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In the modern business world, transactions are made either on cash or on credit basis. To enhance sales, customers have to be lured with the facility of enjoying credit for a considerable period. If any purchase is made on credit, the buyer has to ensure the seller that the buyer shall make the payment later but within a definite period. It obviates a written promise by the buyer on a written document carrying his authorised signature.
An expenditure is a payment for sacrifice or the incurrence of liability to obtain certain benefits in return. Such benefits may be enjoyed in one accounting period or over a number of accounting periods. Such a concept leads to the classification of expenditure into two parts- capital expenditure and revenue expenditure.
Accounting always assumes the perpetual life of a period (i.e. going concern concept). However, for ascertaining true operating results the entire accounting life of an entity is split into the number of the smaller accounting periods (i.e. periodicity concept). On the basis of these two concepts, an entity classifies its entire transactions into two categories: capital and Revenue Transactions.
When transactions are recorded, some mistakes or errors may creep into the book keeping. These are either clerical errors or erors related to accounting principles. These may occur at the time of recording the transactions in the subsidiary books or at the time of posting journal entries into the ledger accounts. Some of these errors will affect the agreement of the trial balance and some others will not.
Still, some important transactions or non-regular transactions occur which have to be separately recorded. The Journal Proper or General Journal is used to record these transactions. Thus the latter records such transactions that can not be recorded in any other subsidiary journal.
Under the Accrual Basis of Accounting, income is recorded as income, when it is earned or accrued. For example, credit sale is recognized as sale irrespective of the fact whether cash has been received or not. Similarly, if expenses have been incurred but payment has not been made, it will be recorded as an expense. For example, the salary for the month of December 2016 has not been paid. It will still be recorded as an expense because it had become due.
The basis of accounting under which only incomes received in cash and expenses paid in cash are considered to ascertain the financial results and financial position of concern is known as Cash Basis of Accounting. The items of income which are receivable but not yet received will not be considered. Similarly, the items of expenses that are due but not paid will not be considered. But the items of incomes which are not receivable but received (i.e., Pre-received income) will be considered.
According to J.R. Batliboi, “A Trial Balance is a statement, prepared with the debit and credit balance of the Ledger Accounts to test the arithmetical accuracy of the books.” How to Prepare a Trial Balance: 1.The balances of all accounts (or the total of the debit side or credit of an account for total method) should be found out.
Eric L. Kohler has described a Trial Balance as ” A list of abstract of the balances or total debits and credits of the accounts in a ledger, the purpose being to determine the equality of posted debits and credits and to establish a basic summary of financial statements.” (A Dictionary for Accounts) A Trial Balance is prepared to verify whether this equality has been established. It is a statement on a separate sheet putting the debits on one side and the credits on the other side.
Ledger is the Principle Book of Accounts containing summaries of transactions taking place during a particular financial period. Identical transactions related to a particular thing or person or group of persons are recorded in the ledger account to ascertain the accumulated effect of the transactions. From the journal, similar transactions are sorted out.
A petty cash book is a subsidiary book in which all the small payments or petty expenses (Postage, Paid for cold drinks, printing, charges, Stationary, office files, conveyance) are recorded. There are no petty (small) payments to be made every day. If all these small payments are recorded in the main cash book then it (main cash book) will become bulky. Hence, a petty cashier is appointed to make all such petty payments.
What is Cash Book: The cash book is nothing but the cash account removed from the Ledger and bound in a separate book for the sake of convenience. Receipts are entered on the Debit side and subsequently posted to the Credit side of appropriate accounts. Payments are entered n the Credit side and subsequently posted to the Debit side of appropriate accounts. It is the primary book of entry and performs the function of both Journal and Ledger at the same time.
Ruling format of Journal entry: As shown in the specimen, a journal contains five columns for (1) Date, (2) Particulars, (3) Ledger Folio, (4) Debit (Dr) Amount, and (5) Credit (Cr) Amount. now let us try to understand these ones by one. Date: In this column, the date of a transaction is recorded with its month and year. The year is written first on the top. In the next line, the month and date of the entry have recorded the sequence of the dates and months are maintained.
What is Journal Entry in Accounting : The word journal comes from the French word ‘jour’, which means daybook. The word ‘journal’ is associated with the word ‘jour’ and the word ‘nal’.Journal is an important part of accounting. ‘Journal’ is useful in every way of accounting. The journal is the book of accounts in which the various transactions of the organization take place, the first of which is recorded in the journal, hence the journal is called the primary book.
Golden Rules: 1.Personal Account: Debit the Receiver. Credit the Giver. 2.Real Account: Debit: what Comes in. Credit: what Goes out. 3.Nominal Account: Debit: Expenses and Looses. Credit: Incomes and Gains. Debit and Credit are two opposite terms. In simple words, debit refers to the left side of an account and credit refers to the right side of an account.
Explanation of the double entry system: Sir Isaac Newton, the great scientist invented that “to every action, there is an equal and opposite reaction.” The double entry system of bookkeeping developed on the same idea. Although its time of invention is a matter to be traced from the blurred pages of history, Luca Pacioli first advocated it in 1494. The double entry system establishes that each and every transaction has two sides- ane, the giving side, and the other, the receiving side.
Introduction of accounting cycle: It is a complete accounting procedure which repeated in the same order during ane accounting period. Normally a cycle means the occurrence of recurring events in a particular sequence. In accounting, different activities are repeatedly involved in identifying transactions, classifying or summarising them and recording them.