ACCOUNTING PROCESS

Published On : 2018-12-12

ACCOUNTING CYCLE
Accounting cycle or accounting process includes the following:
1. Identifying the transactions from source documents like purchase orders, loan agreements, invoices, etc.
2. Recording the transactions in the journal or subsidiary books as and when they take place.
3. Classifying all entries posted in the journal or subsidiary books and posting them to the appropriate ledger accounts.
4. Summarising all the ledger balances and preparing 
the trial balance 
final accounts which include Trading and P/L A/c to calculate Profit/ Loss
Balance Sheet to Calculate Assets and Liability 


JOURNAL
Journal is the book of primary entry. Transactions are recorded in a chronological.


CASH DISCOUNT
Cash discount is allowed to receive early payment. 
When cash discount is allowed, a less amount is accepted as a full payment of a debt which is debited to Discount Allowed Account. 
When cash discount is received, a less amount is paid in full discharge of a liability which is credited to Discount Received Account. 


TRADE DISCOUNT
Trade discount is a deduction from the list (or catalogue) price allowed by the manufacturers to the wholesalers or by the wholesalers to the retailers for various reasons. Entries for purchases and sales are made at net price i.e. after deducting trade discount from the list price.


SUBSIDIARY BOOKS OF ACCOUNT
Subsidiary Books (special Journal ) are the books of original entry (or prime entry ) which are used to record the specific transactions of similar nature for the first time on the basis of source documents. Thus subsidiary Books are part of journal.
Advantages 
1. Facilitate division of work 
2. Permit the installation of internal check system,
3. Permit the use of specialized skill . 
4. Result in Time and Labour Saving in journalizing and posting 
  
PURCHASES BOOK
Purchases book is meant for recording the purchase of goods on credit only. 
Cash purchases are not recorded in this book.
Posting is done in the
supplier’s/ creditors account daily from the purchases book with their respective amounts. 
At the end of week/month, the total of the purchases book is debited to the purchases account in the ledger.
Purchases Account shows all purchases of goods (whether for cash or on credit .


SALES BOOK
In the Sales Book, only credit sale of goods are recorded.
Cash Sales will be entered in the Cash Book
Sales Account is credited with the monthly total of the Sales Book.
Only sale of goods are recorded in sales book for sale of every other item entry is made in journal proper. 
Sales Account shows all sales  of goods (whether for cash or on credit .


PURCHASES RETURNS BOOK
records the details of goods returned by the business organization to the supplier(s)
A debit note is sent to supplier indicating that his account has been debited with the amount mentioned in the debit note.
An individual transaction of Purchase Return Book is posted to the debit  of supplier’s  Account
The total of Purchase Return Book is posted to the credit  of Purchase Return  Account 
Purchase Return Account shows  Return of goods 


SALES  RETURN BOOK   
Goods returned by the customers are recorded in this book.
Goods sold for cash and returned are not recorded in sales returns book.
A credit note is sent to customer intimating that his account has been credited with the value of goods returned.
The total of Sales Return Book is posted to the debit  of Sales Return  Account 
BILLS RECEIVABLE BOOK 
Records the details of bills receivable
An individual transaction of Bills Receivable book is posted to credit of Debtor’s Account.
The total of Bills Receivable book is posted to the debit of Bills receivables  Account 
The total of Purchase Return Book is posted to the credit  of Purchase Return  Account 


BILLS PAYABLE  BOOK 
Records the particulars of all the bills payable accepted
An individual transaction of Bills Payable  Book is posted to the debit  of Creditor’s Account.
The total of bills payable book is posted to the credit of Bills Payable   Account


JOURNAL PROPER 
Journal Proper is one of the subsidiary  books which is used to record those transactions which cannot be recorded in any other subsidiary books .  
Opening Entries
Closing Entries
Adjustment Entries
Transfer Entries
Rectification Entries
Purchase of Fixed Assets/Stationery
Sale of Worn-out or Obsolete Assets
Goods withdrawn by Proprietor for Personal use
Goods destroyed by Fire


CASH BOOK
Cash book is the book in which all transactions concerning cash receipts and cash payments are recorded.
It serves the purpose of Cash Account also so a cash book is both journal and ledger.


Types of Cash Books

SINGLE COLUMN CASH BOOK
It records only Cash Receipts and Cash Payments.


TWO COLUMN CASH BOOK
This type of cash book contains the following Two amount columns on each side
Cash column for cash received and cash paid; and
Bank column for money deposited and money withdrawn from the bank.
There is no need for a separate bank account in the ledger


Contra Entry: If the debit as well as credit aspect of transaction are recorded in cash book itself , it is called Contra Entry. 
It is passed only when Three Column Cash Book is maintained. Contra Entries are never posted in the ledger 


PETTY CASH BOOK   
Payments in cash of small amounts like traveling expenses, postage, carriage etc. are petty cash expenses. These petty cash expenses are recorded in the petty cash book. 
The petty cash book is maintained by separate cashier known as petty cashier.
The balance is petty Cash Book is an asset . 
Payments recorded in the Petty Cash Book are directly posted to the different nominal accounts


TRIAL BALANCE
A trial balance is a schedule or list of balances of both debit and credit extracted from various accounts in the
ledger including cash and bank balances from cash book. As Debit is equal to credit hence Balance of Both column of trail Balance matches itself. 
It is a check on the accuracy of posting. If the trial balance agrees it proves that:
                   (a) the books are arithmetically accurate, and
                  (b) both the aspects of the transactions have been correctly recorded in the books of original entry as well as in the ledger.
It brings together the balances of all the accounts at one place and this facilitates the preparation of profit and loss account and balance sheet

METHODS OF PREPARING THE TRIAL BALANCE
Totals Method: In this method, the totals of debit and credit sides of the ledger accounts are shown in the trial balance. The sum totals of debit and credit columns of the trial balance must be equal. This is less popular method.

Balances Method: In this method, the balances of ledger accounts are taken to respective debit and credit columns of the trial balance and then grand total is taken out. The total of balances in the debit column must be equal to the total balances in the credit column of the trial balance.

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