Definition and Explanation:
From time to time the balance shown by the bank and cash column of the cash book required to be checked. The balance shown by the cash column of the cash book must agree with amount of cash in hand on that date. Thus reconciliation of the cash column is simple matter. If it does not agree it means that either some cash transactions have been omitted from the cash book or an amount of cash has been stolen or lost. The reason for the difference is ascertained and cash book can be corrected. So for as bank balance is concerned, its reconciliation is not so simple. The balance shown by the bank column of the cash book should always agree with the balance shown by the bank statement, because the bank statement is a copy of the customer's account in the banks ledger. But the bank balance as shown by the cash book and bank balance as shown by the bank statement seldom agree. Periodically, therefore, a statement is prepared called bank reconciliation statement to find out the reasons for disagreement between the bank statement balance and the cash book balance of the bank, and to test whether the apparently conflicting balance do really agree.
Causes of Disagreement Between Bank statement and Cash book:
Usually the reasons for the disagreement are:
1.
That the banker might have allowed interest which have not yet been entered in the cash book.
2.
That the banker might have debited the account for any such item as interest on overdraft, commission for collecting cheque, incidental charges etc., which we have not entered in the cash book.
3.
That some of the cheque which we drew and for which we credited to bank account prior to the date of closing, were not presented at the bank and therefore, not debited in the bank statement.
4.
That some cheques or drafts which the organisation have paid into bank for collection and for which debited the bank account, were not realised within the due date of closing and therefore, not credited by the bank.
5.
The banker might have credited the account with amount of a bill of exchange or any other direct payment into bank and the same may not have been entered in the cash book.
6.
That cheques dishonoured might have been debited inthe bank statement but have not been given effect to in to the books.
Saturday, January 14, 2012
Cash Book
Cash book is a book of original entry in which transactions relating only to cash receipts and payments are recorded in detail. When cash is received it is entered on the debit or left hand side. Similarly, when cash is paid out the same is recorded on the credit or right hand side of the cash book.
The cash book, though it serves the purpose of a cash book of original entry viz., cash journal really it represents the cash account of the ledger separately bound for the sake of convenience. It is more a ledger than a journal. It is journal as cash transactions are chronologically recorded in it. It is a ledger as it contains a classified record of all cash transactions. The balances of the cash book are recorded in the trial balance and the balance sheet.
Vouchers:
For Every entry made in the cash book there must be a proper voucher. Vouchers are documents containing evidence of payment and receipts. When money is received generally a printed receipt is issued to the payer but counterfoil or the carbon copy of it is preserved by the cashier. The copy receipts are called debit vouchers, and they support the entries appearing on the debit side of the cash book. Similarly when payment is made a receipt is obtained from the payee. These receipts are known as credit vouchers. All the debit and credit vouchers are consecutively numbered. For ready reference the number of the vouchers are noted against the respective entries. A column is provided on either side of the cash book for this purpose.
Balancing Cash Book:
The cash book is balanced at the end of a given period by inserting the excess of the debit on the credit side as "by balance carried down" to make both sides agree. The balance is then shown on the debit side by "To balance brought down" to start the next period. As one cannot pay more than what he actually receives, the cash book recording cash only can never show a credit balance.
Types of Cash book:
1. Single column cash book – It is prepared by those companies whose all receipts and payments are made in cash only. In it receipts are shown on the left side while payments are shown on the right side of the cash book.
2. Double column cash book – This contain an additional column of bank account for recording those transaction which are affected through bank. In this there will be contra entries that are transfer of money from company to bank and from bank to company for official purpose and therefore these entries are posted on both side.
3. Petty cash book– This is used for the purpose of recording cash transactions which are small in value and of repetitive nature like conveyance, stationary etc…..This book is maintained so that huge number of transaction which are of small value can be recorded in it and therefore less pressure on person maintaining books.
The cash book, though it serves the purpose of a cash book of original entry viz., cash journal really it represents the cash account of the ledger separately bound for the sake of convenience. It is more a ledger than a journal. It is journal as cash transactions are chronologically recorded in it. It is a ledger as it contains a classified record of all cash transactions. The balances of the cash book are recorded in the trial balance and the balance sheet.
Vouchers:
For Every entry made in the cash book there must be a proper voucher. Vouchers are documents containing evidence of payment and receipts. When money is received generally a printed receipt is issued to the payer but counterfoil or the carbon copy of it is preserved by the cashier. The copy receipts are called debit vouchers, and they support the entries appearing on the debit side of the cash book. Similarly when payment is made a receipt is obtained from the payee. These receipts are known as credit vouchers. All the debit and credit vouchers are consecutively numbered. For ready reference the number of the vouchers are noted against the respective entries. A column is provided on either side of the cash book for this purpose.
Balancing Cash Book:
The cash book is balanced at the end of a given period by inserting the excess of the debit on the credit side as "by balance carried down" to make both sides agree. The balance is then shown on the debit side by "To balance brought down" to start the next period. As one cannot pay more than what he actually receives, the cash book recording cash only can never show a credit balance.
Types of Cash book:
1. Single column cash book – It is prepared by those companies whose all receipts and payments are made in cash only. In it receipts are shown on the left side while payments are shown on the right side of the cash book.
2. Double column cash book – This contain an additional column of bank account for recording those transaction which are affected through bank. In this there will be contra entries that are transfer of money from company to bank and from bank to company for official purpose and therefore these entries are posted on both side.
3. Petty cash book– This is used for the purpose of recording cash transactions which are small in value and of repetitive nature like conveyance, stationary etc…..This book is maintained so that huge number of transaction which are of small value can be recorded in it and therefore less pressure on person maintaining books.
Subsidiary Books
Though the principle of journalising all transactions, known as continental system of bookkeeping is quite perfect in actual business but in a large business it is found inconvenient to Journalise every transaction and sometime it becomes rather impossible for one man to Journalise numerous transactions on a business in one journal. Therefore, the journal is sub-divided into different journals knownas the subsidiary books or books of prime entry or books of original entry . These are the books in which are recorded the details of transactions as they take place from day to day, in a classified manner.
In every trading concern, the transactions, however numerous they may be, can be grouped into small number of classes. They consist chiefly of receipts and payments of cash, purchases and sales of goods, returns of goods purchased and sold, bills receivable and bills payable. The journal is divided in such a way that a separate book is used for each class of transactions.
The important subsidiary books used in modern business world are the following:-
1.
Cash Book:
It is used to record all cash receipts and payments.
2.
Purchases Book:
It is used to record all credit purchases.
3.
Sales Book:
It is used to record all credit sales
4.
Purchases returns book:
It is used to record all goods returned by business to its suppliers.
5.
Sales Returns Book:
It is used to record all goods returned to business by its customers.
6.
Bills Receivable Book:
It is used to record all accepted bills received by business.
7.
Bills payable Book: It is used to record all bill accepted by business to its creditors.
8.
Journal Proper:
It is used for recording those transactions for which there is no separate book.
All these subsidiary books are called books of original entry , as transactions in their original form are entered therein.
Advantages of Different Journals:
The advantages of having several books of original entry in place of one journal may be stated to as follows:
1.
It may be impossible to record each transaction into the ledger as it occurs. Subsidiary books record the details of the transactions and therefore, helps the ledger to become brief.
2.
As similar transactions are recorded together in the same book, future reference to any of them becomes easy.
3.
The chance of fraudulent alteration in an account is reduced as the book of original entry keeps records of the transactions in a chronological order.
4.
The work of posting can been trusted to several clerks at the same time and thus the ledger of a large business can be written up much more quickly.
5.
As each journal contains separately transactions of similar nature any desired analysis can be made conveniently.
In every trading concern, the transactions, however numerous they may be, can be grouped into small number of classes. They consist chiefly of receipts and payments of cash, purchases and sales of goods, returns of goods purchased and sold, bills receivable and bills payable. The journal is divided in such a way that a separate book is used for each class of transactions.
The important subsidiary books used in modern business world are the following:-
1.
Cash Book:
It is used to record all cash receipts and payments.
2.
Purchases Book:
It is used to record all credit purchases.
3.
Sales Book:
It is used to record all credit sales
4.
Purchases returns book:
It is used to record all goods returned by business to its suppliers.
5.
Sales Returns Book:
It is used to record all goods returned to business by its customers.
6.
Bills Receivable Book:
It is used to record all accepted bills received by business.
7.
Bills payable Book: It is used to record all bill accepted by business to its creditors.
8.
Journal Proper:
It is used for recording those transactions for which there is no separate book.
All these subsidiary books are called books of original entry , as transactions in their original form are entered therein.
Advantages of Different Journals:
The advantages of having several books of original entry in place of one journal may be stated to as follows:
1.
It may be impossible to record each transaction into the ledger as it occurs. Subsidiary books record the details of the transactions and therefore, helps the ledger to become brief.
2.
As similar transactions are recorded together in the same book, future reference to any of them becomes easy.
3.
The chance of fraudulent alteration in an account is reduced as the book of original entry keeps records of the transactions in a chronological order.
4.
The work of posting can been trusted to several clerks at the same time and thus the ledger of a large business can be written up much more quickly.
5.
As each journal contains separately transactions of similar nature any desired analysis can be made conveniently.
Trial Balance
Definition and Explanation:
Trial balance may be defined as an informal accounting schedule or statement that lists the ledger account balances at a point in time compares the total of debit balance with the total of credit balance.
The fundamental principle of double entry system is that at any stage, the total of debits must be equal to the total of credits. If entries are recorded and posted correctly, the ledger will reflect equal debits and credits, and the total credit balance will then be equal tothe total debit balances.
Every business concern prepares final accounts at the end of the year to ascertain the result of the activities of the whole year.To ensure correct result, the concern must be free from doubt that the books of accounts have been correctly recorded throughout the year. Trial balance is prepared to test the arithmetical accuracy of the books of accounts. As we know that under double entry system for each and every transaction one account is debited and other account is credited with an equal amount. If all the transactions are correctly recorded strictly according to this rule, the total amount of debit side ofall the ledger accounts mustbe equal to that of credit side of all the ledger accounts. This verification is done through trial balance.
If the trial balance agrees we may reasonably assume that the books are correct. On the other hand, if it does not agree, it indicates that the books are not correct - there are mistakes somewhere. The mistakes are to be detected and corrected otherwise correct result cannot be ascertained. There are however, a few types of errors which the trial balance cannot detect. In other words, the trial balance will agree inspite of the existence of those errors.
The trial balance is not an absolute or solid proof of the accuracy of books of accounts. Thus if trial balance agrees, there may be errors or may not be errors. But if it does not agree, certainly there are errors.
Purposes of Trial Balance:
The trial balance serves two main purposes. These are as under:
1.
To check the equality of debits and credits - an arithmetical or mathematical test of accuracy.
2.
To provide information for use in preparing final accounts.
Methods of Preparing Trial Balance:
There are three methods for the preparation of trial balance. These methods are:
1.
Total or gross trial balance
2.
Balance or net trial balance
3.
Total - cum - balance trialbalance
The method 1 and 2 are described below:
Total or Gross Trial Balance:
Under this method the two sides of all the ledger accounts are totaled up. Thereafter, a list of all the accounts is prepared in a separate sheet of paper with two "amount" columns on the right hand side. The first one for debit amounts and the second one for credit amounts. The total of debit side and credit side of each account is then placed on "debit amount" column and "credit amount" column respectively of the list. Finally the two columns are added separately to see whether they agree of not. This method is generally not followed in practice.
Balance or Net Trial Balance:
Under this method, first of all the balances of all ledger accounts are drawn. Thereafter, the debit balances and credit balances are recorded in "debit amount" and "credit amount" column respectively and the two columns are added separately to see whether they agree or not. This is the most popular method and generally followed.
The various Steps involved in the preparation of Trial Balance under this method are given below:
1.
Find out the balance of each account in the ledger.
2.
Write up the name of account in the first column.
3.
Record the account number in second column.
4.
Record the debit balance of each account in debit column and credit balance in credit column.
5.
Add up the debit and credit column and record the totals.
Trial balance may be defined as an informal accounting schedule or statement that lists the ledger account balances at a point in time compares the total of debit balance with the total of credit balance.
The fundamental principle of double entry system is that at any stage, the total of debits must be equal to the total of credits. If entries are recorded and posted correctly, the ledger will reflect equal debits and credits, and the total credit balance will then be equal tothe total debit balances.
Every business concern prepares final accounts at the end of the year to ascertain the result of the activities of the whole year.To ensure correct result, the concern must be free from doubt that the books of accounts have been correctly recorded throughout the year. Trial balance is prepared to test the arithmetical accuracy of the books of accounts. As we know that under double entry system for each and every transaction one account is debited and other account is credited with an equal amount. If all the transactions are correctly recorded strictly according to this rule, the total amount of debit side ofall the ledger accounts mustbe equal to that of credit side of all the ledger accounts. This verification is done through trial balance.
If the trial balance agrees we may reasonably assume that the books are correct. On the other hand, if it does not agree, it indicates that the books are not correct - there are mistakes somewhere. The mistakes are to be detected and corrected otherwise correct result cannot be ascertained. There are however, a few types of errors which the trial balance cannot detect. In other words, the trial balance will agree inspite of the existence of those errors.
The trial balance is not an absolute or solid proof of the accuracy of books of accounts. Thus if trial balance agrees, there may be errors or may not be errors. But if it does not agree, certainly there are errors.
Purposes of Trial Balance:
The trial balance serves two main purposes. These are as under:
1.
To check the equality of debits and credits - an arithmetical or mathematical test of accuracy.
2.
To provide information for use in preparing final accounts.
Methods of Preparing Trial Balance:
There are three methods for the preparation of trial balance. These methods are:
1.
Total or gross trial balance
2.
Balance or net trial balance
3.
Total - cum - balance trialbalance
The method 1 and 2 are described below:
Total or Gross Trial Balance:
Under this method the two sides of all the ledger accounts are totaled up. Thereafter, a list of all the accounts is prepared in a separate sheet of paper with two "amount" columns on the right hand side. The first one for debit amounts and the second one for credit amounts. The total of debit side and credit side of each account is then placed on "debit amount" column and "credit amount" column respectively of the list. Finally the two columns are added separately to see whether they agree of not. This method is generally not followed in practice.
Balance or Net Trial Balance:
Under this method, first of all the balances of all ledger accounts are drawn. Thereafter, the debit balances and credit balances are recorded in "debit amount" and "credit amount" column respectively and the two columns are added separately to see whether they agree or not. This is the most popular method and generally followed.
The various Steps involved in the preparation of Trial Balance under this method are given below:
1.
Find out the balance of each account in the ledger.
2.
Write up the name of account in the first column.
3.
Record the account number in second column.
4.
Record the debit balance of each account in debit column and credit balance in credit column.
5.
Add up the debit and credit column and record the totals.
Ledger- Procedure for Posting
Transferring information i.e. entries from journal to ledger accounts is called posting. The procedure of posting from journal to ledger is as follows:
1.
Locate the ledger account from the first debit in the journal entry.
2.
Record the date in the date column on the debit side of the account. The date is the date of transaction rather than the date of the posting.
3.
Record the name of the opposite account (account credited in entry) in the particular (also know as reference column, description column etc) column.
4.
Record the page number of the journal in the journal reference (J.R) column from where the entry is being posted.
5.
Record the amount of the debit in the "amount column"
6.
Locate the ledger account for the first credit in the journal and follow the same procedure.
Balancing An Account:
The difference between the two sides of an account is its balance. The balance is written on the lesser side to make the two sides equal. The process of equalizing the two sides of an account is known as balancing.
1.
Locate the ledger account from the first debit in the journal entry.
2.
Record the date in the date column on the debit side of the account. The date is the date of transaction rather than the date of the posting.
3.
Record the name of the opposite account (account credited in entry) in the particular (also know as reference column, description column etc) column.
4.
Record the page number of the journal in the journal reference (J.R) column from where the entry is being posted.
5.
Record the amount of the debit in the "amount column"
6.
Locate the ledger account for the first credit in the journal and follow the same procedure.
Balancing An Account:
The difference between the two sides of an account is its balance. The balance is written on the lesser side to make the two sides equal. The process of equalizing the two sides of an account is known as balancing.
Ledger- Introduction
The journal provides a complete listing of the daily transactions of a business. But it does not provide information about a specific account in one place. For example, to know how much cash balance we have, the accounting clerk would have to check all the journal entries in which cash is involved, and this is very laborious job; because there are hundreds or even thousands of cash transactions recorded on different pages of journal. To avoid this difficulty, the debit and credit of journalized transactions are transferred to ledger accounts. Thus all the changes for a single account are located in one place - in a ledger account. This makes it easy to determine the current balance of any account.
Definition and Explanation of Ledger:
The book in which accounts are maintained is called ledger . Generally, one account is opened on each page of this book, but if transactions relating to a particular account are numerous, it may extend to more than one page. All transactions relating to that account are recorded chronologically. From journal each transaction is posted to at least two concerned accounts - debit side of one account and credit side of another account. Remember that, if there are two accounts involved in a journal entry, it will be posted to two accounts in the ledger and if the journal entry consists of three accounts (compound entry) it will be posted to three different accounts in the ledger. The process of transferring information from journal to ledger accounts is known as posting. The goal of all transactions is ledger. Ledger is known as the destination of entries in journal but it must be remembered that transactions cannot be recorded directly in the ledger - they must be routed through journal. This concept is illustrated below:
1. Transaction
2. Journal
3. Ledger
So, the books in which all the transactions of a business concern are finally recorded in the concerned accounts in a summarized form is called ledger.
Characteristics of Ledger Account:
The ledger has the following main characteristics:
1.
It has two identical sides - left hand side (debit side) and right hand side (credit side).
2.
Debit aspect of all the transactions are recorded on the debit side and credit aspects of all the transactions are recorded on credit side according to date.
3.
The difference of the totals of the two sides represents balance. The excess of debit side over credit side indicates debit balance, while excess of credit side over debit side indicates the credit balance. If the two sides are equal, there will be no balance.
4.
Generally the balance is drawn at the year end and recorded on the lesser side to make the two sides equal. This balance is know as closing balance .
5.
The closing balance of thecurrent year becomes the opening balance of the next year.
Definition and Explanation of Ledger:
The book in which accounts are maintained is called ledger . Generally, one account is opened on each page of this book, but if transactions relating to a particular account are numerous, it may extend to more than one page. All transactions relating to that account are recorded chronologically. From journal each transaction is posted to at least two concerned accounts - debit side of one account and credit side of another account. Remember that, if there are two accounts involved in a journal entry, it will be posted to two accounts in the ledger and if the journal entry consists of three accounts (compound entry) it will be posted to three different accounts in the ledger. The process of transferring information from journal to ledger accounts is known as posting. The goal of all transactions is ledger. Ledger is known as the destination of entries in journal but it must be remembered that transactions cannot be recorded directly in the ledger - they must be routed through journal. This concept is illustrated below:
1. Transaction
2. Journal
3. Ledger
So, the books in which all the transactions of a business concern are finally recorded in the concerned accounts in a summarized form is called ledger.
Characteristics of Ledger Account:
The ledger has the following main characteristics:
1.
It has two identical sides - left hand side (debit side) and right hand side (credit side).
2.
Debit aspect of all the transactions are recorded on the debit side and credit aspects of all the transactions are recorded on credit side according to date.
3.
The difference of the totals of the two sides represents balance. The excess of debit side over credit side indicates debit balance, while excess of credit side over debit side indicates the credit balance. If the two sides are equal, there will be no balance.
4.
Generally the balance is drawn at the year end and recorded on the lesser side to make the two sides equal. This balance is know as closing balance .
5.
The closing balance of thecurrent year becomes the opening balance of the next year.
Journal- Journalising and Rules of journalising
Journalising and rules of journalising: Journalising Journalising is a systematic process of recording financial transaction. Such recording are made in terms of debit and credit. In it, financial transactions are recorded in the original book. Rules of journalising: Every financial transaction of a business organization has dual effect.It means that every financial transaction of a business involves at least two accounts. One account is debited and the other account is credited. Before journalising a transaction, following three steps must be borne in mind. 1. Firstly, we need to find outthe two aspects or two fold effects of a transaction. 2. Secondly, we need to identify the accounts whether they are personal, real or nominal accounts. 3. Finally, we need to use the rules of debit and credit. whether it may be traditional approach rules or modern approach rules.
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