ANALYSIS OF ACCOUNTING PROCESS

“ANALYSIS OF THE ACCOUNTING PROCESS”

FAIR DRAFT SUBMITTED IN THE PARTIAL FULFILLMENT OF THE COURSE

TITLED-

PRINCIPLES OF ACCOUNTING AND AUDITS

SUBMITTED TO- SUBMITTED BY-

Mr. ASHOK KUMAR SHARMA NAME: ARIDAMAN RAGHUVANSHI

TEACHER ASSOCIATE COURSE: B.B.A, L.L.B (Hons.)

ROLL NO- 2013

SEMESTER- 2nd

CHANAKYA NATIONAL LAW UNIVERSITY

NYAYA NAGAR, MITHAPUR, PATNA-800001

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ANALYSIS OF ACCOUNTING PROCESS

Contents
Declaration by Candidate ........................................................................................................... 4
Acknowledgement ..................................................................................................................... 5
1. INTRODUCTION ................................................................................................................. 6
1. I The Role of Accounting Records .................................................................................... 6
1. II THE USE OF ACCOUNTS ........................................................................................... 7
1. III DEBIT AND CREDIT ENTRIES ................................................................................ 7
1. IV DOUBLE ENTRY SYSTEM ....................................................................................... 7
2. PROCESS OF ACCOUNTING ............................................................................................. 8
2.I BOOKS OF ORIGINAL ENTRY- JOURNAL ............................................................... 8
2.I.1 JOURNAL ..................................................................................................................... 8
Format of Journal ............................................................................................................... 9
Steps in journalising......................................................................................................... 10
2.I.2 Cash Book.................................................................................................................... 10
Types of cash book .......................................................................................................... 11
2. II Ledger........................................................................................................................... 13
Definition and Explanation of Ledger: ............................................................................ 13
Characteristics of Ledger Account: ................................................................................. 14
Types or Forms of Ledger Accounts: .............................................................................. 14
Standard Form of Ledger Account: ................................................................................. 14
2. III Trial Balance ............................................................................................................... 16
Definition and Explanation: ............................................................................................. 16
Purposes of Trial Balance: ............................................................................................... 17
Methods of Preparing Trial Balance: ............................................................................... 17
Total or Gross Trial Balance: ........................................................................................... 17
Balance or Net Trial Balance: .......................................................................................... 17
2. IV ERROR AND THEIR RATIFICATION.................................................................... 18
2. V Financial statement ...................................................................................................... 20
Income statement ............................................................................................................. 21
Balance sheet ....................................................................................................................... 22
Definition and Explanation: ............................................................................................. 22
Features of Balance Sheet: ............................................................................................... 23
Method of Preparation of Balance Sheet: ........................................................................ 24
Classification of Assets .................................................................................................... 24
3. Conclusion ........................................................................................................................... 28

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ANALYSIS OF ACCOUNTING PROCESS

4. BIBLIOGRAPHY ................................................................................................................ 29

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ANALYSIS OF ACCOUNTING PROCESS

DECLARATION BY CANDIDATE

I, ARIDAMAN RAGHUVANSHI, student of Chanakya National Law

University hereby declare that the work reported in the B.B.A.LL.B. (HONS.)
project report entitled: Analysis of the Accounting Process submitted at
Chanakya National Law University, Patna is an authentic record of my work
carried out under the supervision of Mr. Ashok Kumar Singh. I have not
submitted this work elsewhere for any other degree or diploma. I am responsible
for the contents of my Project Report.

(Signature of the Candidate)

NAME: ARIDAMAN RAGHUVANSHI

ROLL NO: 2013

COURSE: B.B.A., LL.B. (Hons.)

SEMESTER: 2018-2019 (2nd)

SESSION: 2018-2023

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ACKNOWLEDGEMENT

I would like to thank my faculty Mr. Ashok Kumar Sharma whose guidance
helped me a lot with structuring of my project. I take this opportunity to
express my deep sense of gratitude for his guidance and encouragement
which sustained my efforts on all stages of this project.

I owe the present accomplishment of my project to my friends, who helped

me immensely with materials throughout the project and without whom I
couldn’t have completed it in the present way.

I would also like to extend my gratitude to my parents and all those unseen
hands that helped me out at every stage of my project.

THANK YOU

NAME: ARIDAMAN RAGHUVANSHI

ROLL NO: 2013
COURSE: B.B.A., LL.B. (Hons.)
SEMESTER: 2018-2019 (2nd)
SESSION: 2018-2023

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1. INTRODUCTION

The sequence of accounting procedures used to record, classify, and summarize accounting
information in financial reports at regular intervals is often termed the accounting cycle. The
accounting cycle begins with the initial recording of business transactions and concludes with
the preparation of a complete set of formal financial statements. The term cycle indicates that
these procedures must be repeated continuously to enable the business to prepare new, up-to-
date, financial statements at reasonable intervals.

The accounting cycle generally consists of eight specific steps. In this chapter, we illustrate
how businesses (1) journalize (record) transactions, (2) post each journal entry to the
appropriate ledger accounts, and (3) prepare a trial balance. The remaining steps of the cycle
will be addressed in Chapters 4 and 5. They include (4) making end-of period adjustments, (5)
preparing an adjusted trial balance, (6) preparing financial statements, (7) journalizing and
posting closing entries, and (8) preparing an after-closing trial balance.

1. I THE ROLE OF ACCOUNTING RECORDS

The cyclical process of collecting financial information and maintaining accounting records
does far more than facilitate the preparation of financial statements. Managers and employees
of a business frequently use the information stored in the accounting records for such purposes
as:

1. Establishing accountability for the assets and/or transactions under an individual’s control.

2. Keeping track of routine business activities—such as the amounts of money in company

bank accounts, amounts due from credit customers, or amounts owed to suppliers.

3. Obtaining detailed information about a particular transaction.

4. Evaluating the efficiency and performance of various departments within the organization.

5. Maintaining documentary evidence of the company’s business activities. (For example, tax
laws require companies to maintain accounting records supporting the amounts reported in tax
returns.)

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1. II THE USE OF ACCOUNTS

An account is a means of accumulating in one place all the information about changes in
specific financial statement items, such as a particular asset or liability. For example, the Cash
account provides a company’s current cash balance, a record of its cash receipts, and a record
of its cash disbursements. In its simplest form, an account has only three elements: (1) a title;
(2) a left side, which is called the debit side; and (3) a right side, which is called the credit side.
This form of an account, illustrated below and on the following page, is called a T account
because of its resemblance to the letter “T.” In a computerized system, of course, the elements
of each account are stored and formatted electronically.

1. III DEBIT AND CREDIT ENTRIES

An amount recorded on the left, or debit, side of an account is called a debit, or a debit entry.
Likewise, any amount entered on the right, or credit, side is called a credit, or a credit entry. In
simple terms, debits refer to the left side of an account, and credits refer to the right side of an
account.

1. IV DOUBLE ENTRY SYSTEM

“Every transaction involving money or money’s worth has a two-fold aspect –the receiving of
a value on the one hand and the giving of the same value on the other. This two fold nature in
all transaction must be recorded in the books, and this gives rise to the term double Entry Book-
Keeping.” -Munro and Palmer

Double entry system is the most progressive, scientific and complete system of recording the
financial transactions of a business. The rules of recording transactions under this system are
so definite and clearly stated that the system is being used extensively in all countries.
According to this system there are two accounts involved in every business transaction. One of
them is debited and the other is credited. Under this system the accuracy of the accounts can
be checked by preparing a trial balance with the help of the balances of ledger accounts cat any
time and with the help of the trial balance a profit and loss account can be prepared in order to
ascertain the profit earned or loss suffered during particular period. Also, with the help of the
trial balance a balance sheet can be prepared to ascertain the financial position of the firm.

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2. PROCESS OF ACCOUNTING

2.I BOOKS OF ORIGINAL ENTRY- JOURNAL

The books in which a transaction is recorded for the first time from source document are called
‘Books of Original entry’. Journal is one of the basic books of original entry in which the
transactions are recorded in a chronological order according to the principles of double entry
system. When the size of the business is a small one, then it is possible to enter each and every
transaction in the Journal. But when the size of the business grows, it become sno longer
possible to record each and every transaction in the Journal.

2.I.1 JOURNAL
According to Professor Carter, “The journal as originally used, is a book of prime entry in
which transactions are copied in order of date from a memorandum or waste book. The entries
as they are copied are classified into debits and credits, so as to facilitate their being correctly
posted, afterwards in the ledger.” The information about each business transaction is initially
recorded in an accounting record called the journal. The journal is a chronological (day-by-
day) record of business transactions. At convenient intervals, the debit and credit amounts
recorded in the journal are transferred (posted) to the accounts in the ledger. The updated ledger
accounts, in turn, serve as the basis for preparing the company’s financial statements. The
simplest type of journal is called a general journal. Note the way in which transactions are
recorded in the general journal:

1. The name of the account to be debited is written first, and the dollar amount to be debited
appears in the left-hand money column.

2. The name of the account credited appears below the account debited and is indented to the
right. The dollar amount credited appears in the right-hand money column.

3. A brief description of each transaction appears immediately below each journal entry.

Accounting software packages automate and streamline the way in which transaction are
recorded. However, recording transactions manually—without a computer—is an effective
way to conceptualize the manner in which economic events are captured by accounting systems
and subsequently reported in a company’s financial statements.

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Format of Journal

Date Particulars Ledger Folio Amount Dr. Amount Cr.

(1) (2) (3) (4) (5)

The columns have been numbered only to show how the journal is written up, otherwise the
columns are not numbered

1. In the first column the date of the transaction is entered. The year and month is written only
once, till the change. The sequence of the dates and months should be strictly maintained.

2. Particulars:- Each transaction affects two account out which one account is debited and
other account is credited. The name of the account to be debited is written first and the word
‘Dr.’ is also written towards the end of the column. In the second line, the name of the account
to be credited is written. The credit account starts with the word 'To', a few space away from
the margin to make it distinct from the debit account ( A practices is now developing to omit
the writing of words 'Dr.' and 'To' from Journal entries).

Narration:- After each entry, a brief explanation of the transaction together with necessary
details is given. This explanation is called 'narration'. The narration has to know in future the
reason for the entry and also as to why a particular account was debited or credited. It is
necessary to write the narration after each entry and should be short, complete and clear.

3. Ledger folio or L.F.:- All entries from Journal are later posted into the ledger account. The
page number or Folio number of the ledger account where the posting has been made from the
journal is recorded in the L.F. column of the Journal. For example, if we make a posting in
Machinery A/c which is prepared at page 40 of the ledger, we shall write 40 in the L.F. column
against machinery account in the journal there are many advantages of writing the folio
numbers :-

1. The L.F. column in the journal shows whether an entry has been posted or not. If the page
number of the ledger does not appear against an entry, it will indicate that the entry has not
been posted to the ledger, so far.

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2. Page number written in the L.F. column in journal is indicative of the page number of ledger
where such posting has been made. It helps in understanding and checking the ledger posting
at a glance in the future.

3. If the trial balance does not agree, the posting of each and every entry has to be checked.
Such checking will not be possible without the help of L.F. column.

4. Amount Dr:- In the fourth column, the amount of the account being debited is written.

5. Amount Cr.:- In the fifth column, the amount of the account being credited is written.

Steps in journalising

1. Before recording a journal entry, it is essential to analyse a transaction in order to determine

the two accounts which are affected. Then, on the basis of rules of journalising, it must be
decided as to which account is to be debited and which account is to be credited.

2. It not necessary to use the word 'account' or A/C after the personal account.

3. After every journal entry, a line should be drawn in particular column so that each entry is
separated from the preceding one.

4. At the end of each page, both the Dr. and Cr. are dot columns are totalled up just in front of
each other. These total must be equal because the amount debited in each entry equals the
amount credited. These totals are carried forward to the next page progressively up to the end
of accounting period for this purpose the words carried forward or CF are written in particular
column at the end of each page and the words brought forward or BF are written at the start of
each page.

2.I.2 CASH BOOK

Meaning and Importance:- This book is used to record all transactions relating to cash receipts
and cash payments. The number of cash transaction is quite large in every business and it is
quite practicable and inconvenient to record all cash transaction in the journal. It is, therefore,
necessary to maintain a separate book for cash transaction. This book enables a businessman
to know the balance of cash in hand and at Bank at any point of time. It also gives information
about the daily receipts, payments and the closing cash balance at the end of each day. Hence,
as this is a very popular book and is maintained by all the organisation- big or small.
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Types of cash book

1) Cash book may be of four types
2) Single column cash book or one column cash book.
3) Double column cash book having
a) Cash and discount column; or
b) Bank discount column; or
c) Cash and bank columns.
4) Triple column cash book
5) Petty cash book

1] Simple Cash Books

This is also known as a Single Column Cash Book. This cash book will only record cash
transactions. The cash coming in (receipts) will be on the left and the cash payments will be on
the right. And since we will record all cash transactions here there is no need for a cash ledger
account.

Now since there is only one column we do not record bank transactions in this cash book. Any
discounts given will also not feature here. We will record bank and discount transactions in
their separate ledger accounts. Cash books are balanced quite frequently. In fact, most
companies balance their cash book daily. One important point to remember is that the cash
book can never have a credit balance. Cash books only show a debit balance.

2] Two Column Cash Books

Here instead of one column, we have an additional column for discounts. So along with the
cash transactions, we will also record the discounts in the same cash book. So both discounts
received and the discount that is given is recorded here. If any organization is in a general
practice of giving or receiving discounts this is the preferable option. Discount is a nominal
account – so the discount is given (loss) is on the debit side and discount received (profit) is on
the credit side. At the end of the period, we balance both columns and transfer the closing
balances.

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3] Three Column Cash Books

This cash book has the cash, the discount and additionally the bank columns in it. Since the
development of banking most firms, these days prefer to deal in cheques or other such bills of
exchange. And so having a bank column in your cash book makes things concise and simpler
to understand.

So when you receive a cheque and you deposit it in the bank the same day you make the entry
in the bank column (the debit side in this case). But say you send the cheque later (not the same
day) then this will be a contra entry. A contra entry is transactions that happen between a cash
account and a bank account. Ultimately your Cash & Bank balance remains the same, the
money just moves around.

4] Petty Cash Book

In a firm, there are usually cash transactions happening in all the departments. These we will
record in one of the above formats of cash books. But there are many cash transactions
happening for very small amounts. Sometimes there are dozens of such transactions that occur
in just one day. These are known as petty transactions. Examples are expenses for postage,
stationery, traveling, food bills, etc.

So since the number of such transactions tends to be very high we maintain a separate cash
book for them – the petty cash book. Such a cash book is maintained by the petty cashier (who
in most cases also handles the petty cash).

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2. II LEDGER

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:

Transaction

Journal

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.

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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 the current year becomes the opening balance of the next year.

Types or Forms of Ledger Accounts:

There are two forms of ledger accounts. These are:

1. Standard form
2. Self-balancing form

Standard Form of Ledger Account:

To understand clearly as to how to write the accounts in ledger, the standard form of an account
is given below with two separate transactions:

Date Particulars J.R Amount Date Particulars J.R Amount

2005 2005
Dec. 17 Cash A/C 1,200 Dec. 17 Purchases A/C 2,000

It appears that each account in the ledger has two similar sides - left hand side is called debit
side (briefly Dr.) and right hand side (briefly Cr.) side. Now a days these two words are not
used, because it is obvious that the left hand side is debit side and right hand side is credit side.

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Posting Procedure:

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.

The rules for balancing an account are stated as below:

1. Add up the amount columns of both the sides of an account and write the totals in a
separate slip of paper.
2. Find out the difference of the two totals.
3. Write down the difference on the lesser side of the account.
4. Now total up both the sides and write the totals and draw double lines under them.
5. Again write the difference on the opposite side below the double line.

If the debit side of an account is heavier, its balance is known as debit balance. and if the credit
side of an account is heavier its balance is know as credit balance. If the two sides are equal,
that account will show zero balance. The rules for determining the balance is as follows:

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Total debit = More than total credit = Debit balance

Total credit = More than total debit = Credit balance

Total debit = Total credit = Nil balance

It may be noted that at the time of balancing an account debit balance is placed on the credit
side and credit balance on debit site. This balance is known as closing balance. What is closing
balance in this year, is the opening balance of the next year.

2. III 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 to the 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 of all the ledger accounts must be 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

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ascertained. There are however, a few types of errors which the trial balance cannot detect. In
other words, the trial balance will agree in spite 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 trial balance

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

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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.

2. IV ERROR AND THEIR RATIFICATION

In our life we make many mistakes. As soon as these are detected, he/she corrects
them. In the similar manner, an accountant can also make mistakes or commit errors
while recording and posting transactions. These are called ‘Accounting Errors’. So
accounting errors are the errors committed by persons responsible for recording and
maintaining accounts of a business firm in the course of accounting process. These
errors may be in the form of omitting the transactions to record, recording in wrong
books, or wrong account or wrong totalling and so on.

Accounting errors can take the following forms: l Omission of recording a business
transaction in the Journal or Special purpose Books l Not posting the recorded transactions in
various books of accounts to the respective accounts in ledger l Mistakes in totalling or in
carrying forward the totals to the next page l Mistake in recording amount wrongly, writing it
in a wrong account or on the wrong side of the account. Again there may be two types of
accounting errors (i) That cause the disagreement of trial balance, (ii) That do not affect the
agreement of Trial Balance. Locating Errors It is obvious that if there are errors they must be
located at the earliest. After locating the errors, they are to be rectified. In accounting also
once it is established there are some accounting errors these need to be located and detected

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as early as possible. How to locate the errors? Steps to be taken to locate the accounting
errors can be stated as follows:

(A) When the Trial Balance does not agree

1) Check the columnar totals of Trial Balance

2) Check that the balances of all accounts (including cash and bank balances) in the ledger
have been written and are written in the correct column of trial balance i.e. debit balance
in the debit column and credit balance in the credit column.
i) Find the exact figure of difference with trial balance and see that
ii) No account of a similar balance has been omitted to be shown in the Trial Balance
or
3) A balance amount which is half of the amount of difference amount but is written on
the wrong side of the trial Balance.
4) Recheck the totals of Special Purpose Books.
5) Check the balancing of the various accounts in the ledger.
6) If difference is still not traced, check each and every posting from the Journal and various
Special Purpose Books, one by one in the ledger.

(B) When the Trial Balance agrees. You have already learnt that if the totals of the two
amount columns of trial balance tally it is no conclusive proof of the accuracy of accounts.
There may still be some accounting errors. These errors may not be immediately traced but
may be detected at much later stage. These are rectified as and when detected. Following are
the errors which don’t affect the trial balance :

1) Omission to record a transaction in a journal or in a Special Purpose Book. For example,

goods purchased on credit but are not recorded in the Purchases Book at all.
2) Recording a wrong amount of an item in journal or in a Special Purpose Book. For
example, sale of Rs. 2550 on credit entered in the Sales Book as Rs.5250.
3) Posting the correct amount on the correct side but in wrong account. For example, cash
received from Jagannathan was credited to Vishvanathan.

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4) An item of Capital Expenditure recorded as an item of Revenue Expenditure and vice-a-

versa. For example, Repairs to Building was debited to Building A/c. Why does the trial
balance still agree though there may be above stated errors? Reason is that in the above
cases the debits and credits are affected simultaneously by the same amount

Various accounting errors can be classified as follows :

A. On the basis of their nature

(a) Errors of omission
(b) Errors of commission
(c) Errors of principle
B. On the basis of their impact on ledger accounts
(a) One sided errors
(b) Two sided errors.
A. On the basis of their nature
(a) Errors of omission: As a rule, a transaction is first recorded in books of
accounts. However, accountant may not record it at all or record it partially.
It is called an error of omission. For example, goods purchased on credit are
not recorded in Purchases Book or discount allowed to a customer was not
posted to Discount A/c in the ledger. In the first case it is a complete
omission. Therefore, both debit and credit are affected by the same amount.
Therefore, it does not affect the Trial Balance. The second example is the
example of partial omission. It affects only one account i.e. Discount A/c.
Therefore it affects Trial Balance.
(b) Errors of commission: When the transaction has been recorded but an error
is committed in the process of recording, it is called an error of commission.

2. V FINANCIAL STATEMENT

A financial statement is the combination of the three major reports on a business. It will contain
the cash flow statement, the income statement and the balance sheet of the business. All three
together produce an overall picture of the health of the business.

Financial statements are the basic and formal annual reports through which the corporate
management communicates financial information to its owners and various other external

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parties which include investors, tax authorities, government, employees, etc. These normally
refer to:

(a) the balance sheet (position statement) as at the end of accounting period, and
(b) the income statement.

Now-a-days, the cash flow statement is also taken as an integral component of the financial
statements of a company.

Income statement

The income statement is one of the major financial statements used by accountants and business
owners. (The other major financial statements are the balance sheet, statement of cash flows,
and the statement of stockholders' equity.) The income statement is sometimes referred to as
the profit and loss statement (P&L), statement of operations, or statement of income. We will
use income statement and profit and loss statement throughout this explanation.

The income statement is important because it shows the profitability of a company during the
time interval specified in its heading. The period of time that the statement covers is chosen by
the business and will vary. For example, the heading may state:

"For the Three Months Ended December 31, 2018" (The period of October 1 through December
31, 2018.)

"The Four Weeks Ended December 27, 2018" (The period of November 29 through December
27, 2018.)

"The Fiscal Year Ended June 30, 2018" (The period of July 1, 2017 through June 30, 2018.)

Keep in mind that the income statement shows revenues, expenses, gains, and losses; it does
not show cash receipts (money you receive) nor cash disbursements (money you pay
out).People pay attention to the profitability of a company for many reasons. For example, if a
company was not able to operate profitably—the bottom line of the income statement indicates
a net loss—a banker/lender/creditor may be hesitant to extend additional credit to the company.
On the other hand, a company that has operated profitably—the bottom line of the income
statement indicates a net income—demonstrated its ability to use borrowed and invested funds
in a successful manner. A company's ability to operate profitably is important to current lenders
and investors, potential lenders and investors, company management, competitors, government
agencies, labor unions, and others.

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The format of the income statement or the profit and loss statement will vary according to the
complexity of the business activities. However, most companies will have the following
elements in their income statements:

A. Revenues and Gains

1. Revenues from primary activities
2. Revenues or income from secondary activities
3. Gains (e.g., gain on the sale of long-term assets, gain on lawsuits)

B. Expenses and Losses

1. Expenses involved in primary activities
2. Expenses from secondary activities
3. Losses (e.g., loss on the sale of long-term assets, loss on lawsuits)

If the net amount of revenues and gains minus expenses and losses is positive, the bottom line
of the profit and loss statement is labelled as net income. If the net amount (or bottom line) is
negative, there is a net loss.

BALANCE SHEET

Definition and Explanation:

Balance sheet is a list of the accounts having debit balance or credit balance in the ledger. On
one side it shows the accounts that have a debit balance and on the other side the accounts that
have a credit balance. The purpose of a balance sheet is to show a true and fair financial position
of a business at a particular date. Every business prepares a balance sheet at the end of the
account year. A balance sheet may be defined as:

"It is a statement of assets, liabilities and owner's equity (capital) on a particular date".

"It is a statement of what a business concern owns and what it owes on a particular date". What
is owns are called assets and what it owes are called liabilities.

"It is a statement which discloses total assets, total liabilities and total capital (owner's equity)
of a concern on a particular date".

"It is a statement where all the ledger account balances which remain open after the preparation
of trading and profit and loss account, find place".

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Balance sheet is so called because it is prepared with the closing balance of ledger accounts at
the end of the year. It has two sides - assets side or left hand side and liabilities side or right
hand side. The accounts have a debit balance are shown on the asset side and those have a
credit balance are shown on the liabilities side and the total of the two sides will agree.

Assets means all the things and properties under the ownership of the business i.e. building,
plant, furniture, machinery, stock, cash etc. Assets also include anything against which money
or service will be received i.e. creditors accrued income, prepaid expenses etc.

Liabilities means our dues to others or anything against which we are to pay money or render
service, i.e. creditors, outstanding expenses, amount payable to the owner of the business
(capital) etc.

Asset side of the balance sheet indicates the different types of assets owned by a concern, while
liabilities side discloses the various sources through which funds have been obtained in order
to acquire those assets. Balance sheet reveals the financial position of the firm on a particular
date at a point of time, so it is also called "position statement". It is prepared on the last day of
the accounting year and discloses concern for the whole year cannot be determined through the
balance sheet because financial position is ever changing. The is why the heading of the balance
sheet is given as under:

Balance Sheet as at 31st December, 2005

(If accounting year ends on 31 Dec. 2005)

Features of Balance Sheet:

Balance sheet has the following features:

A. It is the last stage of final accounts

B. It is prepared on the last day of an accounting year.
C. It is not an account under the double entry system - it is a statement only.
D. It has two sides - left hand side known as asset side and right hand side known as
liabilities side.
E. The total of both sides are always equal.
F. The balances of all asset accounts and liability accounts are shown in it. No expense
accounts and revenue accounts are shown here.
G. It discloses the financial position and solvency of the business.

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H. It is prepared after the preparation of trading and profit and loss account because the
net profit or net loss of a concern is included in it through capital account.

Method of Preparation of Balance Sheet:

All the information necessary for the preparation of balance sheet is available from trial balance
and from some other ledger accounts. After transferring accounts relating to expenses and
revenues to trading and profit and loss account, the trail balance contains only the accounts of
assets, liabilities, and capital. All assets have debit balances and all liabilities and capital have
credit balances. The asses are shown on the asset side of the balance sheet and liabilities and
capital are shown on the liabilities side of the balance sheet after arranging them properly.

As the balance sheet is prepared on the last day of an accounting year, so its heading and format
will be:

Balance Sheet as at 31st December, 2005

Asset $ Liabilities and Capital $.

Classification of Assets:

Assets may be classified as follows:

Real Assets:

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Assets which have some market value are called real assets, e.g. building, machinery, stock,
debtors, cash, goodwill, etc. Real assets are further divided into two types according to their
permanence:

Fixed Assets: Assets which have long life and which are bought for use for a long period of
time are called "fixed assets". These are not bought for selling purposes, e.g. land, building,
plant, machinery, furniture etc. Fixed assets are again sub-divided into two:

Tangible Assets: Assets which have physical existence and which can be seen, touched and
felt are called "tangible assets", e.g. building, plant, machinery, furniture etc.

Intangible Assets: Assets which have no physical existence and which cannot be seen, touched
or felt are called "intangible assets", e.g. goodwill, patent right, trade mark etc.

Current Assets: Assets which are short-lived and which can be converted into cash quickly to
meet short term liabilities are called "current assets", e.g. stock debtors, cash etc. Such assets
change their form repeatedly and so, they are also known as circulating or floating assets. For
example, on purchase of goods cash is converted into stock and on sale of goods, stock is
converted into debtors, on collection from debtors, debtors take the form of cash etc.

Out of current assets those which can be converted into cash very quickly or which are already
in the form of cash are called liquid or quick assets e.g. debtors, cash in hand, cash at bank etc.

Fictitious Assets: Assets which have no market value are called fictitious assets. examples of
fictitious assets include preliminary expenses, loss on issue of shares etc. They are also known
as nominal assets.

Besides these, there is another type of assets whose value gradually reduce on account of use
and finally exhaust completely. This type of assets is called wasting assets e.g. mine, forest etc.

Classification of Liabilities:

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Internal Liabilities:

The total amount of debts payable by a business to its owner is called internal liability e.g.
Owner's equity (capital), reserve etc. From practical view point internal liabilities should not
be regarded as liabilities, since there is no question of meeting such liabilities al long as the
business continues.

External Liabilities:

All debts payable by a business to the outsiders (other than the owner) are called external
liabilities e.g. creditors, debentures, bills payable, bank overdraft, etc. External liabilities are
further divided into two.

Fixed or Long Tern Liabilities: The liabilities which are payable after a long period of time
are called fixed or long term liabilities e.g. debentures, loan on mortgage etc.

Current or Short Term Liabilities: The debts which are repayable within a short period of
time are called current or short-term liabilities e.g. creditors, bills payable, bank overdraft etc.
Current liabilities may again be divided into two:

Deferred Liabilities: Debts which are repayable in the course of less than one year but more
than one month are called deferred liabilities e.g. Short term loan etc.

Liquid or Quick Liabilities: Debts are repayable in the course of a month are called liquid or
quick liabilities e.g. bank overdraft, outstanding expenses, creditors etc.

Besides the above, there is another type of liability which is known as contingent liability. It
is one which is not a liability at present, but which may or may not become a liability in in
future. It depends upon certain future event. For example, suppose, the buyer of goods filed a
suit in the court against the seller claiming damage of $10,000 for breach of contract. This will
be regarded as a contingent liability to the seller until the receipt of the court's order. To the
buyer, this is a contingent asset. Both contingent liability and contingent asset are not recorded
in the balance sheet. They are generally mentioned in the balance sheet as a note.

Grouping and Marshaling of Assets and Liabilities in Balance Sheet:

As we have discussed that the main purpose of balance sheet is to disclose a true and fair
financial position of a business on a particular date. So, the assets and liabilities must be shown
in such a manner that the financial position of the business can be assessed through it easily
and quickly. Thus an arrangement is made in which assets and liabilities are shown in the

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balance sheet. Such an arrangement is called marshaling of assets and liabilities. There are
three methods of marshaling:

1. Permanency Preference Method

2. Liquidity Preference Method
3. Mixed Method

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3. CONCLUSION

Accounting is the systematic and comprehensive recording of financial transactions pertaining

to a business. Accounting also refers to the process of summarizing, analysing and reporting
these transactions to oversight agencies, regulators and tax collection entities. Accounting cycle
refers to the specific tasks involved in completing an accounting process. The length of an
accounting cycle can be monthly, quarterly, half-yearly, or annually. It may vary from
organization to organization but the process remains the same

The accounting cycle generally consists of eight specific steps. In this chapter, we illustrate
how businesses (1) journalize (record) transactions, (2) post each journal entry to the
appropriate ledger accounts, and (3) prepare a trial balance. The remaining steps of the cycle
will be addressed in Chapters 4 and 5. They include (4) making end-of period adjustments, (5)
preparing an adjusted trial balance, (6) preparing financial statements, (7) journalizing and
posting closing entries, and (8) preparing an after-closing trial balance.

The cyclical process of collecting financial information and maintaining accounting records
does far more than facilitate the preparation of financial statements.

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ANALYSIS OF ACCOUNTING PROCESS

4. BIBLIOGRAPHY

The researcher has consulted following sources to complete the rough proposal:

SECONDARY SOURCES:

1) WEBSITES:
 https://www.investopedia.com/terms/a/accounting.asp
 http://www.netmba.com/accounting/fin/process/
 https://www.tutorialspoint.com/accounting_basics/accounting_process.
htm

2) BOOKS:
 Accountancy by D K Goel
 Introduction to Accountancy by T S Grewal
 Financial Accounting by V K Goel
 Financial Accounting for Managers by T. P Ghosh

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