Recording of business Recording of business transactiontransaction

Chapter number -Chapter number -fourfour

JournalJournal

Journal is a book of original entry in Journal is a book of original entry in which business transactions are which business transactions are recorded date wise and serial wise recorded date wise and serial wise according to double entry system.according to double entry system.

““A journal is a book, employed to A journal is a book, employed to classify or sort out transactions in a classify or sort out transactions in a form convenient for their subsequent form convenient for their subsequent entry in the ledger.”………entry in the ledger.”………L.C.COPPER L.C.COPPER

FORMAT OF JOURNALFORMAT OF JOURNAL

Date|particulars|ledger folio|dr.Rs.|Date|particulars|ledger folio|dr.Rs.|cr.Rs.cr.Rs.

| | | | | | | |

RULES OF JOURNALISINGRULES OF JOURNALISING

PERSONAL ACCOUNT: PERSONAL ACCOUNT: Rule..”Dr. the receiver, cr. The Rule..”Dr. the receiver, cr. The

giver.”giver.”

Example..Example..

Ravi a/c Dr. 2000Ravi a/c Dr. 2000

To cash 2000To cash 2000 (paid 2000 rs. to Ravi )(paid 2000 rs. to Ravi )

REAL ACCOUNTREAL ACCOUNT

Rule …. Debit what comes in , Cr. Rule …. Debit what comes in , Cr. What goes out.What goes out.

Example…. Computer was purchased Example…. Computer was purchased for rs. 30000.for rs. 30000.

Entry ….Entry ….

computer account dr. 30000computer account dr. 30000

To cash 30000To cash 30000

(being computer purchased for cash) (being computer purchased for cash)

NOMINAL ACCOUNTNOMINAL ACCOUNT

RULE…..DR. ALL EXPENDITURES AND RULE…..DR. ALL EXPENDITURES AND LOSSES, CR. ALL INCOMES AND GAINS.LOSSES, CR. ALL INCOMES AND GAINS.

Example…Rs. 2000 paid as salary.Example…Rs. 2000 paid as salary.

SALARY ACCOUNT DR. 2000SALARY ACCOUNT DR. 2000 TO CASH 2000TO CASH 2000

( being 2000 rs. Paid as salary )( being 2000 rs. Paid as salary )

DISCOUNTDISCOUNT

MEANING..it means received or paid MEANING..it means received or paid less amount after deduction from less amount after deduction from purchase price.purchase price.

Example.. Fan purchased at rs.800 Example.. Fan purchased at rs.800

(print price rs. 1000) so discount (print price rs. 1000) so discount received by customer is 200 Rs. received by customer is 200 Rs.

TYPE OF DISCOUNTTYPE OF DISCOUNT

TRADE DISCOUNT- TRADE DISCOUNT- discount which is given discount which is given

for promoting sales at a certain for promoting sales at a certain percentage on sales.percentage on sales.

example .. A seller sold goods for example .. A seller sold goods for rs. 20000 @10%rs. 20000 @10%

It is not recorded in the books and It is not recorded in the books and deducted from invoice price.deducted from invoice price.

cash account dr. 18000cash account dr. 18000 To sales 18000To sales 18000

Cash discountCash discount

The discount which is given to debtor The discount which is given to debtor by creditor for early payment of price by creditor for early payment of price of goods.of goods.

It is recorded.It is recorded. It is a nominal account .It is a nominal account .Discount allowed is a loss so debitedDiscount allowed is a loss so debitedDiscount received is a gain so Discount received is a gain so

credited.credited.

DIFFERENCE BETWEEN TRADE DIFFERENCE BETWEEN TRADE DISCOUNT AND CASH DISCOUNTDISCOUNT AND CASH DISCOUNT Trade discountTrade discount Given at the time Given at the time

of sales.of sales. Purpose-to Purpose-to

increase the sales.increase the sales. Not recorded in the Not recorded in the

books.books. Deducted from the Deducted from the

invoice prices.invoice prices.

Cash discountCash discount Given for early Given for early

payment.payment. Purpose-early Purpose-early

payments.payments. Recorded in the Recorded in the

books.books. Not deducted from Not deducted from

invoice price.invoice price.

MEANING OF GOODSMEANING OF GOODS

THE THINGS WHICH ARE PURCHASED BY THE THINGS WHICH ARE PURCHASED BY

TRADER FOR THE PURPOSE OF RESALE TRADER FOR THE PURPOSE OF RESALE

AT A PROFIT.AT A PROFIT.

FOR THIS “GOODS ACCOUNT” IS OPENED. FOR THIS “GOODS ACCOUNT” IS OPENED.

CLASSIFICATION OF GOODS CLASSIFICATION OF GOODS ACCOUNTACCOUNT

Purchase accountPurchase account

Sales accountSales account

Purchase return accountPurchase return account

Sales return accountSales return account

IMPORTANCE OF JOURNALIMPORTANCE OF JOURNAL

To understand To understand double entry double entry systemsystem

Less possibility of Less possibility of errorserrors

Date wise Date wise accountingaccounting

ProofProof Helpful in Helpful in

formation of ledgerformation of ledger

LIMITATIONS OF JOURNALLIMITATIONS OF JOURNAL

Limited useLimited use

More useful for small businessesMore useful for small businesses

Lack of business informationLack of business information

LEDGERLEDGER

Meaning of ledgerMeaning of ledger

The book in which a trader’s The book in which a trader’s transcationstranscations

are recorded in a classified , permanent are recorded in a classified , permanent

record is called a ledger.record is called a ledger.

L.C. COPPER L.C. COPPER

Format of ledgerFormat of ledger

dateparticularsj.f.amountdateparticuladateparticularsj.f.amountdateparticularsj.f.amountrsj.f.amount

Rules of postingRules of posting

Name of account at the topName of account at the topTwo sides DR. and CR. Written at the Two sides DR. and CR. Written at the

top of account.top of account.All the dr.with TO, all the cr. With BYAll the dr.with TO, all the cr. With BYWriting of ‘account’ word with Writing of ‘account’ word with

personal account is not compulsory.personal account is not compulsory.

Importance of ledgerImportance of ledger

It provides different information:It provides different information:E.G.:E.G.:How much goods soldHow much goods soldhow much puchasedhow much puchasedHow much paid to othersHow much paid to othersHow much received How much received Expenditure and income received Expenditure and income received Profit or losses during a certain time.Profit or losses during a certain time.

Advantage of ledgerAdvantage of ledger

Helpful in preparing trial balanceHelpful in preparing trial balanceHelpful in preparing final accountsHelpful in preparing final accountsKnowledge of financial positionKnowledge of financial positionOvercoming the limitations of journalOvercoming the limitations of journalKnowledge of business result.Knowledge of business result.

Difference between journal and Difference between journal and ledgerledger

Journal Journal Book-priliminaryBook-priliminary Process-recordingProcess-recording NarrationNarration Basis-ledgerBasis-ledger Final accounts-not Final accounts-not

prepared after itprepared after it Datewise recordingDatewise recording

LedgerLedger Book-mainBook-main Process –postingProcess –posting No narrationNo narration Basis- trial balanceBasis- trial balance Final account Final account

prepared prepared Recording account Recording account

wisewise

TRIAL BALANCETRIAL BALANCE

according to J.r.batliboi…. according to J.r.batliboi….

Trial balance is a statementTrial balance is a statement

prepared with the debit and credit prepared with the debit and credit balancesbalances

of ledger acounts to verfy the of ledger acounts to verfy the airthmaticalairthmatical

accuracy of the books.accuracy of the books.

Method of preparing trial Method of preparing trial balancebalance

TOTAL METHODTOTAL METHOD

BALANCE METHODBALANCE METHOD

ACCOUNTING ERRORSACCOUNTING ERRORS

Errors not disclosed by trial balanceErrors not disclosed by trial balance1} error of commision1} error of commision2}error of ommision2}error of ommision3}error of principles3}error of principles4}wrong enteries in the books of 4}wrong enteries in the books of

original recordsoriginal recordsCompensating errorsCompensating errors

Errors disclosed by trial Errors disclosed by trial balancebalance

Wrong totalingWrong totaling wrong postingwrong posting entering wrong amountentering wrong amount double postingdouble posting Wrong entry in trial balanceWrong entry in trial balance ommision of any amount from trial ommision of any amount from trial

balancebalance Ommision of posting of one aspect of the Ommision of posting of one aspect of the

entryentry Error in casting and balance of accountsError in casting and balance of accounts Error in the total of trial balanceError in the total of trial balance

Limitations of trial balanceLimitations of trial balance

no guarantee of complete accuracyno guarantee of complete accuracy

costly systemcostly system

Sub-division of journalSub-division of journal

Cash bookCash bookPurchase bookPurchase bookSales book Sales book Purchase return book Purchase return book Sales return bookSales return bookBills receivable bookBills receivable bookBills payble bookBills payble book Journal proper Journal proper

Suspense accountSuspense account

Suspence account is that account Suspence account is that account whichwhich

tells about the gap between dr. and tells about the gap between dr. and cr.cr.

balances of trial account when it is balances of trial account when it is not matched.not matched.

CHAPTER NUMBER - 5CHAPTER NUMBER - 5

CAPITAL AND REVENUE ITEMS CAPITAL AND REVENUE ITEMS

According to Cartor…..According to Cartor…..

Capital items are those items whose Capital items are those items whose profit is received in many accounting profit is received in many accounting years but revenue items are those years but revenue items are those items whose complete profit is items whose complete profit is received in related years.received in related years.

CLASSIFICATION OF CAPITAL CLASSIFICATION OF CAPITAL AND REVENUE ITEMS AND REVENUE ITEMS

Capital expenditure and revenue Capital expenditure and revenue expenditureexpenditure

Capital receipt and revenue receiptCapital receipt and revenue receiptCapital losses and revenue lossesCapital losses and revenue lossesCapital profit and revenue profitsCapital profit and revenue profits

CAPITAL EXPENDITURECAPITAL EXPENDITURE

Expenditure which are made to Expenditure which are made to yieldsyields

benefits over a long period and which benefits over a long period and which areare

related to any fixed asset are called related to any fixed asset are called capitalcapital

expenditure.expenditure.

examplesexamples

Purchase of fixed assetsPurchase of fixed assetsExp. On expantion and modification of Exp. On expantion and modification of

fixed assets.fixed assets.On aquiring the right to carry business On aquiring the right to carry business

e.g. purchase of patent , goodwille.g. purchase of patent , goodwillAcquiring of capital e.g. exp. On issue Acquiring of capital e.g. exp. On issue

of shares, prospectus.of shares, prospectus.On establishment On establishment

REVENUE EXPENDITUREREVENUE EXPENDITURE

Incurred for the operaton of businessIncurred for the operaton of business

Benefits of these for the current yearBenefits of these for the current year

For smooth running of businessFor smooth running of business

ExamplesExamples

Incured for the operation of business-Incured for the operation of business-wages,salary legal exp.administrative wages,salary legal exp.administrative exp.exp.

On ordinery repairs of fixed assets to On ordinery repairs of fixed assets to maintain the capacity maintain the capacity

For production of goods or for resale of For production of goods or for resale of goods-cost of raw material, production goods-cost of raw material, production exp.exp.

Interest on loanInterest on loanDepriciation on assetsDepriciation on assets

Difference between capital and Difference between capital and revenue exp.revenue exp.

Capital exp.Capital exp. Nature-related to Nature-related to

fixed assetsfixed assets Accounting –assets Accounting –assets

side of balance sheetside of balance sheet Profit-for many yearsProfit-for many years for increase in profitsfor increase in profits To pay the capital To pay the capital

liabilityliability

Revenue expRevenue exp Routine exp.Routine exp. Related to Related to

productionproduction

And resaleAnd resale

accounting –trading accounting –trading and profit and losses and profit and losses

Profit-for current yearProfit-for current year

Settlement of revenue Settlement of revenue liabilityliability

DEFFERED REVEUE DEFFERED REVEUE EXPENDITUREEXPENDITURE

EXPENDITURE- incurred in advance, EXPENDITURE- incurred in advance, Benefits receive in futureBenefits receive in futureExamples-Examples- preliminary expencespreliminary expences advertisement expencesadvertisement expences expences on issue of sharesexpences on issue of shares expences on issue of expences on issue of

debenturesdebentures

CAPITAL RECEIPT AND REVENUE CAPITAL RECEIPT AND REVENUE RECEIPTRECEIPT

CAPITAL RECEIPTS-CAPITAL RECEIPTS- amount received from fixed amount received from fixed

assets or investment.assets or investment.Amount received by company from Amount received by company from

issue of shares.issue of shares.Amount received as loanAmount received as loanAmount received as compensation Amount received as compensation

from accident of assetsfrom accident of assets

Revenue receiptsRevenue receipts

Amount received from sale of goodsAmount received from sale of goodsFees received from the services Fees received from the services

provided by the businessprovided by the business Interest and dividend received on Interest and dividend received on

investmentinvestmentRoutine incomesRoutine incomes

Capital loss Capital loss

Capital loss- which occurred in Capital loss- which occurred in relation to fixed assets. e.g.-relation to fixed assets. e.g.-

Loss from sale of fixed assetsLoss from sale of fixed assetsLoss from accident of fixed asetsLoss from accident of fixed asetsLosses not from normal natureLosses not from normal nature

Reveue lossesReveue losses

Losses from the normal natureLosses from the normal naturefrom the normal operationfrom the normal operationLoss from bad debtsLoss from bad debtsLoss from destroy of goodsLoss from destroy of goodsLoss from selling of goodsLoss from selling of goodsFroad by any employeeFroad by any employeeTheft of goods or cashTheft of goods or cash

Capital profit and revenue Capital profit and revenue profitsprofits

Profit from sale of fixed assets is Profit from sale of fixed assets is capital profits.capital profits.

Revenue profits-which are normally Revenue profits-which are normally earned by business.e.g.-earned by business.e.g.-

commission receivedcommission received discount receiveddiscount received rent receivedrent received

Business incomeBusiness income

Meaning-remaining balance in a Meaning-remaining balance in a certain period after deducting certain period after deducting operating expences.operating expences.

measurement –measurement – net worth methodnet worth method profit and loss account profit and loss account

methodmethod