prominent Definition of Book-keeping: t authorities. The ifferen' The term book-keeping has been defined by differe' among them are as under ‘ jence and art of ig the sci insactions that According to R.N, Garter, "Book-keeping IS fe ee tra Correctly recording in the books of account all those . result in the transfer of money or money's wort f recording business According to J. R. Batliboi, “Book-keeping Is the art 0" dealings in a set of books of recording ¥ 4 jence L.C. Cropper has described Book-keeping as, ‘the Sclenee any transactions in money or money's worth in such a manner thal that when required Gate, their nature and effect may be clearly understood, and thal 2 combined statement of their results may be prepared”. , ina k ience Thus, the above definitions make it clear that Book-keeping i a feat and art of ding financial transactions in the books of accoun! frend and systematic manner so that the net results of the ‘operations and the financie Position of anventity can be ascertained at any time. In other words, Book-keepin art of recording business transac or money's worth in the books of account in a ~ Systematic manner so that it may help the business to ascertain its result of operation after a given period. ~ Objects of Book-keeping: Records of business transaction are kept with certain objective. The following are the objects of Book-keeping: dl {a} Complete and permanent record: To have a complete and permanent record of each transactions of the business for future reference, it is necessary to put all-business transactions in writing, 1 b)-Ascertaining the amount of Debtors: Where the goods are sold on credit "the party to whom goods are sold are called debtors. In order to ascertain the amount owing by them to the business, recording of such transactions are necessary. (c) AScertaining the amount of Creditors Where the goods are purchased on ~~ credit, the party from whom goods are purchased are Called creditors. In order to ascertain the amount owing to them by the business, recording of such transactions are necessary, (d) Ascertainment of Profit/Loss: Each and every business ig cartied on with the object of earning profit. In order to ascertain the profit ®arned or loss suffered by a business during a given period, a systematic fecord of the transactions are necessary."<> prepared to test ne aruniuew— Meaning of Accounting: Th ctivities. The 4 : A business entity engages itself in a number of ed or rendering services 1s or sale of 9 The existence be in the form of manufacturing activities . The ultimate motive of sae on such activities is to earn yi business and continuation of a business depends on its ability to earn a (or loss incurred) is, therefore, interested to find out the amount of profit ere amount of profit during a particular period. For the purpose of ae f business transac- ®arned (or loss incurred), a complete and systematic record of iness in having a tions are required to be maintained. Accounting helps 4 busines: iid iésuks complete and systematic record of its business transactions, reporting ntrol of Of its operation and interpreting such results for the purpose of effective co future operations or activities. ‘ f counting is a man-made activity which has evolved over 2 period © time’{It is @ systematic exercise carried on for the purpose of recording, summarising and interpreting the results for the users of the information. e activities may Definitions: The term accounting has been defined by different authorities as under: According to R. N. Anthony: “Nearly every business enterprise has accounting system. It is a means of collecting, summarising, analysing and reporting in monetary terms, informations about business.” According to Smith and Ashbume: “Accounting is a means of measuring and reporting the results of economic activities.” (ico to American Institute of Certified Public Accountants: nting the art of recording, classifying and summarising in a Significant manner and in terms of money, transactions and events, which are, in Part atleast, of a financial character, and interpreting the results beret”)INTRODUCTION TO ACCOUNTING 1.6 Di istinction between Book-keeping and Accounting : Book-keeping and accou \ inting should not be confu 'nvolves the recording of busi | ond hd Sepoutang e Aiea used} ness transactions, but accounting is a broader term ‘Or entire accounting system. To be more Specific, book-keeping is a part of Accounting just as ak gebra is a part of mathematics. Following are the differences between book-keeping ahd Accounting . 1. Meaning 2. Object Points of Distinction fa Book-keeping A process of recording financial transactions in the books of account. ‘The object is to record the transactions in the books of accounts, Its scope is limited) It is concerned mainly with recording although it includes journalising, ledger posting, balancing of accounts and preparation of trial balance. The clerical works relating to recording etc. is done at this level. It is useful for recording and preservation of transactions. No significant managerial decision or managerial use can be made out of it. itis merely a primary record of the business transactions. It does not give final shape to the — accounting information system. ‘Accounting A process of measuring, intetpreing and reporting recored financial transactions to the interested parties. The object is to classify, summarise and interprete the business transaction to find out the accuracy of recorded data. It has wider scope) as compared to book-keeping. It comprises preparation of trading and profit and loss account and balance sheet. Accounting is related to feporting and interpretation of recorded data. It is useful for taking decision by the various user groups interested in the financial statements of an entity. Accounting is a source of financial information. It gives final shape to the accounting information system because the information furnished can be used for decision makin, 9S.ACTICE OF ACCOUNTANCY 1.16 THEORY AND PR Advantages/Uses of. Accounting: Accounting has the following advantages : sith itl Be Blas iplete and Systematic Record ; As the number aa Aions iat, J i each every ‘na business is numerous, it is Not possible to remember ¢ a ait fia, Accounting keeps a systematic record of all the any aid ie ize8 in order to provide a true picture of the activities iness Seiad of proper accounts help in (i) Rscertainment of Profit or Loss : Manone the profit and loss account, Seana ration of profit & loss account. By preparing , 7 the = of operation of the business can be known) The information regarding profitloss is of great use to the owners and various other interested parties. ( (ij Ascertainment of Financial Position : The financial position of the business [an be ascertained by preparing a statement called Balance Sheet at the end of each accounting period. Again, the preparation of this statement is possible only when proper accounting records are available. (iv) Evidence in Legal Matters: In case of disputes, properly maintained accounts, supported by authenticated documents, are accepted as a piece of evidence even by the court of law. zest Assessment of Tax Liability : Accounting records are of great help when the firm is assessed by the tax authorities — both income tax and goods and services tax (GST). Accounting records audited by qualified chartered accountants are_accepted by tax authorities as correct. (Avi) ) Helpful to Management : Accounting provides i i janagement én are required for the at eee eee : purpose of planning, control and decision making f the smooth functioning of the business. ed (vii) Helpful for raising Loans: Accounting i i 5: ig information is of great i raising loans from banks and other financial institutions. The financial = hi ‘end money on the basis of profitability and soundness of the business sracriies The profitability and financial soundness can be measured by the trading, t and loss account and balance sheet, the financial results of books o peste (vill) Valuation of business: In case of sale of business or ¢ ee Onversion of business from one form into another, tru » true and fe calculated. Through accounting, the correct er aiue of the business is shows the value of assets and liabilities of calculate its net worth.. ee cag ee“Wr ey weiner suAeETNENS CaMNOt be prepared. BASIC ACCOUNTING TERMS There are certain basic terms which are used in the business world daily. These are called accounting terms. It is essential to understand these terms as they have their specific meaning in Accounting. These basic terms are calied accounting terminology : (Pi Proprietor: (Proprietor is the individual or group of persons who own a ness. All the business risk is undertaken by them as the required amount of capital is provided by them.)The proprietor gets the reward for the risk undertaken by them in the form’of profit. If the business is owned by only one Person, such business is called sole proprietorship business and the owner is called sole proprietor or proprietor. If the business is owned by more than one person, it may take the form of partnership, company or co-operative form ofone is used to mean an organisation ; ‘entity’ is an abstract one. It is. us rs. Accounting is ion hae : tee ae different identify from_its eae entity usually Siways done for an entity may be a Bora Brothers, aeaeice a i 9 i xam| " . iatic ic. Ti, Gand Coa College, Aasam Cricket Association e! _ organisations have different identity from its oe Feeriecild in a Capital : The amount brought in by the seat sh itis the amount Sines enterprise for carrying on the business is vest in the business. On Sere oy ee Men Gt ore SRR eo AURA) Cake Closure of the business, the capital amount is paid back to 5 is also known as Owner's Equity or Net Worth or Net Assets. {3yDrawings : Amount of cash or value of goods withdrawn pated en “he ‘business for personal use or for any private purpose is called di Nis a y Payment made for personal purpose of the proprietor out of business fun : = included in drawings. For example, income tax paid by sole proprietor, rent o} residence of the proprietor, tuition fee of proprietor’s children paid out of business fund etc. 9 goods or services Land, Building, Plant 'g-trm Investments etc. cattle, horses, elephants Sets. Fixed assets may be and are not meant for resale. Examples of fixed assets are and Machinery, Motor Vehicles, Furniture, Live Stock, Lon, Examples of livestock are Domestic animals such as. etc. Fixed assets are also termed as Non-current As: Tangible and Intangible in nature. Le} Tangible Assets : Tangible assets are those assets which touched and have physical existence. For example; Land, Bidar Poor “ald Machinery, Furniture, Computer, Motor Vehicle, Investments, Stock, Coutan Intangible Assets : Intangible assets are those assets whi have a physical existence and which cannot be seen Or touched, Eee pie ae Goodwill, Patents, Trade Marks, Copyrights, Computer Sofware ana n oe : Expenses.INTRODUCTION TO ACCOUNTING 4.24 way Current Assets : Current assets are those assets which are meant for sale or which can be converted into cash within one year. As such, these assets are also termed as ‘short-lived or active assets’. Current assets are also known as floating assets or circulating as the amount and nature of sucit assets keeps changing continuously. For example, ‘Debtors’ are converted into cash within a Teasonable short period, Stock is continuously sold and Bills receivables are also converted into cash. Although ‘Prepaid Expenses’ will never be realised in Cash, these are also included in Current Assets since the service or benefit will be available against these without further payment. (e) Liquid Assets : Liquid assets are those assets which can be converted into cash within a short period. For example; cash in hand, cash at bank, debtors, bills receivable etc. In other words, all current assets except stock and prepaid expenses are considered as liquid assets. (f) Wasting Assets : Wasting assets are those assets which get exhaust through being worked or used. For example; mines, oil fields. A coal mine becomes valueless once the whole of the coal is extracted. (g) Contingent Assets : A contingent asset is a possible asset that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise. For example; Court case for compensation filed by the company against others. The company does not know with certainty whether the case will be decided in favour of the company or not. If the case is decided in favour of the company, the company will be entitled to receive the compensation. Therefore, on the balance sheet date, such item is treated as contingent asset. \Wy Fictitious. assets: Fictitious assets are those assets which cannot be realised in cash or no further benefit can be derived from these assets. Such assets include the expenditure not yet written off such as Advertisement Expenses) In case of company form of business fictitious assets include discount on issue of debentures, Cost of issue of shares and debentures, etc. These assets are not really assets but are temporarily shown on the Assets side only for the Purpose of transferring them to the Profit and Loss Account gradually over a Period of time. The amount which the firm is required to pay in future to is known ~ 8 liability. It is the future monetary obligation of the enterprise. ligatic of the enterprise may be divided a eerste. The‘stuaaten (i) Internal Liabilities: The obligation of the business to the owner is called internal Liabilities. Examples of internal liabilities are capital, accumulated/ tar gs f See S 1 A A Se oe 2(12)) Debtors : The term ‘Debtors’ represent those persons or firms to whom is have been sold or services rendered on credit and the payment has not been received from them. In other words, Debtors are the persons or firms from whom the payment is to be received by the business in future or in due course of time. For example, if goods worth & 8,000 have been sold to Geeta on credit, she will continue to remain as debtor of the business so long as she does not make the full payment. ¥ (13 ‘Bad Debts : The portion of amount receivable from debtors, which is verable is called Bad Debts. in other words, the amount which debtors fail° : The term ‘Creditors’ represents those persons or firms from whom have been purchased or services received on credit and payment has not been made: Creditors are the persons or firms to whom some money is still owing by the business. For example, if Mr. Hari purchases goods worth 12,000 from Mis. AB & Co. on Credit, Hari will continue to remain as creditor of the M/s. AB &0. 80 long as, the full payment is not made by Hari to M/s. AB & Co.Returns or Returns Outward: When goods were purchased on it earlier and if for some reasons any of these goods are retuned to the Supplier, such returns are termed as ‘purchase retums’ or ‘returns outward’.ewer et eeweeey crery manure change which occurs ji business is a transaction”. in your Business Transaction{A monetary event which is related to a business is called _business | ion,) All business activities may not be an accounting activity So, every activity of a business is not recorded in the books of : 2 account( For example, placing an order for purghase of goods. in accounting, only the business transactions are recorded./in other words, every activity of financial nature having documentary evidence, measurable in terms of money, causing1.30 THEORY AND PRACTICE OF ACCOUNTANCY an effect on assets, liabilities, capital, revenue or expenses is termed as business transaction. = Features of a Business Transaction: (a) Business Transaction must be between two parties or two accounts. (b) Business Transaction must be financial in nature. (c) Business Transaction must be measurable in monetary terms. (d) Business Transaction must be supported by documentary evidence (e) Business Transaction must cause an effect on assets, liabilities, capital, revenue or expenses. Winetration 1. State with reasane whathas who en,ot INS YE ENNNOANUIUNS = | 3.29 Classification of Accounts : For the purpose of rec Classification of accounts ounts essary. TI approaches for classification of accounts or account fie teva he (A) English Approach or Traditional Approach; and (B) American Approach or Modern Approach. These are discussed below: (A) English Approach or Traditional Approach: ‘ording and ascertaining the two-fold effe (account heads) are ne tp Traditional Classification of Accounts Personal accounts i Impersonal accounts Natural Artificial Representative Personal A/c Personal A/c Personal A/c Real accounts Nominal accounts (Revenue and Expenses accounts) The above classification is explained below: (@) Personal accounts: Account heads pertaining to persons, firms, companies, Srenieatons, etc, are called personal accounts. Personal accounts are further clas d into the following catego! 3 (i) Accounts of Natural persons: Account heads recording the transactions of individual human beings fall into the category of natural persons. For example; accounts of Ram, Jadu, Suresh, Jayanta, Raju etc. (ii) Accounts of artificial persons : Accounts recording the transactions concerning a firm, company, institution, association, organisation etc. fall into this category. For example, Gauhati Commerce College Alc, J. B. College A/ c, Army School, Narangi, M/s. Baruah Brothers A/c, Assam Tea Company A/ ¢, Oil India Ltd. A/c., State Bank of India A/c, N. F. Railway A/c, Gauhati Club Al, etc. (iii) Representative Personal Accounts : Representative Personal Accounts are the accounts which represent a certain person or a group of persons although the name of the concerned person or persons are not mentioned in the account head) Such type of account head occurs in cases of outstanding ses, prepaid expenses, income receivable and income received in advance. ‘or example, Wages outstanding A/c, Outstanding Salary A/c, Salary Prepaid ‘Alc, Unexpired Insurance or Insurance paid in Advance A/c, Commission Received in Advance A/c oe)3.30 THEORY AND PRACTICE OF AUUYUN IT Note: When any ‘Prefix or ‘Suffix’ is used before /after any nominal account head, such account is classified as Representative Personal Account under Traditional approach. For example, Salary A/c is a nominal account whereas Outstanding Salary A/c is a Personal Account as the word; ‘Outstanding’ has been used as a prefix to Salary A/c. (b) Real Accounts : The ‘account heads’ recording transactions relating to tangible things (which can be seen, touched or physically exchanged) such as goods, cash, land, building, machinery, etc. are classified as real accounts. lt may be mentioned here that there are some intangible items which do not have a physical shape and which cannot be seen or touched but the presence can be felt and can be bought and sold. For example; goodwill, patents. trademarks, copyrights, etc., They also fall within the category of real accounts. (c) Nominal Accounts. The accounts recording transactions relating to losses expenses, incomes and gains are classified as nominal accounts. For exam iS Salaries, Wages, Rent paid, Discount allowed, Discount Received Commi a paid, Commission Received, Interest paid, interest received etc ; ission— (B) American Approach or Modern Approach: According to the American approach or Modern ay } ipproach, accounts Classified into five categories as under: ete American or Modern Classification of Accounts Assets Liabilities These are explained below: (a) Assets Account: Assets account are the accounts of assets and properties such as land, building, plant, machinery, patents, Cash in hand, cash at bank investments, inventory, etc. held by an entity. This Category also includes the accounts of debtors. Capital Revenue Expense (b) Liabilities Account: Liabilities accounts are the accounts pertaining to the liabilities of the entity to lenders, creditors for goods, creditors for assets, creditors for expenses, etc. (c) Capital Account: Capital is the amount with which the business is started. It is the account of the owner who invests money in the business as capital. In case of sole proprietorship business or partnership firm withdrawal by partners is termed as Drawing and is also classified as Capital account. (d) Revenue Accounts: Revenue Accounts are the accounts of incomes and gains. For example, sales, discount received, interest feceived, commission received etc. These accounts are taken into account for preparation of Trading & Profit and Loss Account. (e) Expense Accounts: Expense Accounts are the accounts of expenses incurred and losses suffered by an entity. For examples; purchases, wages paid, depreciation, rent paid, rates and taxes, etc. Like revenue account, expense accounts are also taken into account for preparation of Trading & Profit and Loss Account. illustration 14. Classify the following accounts according to Modern Approach: (i) Land; (ii) Building; (iii) Investment; (iv) Furniture; (v) Machinery; (vi) Goodwill;fot USed IN Gao were — RULES FOR DEB! IT AND CREDIT e accounts to be debited or plied with reference two approaches licable for debit Rules for debit and credit tells us about th credited in respect of a particular transaction. The rules are apy to the class of accounts affected by a transaction. As there are for classification of accounts or accounts heads, the rules app! These are explained below: and credit also different (A) Under English Approach or Traditional Approach: The rules for debit and credit Under English Approach or Traditional Approach it’. These rules are as under : are termed as ‘Golden Rules of Debit and Credit’. {i) In case of Personal Accounts: Debit the Receiver of the benefit. Credit the Giver of the benefit. (ii) In case of Real Accounts: Debit What comes in. Credit what goes out. In case of Nominal Accounts: Debit Expenses and Losses. Credit Gains and Incomes. (A) Under American Approach or Modern Approach: The rules for ‘Debit’ and ‘Credit’ applicable for each of under American or Modern Approach are given below: an Sos (a) Assets Account: (i) When there is an increase in the Asset, it is ‘Debited’ (ii) When there is a decrease in the Asset, it is ‘Credited’RECORDING OF TRANSACTIONS - | 3.35 (b) Liabilities Account: (i) When there is an increase in the Liability, it is “Credited” (ii) When there is a decrease in the Liability, it is ‘Debited’. (c) Capital Account: (i) When there is an increase in the Capital, it is ‘Credited’. (ii) When there is a decrease in the Capital, it is ‘Debited’ (d) Revenue Account: (i) When there is an increase in the Revenue, it is ‘Credited’ (ii) When there is a decrease in the Revenue, it is ‘Debited’. (e) Expense Account: (i) When there is an increase in the Expense, it is ‘Debited’. (ii) When there is a decrease in the Expense, it is ‘Credited’. The rules for ‘Debit’ and ‘ Credit' as applicable under Modern classification is summarised below: [ano | ian acount | Winn ob i | a ei Fe | tities Aun Sc Rei DecuJournal: _Journal is a_b¢ book of original entry ir entry in which transactions are originally recorded in chronological order (in order in order of c date) from the vouchers showing the accounts to be debited and credited in_a systematic manner. Thus, the Journal provides a date-wise record of all the transactions with details of the “accounts _and amounts debited and credited for each transaction with a short explanation following the rules of ‘Debit’ and ‘Credit’. The word ‘Journal’ has been derived from the French word ‘JOUR’ means daily records. Journal is a book of f primary entry for daily records. Firms having limited number of transactions, record them in one primary ‘book called Journal and post them to the concerned ledger accounts. Firms having large number of transactions, maintain some special purpose books such as Cash Book, Purchases Book, Sales Book etc. in addition to Journal proper and post them to respective ledger accounts.Features of a Journal : The chief features of journal are as under : sar Original entry: Journal is a book in which the transactions are recorded . as and when they take place. Hence, it is called a book of original entry. J First step of double entry system: Recording of transaction in journal is a first step in the process of Double entry system) Both the debit and credit aspects of every transactio transaction is recorded in the journal according the double entry system of book-keeping. Chronological order: \n journal, transactions are recorded in a Cc nological order, i.e. in order of date. Daily record of transactions: A journal is a daily record of transactions t ‘aking place on a particular day. xplanation in every entry: Each entry in the journal is followed by a brief explanation of the transaction which is called ‘Narration’. (f) Book of primary record: A journal is only a book of primary entry. All the transactions recorded in the journal are subsequently transferred to the principal book of accounts i.e. ledger.Advantages/Utilities of a Journal: intain a journal an‘ is, the recording of .d the transactions can be Although it is not necessary to mai transactions in journal recorded directly in the ledger account: has the following advantages: : (a) Immediate Record: As the transactions are ente nd when they take place, the the ‘books of accounts is reduced to a great extent. . ( Easy location of transaction: AS transactions in journal oa ea ded in chronological order, it is very easy to locate a particular transaction as and when required. i _ i fr i : Sit h and every transacti 0 (0) Easy posting to ledger: The analysing eacl : debit and credit aspects, the journal facilitates the easy posting into red in the journal as n of a transaction in Jedger. . dy Facilitates cross checking: As the transactions are posted in the ledger from journal, it facilitates cross checking of ledger accounts in case a trial balance does not agree. Permanent Record: Since all the transactions are recorded at one place in the journal, the identity of each transaction is maintained on a permanent basis. Journalising: Journalising is the process of recording the dual aspects of the transactions _in Journal. In other words, recording of entries in the ‘journal’ is known as journalising. Each and every entry recorded in the journal is followed by a short explanation called ‘Narration’. The narration must be short, complete and clear. Entry: The term “entry” means entering a trasaction in Journal or in the books of original entry. 4 Process of Journalising/ Steps involved in Journali: ing: The process of journalising means the Steps to be foll i it lowed fe the account heads to be debited/credited for a particular transection: ahaa three steps involved in the process of Journalising a tran oe ere are. Step 1: Identification of ‘Accounts’ or ‘Account heads’ affected by the transaction. Step 2: Classification of accounts or account heads. . Step 3: Application of Rules for Debit ang Credit.RECORDING OF TRANSACTIONS - | 3.45 These are explained below: (i) Identification of accounts or ‘account heads’ affected by the transaction: Transaction are recorded in the books of account under different accounts or account heads. From the given transaction(s), Accounts or Account heads affected by the transactions will have to be identified correctly. Incorrect identification would lead to incorrect recording of transaction. (ii) Classification of accounts or account heads: Next step is to classify the identified accounts or account heads affected by the transactions either according to English approach or Modern approach. (iii) Application of Rules for Debit and Credit: Next step is to apply the rules for Debit and Credit to ascertain the account(s) or account head(s) to be Debited and Credited for recording the transaction.RECORDING OF TRANSACTIONS - | LEDGER Introduction : Although journal is a chronological record of all business transactions, yet it cannot provide all information regarding a particular account at one place. The journal cannot show the net effect of various transactions affecting a particular person, asset, revenue and expense. For example, if a trader wants to know the amount due to a particular supplier or the amount due from a particular customer, he will have to go through the whole journal. It would be a tedious and time consuming process. To overcome this difficulty, another book of account, in addition to Journal / special purpose books, is maintained. This book is called ‘Ledger’ [meaning : Ledger is a book of account which hich contains a condensed and — record Of all transactions of the business posted from the ji the book of final entry, since all transactions are ultimately reco aceon in the ledger. In this book, separate accounts are opened for each ‘account head” and all transa lating to a particular ‘account head’ will be posted in t in that concerned pe of revenue, expenses asset and lia liability is opened in the ledger. For example, ail transactions relating to a particular supplier; say Mukesh, will be posted to the account of Mukesh. This helps in ascertaining the amount due to Mukesh. ae : According to William Pickles, ‘A ledger is the most important book of account and is the destination of the entries made in SUORFOLY. books.”because no other book of account can supply all the informauur me rugs. Utility/Importance/Advantages : i ition regarding The ledger is the main book of account, which contains informal all ‘account heads’. It gives necessary information regarding various accounts, The asset accounts in a ledger show the value of various assets held by the business. The revenue and expense accounts show the sources of various income earned and expenses incurred respectively. It facilitates the preparation of final accounts. It provides information on the amount due to creditors and the amount receivable from debtors. ; The-ttilities/importance of ‘Ledger’ can be summarised as follows : (a) Condensation of Scattered Information ; The ledger brit Scattered information from the ‘Journal’. Jt shows the condensed informe under each account head. 7 Full Information at a glance : As the ledger records both the debit ape credit aspects in two different sides, the complete position of an account can be ascertained at a glance. _eo(c) Balance : At the end of a specified period, the net effect of transactions ‘On a particular ‘account head’ can be ascertained by finding out the balance of that account. For example, how much is due from a customer or how much is payable to a creditor or what is the total amount of purchases or what has been the expenditure on different heads? All these information can be ascertained by balancing the accounts appearing in the ledger. (d) Trial Balance : As both the aspects are recorded, the net debit effect ang the net credit effect on the accounts must be equal on a particular date. This ts verified by preparing a statement called trial balance. This is possible only if the ledger accounts are maintained. (e) Preparation of final accounts : Ledger is the “store-house” of all information relating to the transactions. It facilitates the preparation of a Trading and ‘Profit and Loss Account’ from the balances of revenue and expenses accounts. It also facilitates the preparation of a ‘Balance Sheet’ from the balances of assets, liabilities and capital accounts.Meaning of Posting: Posting is a process of transferring debit and credit aspects of the entries appearing in the journal and other books of original entry fo thé debit and credit relevai ounts in the ledger. tings are made using the word ‘To’ and ‘By’ as a prefix on the debit side and credit side res; 7 of posting is to make ified and summerised record of “alr business transactions under appropriate account heads : Basic rules to be followed while posting the transactions in the Ledger: The following basic rules are to be observed while posting the transactions in the ledger: (a) Separate accounts should be opened in the ledger for posting the diffe’ent trans stions recorded in the Journal. (b) All thé transactions pertaining to one account head’ should be posted to that accourit. (c) Two aspects of the business transaction namely - debit aspect and credit aspect — should be posted on the debit side and credit side of the account respectively.DEIANCS OF GN GLCOUNE SHOWS WIG PUSHION OF af account On a4 particular Gay. Procedure for balancing of an account: The following procedure is to be followed for balancing of an account: (i) Totalling the amount columns outside: On a rough sheet of paper, the total of the amount column of two sides of the account concerned are to be ascertained. (ii) Determining the balance: The difference of the total of two sides, called balance is then found out. (iii) Entering the balance 011 the smaller side : \f the total of the debit side is more, the difference is to be put in the amount column on the credit side, by writing the words ‘By Balance c/d’ in particulars column. If the total of the credit side is more, the difference is to be put in the amount column on the debit side by writing the words ‘To Balance cid’ in particulars column. This will be done on the date of balancing and the date will be entered in the date column. (iv) Totaling both the columns: After putting the difference in the appropriate side of the account, both sides of the account is to be totalled. The total of both the sides will be equal. A thin line above the total and two parallel lines below the total is to be drawn. (v) Taking the balance on the opposite side: Lastly, on the next day of the balancing, the debit balance will be written on the debit side by writing the words ‘To Balance b/d’ in the particulars column. Similarly, the credit balance will be brought down on the credit side by writing the words ‘By Balance b/d’ in the particulars column. If the Balance b/d (brought down) appears on the debit side, it indicates that the account has a Debit Balance. On the other hand, if the balance b/d (brought down) appears on the credit side, it indicates that the account has Credit Balance.TRIAL BALANCE AND RECTIFICATION OF ERRORS TRIAL BALANCE Meaning: According to the transaction, , Principle of double entry system of book keepi i ping, in an So ee einccourt in the ledger is debited with an amount, srtBer pith lates de must be credited with the same amount. The two accounts ingte Wrist be pe Lhe be in balance i. if. an account shows debit balance, *anncint thie Te Re er. account whit should show credit balance for the same Bat Biko in the le in the case of not only éniries relating to one transaction, Ni case of entries relating to a number of transactions in the ledger. lo matter how many transactions are recorded or how many accounts are there in the ledger, the condition of equality of the sides of the ledger accounts must always be maintained. That is, if the transactions are properly entered, total of the amount of accounts showing debit balance will be equal to the total of amounts of accounts showing credit balance. This is what is meant by the statement that ‘the ledger should always be in balance’. All the business entities after completion of postings from journal/subsidiary books to the ledger, want to verify the accuracy of the postings made in the ledger. For this purpose, a statement called Trial Balance is prepared to test the correctness of posting and arithmetical accuracy of the entries in the accounts. ition: The term ‘Trial balance’ has been defined by different authors. Some of the are as under: Accordi arter, “Trial Balance Is the list of debit and it also includes the balances of ee 7" P ies jing to William Pickles, “The statement prepared with the help of balances, at the end of financial year (or at any other date) to find out letiorer debit total agrees wih credit ‘otal is called Trial Balance.” ing to J. R. Batliboi, “Trial balance is a statement, prepared with the debit and credit palances of ledger accounts to test the arithmetical accuracy of ad ds list of balances, both debit and i schedule or (Tair srl nw st Se order to tost wheter te a trial ‘from. the accounts. 10ICE OF ACCOUNTANCY y AND PRACT! 42 THEOR ited from the original records into ‘ been correctly pos! the. transactions have uracy of the ledger. be GET aE im totals of the ti, balance are equal, it Fe If the oath postings have been properly made and the books gf a presumed thal lly accurate. If the trial balance disagrees, it reveals the preg’ Si ornare which must be located and rectified. PSE, of Features/Characteristics of a Trial Balance: The following are the features of a Trial Balance: . it is ly a statement prepa, tatement: The trial balance is merely a PATE op ~" Separate ae of paper. It is neither prepared in the journal nor in the ledger” 5} Wot @ part of the Double entry system: The trial balance is not Part of “tne double entry system. Method of recording or posting of transactions hag nothing to do with the preparation of trial balance. Periodicity of preparation: The trial balance is prepared at the end of certain period, namely, a.day, week, month, quarter-year, half-year, one Year, ete ©) Arithmetical accuracy: The trial balance is a means through which the arithmetical accuracy of the books of accounts can be tested. it a conclusive proof of accuracy: Even if the trial balance agrees, it ‘nnot be said with certainty that the books of accounts are correct in all respects. Objectives advantages of Preparing a trial balance: The following are the objectives/ advantages of Preparing a trial balance (i) To Check Accuracy of Ledger Accounts : The Preparation of trial balance fovides an opportunity to check the arithmetical accuracy of ledger accounts. (@) Helptul in detection of Errors : Trial balance helps in locating errors of Posting and casting in the subsidiary books and Ledger. ) Summary of each Account : Trial balance shows the summary of each account in Ledger. It provides a condensed picture of each account in the ledger hence it is a source of information, in a condensed form, of the position of every int. Nr Kapaa Of required adjustments : The ji i | it a t Preparation of trial balance facilitates the identification Of the items for which adjustments are required. Helps in preparing Final account: Final accounts can be prepared easiY the preparation of tral balance, The tial ba ing link i and final accor lal balance acts as a connectingMethods of Preparing Trial Balance: There are three methods of preparing trial balance. Hine a followed, the total of both the debit and credit columns of the trial oe be equal. The following are the methods which can be used for prep: ig balance : __() Balance method __{ii)Total Amount method _Aiit) Total and Balance method.44 EIR Le 8 ee cite ee ey INCY os Not tact POM (i) Balance Method: Every account in the ledger has both debit ang Credit y At the end of a certain period, ledger accounts are balanced. There m ts some account which show debit balance, some accounts which show Cre balance and some accounts which do not show any balance. Under Dalangg method, only those accounts which show balances are written in the trial Dalancg along with the amount of balances. Accounts showing debit balances are Written on the debit side and accounts showing credit balances are written on the credit side of the trial balance. The accounts which do not show any balance are ng written in the trial balance under this eps once. (ii) Total Amount Methoa: U Stile ethod, the total of the debit side and credit side of every account is separately written in the debit and credit colum of the trial balance. Therefore, the names of all accounts which appear in the ledger is written in the trial balance. (iii) Total and Balance Method: Under this method, both the balance and to! of both sides of the accounts are shown in the same trial balance side by side The amount column is divided for writing the total and balance of the accounts The total of the debit and credit of balance columns must be equal. Again, te total of both sides of total columns must be equal. Of course, the total of a trial balance will be different under differe methods but the total of debit column and that of credit column under each ° the methods will be equal. BO ie ee ee ge gt ee