VIVEKANANDA COLLEGE OF LAW

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1 VIVEKANANDA COLLEGE OF LAW Gayathrinagar, Bengaluru. CLINICAL COURSE I: Professional Ethics & Professional Accounting System (Unit V Study Material) Prepared by: Students from III Semester of three year course under the supervision of Course Instructor Mr. K. Srikanth Patil.

2 UNIT-V Accountancy for lawyers Need for maintenance of Accounts- Books of accounts that need to be maintained- Cash Book, journal and ledger: Meaning: Accounting is discipline, which records, classifies, summaries and interprets financial information about the activities of a person or concern. It is a work of recording money paid, received, borrowed, owed etc., the word accounting is used in India regarding collection, recording, classification and presentation of financial data for the benefit of management and for outside agencies such as shareholders, creditors, bankers and the Government. In the same meaning those words are also used for professionals such as Doctors, Advocates, Chartered Accountants, Engineers and Technicians etc. Need and role of accounting: Profit in a business is like food to human body - just as food is very essential for the development of human body profit is very essential for the development of a business. The transactions of a modern business are so many that is not possible for any business to remember all the transaction of his business for the years, however good his memory may be, so every businessman is forced to record his business transaction in a set of accounts books called books of accounts i. To have a permanent record of all the transactions of a business for future reference. ii. To ascertain the net result (i.e. Net profit or loss) of the business for any particular year, iii. To know the exact reasons (i.e. the expenses and losses, and income and gains) leading to the net profit or the net loss. iv. To ascertain what amount are due to the business and from whom the amounts are due. v. Top ascertain what amounts are due to the business and from whom the amount are due. vi. To know the exact financial position of the business. ( i.e. the assets, the liabilities and the capital in the business as on a particular date) vii.to know the progress of the business from years to years.

3 viii. To minimise errors and free by facilitating their quick detects. ix. To keep control over the people and on activities of the business, x. To have necessary information for future planning, Accounting for Lawyers: The duties of an advocate to keep accounts of client s money entrusted to him are provided in Section II, Rules 25 to 32 of the Bar Council of India The said Rules read as follows: Rule 25. Keep Proper Accounts, Rule 26. Divert money from accounts, Rule 27. Intimate the client on amounts, Rule 28. Adjust fees after termination of proceedings, Rule 29.Where the fees has been unsettled, the Advocate shall be entitled to deduct out of any moneys of the client remaining in the his hands, at the termination of the proceedings for which he had been engaged, the fee payable under the Rules the Court, in force for the time being, or then settled and the balance, if any shall be refunded to the client. Rule 30. A copy client s account shall be furnished to him on demand provided the necessary copying charges are paid. Rule 31. An advocate shall not enter into arrangements whereby funds in his hands are concerned into loans. Rule 32. An advocate shall not lend money to his client for the purpose or any action or legal proceedings in which he engaged by such client. With reference to above Rules of Bar Council of India 1975, it is clear that the practicing Advocates need to maintain books of accounts for their economic transactions. Need for maintenance of accounts: - There are two systems of keeping accounts namely, the mercantile accountancy system and cash system. The system of keeping accounts strictly on a cash basis is not sufficient for trading and manufacturing concerns whereas this method is quite suitable for professional men such lawyers, doctors, accountants etc. In case of

4 professional men, the number of credit transactions is usually small so it is not necessary to have the elaborate mercantile accounting system. A professional man records transactions for the followings purposes: 1. All items of income and expenses may be correctly recorded. 2. He may be able to ascertain his professional income for the given period. To know net professional income for the given period. It is necessary that separate accounts should be maintained for private and professional income and expenditure. To keep a record of the professional income and expenditure the accounts may be kept as follows: 1. Cash Book: The principal books of accounts in case of professional persons are the CASH BOOK. The cash book makes a record of all cash receipts and cash payments concerning the profession. The number of credit transactions being not large is noted in a memorandum book so that they may not be forgotten. The transactions are scored off from the memorandum book and entered in the CASH BOOK when they are actually received for paid for. At the end of a year or any other period, the CASH BOOK is summarised to know the receipts and payment sunder various heads for the whole period. Another method of getting the total receipts and payments under various heads for a particular period can be the preparation of an analytical CASH BOOK having a number of analysis columns on the both sides. CASH BOOK is summarised so that net income for a particular period may be ascertained and the financial position on a particular date may be know. 2. Stock Ledger: In addition to the CASH BOOK a stock register is also kept for making a record of : i. All the articles purchases for use for the profession and not meant for resale such stationery, books, furniture, computers, software etc. And

5 ii. Goods purchased for resale such as medicine in case of doctor, when any article is consumed, sold or destroyed a note to the effect should be made in the stock register so that the value of stock in hand on a particular date may be ascertained and compared with the Physical stock. iii. 3. Receipts and Expenditure Accounts: Professional people prepare Receipt and expenditure Account to ascertain their net professional income for a particular period. This account is like Profit and Loss Account and is prepared by noting down the items of income and expenses from the summarised CASH BOOK or abstract CASH ACCOUNT and opening and closing stocks from the Stock Register. They ignore outstanding income as they maintain accounts on cash basis. Another cause of ignoring outstanding income is that they do not file suits for recovery of their outstanding dues. They consider outstanding income only when it is actually received. However, the take into consideration outstanding expenses, so the account showing net result for a particular period is termed as Receipt and Expenditure Account and not as Receipt and Payments Account because payments would indicate only cash disbursement and not outstanding expense. Thus in Receipt and Expenditure Account, income is considered on cash basis and expenditure is considered on mercantile. I.e., on accrual basis. Journal: - A journal is a record that keeps accounting transactions in chronological order i.e. As they occur all accounting transactions are recorded through journal entries that show account names, amounts and whether those accounts are recorded in debit or credit side of accounts. A journal entry is called balanced when the sum of debit side amounts equals to the sum of credit side amounts. The journal is the book of first entry or original entry. In the Journal the transactions are recorded in the order of their occurrence. The Journal entries should contain the following essential. 1. Date of Transaction,

6 2. Account to which the transaction relates, 3. Amount to be debited, 4. Amount to be credited, 5. Explanation of the transaction, 6. The transaction recorded in Journal is to be posted to the separate heads of accounts in another book called the ledger. In the ledger different pages will be allotted to the different heads of accounts. When the journal entries are posted to the concerned heads of accounts of the ledger. The page of the ledger is the Ledger folio (L.F.), the corresponding page of the journal is the Journal folio (J.F). Journal Register: format Date Particulars Debit Credit The explanation given for respective journal entry is known as Narration Ledger: All the transaction recorded in primary books or registers to be posted to separate heads of accounts in another book called ledger. It is a derived or secondary book record, as the entries in the ledger are derived from the entries in Journal. The Ledger contains all the entries like Personal accounts, real accounts and nominal accounts transactions. - To know the clients transaction, - To know the each clients due to Advocate, - To know the expenses of each head, - To know the balances of receivables and payables, - To know the financial position of accounts, - To know the cash and bank balance, - To know the assets and liabilities,

7 - To draw trial balance and facilitate to prepare Income and expenditure account and Balance sheet. Debit KIRAN Malleshwaram, Bengaluru. Credit Date Particulars JF Amount Date Particulars JF Amount Elementary aspects of bookkeeping: Meaning, object, journal, double entry system, closing of accounts ACCOUNTANCY In Terms of Common usage: For the layman, accountancy means a method of keeping a track of the money received and the money spent. Accountancy is all pervasive, starting right from a simple housewife, who has to manage her household expenses in a limited budget. For an ordinary individual, for example, a housewife, accountancy is a loosely termed as hisab and merely involves keeping a track of money in hand, received or earned and money spent on day to day expenses. According to corporate: In a large corporate entity where accounting implies, apart from complying with statutory requirements, a means to measure the value of the business.

8 DOUBLE ENTRY is the process by which the dual aspects of business transactions are recorded is known as the double entry book-keeping. The double entry system of accounting or bookkeeping means that every business transaction will involve two accounts (or more). For example, when a company borrows money from its bank, the company's Cash account will increase and its liability account Loans Payable will increase. If a company pays $200 for an advertisement, its Cash account will decrease and its account Advertising Expense will increase. Double entry also allows for the accounting equation (assets = liabilities + owner's equity) to always be in balance. In our example involving Advertising Expense, the accounting equation remained in balance because expenses cause owner's equity to decrease. In that example, the asset Cash decreased and the owner's capital account within owner's equity also decreased. A third aspect of double entry is that the amounts entered into the general ledger accounts as debits must be equal to the amounts entered as credits. Accountancy: Accounting is a process of identifying, recording, classifying, summarizing, analyzing the business transaction and interpreting the result thereof. Need: 1. Serves as record. 2. To know the financial status. 3. To take decision. 4. To calculate the results. 5. To pay the taxes under the 145 of the income tax act To know the dues and balances. 7. To gain excellent control over assets, expenses, borrowings. 8. Recommended under the act. Indian stamp act 1899

9 Bookkeeping: The registration act 1908 Court fee and suit valuation act. Advocate fee rules. Bookkeeping in business, is the recording of financial transactions, and is part of the process of accounting. Transactions include purchases, sales, receipts and payments by an individual or organization. There are some common methods of bookkeeping such as the single-entry bookkeeping system and the double-entry bookkeeping system. But while these systems may be seen as "real" bookkeeping, any process that involves the recording of financial transactions is a bookkeeping process. For example this includes: A DAYBOOK is a descriptive and chronological (diary-like) record of day-to-day financial transactions also called a book of original entry. The daybook's details must be entered formally into journals to enable posting to ledgers. A LEDGER is a record of accounts. OBJECTIVES OF BOOKKEEPING: To have a permanent record of each transaction of the business. To show the financial effect on the entity of each transaction recorded. To ascertain the combined effect of all the transactions (during an accounting period) on the financial position on a particular date. To disclose the factors responsible for earning profit or suffering loss in a given period. The amount recoverable by the business from others (sundry debtors) and payable to others (sundry creditors) Determination of tax-liability of the business.

10 Prevention of errors and frauds. Protection of assets. Measure of exercising a system of control. What does a bookkeeper do and why do we need one? Every business regardless of its size is required by law to keep books, essentially this means the recording and documenting of all the financial transactions of the business, which can be done either manually (with ledger books) or on a computerised system. A properly managed bookkeeping system can provide you with reports that are relevant to your particular business, and show you exactly where your money has come from and where it has gone to. In the context of a business is simply the recording of financial transactions. Transactions include purchases, sales, receipts and payments by an individual or organization. Accounting process includes the bookkeeping function, but is just one part of the accounting process. There are some common methods of bookkeeping such as the single-entry bookkeeping system and the double-entry bookkeeping system. IMPORTANCE : 1. Limitation of human memory. 2. Owners and managers being different persons. 3. Preparation of financial statements. 4. Need for financial information. 5. Need of taxation authorities. 6. To know the assets and liabilities. 7. Helps to Planning and Decision making. 8. To improve the position of the business.

11 ELEMENTARY ASPECTS OF BOOKKEEPING: There are some common methods of bookkeeping such as 1. SINGLE-ENTRY BOOKKEEPING SYSTEM 2. DOUBLE-ENTRY BOOKKEEPING SYSTEM. Meaning of Single Entry Book Keeping System: Under single entry book keeping system, only one aspect of a transaction is recorded, so it is known as incomplete system of recording transactions. Under it only records of cash and personal accounts are maintained. In it, accounts relating to debtors, creditors and cash are prepared. It ignores all impersonal account like salaries, wages, sales, purchases, etc. It maintains a cash book and personal accounts but does not record nominal and real accounts. It is not a reliable system but it is still used by small organizations to keep the records of transactions. Features of Single Entry Book Keeping System: 1. It maintains only accounts relating to person but it ignores the real and nominal accounts. 2. It prepares the cash book but both personal and business cash transactions are recorded in the same book. 3. It is suitable to small traders having lesser numbers having lesser number of transactions. 4. It lacks the specific rules of maintaining books of accounts as a result there is no uniformity in accounts of different firms. 5. Trial balance cannot be prepared under this system. 6. The profit or loss calculated under this system is only a guess.

12 Meaning of double entry book keeping system: Double entry book keeping system is a modern and scientific system of recording the financial transactions. It follows the principle that there are two aspects of each business transaction. Both of these aspects i.e., one debit and another credit must be recorded in this system of book keeping. The golden rule for it is that every debit must have a corresponding credit of same amount. In other words, there are two parties in every transaction, one is giver and another is receiver. Generally, the account of receiver is debited and the account of giver is credited. Features of double entry book keeping system: 1. Double Effect- In it, every transaction has two fold effects i.e., debit and credit. 2. The double aspects of a transaction are recorded in opposite side of two different accounts. 3. Equal effect- The amount of debit and credit aspects must be equal in terms of monetary value. The same amount of a transaction is shown in two books on opposite sides. 4. Classification of accounts- Under it, accounts is classified into three categories as personal account, real account and nominal account. 5. Checking of Mathematical Accuracy- Since the amount is recorded on the debit and credit side of two separated books, the total amount is always equal to the credit. 6. It helps to find the arithmetical accuracy of accounting records by preparing a trial balance. Books to be maintained by advocates: 1. Journal entry : Journal : The word journal is derived from a French word jour which means a daily, day book or log book. In this book, transactions are recorded in a chronological order i.e. in order of dates, as and when they take place.

13 Importance & Advantages of Journal a. It provides a date wise record of all business transactions in a methodical order. So, there s less chance to leave the transaction UN entered. b. The use of journal ensures the observation of Double Entry system in the recording of transactions. c. The transactions recorded in the journals with details of the account debited and credited and the amount of each transaction. d. From journal adequate explanation of each entry may be obtained as every entry in journal is supported by the narration relating to that transaction. e. The use of journal simplifies ledger as details regarding the business transaction and are not required to be noted down in the ledger. f. From legal point of view, journal is more reliable evidence of business transactions than the ledger. Format of Journal Entry System and Its Ingredients: * Ledger Folio: This column is meant to record the reference of the main Book* 1) Date 2) Particulars Ledger Folio 3) Dr. Amount Rs. 4) Cr. Amount Rs. Salary A/C Dr To Cash A/C 6) JOURNALISING (For salary is paid in Cash) 1,000 1,000

14 5) NARATION 2. Ledger : a) Ledger is a book of final entry. b) Posting in the ledger is made periodically. c) The ledger information about a particular account is found at one place only. d) Recording of transactions in the journal is called journalising and recording of transactions in the ledger is called posting. e) A journal entry shows both the aspects debit as well as credit but each entry in the ledger shows only one aspect. f) Journal constitutes basic record for ledger entries. VCL s Capital A/c Dr. Cr. Date Particulars LF Amount Date Particulars LF Amount 2014 June 30 To Balance c/d 30, ,000 July 1 30,000 July 1 By Cash A/c By Balance b/d 30,000 30, Cash book: a. Cash Book is a sub-division of Journal. b. Recording transactions pertaining to cash receipts and payments. c. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are posted subsequently to the respective ledger accounts.

15 d. All cash receipts are recorded on the debit side and all cash payments are recorded on the credit side. e. All cash transactions are recorded chronologically in the Cash Book. f. The Cash Book will always show a debit balance since payments cannot exceed the receipts at any time. g. Kinds of Cash Book Depending upon the nature of business and the type of cash transactions, various types of Cash books are used. They are: a) Single Column Cash Book b) Two Column Cash Book or Cash Book with cash and discount columns. c) Three Columnar Cash Book or Cash Book with cash, bank and discount columns. d) Bank Cash Book or Cash Book with bank and discount columns. e) Petty Cash Book. a) Single or Simple Column Cash Book : This is the simplest form of Cash Book Is used when payments and receipts are mostly in the form of cash and where usually no cash discount is allowed or received.. The ruling of Single Column Cash Book is as follows: Single Column Cash Book Dr. Cr. Date Particulars R.No. L.F Rs. Date Particulars V.No.. L.F Rs.

16 b) Two Column Cash Book : Or Cash Book with Cash and Discount Columns. This type of Cash Book is used when cash transactions involving discount allowed or received are affected. The ruling of Single Column Cash Book is as follows: Two Column Cash Book Dr. Cr. Date Particular s R.No. L. F Discount Allowed Rs. Date Particulars V.No.. L.F Discount received Rs. c) Three Columnar Cash Book: Or Cash Book with Cash, Bank and Discount Columns. Instead of maintaining the bank account in the ledger, it is found more convenient if it is included in the Cash Book as Cash Column. Three Column Cash Book Dr. Cr. Date Particular R.No.L.F Discount allowed Cash Rs. Bank Rs. Date Particular V.No.. L.F Discount received Cash Rs. Bank Rs.

17 d) Bank Cash Book : Cash Book with Bank and Discount Columns. Bank Column Cash Book Dr. Cr. Date Particulars R.No. L.F Discount allowed Bank Rs. Date Particulars V.No.. L.F Discount received Bank Rs. e) Petty Cash Book: 4. Final accounts : a. Trial balance : The word petty has its origin from the French word petit which means small. The petty cash book is used to record items like carriage, cartage, entertainment expenses, office expenses, postage and telegrams, stationery, etc. The person who maintains this book is called the petty cashier. The petty cash book is used by many business concerns to save the much valuable time. To prevent over burdening of the main cash book. Trial balance is a statement prepared with the balances or total of debits and credits of all the accounts in the ledger to test the arithmetical accuracy of the ledger accounts. Features: i. A trail balance is prepared as on a specified date. ii. It contains a list of all ledger account including cash account.

18 iii. It may be prepared with the balances or totals of Ledger accounts. iv. Total of the debit and credit amount columns of the trail balance must tally. v. It the debit and credit amounts are equal, we assume that ledger accounts are arithmetically accurate. vi. Tallying of trail balance is not a conclusive profit of accuracy of accounts VCL s Books Trail Balance as on.. S.No. Name of Account L.F Debit Total Amount Rs. Credit Total Amount Rs. b. Trading account : Trading refers buying and selling of goods. Trading A/c shows the result of buying and selling of goods. This account is prepared to find out the difference between the Selling prices and Cost price. Trading Account for the year ending 2014 Dr Cr Particulars Amount Amount Particulars Amount Amount Rs Rs Rs Rs

19 To Opening Stock XXX By Sales XXX Less: Returns XXX To Purchase XXX Inwards XXX Less: Returns Outwards To Wages To Freight To Carriage Inwards To Clearing Charges To Packing charges XXX XXX XXX XXX XXX XXX By Closing Stock By Gross Loss (to be transferred to P&L A/c) XXX XXX To Dock dues To Power XXX To Gross Profit (to be transferred to P&L A/c) XXX XXXX XXXX Advantages of Trading Account 1. The result of Purchases and Sales can be clearly ascertained 2. Gross Profit ratio to Sales could also be easily ascertained. It helps to determine Price. 3. Gross Profit ratio to direct Expenses could also be easily ascertained. And so, unnecessary expenses could be eliminated.

20 4. Comparison of trading account details with previous years details help to draw better administrative policies. c. Profit and loss account : Trading account reveals Gross Profit or Gross Loss. Gross Profit is transferred to credit side of Profit and Loss A/c. Gross Loss is transferred to debit side of the Profit Loss Account. Thus Profit and Loss A/c is commenced. This Profit & Loss A/c reveals Net Profit or Net loss at a given time of accounting year. Profit & Loss Account for the year ended 31st March 2007 Particulars Amount Particulars Amount To Trading A/c (Gross Loss) To Salaries To Rent & Taxes To Stationeries To Postage expenses To Insurance To Repairs To Trading expenses By Trading A/c (Gross Profit) By Commission earned By Rent received By Interest received By Discounts received By Net Loss (Capital A/c) To office expenses To Interest To Bank charges

21 To Establishment expenses To Sunder expenses To Commission To Discount To Advertisement To Carriage outwards To Travelling expenses To Distribution expenses Too Bad debt provision To Net Profit (transferred to Capital A/c) a. Balance sheet : 1. It shows accurate financial position of a firm. 2. It is a list of various transactions at a given period. 3. It clearly indicates, whether the firm has sufficient assets to repay its liabilities. 4. The accuracy of final accounts is verified by this statement

22 5. It shows the profit or Loss arrived through Profit & Loss A/c. The Word Balance Sheet is defined as a Statement which sets out the Assets and Liabilities of a business firm and which serves to ascertain the financial position of the same on any particular date. Balance Sheet of VCL as on 31 st Mar 2014 Liabilities Amount Amount Assets Amount Amount Sundry Creditors Bills Payable Bank overdraft Loans Mortgage Reserve Fund Outstanding exp. Capital Add: Net Profit (or) Less : Net Loss Less Drawings Cash in hand Cash at bank Bills receivable Sundry Debtors Closing Stock Furniture & Fittings Investments Plant & Machinery Loose tools Land & Buildings Business premises Horses & carts Prepaid exp. Patents & Trade

23 Less: Income tax marks Good will As per Rule 6F (2) the following books of accounts and documents are required to be maintained: 1) Cash book, 2) Journal, if the accounts are maintained as per mercantile system of accounting, 3) Ledger 4) Carbon copies of bills, serially numbered and carbon copies or counterfoils of receipts issued in respect of sums exceeding Rs 25, 5) Original bills for expenses exceeding Rs. 50 and payment vouchers for petty expenses. However in a case where the cash book maintained by the person contains adequate particulars in respect of the expenditure incurred, then vouchers are not necessary in respect of expenses up to Rs 50. Books or books of accounts have also been defined u/s 2(12A) as including ledgers, day-books, cash books, account-books and other books, whether kept in the written form or as print-outs of data stored in a floppy, disc, tape or any other form of electro-magnetic data storage device. Document has been u/s 2(22AA) as including an electronic record as defined in clause (t) of sub section (1) of section 2 of the Information Technology Act, Rule 6F (5) provides that the books of accounts and other documents are to be kept for at least 6 years from the end of relevant assessment year. That means

24 from the assessment year one should keep books of accounts up to the assessment year i.e. books of accounts of financial year THE CASH BOOK SPECIAL JOURNALS (OR SUBSIDIARY BOOK) A special journal refers to the journals meant for specific transaction of similar nature. Special journals are also known as subsidiary books or day book. Cash book is one among the kinds of special journals. MEANING Cash book may be defined as the record of transaction concerning Cash Receipts, Cash Payments & Cash Transfers (Contra transactions). NECESSITY OF CASH BOOK: It is a common experience in any business, cash transactions occurs very frequently, cash receipts, cash payments, payment of expenses like salaries, wages, cartage, carriage, commission, rent, electricity expenses, water bills, rates & taxes, collection of cash from clients, payments to creditors are a few examples of transaction affecting cash. In the view of the above fact, the necessity of maintaining a separate book for recording cash transaction made mandatory. TYPES OF CASH BOOK Single Column Cash Book with cash column only (Cash Transaction). Two-Columnar Cash Book with Cash & Discount Column. Three Columnar Cash Book with Cash, Bank & Discount Column. Subsidiary Cash Book: -

25 1. Petty Cash Book for petty cash payment. 2. Cash Book for recording collection from debtor (when collection is numerous). 3. Cash Bank for recording payments to creditors. 4. Cash Bank for recording remittance from branch. 5. Cash Bank for payment of claims etc. Bank Book (Cash at Bank) for Cash & Bank Transactions. Types of Discounts: 1) Trade Discount and 2) Cash Discount. Trade Discount: It is a reduction granted by a supplier (such as on quantity bought) as a trade practice other than for prompt payment. List price is the selling price as printed on the product or in the List/Catalogue of products (which stated in invoice). Example: [List price (-) Trade Discount = Invoice Price] Cash Discount: A Reduction granted by supplier from the invoice price in consideration of immediate payment or payment with in stipulated period. Example: [Invoice Amount (-) Cash = Cash Paid (if paid < 30days)] 3) Three Column Cash Book: In Three Columnar Cash Book there is three amounts Column (one for Cash, one for Bank & one for Discount) on each side. All cash receipts, deposits into bank and discount allowed are recorded on debit side and all cash payments, withdrawals from bank and discount received are recorded on the credit side. Infact a three columnar cash book serves two purpose say, one is Cash Account and other Bank Account. Hence there is no need to open these two accounts in the ledger. NOTE:

26 1) Cash Account is not opened in the ledger since the Cash Column in the cash book serves the purpose of cash account. 2) In case cash book with bank column, Bank Account is not opened in the ledger, since the Bank Column in cash book serves the purpose of bank account. 3) In case cash book with Discount Column, Discount Allowed Account and Discount Received Account are opened in the ledger since the cash book does not serves the purpose of Discount Account. 4) In case of cash book with Discount Column, Discount Column are merely totalled and never balanced. 5) When opening cash and bank balance given record on the debit side of cash and bank column. 6) When opening bank balance (Cr) is given as Overdraft, it should be recorded on the credit side of the bank column. 7) When cash is received it should be recorded on the debit side of the cash book. 8) When cheque is received from that should be recorded on the debit side of bank column. 9) When any payment made through cash then it should be recorded on the credit side of the cash book similarly when cheque issued it should be recorded on the credit side of the bank column. 10) When cash is withdrawn from bank for business use, bank column should be credited and corresponding entry made in the debit side of the cash book. 11) When cash deposited into bank cash column will be credited and bank column will be debited. This is called Contra Entries. PETTY CASH BOOK Petty Cash Book is the cash book which is used for the purpose of recording the payments of petty cash expenses. Example: Payments towards stationeries, postage, stamp, courier charges, transport expenses (local), housekeeping expenses etc. if all these sum is recorded in the main cash book it will unnecessarily be overburdened. A small amount called Impress or float can be kept in this account for the need.

27 JOURNAL PROPER Journal Proper is a residuary book in which those transactions are recorded which cannot be recorded in any other subsidiary book, such as; a) Cash Book, b) Purchase Book, c) Sales Book, d) Purchase Return Book, e) Sales Return Book, f) Bills Receivable Book, g) Bills Payable Book. Following are the transactions entered in Journal Proper: 1) Opening Entry: When books are started for a fresh year, the opening balance of assets and liabilities are journalized. 2) Closing Entry: At the end of the year the profit and loss account to be prepared, for this purpose, the nominal accounts are transferred to this account. This is done through journal entries called closing entries. 3) Transfer Entry: if some amount is to be transferred from one account to another, the transfer will be made through a journal entry. 4) Adjusting Entry: At the end of the year the amount of expenses or income may have to be adjusted for amount received in advance or for amounts not yet settled in cash. Such an adjustment is also made through journal entries. Usually, the entries pertain to the following: Outstanding expenses: i.e. expenses incurred but not yet paid; Prepaid expenses: i.e. expenses paid in advance for some period in the future. Interest on capital: i.e. the interest which the proprietor thinks proper to allow on his investment; Depreciation: i.e. fall in the value of the assets used on account of wear and tear. 5) Rectifying Entry: These entries passed through journals in order to rectify the errors committed while posting, totalling and balancing. 6) Miscellaneous Entry Credit purchase of things like purchase of furniture or machinery (i.e. fixed assets) will be journalized.

28 Allowance to be given to the clients or charge to be made to them after the issue of Bills/Invoices. On an amount becoming irrecoverable, say, because of the client becoming insolvent. Effects of accidents such as loss of property by fire. Transfer of Net Profit to Capital Account. LEDGERS 1. INTRODUCTION After recording the transactions in the journal, recorded entries are classified and grouped into by preparation of accounts and the book, which contains all set of accounts (viz. personal, real and nominal accounts), is known as ledger. It is known as principal books of account in which account-wise balance of each account is determined. 2. SPECIMEN OF LEDGER ACCOUNTS A ledger account as two sides- debit (left part of the account) and credit (right part of the account). Each of the debit and credit side has four columns. (i) Date (ii) Particulars (iii) Journal folio i.e. page from where the entries are taken for posting and (iv) Amount. Dr. Account Cr. Date Particulars J.F Amount ( ) Date Particulars J.F Amount ( ) 3. POSTING The process of transferring the debit and credit items from journal to classified accounts in the ledger is known as posting.

29 3.1 RULES REGARDING POSTING OF ENTRIES IN THE LEDGER 1. Separate account is opened in ledger book for each account and entries from ledger posted to respective account accordingly. 2. It is a practice to use words To and By while posting transactions in the ledger. The word To is used in the particular column with the accounts written on the debit side, while By is used with the accounts written in the particular column of the credit side. These To and By do not have any meanings but are used to represent the account debit and credit. 3. The concerned account debited in the journal should also be debited in the ledger but reference should be of the respective credit account. For example: Rent paid by cash Rs.500. The journal entry for this transaction would be. Rent Account Dr. 500 To Cash Account 500 Dr. Cash Account Cr. Date Particulars J.F Amount ( ) Date Particulars J.F Amount ( ) 03/11/2014 Rent A/c # BALANCING AN ACCOUNT After having known the procedure of recording and posting of transactions, it is essential to find out the balance of each account. Finding the balance of an account involves equalization of both the sides of the account by putting the difference on the side which has lesser total compared to other side. E.g. if the debit side of an account exceeds the credit side then the difference is put on the credit side. This balance is called debit balance. This balance is brought down on the debit side while opening the account.

30 Similarly, if the credit side of an account exceeds the debit side, the difference is put on the debit side. This balance is called credit balance. This is brought down on the credit side while opening account. Balancing a ledger account involves the following important steps: (a) Total the amount of debit and credit entries in the account. (b) If the debit and credit side totals are equal, then there is no balance. The balance is nil. The account stands automatically balanced or closed. (c) If the debit total is greater than the credit total or the credit total is greater than the debit total, find out the balance or difference and place it in the shorter side, so that both the side of account may be equal. (d) If difference is placed on the debit side, write against the balance as To balance c/d. The word c/d refers to carried down to next period. Similarly, if difference is placed on the credit side, write against the balance By balance c/d. (e) Put the totals of both the sides, which will be equal, at the bottom of both the sides. (f) At the beginning of the next period, the closing balance will appear as the opening balance in the opposite side as To balance b/d. Or By balance b/d. The word b/d refers to brought down from the earlier period. Thus balance can be of two types: (a) Opening balance: There can be opening debit balance and opening credit balance. The rule for showing these balances is: show debit balance on the debit side and credit balance on the credit side. (b) Closing balance: These are two closing balance closing debit balance and closing credit balance. The rule for showing them in the account is as under: show debit balance on the credit side and credit balance on the debit side.

31 TRIAL BALANCE (TB) 1. MEANING Trial balance is a statement which shows either the balance or total amounts of debit items and credit items of all accounts in the ledger and the Cash and bank balances. It may be noted that a trial balance is a statement and not an account and is prepared on a particular date and not for a particular period. 2. OBJECTIVES OF TRIAL BALANCE The main objectives of preparing the trial balance are as under: (a) To ascertain the arithmetical accuracy of ledger accounts: A tallied trial balance indicates that equal debits and credits have been recorded in the ledger accounts. (b) To help in locating errors: An untallied trial balance indicates that some error(s) has (have) been committed. (c) To facilitate the preparation of financial statements: A trial balance can directly be used for preparing the financial statements and need not refer to the ledger. 3. LIMITATIONS OF TRIAL BALANCE A tallied Trial Balance is not a conclusive proof of the accuracy of the books of accounts since certain types of errors remain even when the Trial Balance tallies. The following errors do not affect Trial Balance at all. (a) (b) (c) (d) (e) Errors of Principle, Compensating errors, Errors of complete omission, Errors of Recording in the books of original entry, and Posting a correct amount in the wrong account but on the correct side.

32 4. FORMAT OF TRIAL BALANCE TRIAL BALANCE As at.. S. No. Ledger Accounts L.F. Dr. Amount Cr. Amount (Total or Balance) (Total or Balance) The under mentioned points may note: (i) A trial balance is prepared as on the particular date which should be mentioned at the top. (ii) In the second column the name of the account is written. (iii) In the fourth column the total of the debit side of the account concerned or the debit balance, if any is entered. (iv) In the next column, the credit side or the credit balance is written. (v) The two columns are totaled at the end. (vi) The first and third column needs no explanations. 5. PREPARATION OF TRIAL BALANCE To verify the correctness of the posting of ledger accounts in terms of the debit and credit amounts periodically, a periodic trial balance is may be prepared (say) at the end of a month or quarter or half-year. Though a trial balance may be prepared at any time, but it should be prepared at the close of the accounting period so as to verify the arithmetical accuracy of the ledger accounts before the preparation of the financial statements. It may be noted that a Trial Balance is always prepared on a particular date and not for a particular period. A trial balance may be prepared by following either method: (A). Balance Method & (B). Total Method (A) Balance Method:-

33 Under this method, the balance of all the accounts (including Cash and Bank Account) are incorporated in the trial balance. It may be noted that a trial balance by this method can be prepared only when all the ledger accounts have been balanced. (B) Total Method:- Under this method, the total amount of debit items and credit items in each ledger account are incorporated in the trial balance. It may be noted that a trial balance by this method can be prepared immediately after the completion of posting from the books of original entry to the ledger. 6. DIFFERENCE BETWEEN A) BALANCE METHOD & B) TOTAL METHOD Trial Balance by Balance Method Trial Balance by Total Method a) It can be prepared only when all the ledgers have been balanced. It can be prepared immediately after the completion of posting from books of original entry to the ledger. b) It shows the balance of all the accounts in the ledger. It shows the total amounts of debit items and credit items in each ledger account. FINAL ACCOUNTS / FINANCIAL STATEMENT MEANING Basically, Financial Statements are organized summaries of detailed information about the financial position and performance of an enterprise. Traditionally, the term Financial Statements is used to denote only two basic statements which are as under: (a) Balance Sheet (or Position Statement) which shows the financial position of an enterprise at a particular point of time, (b) Trading and Profit and Loss Account (or Income Statement) which shows the financial performance of business operations during an accounting period.

34 Nowadays in addition to the aforesaid two basic financial statements, a Statement of Retained Earnings and a Cash Flow Statement of Changes and Value Added Statement are also prepared in practice. USEFULNESS OF FINANCIAL STATEMENTS The information contained in these statements is used by the management, present and potential investors, lenders, short-term creditors, employees, customers, government and their agencies to satisfy some of their different needs for information. Users can get better insight about the financial strengths and weakness of the firm if they properly analyze the information from their own points of view. The usefulness of the financial statement for some of the users is explained as follows. 1). TRADING ACCOUNT Trading Account is prepared at the end of each accounting period to assess the Gross Profit or Gross Loss. Gross Profit is nothing but the excess of the total of credit column over the total of the debit column. If the net sales (sales minus sales returns) amount is more than the cost of production (Direct Material + Purchases + Direct Labour + Direct expenses) the difference is called Gross Profit, it should be transferred to Profit and Loss Account and posted on credit side. If sales cannot observe the cost of production then it leads to Gross Loss, it will be transferred to the debit side of profit and loss account. 1.1) NECESSITY OF TRADING ACCOUNT - In case of Manufacturing and Trading Entity Trading Account is first prepared. - It helps in ascertaining Gross Profit / Gross Loss. - It helps in identifying the material changes in direct expenses. - It helps to establish the relation between the costs and revenues. - One can analyse the trend in sales. - One can estimate the earning capacity of the entity.

35 2). PROFIT AND LOSS ACCOUNT (Income Statement): Profit and Loss Account is prepared in order to assess the net profit or net loss of the firm for the accounting period. It can be arrived by debiting the Administrative Expenses, Promotional Expenses, General Expenses, Depreciations and other miscellaneous expenses from the gross profit carried from trading account. Profit and Loss account by its nature a Nominal Account, since profit and loss account is an account pertains to particular period there won t be any carry forwards so it doesn t have either opening or closing balance. If the total of credit column exceeds the debit column the difference is called Net Profit, which is further transferred to Profit and Loss Appropriation Account for further allocations for income tax and remaining will be transferred to capital account and general reserve account. Such addition to capital will increase the capital balance. If the debit column is more than the credit column then it will be denoted as Net Loss, such loss will be transferred to capital account in turn capital gets reduced. Note: - Only Revenue Income and Revenue expenses will be considered under profit and loss account, not capital items. - Income tax element will come under Profit and Loss Appropriation Account Not under Profit and Loss Account. - Capital Expenditure are purchase of fixed assets say plant and machinery, furniture, motor vehicles, land and buildings, such expenditures are capitalized not charged to profit and loss account. 3). BALANCE SHEET (Position Statement) Preparation of balance sheet is the final stage of financial statement, arriving at the entities financial position as at particular date showing the present position of its total Assets and corresponding total Liability of the firm on the particular date. The Trading and Profit and Loss are prepared for a period of time say for financial year (i.e. period starting from 1st April 2014 to ending on 31st March 2015), where as the

36 Balance sheet is prepared an a particular date(i.e. as on 31st March 2015). The balances taken from Trial Balance are properly grouped under Balance Sheet i.e. proper allocations with reference to Real, Nominal, and Personal Account are made in a systematic manner that is all Assets on right hand side and all Liabilities on left hand side of the Balance Sheet in case of (Horizontal Format). Where as in case of Vertical form of balance sheet first Sources (Liabilities) will be considered there after Application (Assets) will be considered as a deduction from sources. Note: - Balance Sheet is a Statement Not an Account - It will not be recognized as Debit and Credit side but it will be considered as Asset side and Liability side. - All credit balances will be considered under Liability side and all debit balance will take place in the Asset side. - It is prepared to assess the financial position on the particular date. CLASSIFICATION OF ASSETS AND LIABILITIES: ASSET SIDE: - Tangible Fixed Assets: Tangible Fixed Assets are the assets are those assets which can be seen and felt which is having physical existence and are used in the course of business or profession, which are essential for the running the business or profession. They are in physical nature; it is having life of more than 12 months. Example: Land, Building, furniture, machinery etc - Intangible Fixed Assets: These are good will, brand, intellectual properties etc. which benefits are enduring in nature. - Current Assets: Cash and other short term assets or circulating capital, debtors, stock, bills receivable, bank balance, trade receipts which are easily convertible to cash within period of 12 months are treated as current assets. LIABILITY SIDE - Fixed Liability: This comprises Capital, Reserves and surplus, Loan from Bank (long term), Debenture etc.

37 - Current Liability: These are the short term obligation to be met out of current assets; these are sundry creditors, bills payable, bank overdraft, advances received and short term loans. - Contingent Liability: These are the liabilities, which may or may not arise in future depending on the happening or not happening of certain future events. Example: claim which is still under dispute, bills discounted but likely to be dishonoured GROUPING AND MARSHALLING OF ASSETS AND LIABILITIES The term Grouping means putting together items of similar nature under a common heading. For example, under the heading Trade Creditors the balances of the ledger accounts of all the suppliers will be shown. The term Marshalling refers to the order in which the various assets and liabilities are shown in the balance sheet. ORDER OF BALANCE SHEET - Order of Liquidity: Under this method assets and liabilities will be presented in the order of liquidity. - Order of Permanency: Under this method Assets are arranged in the order of least liquid basis. ADJUSTMENTS TO FINANCIAL STATEMENT Financial statements are prepared with a view to arrive at the opinion that at the end of financial period one can assess the financial position and income earned by the entity and those methods and procedures adopted in arriving such financial statements and ultimate output derived from such financials are reliable and accurate and it is not misleading, so while preparing such financials we need to consider and make appropriate adjustments, provisions for prior period and extraordinary items say prior period salaries which firm was not liability to pay due to law suit favoured

38 employee by reinstating back wages in such situation such adjust has to be given effect through adjusting entries in the books. The items which are not included in the respective accounts can be included with adjustment entries, when such adjustment entry made it must be rooted through trading profit and loss account. While preparing financial statements ensuring that it is in conformity with the Accounting Standards Issued by the Institute of Chartered Accountants of India, ensuring there is no violation to these standards. COMMERCIAL MATHEMATICS MEANING: Commercial Mathematics is concerned with mathematics used in the practical world of business operations mainly of commerce area and in everyday life. It is a branch of mathematics related to profit and loss, simple & compound interest, discount percentage, etc. Topics like elementary arithmetic (fractions, percentage, decimals); elementary algebra, statistics & probability, mortgages, simple & compound interest are included in it. KINDS COMMERCIAL MATHEMATICS: 1. PERCENTAGE, PROFIT & LOSS. 2. SIMPLE INTEREST & COMPOUND INTEREST 3. GROWTH & DEPRECIATION 1) PERCENTAGE, PROFIT & LOSS a). Percentage: A percentage is the fraction with its denominator as 100. However it is expressed as the value of its numerator followed by a percentage % sign and the denominator 100 is omitted.