common titles. More about depreciation will be
discussed in a later chapter.

o Miscellaneous Expenses The total cost of all business expenses that are not
separately itemized.

TITLES COMMONLY USED ON THE BALANCE SHEET

 Current Asset Titles

 Cash Currency, coins and cheques that the business has received from customers
and other sources that have not yet been deposited in its bank account.

 Bank The amount the business has no deposit in its commercial bank account.

 Accounts Receivable Total amount to be collected from customers.

 Notes Receivable The written promise received from persons or business organizations
to pay cash to the business on the date specified in the not is called a notes receivable.

 Merchandize Inventory This term is found on the balance sheet of merchandising

business. This represents goods on hand as of the balance sheet date, i.e goods
remaining unsold. It is called stock, stock-in trade, or simply inventory.

 Supplies The cost of such things as wrapping papers and twin (often times shown
under a separate title of store supplies) and typewriter ribbons, envelopes stamps and
letter heads (often times shown under a separate titles of office supplies) and other things
of a similar nature which the business will use up in performing its activities. This shows
the cost of supplies on hand i.e unused supplies.

 Prepaid Rents Advance payment of building rent is a very common feature. With
the passage of time a portion of it is used up. The balance of the advance on the balance
sheet date is reported as prepaid rent.

 Prepaid Insurance Insurance premiums too are paid in advance, on the balance sheet
date the balance of such advance is reported as prepaid insurance.

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FIXED OR NON-CURRENT ASSET TITLES

 Land It is the cost of land the business used to carry on its operations for example,
the plot of land on which the office or factory building is constructed (provided the land is
owned by the firm). If it is not owned by the business, it is not an asset of the business.

 Building This item could be separated into factory building, office building etc. It is
shown at its original cost less depreciation (more about depreciation will be discussed in later
chapter).

 Equipment This item may be shown under different headings. Office equipment which
includes trucks and automobiles the business uses to deliver its merchandise to customers
and many other headings (surgical equipment, dental equipment, stage equipment etc). It is
shown at its original cost less depreciation.

 Plant and Machinery This item is common to manufacturing business. It includes all the
machines in the factory. It is shown at its original cost less depreciation. Plant is a blanket
term for the looks machinery, fixtures, building, ground etc of a factory or business or
business. The work machinery does not go with the term plant in the above commonly used
heading. Care should be taken in the choice of titles.

 Furniture or Fixture The movable things in a room, building etc, which equip it for living
(use) are called furniture. Anything firmly in place is called fixture.

CURRENT LIABILITY TITLES

 Accounts Payable The total amount to be paid by the business to its supplier for the
credit purchase of merchandise and services. This shown only that amount which is due for
payment within one year from the balance sheet date.

 Notes Payable When merchandise is bought on credit or when loan is taken from a bank, the
creditor may require the business to sign a note promising to pay the amount on the date
specified in the note. These notes are called notes payable (to the creditor these are notes
receivable). All such notes which are due for payment within one year from the date of the
balance sheet are reported as such in this section.

 Interest Payable It is the amount of interest owed by the business on the balance
sheet date for money borrowed or notes issued to lenders.

 Salaries Payable Salaries are commonly paid after the services have been received by
the business. This item reports such salaries which are due for payment to employees on the
date of the balance sheet.

 Taxes Payable These are the amount of taxes owed by the business on the balances sheet
date.

 Advance from Customers Often times, customers give advances. The firm receiving
such advances has either to supply merchandise, lender services, or refund the amount if it
fails to do so. So long as the merchandise is not supplied or service is not performed, the
amount of advance is a liability of the business.

LONG TERM LIABILITY TITLES

 Long Term Notes Payable These are amounts on signed notes due after one year from
the date of the balance sheet.

 Mortgage Loan Payable when some business, property like land or building is
pledged as security for loan it is called mortgaged loan payable. Such loans if payable after
one year from the date of the balance sheet are reported as long term liabilities

PROPRIETORSHIP OR CAPITAL TITLES

Owner’s (Name) Capital It is the amount of owner’s claim as of the date of the
balance sheet. This name of the owner and the amount of his capital are shown under his
heading.

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NEED OF SPECIALIZED JOURNALS

 Some of the reasons for using more than one journal are as follows:

 Recording of a large number of transactions in one journal requires more time and effort thus
will cause delay in recording.

 Handling of a large number of transactions will require the services of more than one book-
keeper. If three or four book-keepers are engaged in making entries in the same journal,
there are chances that:

o Services will not be utilized efficiently

o Fixation of responsibility will be difficult
o A transaction may get recorded twice

 Some transactions take place very often e.g sales, cash receipt, cash payment and
purchases etc. it is a waste of time, energy and space to make a separate journal entry for
like transactions which take place so frequently.

 In view of above, it can be said that a separate journal can be used for recording each for those
transactions which are of the same nature and are large in number.

SPECIAL JOURNAL Special journals are selected and designed to lift the needs of each business.
Not all business need exactly the same types of journals, but certain special journals can be used by
almost all kinds of business.

 Cash Receipt Journal It is used to record the amounts of cash received by the
business from all sources, from cash sales from customers paying on their accounts, from
loans, from additional capital invested by proprietors and from other sources.

 Cash Payment or Cash Disbursement Journal It is used to record all major

payments made out of business cash. Payments may be made by cheques drawn on the
business bank account or out of cash kept in hand.

 Cash Journal (Cash Book) It is used by some businesses to record in a single

journal all cash received and paid out.

 Petty Cash Book Small cash payments are recorded in this book.

 Sales Journal It is used to record credit sale of goods or services.

 Sales Returns & Allowances Journal It is used to record merchandise returned by

customers and allowances granted to customers.

 Purchases Journal It is used to record credit purchase of merchandise meant for re-sale.

 Purchases Returns & Allowances Journal It is used to record merchandise returned to

suppliers and allowances granted by suppliers.

 General Journal It is used to record all those transactions which can not be
recorded in any of the above journals.

Business Paper A transaction originates a business paper or business documents.

For example, when a firm receives cash from a customer a receipt is issued. This receipt is objective
evidence that the firm collected cash from the customers. And further, that collection of cash can be
verified through this receipt, later on. Business papers or documents are objective, verifiable
evidences of transactions. All transactions must be supported by such evidences.

Negotiable instruments The term negotiable means transferable in the ordinary course of
business. A negotiable instrument is an unconditional written promise or order to pay a certain sum in
money to a designated person or to his order or bearer on deemed or at a fixed or determinable future
time. There are four essential elements of negotiability in the definition. They are:

 The instrument must be in written (or printed) and signed by the maker and drawer.

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  It must contain unconditional promise or order to pay a specified sum in money.

 It must be made payable to a designated person or to his order or to bearer.

 It must be payable on deemed or at a fixed or determinable time in the future.

Types of negotiable instruments There are two types of negotiable instruments:

 Instruments which serve as cash or substitute for coins or currency e.g cheques and bank
drafts.

 Instruments which serve as a means of extending credit in a more definite and formal form
e.eg promissory notes and bells of exchange. They are used preliminary for the purpose of
deferring payment in currency.

Reasons for Preparation of Worksheet Income statement and balance sheet is to benefit
owners or manager of business, they must be prepared and available to them immediately after the
end of the accounting period to see that presently business is in good financial condition or not.
Income statements showing the results of operation for accounting period. At the end of accounting
period, these owners exert great pressure upon accountant for speedy preparation of accounting
statements. Because the journalizing and posting of adjusting entries is time consuming accountants
have found a way of postponing such journalizing and posting the worksheet.

Work Sheet The worksheet is a basic form on which the accountant arranges information for the
preparation of statements. The form provides columns for the number and names of accounts as well
as several paring of money columns. The worksheet is usually prepared in pencil. The worksheet is
a device sued by accountants to speed up preparation of financial statements. This is not an
accounting statement. It is simply a work paper or the account scratch pad.

THE ACCOUNTING CYCLE

Following steps are repeated in each accounting period. This over and over repetition is like the
unending circle of a cycle. That is why the combination of these steps is called ‘Accounting Cycle’.

 Journalize the transactions in the general journal on basis of supporting documents.

 Post the journal entries to ledger accounts.

 Foot the ledger accounts.

 Prepare Schedule of Accounts Receivable and Accounts Payable.

 Prepare a trial balance to check the accuracy of the ledger accounts (Pre-closing Trial
balance).

 Find out information for making necessary adjustments. On that basis prepare adjusting
entries in the general journal, and then post them to affected ledger accounts.

 Re-foot the ledger accounts affected by adjustments.

 Check the accuracy of making adjustments by preparing an ‘Adjusted Trial Balance’.

 Close all revenue and expense accounts by transfer to Expense and Revenue Summary
Account. To do so, prepare closing journal, and post them to affected accounts. Also make
the summary account by transfer to Capital Account of the proprietor, again prepare a closing
journal entry and post it.

 Rule off revenue, expense, and summary accounts.

 Re-produce the Expense and Revenue Summary account in the form of an ‘Income
Statement’.

 Balance and rule-off assets, liability, and proprietary accounts

 Check then accuracy of the above by preparing a ‘post closing’ Trial Balance.

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  Arrange the assets, liability, and proprietary accounts in the form of a ‘Balance Sheet’.

ADJUSTMENTS

The trial balance which is prepared immediately after posting in the ledger accounts is generally
incomplete in many respects. The account balance appearing therein cannot be used for determining
the profit or loss for an accounting period, without making necessary adjustment.

Adjusted Trial Balance

A large number of adjustments are made in actual practice. The correctness of the adjustment making
process is checked by preparing another trial balance. As trial balance is prepared after making
adjustment is called ‘Adjusted Trial Balance’.

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