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COMMERCEATEASE.

COM

AN EASY APPROACH TO
ACCOUNTANCY
(FOR BEGINNERS)

Ms. PRABHJOT KAUR


6/24/2018

Learn the basics of Accountancy in a week.


AN EASY APPROACH TO ACCOUNTANCY

CONTENTS

 Why this e-book?


 Meaning of Accounting
 Objectives of Accounting
 Branches of Accounting
 Theory Base of Accounting
 Basis of Accounting
 Systems of Accounting
 Basic Accounting Terms
 Accounting Process

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Why this e-book?


The main purpose of writing this e-book is to take a step in the direction of
fulfilling the dream of the website i.e. to facilitate the learning of
Accountancy in the easiest possible way. Let it become the solid foundation
of knowledge in the field Accountancy.

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Meaning of Accountancy
There are three terms used interchangeably :

Accounts, Accounting and Accountancy.

These words are inter-related and must be understood.

Account

Account is simply a part of the whole. It does not exist independently of the
other two. Like in learning of the English language a person one uses words.

The exact meaning of the word Account will be discussed later on.

Accounting

Accounting is the art of preparing and working with these accounts to


accomplish the ultimate purpose of Accountancy. This is what an accountant
would be required to do.

Accounting has been defined as the process of identifying, measuring,


recording and communicating the required information relating to the
economic events of an organization to the interested users of such
information.

Accountancy

Accountancy is the branch of knowledge dealing with these two terms. It


explains the principles and practices for accounting.

So, a student is learning the subject Accountancy.

Book-keeping

Book-keeping is the part of Accounting.

'Book' here means Accounting records and 'keeping' means maintaining.

So, Book-keeping involves the art of preparing accounting records.

After preparing accountings records these must be analyzed and interpreted


for different parties interested for different purposes and communicated to
them.

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Objectives of Accounting
Accounting is used all over the world, but the basic purposes for which
Accounting is used remain almost the same.

But it is used with different objectives in mind, depending on the type of


persons or parties interested:

For Owner

The owner, who has invested money or something in the business wants to
know the result, as to whether his business is going into profit or loss. He is
interested to know the financial health of his business whether it is weak or
strong.

For Management

A person or a group of persons who are responsible for running the business
want to evaluate the performance of the business they are managing for
someone else. They want to take various decisions like whether a component
of the product they are using, is to be produced or purchased from the
market, what should be the selling price of the product etc.

For Investors

Investors are the persons who have invested their money in any form, known
by any name, want to know safety and growth of their investments and
future of the business.

For Creditors

Creditors, who have provided some goods or services to the business on


credit, want to assess the ability of the business to repay its debts due to
them.

For Lenders

Those who have provided money to the business on loan, want to know their
repaying capacity and credit worthiness.

For Taxation Authorities

Taxation Authorities are interested to know assessment of taxes to be paid,


like Income tax, GST ,etc.

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For Employees

Employees take interest for the profitability to claim higher wages and
bonus, facilities etc.

There can be many other persons and parties interested accounting


information.

All these purposes are achieved by different branches of Accounting.

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Branches of Accounting

Accounting can broadly be divided into the following branches:

Financial Accounting
Financial accounting is concerned with calculating net result of business
operations. It means to check whether the business has earned profit or
incurred loss during a particular time period.

The second main purpose is to know the financial position of the business at
the end of the accounting year. It means to see how much business owns
and how much it owes to others at the end of that particular time period.

Cost Accounting
It is concerned with determination of total cost of production and per unit
cost of production.

Calculation of cost is necessary for cost control, cost reduction and taking
various decisions also, apart from setting the selling price.

Management Accounting
Management Accounting is concerned with checking the effectiveness of
various management decisions, policies and practices.

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Financial Accounting

Financial accounting is the foremost branch of accounting concerned with


calculating net result of business operations carried out during the
accounting period in the form of Net Profit or Net Loss and Financial Position
of the business at the end of the accounting year. Financial position means
how much a business owns on that day, how much it owes to the outsiders.

All the further topics are relevant to Financial Accounting.

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THEORY BASE OF ACOUNTING

Generally Accepted Accounting Principles (GAAP)

Generally Accepted Accounting Principles refer to the rules or guidelines


adopted for recording and reporting of business transactions in order to bring
uniformity in the preparation and presentation of financial statements and
are also known as concepts, conventions, principles, postulates, conventions
modifying principles, assumptions, etc.

Basic Accounting Concepts

The basic accounting concepts are referred to as the fundamental ideas or


basic assumptions underlying the theory and practice of financial accounting.

Business Entity concept

This concept assumes that business has distinct and separate entity from its
owners. For the purpose of accounting, business and its owners are to be
treated as two separate entities.

Business assets and personal assets of the proprietor and business liabilities
and personal liabilities of the proprietor are to be kept separate. Only
business transactions should be recorded in accounting books. Any personal
transaction is to be ignored.

Money Measurement concept

The concept of money measurement states that only those transactions and
happenings in an organization, which can be expressed in terms of money
are to be recorded in the book of accounts.

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Also, the records of the transactions are to be kept not in the physical units
but in the monetary units. Any transaction not expressed in terms of money
should not be recorded e.g. Goods purchased can be recorded but loyalty of
workers towards the business cannot be recorded.

Going Concern concept

The concept of going concern assumes that a business firm would continue
to carry out its operations indefinitely (for a fairly long period of time) and
would not come to an end in the near future.

So, difference must be made in fixed assets and current assets and capital
items and revenue items.

Accounting Period concept

Accounting period refers to the period of time at the end of which the
financial statements of an enterprise i.e. Statement of Profit and Loss and
Balance Sheet are prepared.

Generally it is a period of twelve months which may be calendar year or


Governmentૻs financial year commencing with first day of April and ending
with the last day of March next or any other such period.

Cost Concept

The cost concept requires that all assets are recorded in the books of
accounts at their cost price, which includes cost of acquisition,
transportation, installation and making the asset ready for the use e.g.an
asset purchased for ` 30,000 on which carriage ` 500 has been paid should
be recorded at ` 30,500.

Dual Aspect

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Dual aspect or Duality concept states that every transaction has a dual or
twofold effect on various accounts and should therefore be recorded at two
places e.g. when goods are purchased for cash ,goods are increasing stock
and cash is decreasing ,both of which must be recorded and should be same
in books.

The duality principle is commonly expressed in terms of fundamental


accounting equation, which is:

Capital + Liabilities = Assets

Balance sheet is based on this equation.

Revenue Recognition

Revenue is the gross receipts of cash arising from the sale of goods and
services by an enterprise and interest, royalties and dividends etc.

According to this concept of revenue recognition, the revenue for a business


transaction should be considered realized when legal right to receive it arises
e.g. When goods are sold ,revenue should be recorded though the cash is
received after a few days or a bill of exchange is received that will mature
after two months.

Matching concept

According to the matching concept expenses incurred in an accounting


period should be matched with revenues during that period, in order to
calculate the results of business operations in terms of Profit or Loss.

Excess of Revenues over Expenses represent Profit and vice-versa. It follows


from this that the revenue and expenses incurred to earn this revenue must
belong to the same accounting period.

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Full Disclosure concept

This concept requires that all material and relevant facts concerning financial
performance of an enterprise that can affect the decision making by the
users of accounting information must be fully and completely disclosed in
the financial statements.

If there is need, some information can be given in the form of footnotes.

Consistency concept

This concept states that accounting policies and practices followed by


enterprises should be uniform and consistent over the period of time so that
results are comparable. Results are comparable when the same accounting
principles are consistently being applied by different enterprises for the
period under comparison, or the same firm for a number of periods.

If however there is a change in the methods or policies, it must be


mentioned.

Conservatism concept

This concept requires the business to play safe. It means that business
transactions should be recorded in such a manner that profits are not
overstated.

All anticipated losses should be accounted for but all unrealized gains should
be ignored. It means that profits are to be recorded only when actually
become due, but provisions for any possible losses must be made.

Materiality concept

This concept states that accounting should focus on material facts means
important from effect on decision making point of view. If the item is likely to

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influence the decision of a reasonably prudent investor or creditor, it should


be regarded as material, and shown in the financial statements i.e. Income
Statement as well as Balance Sheet.

Objectivity concept

According to this concept, accounting transactions should be recorded in the


manner so that it is free from the bias of accountants and others. It should
not be affected by the prejudices of the persons using this information.

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Accounting Standards

Accounting standards are written statements of uniform accounting rules


and guidelines in practice for preparing the uniform and consistent financial
statements. These standards cannot override the provisions of applicable
laws, customs, usages and business environment in the country. In India,
preparing Accounting Standards is the responsibility of Institute of Chartered
Accountants of India (ICAI).

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Basis of Accounting

The two broad approach of accounting are Cash basis and Accrual basis.
Under cash basis transactions are recorded only when cash are received or
paid. Whereas under accrual basis, revenues or costs are recognizes when
they occur rather than when they are paid.

In the present e-book Accrual Basis of accounting has been explained


which is practically used in the modern business world.

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Systems of Accounting
There are two systems of recording business transactions:

1. Single entry system and

2. Double entry system.

Single Entry System

Single entry system accepts single aspect of a business transaction so it is


known as system of incomplete records. It cannot be used by modern large
scale business and is not acceptable by law, so not studied in details.

Double Entry System

Under double entry system every transaction has two-fold effects . Like a
business sells something to others for cash, it will record the position of cash
as well as that something sold. It is a complete, scientific and widely used
system accepted by law also.

Double Entry system of Book-keeping requires record of both the aspects of


a transaction into accounting books, one Dr. and the other Cr. e.g. Sold
goods to Ashok for ₹3,000.In this case Goods worth ₹3,000 are going out of
the business and cash ₹3,000 is coming into the business, both must be
recorded in accounting books.

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Rules of Double Entry

Rules of Double Entry can be studied under two methods:

1. Basic Book-keeping method.

2. Balance Sheet Equation method.

1. Basic Book-keeping method.

Under this method rules are studied on the basis of various types of
accounts. Account is the summary of transactions relating to a particular
item relating to the business, in ૺTૻ form, where left side is used for Debit and
right side is used for Credit.

Types of Account:

1. Personal accounts: These accounts are related to the persons or group


of persons and can be:

(a)Natural personal accounts like X account, Ashok account.

(b)Artificial Personal accounts like Sharma Brothers account.

(c)Representative personal accounts like expenses outstanding, Income


received in advance.

2. Impersonal accounts: These accounts are other than personal accounts:

(a)Real accounts: Related to assets also called property accounts.

(b)Nominal accounts: Related to expenses, Incomes, losses, gains,


revenues of the business.

Personal accounts:

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Debit the receiver, Credit the giver e.g. if cash is given to Mahesh, Mahesh is
receiver so Mahesh account should be debited.

Real accounts:

Debit what comes in, Credit what goes out e.g. If furniture is sold to Ramesh,
furniture is going out of the business so Furniture account should be
credited.

Nominal Accounts:

Debit the expenses and losses, Credit the Incomes, gains, revenues and
profits e.g. if commission is received, Commission account should be
credited as it is Income of the business.

2. Balance Sheet Equation Method:

Under this method rules of Double Entry are studied on the basis of the items
of Balance Sheet Equation so all the accounts are divided into five categories
for this purpose:

(a) Asset account:

Debit in case of Increase, Credit in case of Decrease like In case machinery is


purchased for cash, Machinery account should be debited and cash account
should be credited.

(b) Liability account:

Credit in case of Increase , Debit in case of Decrease like If loan is borrowed


from State Bank of India, State bank Of Indiaૻs loan account should be
credited.

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(c) Capital account:

Credit in case of Increase, Debit in case of Decrease like when proprietor


invested cash into business, his capital account should be credited.

(d) Expenses/Losses account:

Debit all the expenses/losses (Debit in case of Increase, Credit in case of


Decrease.), Expenses are always debited except in case of cancellation like if
rent is paid, Rent account should be debited.

(e)Revenues/Gains/Incomes and profits account:

Credit all the revenues/gains/incomes/profits (Credit in case of Increase,


Debit in case of Decrease), Incomes accounts are always credited like if rent
is received, rent account should be credited.

Note: It may be noted that there is no specific instruction for the use of
these two methods for the Application of Rules of Debit and Credit. The
results of these two methods are same. So, either of these two may be used.

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Accounting Terminology

All the basic terms used in accounting work have been explained here in
brief, the details can be understood later on without much difficulty.

Entity
It is the basic unit for which accounting records are to be prepared. It can be
a single person business, a partnership firm, a company, a school, a college,
a hospital etc.
Capital
Anything invested by the proprietor in his business is called capital. A
business owner can bring anything in his business- may be cash, his bank
balance, his household furniture etc.
Liability
It is the amount owed by the business to the outsiders. In other words,
whatever a business has borrowed from others, that is to be repaid in any
form, is called liability for the business.
For example: Loans, creditors, bank overdraft, outstanding expenses, Income
received in advance etc.
Asset
It is the property of the business. In simple words, these are the articles on
which the business has ownership rights as against the outsiders.
For example: cash, bank, stock, debtors, bills receivable, land, plant
and machinery, building, furniture, computer, transport vehicles, etc.
Equity
It means claim on something. It can be owner's equity(Capital) or creditor's
equity(Liability).
Capital
It is called owner's equity and Liability is called creditor's equity.
Assets can be fixed assets or Current assets.

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Fixed assets
These assets are generally meant to be retained by the business for long
term, generally one year. These are kept for doing the business and not for
re-sale.
For example: Land &building, machinery, furniture etc.
Current assets
These are kept for running day to day activities of the business. (cash, bank,
stock, debtors, bills receivable, prepaid expenses)
Assets can be tangible assets or intangible assets.
Tangible assets
Tangible assets are assets with physical existence. (Land & building, plant&
machinery, furniture)
Intangible assets
Intangible assets are assets without physical existence. (Goodwill,
copyrights, trademarks, patents)
Liabilities can be current or non-current.
Current liabilities
These are the liabilities to be paid within a period of one year.(bank
overdraft, outstanding expenses, creditors, bills payable)
Non-Current liabilities
Non-Current liabilities, popularly known as long term liabilities are to be paid
after one year. (Loans for long term, debentures issued)
Liabilities can be internal or external.
Internal liabilities
These are to be paid by the business to its proprietor (capital).
External liabilities
These are to be paid by the business to the outsiders (liabilities towards
outsiders).
Revenues
It means the total receipts out of sale of goods and/or services by the
business (sale of goods and services sold).

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Goods
Goods are the articles in which the business deals (computers for computer
dealer).
Purchases
It means are purchase of goods for use or for resale.
Expenses
Expenses are the total costs incurred by the business to generate Revenues
(salaries, wages, rent, electricity charges, water charges, audit fees,
stationery, conveyance charges, etc).
Loss
It is reduction in owner's equity or capital due to any reason (loss of furniture
by fire).
Income
It is increase in the capital due to any reason.
Profit
It is the excess of revenues over costs for the same accounting period.
Gain
It is profit of irregular and non-recurrent nature.
Accounting period
It is the normal period of twelve months for which accounting records are to
be prepared.
Drawings
Drawings mean anything taken out of the business, by the proprietor for his
private use.
Debtors
Debtors are the persons who have purchased goods or services from the
business on credit and the payment is due from them.
Creditors
Creditors are the persons from whom goods or services have been
purchased by the business on credit and the payment is due to be made.
Bills receivable

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It is a credit instrument accepted by the debtor, against which the payment


is to be received by the business on a future date.
Bills payable
It is a credit instrument accepted by the business, to be paid on a future
date.
Depreciation
It is the permanent, gradual, decrease in the book value of a fixed asset due
to its normal and continuous use.
Appreciation
It is the increase in the book value of assets.
Bad debts
Debtors becoming irrecoverable become bad debts.
Insolvent
Person not in a position to repay his liabilities is said to be insolvent.
Account
It is the summary of transactions relating to a particular item of the business.
Transaction
It is the event affecting the position of goods, services and assets, liabilities
and capital.
Transaction may be:
Cash transaction: affecting the position of cash/ bank balance of the
business.
Credit transaction: creating debtor-creditor relationship.
Non-cash Transaction: affecting the business but not affecting the
cash/debtor/creditor.
Stock
Goods remaining unsold are called stock or inventory.
Outstanding expenses: the expenses due but not paid.
Prepaid expenses: the expenses paid in advance.
Accrued income: the income that has been earned but not received.

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Income received in advance: the income which has not been earned but
has been received.
Trade discount: the discount on quantity of sales or purchases.
Cash discount: the discount to encourage early payments/collection.

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Accounting Process
Accounting process starts with transactions that are recorded usually
in waste book but with the help of vouchers.

Then from there the transactions are recorded in the Journal, which is
classified on the basis of similarity of transactions usually called subsidiary
journals like; Purchases Day Book, Sales Day Book, etc.

The next stage is, when entries passed in journal are further posted
in Ledger. Ledger is set of accounts: real, personal as well as nominal
accounts.

After posting all the journal entries to ledger, ledger accounts are balanced
and from all the balances a summary statement known as Trial Balance is
prepared to check the arithmetical accuracy of records.

Trial Balance is used to prepare the Final Accounts. From Trial Balance all
the nominal accounts are taken to prepare Manufacturing account, Trading
account and Profit and Loss account respectively as the case may be,
and all the real and personal accounts are taken to prepare the Balance
sheet.

Closing Balance Sheet of one accounting year becomes the Opening Balance
Sheet of the next Accounting year. Then, next year transactions enter the
accounting process and this cycle continues, making it Accounting Cycle.

Final accounts i.e. Trading Account, Profit and Loss Account and Balance
Sheet are further analyzed with the help of accounting tools and techniques
and then conclusions are drawn and then communicated to the interested
parties for decision making.

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Steps in Accounting Process


1. Transactions
2. Journal
3. Ledger
4. Trial Balance
5. Trading Account
6. Profit and Loss Account
7. Balance Sheet

1.Transactions are recorded with the help of vouchers.

Source Document or Vouchers are the written evidence of Business


transactions, such as Cash memo, Invoice, Sales bill, Pay-in-slip, Cheque,
Salary slip, etc.

When there is no documentary for any items, voucher may be prepared


showing the necessary details and got approved by appropriate authority
within the firm.

All such documents (vouchers) are arranged in chronological order, serially


numbered and kept in a separate file.

Accounting vouchers are prepared to make entries for recording, on the


basis of these supporting vouchers.

2. Journal

Journal is the book of original entry in which the transactions are entered for
the first time from the source documents, in the form of journal entries, after
which the entries are transferred to the ledger, the principal book of entry.

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The process of recording transactions in journal is called Journalising.

The process of transferring journal entry to individual accounts in the ledger


is called Posting.

How to prepare Journal?

The format of Journal is shown as under:

Date Particulars L.F. Debit ( ₹) Credit ( ₹)

Year
Name of the acct. to be debited Dr.
xxxxx
Mon,Date xxxxx
To Name of the acct. to be credited
(Narration)

Date: The first column in a journal is Date on which the transaction took
place.

Particulars: The name of the account to be debited is written on the first


line beginning from the left hand corner and the word ૺDr.ૻ is written at the
end of the column. The name of the account to be credited is written on the
second line leaving margin on the left side with a prefix ૺToૻ.

Narration: A brief description of the transaction is given below these


account names.

Line: After writing the narration a line is drawn in the Particulars column,
indicating the end of recording the specific journal entry.

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Ledger Folio: L.F. records the page number of the ledger book on which
relevant account appears. This column is filled up at the time of posting.

Debit Amount: It is the amount against the account to be debited.

Credit Amount: It is the amount against the account to be credited.

Journal entry from a transaction:

Building worth ₹25,000 is purchased on July2, 2012, payment made by ₹


25,000 cheque.

Date Particulars L.F. Debit (₹) Credit (₹)

2012 Building A/c Dr.


25,000
July,2 To Bank A/c 25,000

(Purchase of Building on cash basis)

The journal is subdivided into a number of books of original entry, on the


basis of similarity of transactions and for the purpose of efficiency in the
recording work, popularly known as special journals, day books or
Subsidiary Journals:

1. Purchases (journal) book

2. Sales (journal) book

3. Purchase Returns (journal) book

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4. Sale Returns (journal) book

5. Bills Receivable (journal) book

6. Bills Payable (journal) book

7. Cash book:

(a) Single Column Cash Book

(b) Double Column Cash Book

(c) Triple Column Cash Book

(d) Multi Column Cash Book

(e) Petty Cash Book

8. Journal Proper

3. Ledger

The ledger is the principal book of accounting system, containing the set of
different accounts; real, personal as well as nominal accounts. It may be in
the form of bound register or may be maintained in a loose leaf binder.

Importance of Ledger

A ledger provides the net result of all transactions in respect of a particular


account on a given date. For example, to know the amount due from a
certain customer or the amount the firm has to pay to a particular supplier,
such information can be found only in the ledger which is very difficult to
ascertain from the journal because the transactions are recorded in the
chronological order and there is no classification. For easy identification,
each account is allotted a code number.

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Format of the account

Dr. Name of the Account


Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount


To Balance b/d Xxxx By Balance b/d* Xxxx

To........... Xxxx By............... Xxxx

To............... Xxxx By.............. Xxxx

To Balance c/d* xxxx By Balance c/d xxxx

Total xxxx Total xxxx

How to make entry in an account

The information will be entered in the account as follows:

1. An account is debited or credited according to the rules of Double Entry.

2. Title of the account: The Name of the item is written at the top of the
format with suffix ૺAccountૻ.

3. Dr. /Cr.: Dr. means Debit side of the account i.e. left side and Cr. Means
Credit side of the account, i.e. right side.

4. Date: Year, Month and Date of the transactions in chronological order in


this column.
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5. Particulars: In the Account to be debited, in particulars column on


Debit side, write the name of account to be credited. In the Account
to be credited, in particulars column of Credit side, write the name
of account to be debited.

6. Journal Folio: It records the page number of the journal on which


relevant transaction is recorded. This column is filled up at the time of
posting (to be left blank by the students, if no specific information is given in
this regard).

7. Amount: This column records the amount in numerical figure,


corresponding to what has been entered in the amount column of the
journal.

8. To/By: It is customary to write ૺToૻ on debit side with particulars and ૺByૻ
on credit site.

4. Trial Balance

Trial Balance is the summary statement showing the balances of all


accounts, debit as well as credit, where the total of Debit balances and
Credit balances are always equal. The trial balance is prepared with the
primary purpose of checking the arithmetical accuracy of accounting records
of the business.

Objectives

Main objectives of preparing Trial Balance are;

(1) To check the arithmetical accuracy of accounting records.

(2) To find out the errors in accounting records.

(3) To facilitate the preparation of final accounts.

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How to prepare Trial Balance?

Trial Balance is to be prepared by Balance Method; taking the net balances


of ledger accounts, in the form of following statement:

Sr. No. Name of the account L.F. Debit(₹) Credit(₹)


1. Land and Buildings xxx -

2. Business Premises xxx -

3. Motor Vehicles xxx -

4. Plant and Machinery xxx -

5. Furniture and Fixtures xxx -

6. Capital Xxx

7. Sales Xxx

8. Purchases Return xxx

9. Long Term Loan xxx

10. Bills Payable xxx

Total xxx xxx

The above table can be summarized as following:

Assets accounts ---------------------------------------Debit

Expenses/losses accounts ---------------------------Debit

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Liabilities accounts ----------------------------------Credit

Capital account---------------------------------------Credit

Gains/Incomes/Profits accounts-------------------Credit

Provision against Asset Account-------------------Credit

The condition: Totals of both the sides i.e. Debit Balances and Credit
Balances in Trial balance must be equal to ensure the arithmetical
accuracy of the accounting books.

But, there can be cases when this condition is not satisfied and is proof of
presence of some error which must be located (found out) before preparing
Final Accounts i.e. Financial Statements of the business.

5. Final Accounts (Financial Statements)

Trial Balance is generally prepared at the end of every month and at the en d
of the accounting year to know the balances of all the accounts & to test the
arithmetic accuracy of accounts.

The basic objective of accounting is to know about the profit or loss during
the previous year & present financial position at the end of the accounting
year. This can be known only if Trading account and Profit & Loss account
and Balance Sheet are prepared at the end of year. These are also known as
FINANCIAL STATEMENTS.

It is only from Trial Balance that the Final Accounts i.e.

1) Trading and Profit & Loss account and

2) Balance Sheet

can be prepared.

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As these two statements are prepared to give the final results of the
business, both of these are collectively called as final accounts. Accounting
cycle finally ends with these statements.

Trading account is prepared by trading concerns i.e., concerns which


purchase and sell finished goods, to know the gross profit or gross loss
incurred by them from buying and selling of goods during a particular period
of time. Gross profit or gross loss is the difference between the cost of
goods sold and the proceeds of their sale. If the sale proceeds exceed the
cost of goods sold, gross profit is made and vice-versa in case of gross loss.

For non-corporate business organization Profit & Loss account is second


part of income statement. It is prepared to know the net profit or net loss of
business during a particular period. Every businessman has to spend on
expenses other than on manufacture or purchase of goods which are called
indirect expenses. There can be other incomes except sales. So, gross profit
or loss is adjusted keeping in view these indirect expenses and other
incomes to find out net profit or net loss.

Balance Sheet is a component of financial statements which shows


balances of capital, liabilities & assets. All nominal accounts are closed by
transferring these to Trading & Profit & Loss Account. Only personal & real
accounts are left to be entered in Balance sheet.

Balance Sheet is the final step in accounting cycle. It shows the true
position of the business in terms of assets, liabilities and capital on a
particular date.

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