ACCOUNTING CYCLE• Recording: First, all transactions should be

recorded in the journal or books of original entry known as subsidiary books as and when they take place.

• Classifying: All entries in the journal of books of original entry should be posted to the appropriate ledger accounts to find out at a glance the total effect of all such transactions in a particular account.

• Summarising: Last stage is to prepare the trial balance and final accounts with a view to ascertaining the profit or loss made during a trading period and the financial position of the business of a particular date.

Figure 1: Graphical representation of accounting cycle

Journalising• Definition

The word "journal" has been derived from the French word "jour". Jour means day. So journal means daily. Transactions are recorded daily in journal and hence it has been named so. It is a book of original entry to record chronologically (i.e. in order of date) and in detail the various transactions of a trader.

Form of Journal:Date

(1)

Particulars

(2)

L.F.

(3)Dr. Amount Cr. Amount

         

Column (1) It is meant for writing the date of the transaction.

Column (2) It is used for recording the names of the two accounts

affected by transactions.

Column (3) It is meant for noting the number of the page of the ledger

on which the particular account appears in that book.

Column (4) It shows the amount to be debited to the account named.

Column (5) It shows the amount to be credited to the account stated.

Rules of Journalising: Use two separate lines for writing the names of the two accounts concerned in each transaction.

Write the name of the debtor or account to be debited in the first line and the name of the creditor or the account to be credited in the next line

Write the name of the account to be debited close to the line starting the particulars column and that of the account to be credited at a short distance from this line.

Use "Dr" after each debit item and "To" before each credit. The term "Cr." after a credit item is unnecessary, as if one account is debtor, the other must be creditor.

To separate one entry from another a line is drawn below every entry to cover particulars column only. The line does not extend to amount column.

Example• On first January, 1991 A started business with

capital of $20,000 and his transactions of the month were as follows:

Jan.2 Purchased building for cash 8,000Jan.8 Purchased goods from C 1,000Jan.15 Sold goods for cash 500Jan.20 Goods returned to C 100Jan.22 Sold goods to R 400Jan.25 R returned goods 25Jan.31 Salaries paid for the month 200Jan.31 Rent paid for the month 150

Date Particulars L.F Debit CreditJan. 1 Cash Account          ...Dr.   20,000       To Capital Account     20,000

  (Capital introduced)      Jan 2. Building Account       ...Dr.   8,000  

   To Cash Account 8,000

(Building purchased for cash)

Jan. 8 Purchases Account   . ..Dr.   1,000       To C     1,000

(Goods purchased on credit form C)

Jan. 15 Cash Account          ...Dr.   500       To Sales Account     500  (Goods sold for cash)      

Jan. 20 C                           ...Dr.   100       To purchases Returns Account     100  (Goods returned to C)      

Jan. 22 R                           ...Dr.   400       To Sales Account     400  (Goods sold on credit)      

Jan. 25 Sales returns Account ..Dr. 25

   To R 25

(Goods returned by him)

Jan. 31 Salaries Account        ...Dr. 200

   To Cash Account 200

(Salaries paid)

Jan. 31 Rent Account            ...Dr. 150

   To Cash Account 150

(Rent paid in cash)

Total 30,375 30,375

TERMS TO REMEMEBER

Capital Account: The proprietor's account in the business books is called "capital account".

Drawings Account: Any cash or goods taken away by the proprietor for his personal use are called his drawings and are debited to "Drawings Account".

Bad Debts: When any customer is declared insolvent and amount due from him is not recoverable, it should be debited to Bad debts account and credited to customer’s account.

Cash Discount: It is allowed to the creditor by the debtor as an incentive to the later to make an early payment. Cash Discounts are always recorded in the book of accounts and a separate account is opened in ledger. Being a nominal account, it is debited with the loss and discount allowed and credited with the gain on discount received.

Goods Given Away: Sometimes goods are (a) given away as charity (b) taken by the proprietor for his private use (c) distributed free as samples. Such goods are not sales. Therefore they are not credited to sales account but are credited to purchases account because they reduce the amount of goods purchased

Trade Discount:

It is a deduction allowed by manufacturer to the wholesaler or the retailer on the gross value or list price of goods to enable the buyer to sell the goods further (at list price) and yet make a profit for him. Trade discount is not recorded in any accounts it is deducted in the invoice itself from the gross value of goods. The entry in the journal will be recorded with the net value of goods left after deducting trade discount. It may be noted that cash discount is calculated on net value of goods left after deducting trade discount.

Classification of Goods Goods Account can be classified into following

categories. • Purchase Account: The account is meant for

recording all purchases of goods, Goods “come in” on purchasing of goods and, therefore the purchase Account is debited on purchase of goods.

• Sales Account: The account is meant for recording of selling of goods. The goods “go out” on selling of goods, and therefore, on sale of goods, the Sales Account is credited.

• Purchase Returns Account: The account is meant for recording return of goods purchased. The goods “go out” on returning of goods to the suppliers and, therefore, the account should be credited on returning goods purchased.

• Sales Returns Account: The account is meant for recording return of goods sold, by the customers. The goods “come in” and, therefore, the Sales Returns Accounts should be debited on returns of goods.

Opening Entries• In case of running business, the assets and

liabilities appearing in the previous year’s balance sheet will have to be brought forwards to the current year. This is done by means of a journal entry which is termed as “opening entry”. All assets accounts are debited while all liabilities accounts are credited. The excess of assets over liabilities is the proprietor’s capital and credited to his capital account.

Example of Opening Entries• Pass the opening entry on January 1, 1998 on

the basis of the following information taken from the business of Mr. ABC:•Cash in hand

2,000•Sundry Debtors 6,000•Stock of Goods 4,000•Plant 5,000•Land and buildings10,000•Sundry Creditors 10,000

Date Particulars L.F Debit Credit

1 Jan 1998

Cash Account          ...Dr.

  2,000  

Solution:

Sundry Debtors ....Dr. 6,000

Stock A/c ....Dr. 4,000

Plant A/c ....Dr. 5,000

Land and Building A/c ....Dr. 10,000

To Sundry Creditors

10,000

To Capital A/c (Balancing Figure)

17,000

27,000 27,000