FINANCIAL ACCOUNTING

LEARNING OBJCTIVES

BASIC CONCEPTS IN ACCOUNTING

JOURNAL
LEDGER
CASH BOOKS
TRIAL BALANCE
PREPERATION OF FINAN ACCOUNTS
 ACCOUNTING

Accounting is concerned with the process of recording, classifying and summarising

data resulting form business operations and events. According to American
Accounting Association accounting is the process of identifying, measuring and
communicating economic information to permit informed judgements and decision by
users of the information.
The definition given by the (AICPA) American institute of Certified Public
Accountants clearly brings out the meaning and functions of accounting. According to
it accounting is the art of recording, classifying and summarising in a significant
manner and in terms of money, Transactions and events which are in part, at least, of a
finance character and interpreting the results thereof.
The General Equation of Accounting
Assets = Liabilities + Owners Equity
GAAP
Generally Accepted Accounting principles. A widely accepted set of rules,
conventions, standards, and procedures for reporting financial information, as
established by the Financial Accounting standards Board (FASB).

GAAP PRINCIPLES:
The common set of principles, standards and procedures that companies use to
compile their financial statement. GAAP are a combination of authoritative standards
(set by policy boards) and simply the commonly accepted ways of recording and
reporting accounting information
Advantages of Accounting:
The present Global economic world the Accounting process has the following
advantages.
1. Provides information for Systematic records: Since all the financial
transactions are recorded in the books, one need not rely on memory. Any
information required is readily available from these records.
2. Facilitates the preparation for financial statements: Profit and loss account and
balance sheet can be easily prepared with the help of the information in the
records. This enables the trader to know the net result of business operations.
( i.e profit / loss) during the accounting period and the financial position of the
business at the end of the accounting period.
3. Provides the control over Assets: Book keeping provides the information
regarding cash in hand, cash at bank, stock of goods, accounts receivable from
various parties and the accounts invested in various other assets. As the trader
knows the values of the assets he will have control overt them.
4. Provides the required information: Interested parties such as owners. Lenders,
creditors etc.. Get necessary information at frequent intervals.
5. Comparative Study: One can compare the present performance of the
organisation with that of its past. This enables the managers to draw useful
conclusions and make proper decisions.
6. Tax matters: Properly maintained book-keeping records will help in the
settlement of all tax matters with the tax authorities.
7. Helpful to management: Accounting is useful to the management In many
ways. It enables the management to assess the achievement of its performance.
The weaknesses of the business can be identified and corrective measurements
can be applied to remove them with the help of accounting.

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Limitations of Accounting:
The following are the limitations of accounting.
1. Does not record the all events.
2. Does not reflect the current values
3. Estimates based on personal judgement
4. Inadequate information on costs and profits.

TYPES OF ACCOUNTS:
An account is a summary of the relevant transactions at one place relating to a
particular head. Based on accounting principles accounts are divided into three types.
They are as follows.
1. Personal Accounts: These accounts are relates to natural persons, artificial
persons and representative persons. For examples, Ram account, Ram &
company Account.
2. Real Accounts: These accounts relate to assets. For examples, Plant and
Machinery Account, Land and Buildings Account, Furniture Account etc.
3. Nominal Accounts: These accounts relate to expenses, losses and incomes
and profits. For example, Salary expenditure, Rent paid, Rent received,
Commission received etc...

Rules of Accounting:

ACCOUNTING TYPE DEBIT CREDIT

PERSONAL ACCOUNTS Receiver Giver
REAL ACCOUNTS What comes in What goes out
NOMINAL ACCOUNTS Expenses and losses Incomes and gains

Note: Real and Nominal Accounts are called Impersonal Accounts.

BRANCHES OF ACCOUNTING
Accounting Branches can be classified into the following categories:
1. Financial Accounting: The main purpose of this type of accounting is to
record business transactions in the books of accounts in such a way that
operating results for a particular period and financial condition on a particular
date can be known for the information of the various groups of persons.

2. Cost Accounting: It relates to the collection, classification, ascertainment of

cost and its accounting and cost control relating the various elements of cost,
i.e. materials and Labour.

3. Management Accounting: It relates to the use of accounting data collected

with the help of financial accounting and cost accounting for the purpose of
policy formation, planning control and decision making by the management.

OBJECTIVES OF ACCOUNTANCY:
1. To provide knowledge of transactions..
2. To provide knowledge about creditors, debtors and overall financial positions.
3. To find our total purchases, total sales and closing stock etc.
4. To find out net profit or loss made during a particular financial period.

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 5. To provide knowledge about capital assets and liabilities of the firm at any
particular time.
6. To provide ready information to all interested parties.

ACCOUNTING CONCEPTS:
Accounting concepts also known as accounting postulates, provide a base accounting
science and guides for the presentation of business results. These concepts have been
developed on the basis of observation, practice and experience. The following are the
concepts of Accounting.
1. Business Entity concept
2. Going concern concept
3. Money Measurement concept
4. cost concept
5. Dual Aspect concept.

ACCOUNTING CONVENTIONS:
The customs or traditions which must be followed in accountancy while preparing the
accounting statement s are known as accounting conventions. The important
accounting conventions are given below.
1. Conventions of Consistency
2. Conventions of full disclosure
3. Conventions of conservatism

1. CONVENTION OF CONSISTENCY: According to the convention of

consistency the accounting practise should remain the same from one year to
another year. The comparison of the results of one accounting year with
another year is possible only if the convention of consistency is strictly
followed.
2. CONVENTION OF FULL DISCLOSURE: According to convention of full
disclosure all the financial statements should be disclosed fully and firmly and
all accounting statements should be prepared honestly. All information which
is of material interest to proprietors, creditors, investors and suppliers should
be disclosed clearly in the accounting statements.
3. CONVENTION OF CONSERVATISM: Convention of conservatism means
that a glory picture of the business must be given due consideration.
Conservatism is a policy of caution or playing safe to safeguard against
possible losses of business. It makes into consideration all possible losses but
do not anticipate any profits.

Book keeping: Book Keeping is the science and art of correctly recording in the
books of accounts all those transactions that result in the transfer of money or
moneys worth. Book - keeping includes recording in journal posing to ledger and
balancing of accounts. All the records before the preparation of the trial balance is
called book - keeping. Those persons who record the transactions in the book keeping
are called Book-Keepers.

ADVANTAGES OF BOOK KEEPING:

1. It provides a specific means of dealing with opening and closing balances (at
the start and end of the year)

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 2. It provides an arithmetic check on your bookkeeping, since the total amount of
debit entries must equal the total amount of credit entries. (Theres something
fundamentally wrong if this isnt the case)
3. Using a Sales Ledger and Purchase Ledger means you can track who owes the
business money and who the business owes money to much more easily.
(However, it is possible to operate a simple sales ledger and purchase ledger
using single entry)
4. You can see the financial position of the business much more clearly, at any
given time, using double entry.
5. Done properly, it can help detect and reduce accounting errors.
6. Double Entry bookkeeping makes producing the year end accounts easier. If
you use an accountant to produce your year-end accounts, having good
double-entry records may lower your accountancy fees.

DIFFERENCE BETWEEN BOOK- KEEPING AND ACCOUNTING

Book - Keeping Accounting

1. The main object is prepare 1. Its main object is to record,

original books of accounts classify, summarise, analyse and
interpret the business transactions.

2. The persons involved in book- 2. The persons involved in

keeping work are called Book accounting work are called
keepers. accountants.

3. Only insiders are interested in 3. Insiders and Outsiders are

Book keeping. interested in Accountants

4. It has Limited Scope 4. It has wider scope

5. It does not show the net results of 5. It show the net results of the firm
the firm.

ACCOUNTING SYSTEMS: Based on the accounting principles Accounting

systems are divided into following two types
1. Single Entry Book Keeping
2. Double Entry Book Keeping

SINGLE ENTRY BOOK KEEPING

A single entry system is similar to a check book register and is characterized by the
fact there is only a single line entered in the journal for each transaction. In simple
check book, each transaction is recorded in one column of an account as either a

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positive or a negative amount in order to represent the receipt or disbursement of
cash. This system is demonstrated in the following example for a repair shop
business.

SINGLE COLUMN SYSTEM

DATE PARTICULAR AMOUNT IN Rs

JAN 1 BEGINNING BALANCE 1000
JAN 2 PURCHASED SHOP 2000
SUPPLIES

JAN 3 PERFORMED REPAIR 3000

SEVICES

Disadvantages of Single Entry System.

1. Since every debit does not have a corresponding credit, a Trial Balance can
Not be extracted to test the arithmetical accuracy of the entries.

2. In absence of proper records of any assets and of any allowances for

depreciation or other losses of value, it is not possible to prepare a Balance
Sheet
3. It is too easy to perpetrate the errors and frauds and too difficult to detect
them.

DOUBLE ENTRY BOOK KEEPING: SINGLE ENTRY BOOK KEEPING

A single entry system is similar to a check book register and is characterized by the
fact there is only a single line entered in the journal for each transaction. In simple
check book, each transaction is recorded in one column of an account as either a
positive or a negative amount in order to represent the receipt or disbursement of
cash. This system is demonstrated in the following example for a repair shop
business.
To describe the transactions in double entry system we use T accounts concept
The T Account Concept
Think of the letter T representing an account.
Example for T account

DEBIT CREDIT

An account is really just a bucket where we keep all transactions of a similar nature.
So a T account records the in (received) and out (given over) activities of all
transactions of the same nature.
To the left of the vertical line of the T are the debits; to the right of the T are the
credits.

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Debit: A debit is an asset, cash in hand, or an amount owed to you.

Credit: A credit is an amount you owe, cash paid out by you, or money invested in
your business (capital).
ADVANTAGE OF DOUBLE ENTRY SYSTEM:-

1. It is possible to keep a full record of dual aspect of each transaction.

2. Transactions are recorded in a scientific and systematic manner and thus the
books of accounts provide the most reliable information for controlling the
Organization efficiently and effectively.

3. Since the total debit under this system be equal to total Credit, arithmetical
accuracy of the books can be tested by means of a trial balance.

4. An income and expenditure accounts can be prepared to know the excess

income/ expenditure during a particular period and to know how such excess
income/ expenditure has arisen

5. The financial position of the Organization can be readily ascertained by

preparing a Balance Sheet.
6. Frauds are prevented, because alteration in accounts becomes difficult and
discovery of irregularities is facilitated

Abbreviations used in bookkeeping -

a/c account
B/S Balance Sheet
c/d carried down
b/d brought down
b/f brought forward
Dr Debit record
Cr Credit record
G/L General Ledger: (or N/L Nominal Ledger)
P&L Profit & Loss
TB Trial Balance
Points to remember

The amount which the proprietor has invested in the business is Capital
Book-keeping is an art of recording Business transactions in the book of
accounts.
Voucher is a written document in support of a transaction.
Accounting begins where Book- keeping ends.
Liabilities refer to the financial obligations of a business.
Owner of the business is called Proprietor
An account is a Summary of relevant business transactions at one place
relating to a person, assets, expense or revenue named in the heading.
Receipt is an acknowledgement for Cash received.
Income is the difference between revenue and expense
The debts owing to others by the business is known as Liabilities

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 Assets minus liabilities is Capital
A written document in support of a transaction is called Voucher
Business transactions may be classified into two types
Purchases return means goods returned to the supplier due to Defective
quality
Amount spent in order to produce and sell the goods and services is called
Expense
Stock in trades are to be recorded at cost or market price whichever is less is
based on Prudence principle.
The assets are recorded in books of accounts in the cost of Acquisition is based
on Historical cost concept.
The benefits to be derived from the accounting information should exceed its
cost is based on Cost benefit principle.
Transactions between owner and business are recorded separately due to
Business assumption.
Business concern must prepare financial statements at least once in a year is
based on Accounting period assumption.
Consistency principles require that the same accounting methods should be
followed from one accounting period to the next.
As per the business entity assumption, the business is different from the
owner
Going concern assumption tell us the life of the business is Very long
Cost incurred should be matched with the revenues of the particular period is
based on Matching concept
As per dual aspect concept, every business transaction has Two concepts
Accounting may be considered as Basic conditions upon which the science of
accounting is based.
The term Conventions denotes customs or traditions which guide the
accountant while preparing the accounting statements.
The incoming aspect of a transaction is called Debit and the outgoing aspect
of a transaction is called Credit
The business entity concepts implies that a business unit is separate from the
person who supply capital to it.
Traditional approach of accounting is also called as British approach.
The American approach is otherwise known as Accounting Equation
approach.
Impersonal accounts are classified into two types.
Plant and machinery is an example of Real account.
Capital account is an example of Personal account.
Commission received will be classified under Nominal account.
Discount allowed related to Nominal account
The receiving aspect in a transaction is called as Debit aspect The giving
aspect in a transaction is called as Credit aspect
Murali account is an example for Persona A/c
Capital account is classified under Personal A/c
A principle is objective to the extent that the accounting information is not
influenced by the personal bias of those who furnish the information.
A principle is feasible to the extent that it can be applied without undue
complexity or cost
Goodwill is an example of Intangible real

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 Commission received is an example of Nominal
Outstanding rent A/c is an example for Representative personal A/c
Nominal Account is classified under Impersonal A/c
Drawings account is classified under Personal A/c
The Father of Accounts is Luca pacioli

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 JOURNALS
Definition of Journal:
A journal is a record that keeps accounting transactions in chronological order
i.e. as they occur. All accounting transactions are recorded through journal
entries that show account names, amounts, and whether those accounts are
recorded in debit or credit side of accounts. A journal entry is called
balanced when the sum of debit side amounts equals to the sum of credit
side amounts.
OR
An accounting record where all business transactions are originally entered. A journal
details which transactions occurred and what accounts were affected. Journal entries
are usually recorded in chronological order, and using the double-entry method of
bookkeeping. A journal is called Original or Prime entry books of Accounts.
Characteristics of Journal:
Journal has the following characteristics:
1. Journal is the first successful step of the double entry system. A transaction is
recorded first of all in the journal. So the journal is called the book of original
entry.
2. A transaction is recorded on the same day it takes place. So, journal is called
Day Book.
3. Transactions are recorded chronologically, So, journal is called chronological
book
4. For each transaction the names of the two concerned accounts
indicating which is debited and which is credited, are clearly written in two
consecutive lines. This makes ledger-posting easy. That is why journal is
called "Assistant to Ledger" or "subsidiary book"
5. Narration is written below each entry.
6. The amount is written in the last two columns - debit amount in debit column
and credit amount in credit column.
Advantages of Journal:
The following arte the advantages of journal:
1. Each transaction is recorded as soon as it takes place. So there is no possibility
of any transaction being omitted from the books of account.
2. Since the transactions are kept recorded in journal, chronologically with
narration, it can be easily ascertained when and why a transaction has taken
place.
3. For each and every transaction which of the two concerned accounts will be
debited and which account credited, are clearly written in journal. So, there is
no possibility of committing any mistake in writing the ledger.
4. Since all the debits of transaction are recorded in journal, it is not necessary to
repeat them in ledger. As a result ledger is kept tidy and brief.
5. Journal shows the complete story of a transaction in one entry.
6. Any mistake in ledger can be easily detected with the help of journal.

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Form of Journal:

Date Particulars L.F. Dr. Amount Cr. Amount

L.F stands for Ledger Folio number. This represents the Page number of the Ledger.

EXAMPLES ON JOURNAL ENTRIES:

1.EXERCISE: Journalise the following transactions and give the nature of account
(whether personal, real or nominal) in each case.

1996
Jan 1 Mr. mohan started business with 1000 cash. He bought furniture for Rs. 1500
And goods for 1000
Jan 2 Purchased goods on credit form Sohan Lal for Rs. 500.
Jan 3 Paid for carriage Rs. 50
Jan 6 Purchased goods on cash payment for Rs. 2600
Jan 7 Sold goods to Krishna Lal on cash for Rs. 1500
Jan 7 Sold goods to Krishnan Lal on cash for Rs. 1500
Jan 8 Sold goods to Anil on credit for Rs. 1000
Jan 10 Deposited cash in bank Rs. 800
Jan 12 Paid rent Rs. 500

SOLUTION:
JOURNAL ENTRY

Date Particulars l.F Debit Amt Credit Amt Nature of

In Rs In Rs account
1996
Jan 1 Cash A/c Dr 10000 Real
To Mohans capital A/c 10000 Personal
(started business with
cash) 1500 Real
Furniture A/c Dr 1500 Personal
To cash A/c (bought
furniture for cash) 1000 Real
Purchase A/c Dr 1000 Personal
To cash A/c (bought

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 goods for cash

Jan 2 Purchase A/c Dr 500 Real

To sohan lal A/c 500 Personal
(purchased goods on
credit)

Jan 3 Carriage A/c Dr 50 Nominal

To cash A/c (Paid 50 Real
carriage in cash)

Jan 6 Purchase A/c Dr 2600 Real

To cash A/c (Purchased 2600 Real
goods in cash )

Jan 7 Cash A/c Dr 1500 Personal

To sales (sold goods on 1500 Real
cash)

Jan 8 Anils A/c Dr 1000 Personal

To sales ( sold goods on 1000 Real
credit)

Jan 10 Bank A/c Dr 800 Personal

To cash (deposited cash 800 Real
in bank)

Jan 12 Rent A/c Dr 500 Nominal

To cash (By rent Paid) 500 Real

TOTAL 19450 19450

2.Exercise: Journalise the following transactions in the books of M/s Prem Medical
Hall.

1996
April 1 M/s Prem Medical Hall starts business with Rs. 20000. The firm opens an
Account with bank and deposits Rs. 18000 in the bank.
April 2 The firm purchased furniture for Rs 850 and telephone for Rs.2500. The
The payment was made by cheque.
April 3 Medicines were purchased from Ramesh Medical Hall for Rs. 5800 on credit
April 4 Medicines were sold on credit to Garg sons for Rs 1200
April 6 .Medicines were skid ib credit to M/s Paul Medical Hall for Rs 3000
April 7 Paid for office stationary Rs 100
April 8 Paid advance rent for April Rs 500
April 9 Received cash payment form M/s paul Medical Hall for Rs 2500
April 10 Depostied Rs 2000 in bank
April 12 Paid for electric bill Rs 480

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April 15 Received cash from Garg Sons Rs 1000

SOLUTION:
Journal entry of M/S prem Medical Hall

.
Date Particulars L.F Dr Cr.

1996
April 1 Cash A/C Dr 20000
To capital account (started 20000
business with Rs 2000)
1 Bank A/C Dr. 18000
To cash account (cash 18000
deposited in bank)

April 2 Furniture A/C Dr 850

To bank account ( furniture 850
purchased for Rs. 850 against
cheque)
2 Telephone A/c Dr 2500
To bank account (telephone 2500
purchased for Rs. 2500 against
cheque)

April 3 Purchase A/c Dr 5800

To ramesh Medical Hall 5800
account (Purchased medicines
from Ramesh Medical Hall on
credit)

April 4 Garg Sons A/c Dr 1200

To sales account (sold 1200
medicines to Garg Sons on
credit vide invoice No. ..)

April 6 Paul Medical Hall A/c Dr 3000

To sales account (sold 3000
medicines to M/s paul Medical
hall vide invoice No)

April 7 Stationery A/c Dr 100

To cash account (paid 100
stationery vide cash memo

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 No)

April 8 Rent A/c Dr 500

To cash account (paid advance 500
rent for April vide landlords
receipt No)

April 9 Cash A/c Dr 2500

To M/s Paul Medical Halls 2500
account (received cash from
M/s Paul medical hall vide
receipt No..)

April 10 Bank A/c Dr 2000

To cash account (deposited 2000
cash in bank)

April 12 Electricity A/c Dr. 480

To cash account (paid electric 480
bill vide receipt No..)

April 15 Cash A/c Dr 1000

To Garg sons account 1000
(received cash from Garg
Sons vide receipt No.. )

TOTAL 57930 57930

Points to Remember:
The source document gives information about the nature of the Transactions

The accounting equation is a statement of Equality between the debits and

credits.
In double entry book-keeping, every transaction affects at least two Accounts.
Assets are always equal to liabilities plus Capital
A transaction which increases the capital is called Revenue or Income
The journal is a book of original entry or prime
Recording of transaction in the journal is called Journalising
The L.F column of journal represents the place of posting of an entry in the
ledger account.
Closing credit balance of a creditor will be written on the debit side of the
Creditors Account.
Bad debts account is debited for the amount not recovered from the customer.
The origin of a transaction is derived from the Source document
Amount owned by the proprietor is called Capital
The Accounting Equation is connected with Assets, Liabilities and capital
Withdrawals of cash from bank by the proprietor for office use should be
credited to Bank A/c
Building Account indicate a debit balance.

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 An entry is passed in the beginning of each current year is called Opening
Entry
Goods distributed as free samples should be debited to Advertisement
Account.

LEDGERS
DEFINITION OF LEDGER
A ledger is a book containing accounts of various aspects. These aspects relate to
personal, real and nominal accounts.
OR
Collection of an entire group of similar accounts in double-entry bookkeeping. Also
called book of final entry, a ledger records classified and summarized financial
information from journals (the 'books of first entry') as debits and credits, and shows
their current balances. In manual accounting systems, a ledger is usually a loose leaf
binder with a separate page for each ledger account. In computerized systems, it
consists of interlinked digital files, but follows the same accounting principles as the
manual system.

ADVANTAGES OF LEDGER
1. All the transactions of the business are recorded in the journal as per their date
of occurrence. Hence, it is difficult to get full information about a particular
account. Since, a separate account is opened in the ledger for every business
transaction; accounting information is made available from time to time to the
managers and proprietors.
2. Information related to expenditure is present in the expenditure account in the
ledger. Hence, it is possible to control the business expenditure with the
information available from the account.
3. Profit and loss account is prepared at the end of the accounting year to find out
profit and losses of business. All the information related to these accounts i.e.
sales, purchases, different types of expenditure, incomes etc. , would available
in the ledger.
4. Information related to financial status (Assets account, Liabilities account) of
the company is available from the ledger etc..

TYPES OF LEDGER
In case of a small business concern with a limited number of transactions, the
ledger is made to contain all the personal, real and nominal accounts. However, where
the transactions are voluminous, it becomes necessary to maintain a number of
ledgers. In case of a large concern, the following types of ledger may be found.

1. Sales Ledger or Debtor ledger for accounts of debtors.

2. Bought ledger or Creditor ledger for accounts of creditors.
3. Investment ledger for investments of various types.
4. General ledger for real and nominal accounts.

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 DIFFERENCE BETWENN JOURNAL AND LEDGER

JOURNAL LEDGER
1.This is a book of original entry. 1. This is a book of final entry.
2. Transactions are first recorded in this book 2. Journal entries are later posted into the ledger
3. The process of recording a transaction is 3. The process of entering the journal entries in ledger account
called journalisation. is called ledger posting.

4. This does not help in assessing the

summary 4. This helps in providing the summary of transactions and in
Of transactions are results thereof. preparing final accounts to know the financial results and financial
Position.

POINTS TO REMEMBER

Ledger is the Principal or final book of account.

The process of transferring entries from Journal to the Ledger is called
Posting.
c/d means Carried down and b/d means Brought down.
c/f means Carried forward and b/f means brought forward.
Debiting an account signifies recording the transactions on the Debit side.
The left hand side of an account is known as Debit and the right hand side as
Credit side.
Credit Balance means Credit total is heavier than Debit total.
Real accounts cannot have credit balance.
Account having debit balance is closed by writing by balance c/d.
L.F. column in the journal is filled at the time of Posting.
The technique of finding g the net balance of an account after considering the
totals of both debits and credits appearing in the account is known as
Balancing of accounts
Ledger is a book of Final Entry
Personal and real accounts are Balanced
The column of ledger which links the entry with journal is J.F (Journal Folio)
Posting on the credit side of an account is written as By
Nominal account having credit balance represents Income and gain
Nominal account having debit balance represents Expenses and Losses
Real accounts always show Debit balances
When the total of debits and credits are equal, it represents Nil balance
The balances of personal and real accounts are shown in the Balance sheet

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 CASH BOOK

DEFINITION OF CASH BOOK

The cash book is a book of original entry for cash transactions. It is used to record
cash receipts and cash payments side by side. As such, the book is ruled like a ledger
account, with the debit and credit sides, and the balance represents cash on hand at the
end of the accounting period. Besides being a book of original entry, the cash book
also serves as a ledger account.

The cash book is divided into four types.

1. Simple cash book

2. Two- column cash book

3. Three column cash book

4. Petty cash book.

SIMPLE CASH BOOK

A simple cash book is prepared like any ordinary account. The receipts are
Recorded in the Dr Side and the payments are recorded in the Cr side of the
Cash book. The specimen Performa of a simple cash book is given as follows:

Dr Receipts Payments Cr
Date Particulars Amount Date Particulars Amount

Two column cash book

A two column cash back records discount allowed and discount received
Along with the cash payments and cash receipts

PROFORMA OF TWO COLUMN CASH BOOK

Dr Receipts Payments Cr
Date Particulars Amt Amt Date Particulars Amt Amt
Discount Cash Discount Cash

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Note:
Discount columns are not balanced they are merely totaled.

Three column cash book

A three column cash Book is a cash book which contains bank column along with
cash and discount columns.

Format of Three Column Cash book

Dr Receipts Payments Cr
Date Particulars Amt Amt Amt Date Particulars Amt Amt Amt
Disc Cash Bank Disc Cash Bank

Petty Cash book: A business house makes a number of small payments like
telegram, textiles, cartage etc. If all these transactions are recorded in cash book the
cash bank may become bulky and the main cashiers work will also increase therefore
usually firms appoint a petty cashier who makes these small payments and keep
record of these payments in a separate cash book which is called Petty Cash book.

Proforma or Format of petty cash book

Receipts Date Voucher Particular Total Conveyance Cartage Postage Stationery Sundries
No And
Telegram

Points to Remember:
Discount allowed column appears in Debit side of the cash book.
In the triple column cash book, when a cheque is received the amount is
entered in the Cash column.
Discount received column appears in Credit side of the cash book.
A cheque received and paid into the bank on the same day is recorded in the
Bank column of the three column cash book.

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 When a cheque received from a customer is dishonoured, his Account is
debited.
Cash Book is one of the Subsidiary books.
The cash book records all cash receipts & payments
When goods are purchased for cash, the entry will be recorded in the cash
book
The balance of cash book indicates cash in hand
In triple column cash book, cash withdrawn from bank for office use will
appear in both sides of the cash book.
If a cheque sent for collection is dishonoured, the debit is given to customers
A/c
If a cheque issued by us is dishonoured the credit is given to suppliers A/c
The book that records all small payments is called Petty Cash book.
The person who maintains petty cash book is known as Petty Cashier
Analytical petty cash book is just like the Cash Book.
The periodic total of each column in the analytical petty cash
Book is posted to the concerned Nominal accounts.
The balance in the petty cash book is an asset
The book that records all small payments is called Petty Cash book.
The person who maintains petty cash book is known as Petty Cashier
Analytical petty cash book is just like the Cash Book.
The periodic total of each column in the analytical petty cash
Book is posted to the concerned Nominal accounts.
The balance in the petty cash book is an asset

SUBSIDIARY BOOKS:
Subsidiary books are Special or supporting ledger (such as cost ledger, purchases
ledger, sales ledger) that provides more detailed information about individual
accounts than a general ledger. Used by firms with larger number of customers (or
creditors), these ledgers divide masses of financial data into more manageable parts.
Total of all individual accounts in a subsidiary ledger equals the balance of the
corresponding summary account (called control account) in the general ledger.
Subsidiary books are of eight types.

Purchase book
Purchase Returns book or Return Outwards book
Sales book
Sales returns book or Return Inwards book
Bills Receivable book
Bills Payable book
Cash book and
Journal Proper.

Subsidiary book
Sub division of the journals into various books for recording Transactions of
similar nature are called Subsidiary books.
The total of the Purchases book is posted to the debit of purchases account.
The person who prepares a bill is called the Drawer.
Days of grace are three in number.
Purchase of machinery is recorded in Journal proper

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 Purchases book is kept to record Only cash purchase
Credit sales are recorded in Sales book
Goods returned by customers are recorded in Sales return book
On 1st January 2003, Chandran draws a bill on Sundar for 3 months, its due
date is 4th April

TRIAL BALANCE
Definition of Trial balance
It is a statement prepared at the end of the financial year or at any other time with the
net balances of various accounts shown in the ledger or with the totals of various
accounts on both the sides before finding the net balances or casting. This statement
helps in testing the arithmetic accuracy or accounts and locating errors, if any,
committed. This statement provides the net balances of several accounts thereby
simplify the job of preparing final statements i.e., Trading and Profit & Loss Account
and Balance sheet.
The Trial Balance is a statement containing the balances of all ledger accounts, as at
any given date, arranged in the form of debit and credit columns placed side by side
and prepared with the object of checking the arithmetical accuracy of the ledger
postings. - M. S. Gousav

ADVANTAGES OF TRIAL BALANCES

1. To test the arithmetical accuracy of the books
2. To provide a basis, subject to adjustments for the preparation of final accounts
or financial statements the profit and loss account and the balance sheet.
3. To summarize the effects of all transactions of an accounting period so that the
management can have comparative figures for arriving at useful conclusions.
4. To locate the errors of commission etc..

Rules of Trial Balance

Rules In Trial
Particulars balance
Capital Credit
Opening stock Debit
Sales Credit
Return Inwards Debit
Retrun outwards Credit
Wages Debit
Freight Debit
Transport Expnese Debit
Purchase Debit
Royalties Debit
Gas & Fuel Debit

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bad debts Debit
bad debts reserves Credit
Repairs Debit
Rent Debit
Salaries Debit
Loan taken Credit
Interest Received Credit
Interest allowed Debit
Insurance Debit
Carriage Outwards Debit
Advertisements Debit
Petty Expenses Debit
Trade Expenses Debit
Debtors Debit
Creditors Debit
Bills Payable Debit
Bills Receivable Credit
Provision for discount on
debtors Credit
Provsiosn for discount on
creditors Debit
Depreciation Debit
Prepaid Insurance Debit
Investments Debit
Prepaid rent (Received) Credit
Out standing rent Credit
General Resrve Credit
Land & Building Debit
Furniture Debit
Cash in hand Debit
Cash at bank Debit

Suspense Account:
A suspense Account is an account in the general ledger that is used to
temporarily store any transactions for which there is some uncertainty about the
account.
An entry into suspense account may be a Debit or Credit.

OR

A suspense account is an account used temporarily to carry doubtful receipts and

disbursements or discrepancies pending their analysis and permanent classification.

Points to Remember

Trial Balance should be tallied by following the rules of Double entry system.
If the total debit exceeds the total credits of trial balance, suspense account
will show Credit balance.

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 Suspense account having debit balance will be shown on the Asset side of
balance sheet.
If the total debit balance of the trial balance exceeds the total credit balances,
the difference is transferred to the Credit side of the suspense account.
Suspense account having credit balance will be shown on the Liabilities side
of the balance sheet.
Short credit of an account decreases the Credit column of the trial balance.
When errors are located and rectified, Suspense account automatically gets
closed.
Journal entries passed to correct the errors are called rectifying entries..
Excess debit of an account can be rectified by Credit (the excess amount in)
the same account.
If the two sides of the trial balance tally, it is an indication of the fact that the
books of accounts are arithmetically accurate
Short debit of an account can be rectified by further debit of the same
account.
Trial balance is prepared to find out the Arithmetical accuracy of the
accounts
Suspense account in the trial balance is entered in the Balance sheet
Suspense account having credit balance will be shown on the Liabilities side
of Balance sheet
Errors which affect one side of an account are called Single sided errors
Wages paid to workers for the installation of a new Machinery should be
debited to Machinery Account
Goods taken by the proprietor for domestic use should be credited To
purchase Account
Cash received from Mani whose account was previously written off as a Bad
Debt should be credited to: Bad debt account

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