A COMPLEATE GUIDE TO TALLY

By Abhijit Behera.

LESSON 1

INTRODUCTION TO TRADING ORGANISATIONS

Lesion objectives

On completion of this lesson, you will be able to

Understand a trading organization and its activitiesUnderstand the accounting terms associated with trading organizationUnderstand the role of inventory.

recap of tally undergraduateTally undergraduate was the first step towards understanding the wide spectrum of business organizations, from the simple service organization to the complex manufacturing organization. The course took you through working of a service organization, which illustrated the basis of accounting procedures. You learned to process of simple transactions, set up related accounts and prepare financial statements.

Systematic instruction were provide on the treatment of receipts and payments; advance and credit payments for services provide; purchase of officequipments and other supplies; adjusting entries for depreciation, prepayment, accrued revenue and expenses. The hands-on practical approach gave you an understanding of tally and the fundamentals of accounting.

Tally postgraduate will deal with the mechanics of trading organization and accounting procedures related to them.

trading organizationsan organization involved in the process of buying and selling can be called a rading organization. Trading is an exchange of goods for fixed market price or perceived value. Traders act as channels who provide goods produced by the manufacturers at a convenient place, price, quantity and time to the consumers.

Traders can be broadly classified asWholesellers: wholesellers purchase merchandise in bulk directly from manufacturers and sell to retailers.Retailers: retailers purchase merchandise from wholesalers and cater t the end consumers.nature of trading organizationsactual market price of a product is based on the existing demand and supply and is valid for a short period.The value of the product is determined by theQualityConveience. In relation to the actual amount paid it.The tader deals with goods and repacks the if necessary but does not process them.A trading organization has to keep a continuous track of market demand and ensure that inventory planning is done to takeavantage of demand whenever it arises.A different price may be charged to different customer segments by varying the percentage of discount on the list price.

Accounting in trading organizations

collections

Figure 1.1 accountiong in a trading organisation

Trading organisation Service organisationSells goods Sells servicesMaintains inventory Does not have inventoryCost for trading organisation is the cost of goods sold

Cost for service organisation is the cost of providing services

Goods are tangible Services are not tangileActivities of trading organisation

Purchases: purchases for a business are to buy goods in exchange for a monetary value, primarily with the intention of selling them to customers.Sales: a sale involves transfer of goods or services for money. It is reported in financial statements net of trade discount.

Accounting and commercial terms associated with trading organizations

Credit period

Credit is an arrangement for deferred payment for goods and services. Credit period is the time frame for which the supplier agrees to provide the customer with credit.

The factors that help in deciding the credit period are

The credibility of the buyer is based on his own financial stability and the relationship with the seller.Overall profitability from repeated orders by the buyer.The product profit margin.The credit period offered by the competitors.

Trade Discount and Cash Discount

There are two major kinds of discounts offered by traders making a sale.

Trade discount: Trade discount is a discount allowed on the list price of a commodity. It is offered to allow for customer segmentations and represents the position of the buy vis-à-vis the rest of the market.

Customer demand trading organisation

Inventory based on customer demand

Arrival of stock

sale

Cash discount: cash discount is a discount allowed as an inducement or incentives to the coustomers for prompt payments. Cash discount is not deducted from sales revenue, but is recognized separately.

Returns / allowances.

Goods may be returned due to one of the reasons

Quantity related issuesQuality related issuesPayment terms and delivery related issues.

Returns are the total value of merchandise returned by customers for refund or credit.

Allowance is a concession granted to customers for unsatisfactory goods or services.

Both reduce the total value of sales because that portion of the sales considered “not earned”

Type of issue SolutionQuantity related Reach a conclusion on quantity of stock delivered

Deliver the balance to the customer

Reduce the customer obligation

Quality related Take back the stock

Offer a discounted rate

When dealing with quantity/quality related issues with regards to stock, it is important to know whether purchases / sales have been recorded in the books of account.

If purchases/sales are already recorded, a debit/credit note must be raised to account for returns/allowances.If purchases/sales are not recorded, a delivery/receipt note is issued and rejection out/rejection in is recorded to account for returns/allowances.

Cost of goods available for sale

Cost of goods available for sale is the cost of goods that a business could have sold in a period. It represents the sum of opening stock and purchases in a period.

Cost of goods sold

Cost of goods sold represents direct cost incurred by a business in the process of selling goods.

It contains of all the costs associated with the goods that were sold during a specified accounting period, including materials, labour and overhead.

Gross profit

Cost of goods available for sale= opening stock + purchases-purchases returns and allowances

Cost of goods sold=opening stock+purchases-purchases returns and allowances-closing stock

Gross profit is the profit earned out of the core activity of buying and selling. Gross profit is arrived at by reducing direct expenses from direct incomes.

Gross profit in terms of percentage =[(gross operating revenue-cost of goods sold)*100] / (gross operation cost}

This percentage provides a relative measure of profitability.

Operating expenses

Operating expenses are periodic expenses incurred in the course of running a business. It covers all expenses related to the ongoing operations of a company, including sales, marketing and administrative expenses.

Operating profit (PBIT)

Operating profit is the net income before income tax expenses and interest expense. This is a popular measure for comparing the earning power of companies.

Operating profit=gross profit-operation expenses

Net profit

Net profit is also known as profit or net earnings.

Introduction to inventory

Inventory consists of raw materials, items available for sale or in the process of being made ready for sale (work-in –progress). In other words, inventory is the money invested by an organisation in raw materials, work-in-progress and finished goods for expected future sales. The funds invested in the inventory cannot be used for other purposes until cash is received on the sale of goods.

Inventory is a current asset because it can be converted into cash.

Definition of inventory

Inventories are assets

Held for sale in the course of business. In the process of production for such sale. In the form of materials or supplies to be consumed in the production process or in the rendering of services.

Measurement of inventory

Inventory should be valued at the lower of cost net realizable value.

Cost of inventory

The cost of inventory usually comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Costs of purchase

The costs of purchase consists of the purchase price including duties and taxes (other than those subsequently recoverable by the enterprise form the taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the cost of purchase.

Determining inventory levels

A minimum stock of inventory has to be maintained for the following reasons

Accurate prediction of requirement of raw materials or trading goods, and the availability of the same at a desired location and price is difficult.

There is a lead time for procurement of goods after placing orders with suppliers. Factors such as machines, men, money and time that contribute towards the final product, apart from raw

materials, may be affected by breakdowns, strikes, other expenses and there may be an unforeseen extension of time involved in the conversion.

Kind of inventory

Net profit=operating profit-interest expense-income tax expenses

Raw materials are the items purchased for use in the production process, to be modified or transformed into the final product. For example, rubber is the raw material for tyres.

WIP is an acronym for work- in –progress. It is the value of partly finished goods. Finished goods inventory is that portion of goods which are manufactured and available for sale. Supplies are the items consumed in the normal functioning of a firm that are not part of the final products.

Introduction to inventory valuation

A material is valued by determining its cost of purchase.

To determine the profit of transactions, valuation of input stock (raw materials/traded goods) is required when output stock (finished goods/traded goods) is sold.

In a price sensitive market, where one has to quote the selling price of the material based on the cost of purchase, the questions to be answered, while valueing inventory are:

Is input stock identifiable with output stock? Is the cost of input stock identifiable with output stock used for sales?

The valuation of stock has to thus serve the following objectives

The profit on sales needs to be arrived at, after considering cost of materials used. Valuation of material cost has to facilitate comparison of jobs. The closing stock has to be valued fairly close to market value.

Inventory costing methods

FIFO: first in first out

FIFO is an inventory cost method whereby the goods purchased first are assumed to be the goods sold first, so that the closing stock consists of the most recently purchased goods. As the oldest stock in the inventory is sold first, the calculation of the inventory value is besed on the principle that inventory in hand is the one most recently purchased. The cost of goods sold thus represents the cost of items acquired in the earlier purchases. This method is justified by the fact that closing stock represents the latest purchases price (which is considered closer to the market price) and is useful when prices are stable.

Lifo : last in first out

LIFO is an inventory cost method whereby the last goods purchased are assumed to be the first goods sold so that the closing stock consists of the first goods purchased. This method is based on the logic that cost of goods sold should reflect latest costs and profits booked accordingly. This method is developed to overcome the FIFO’s shortfall in handling following scenarios.

When the process of input material are fluctuation. When prices have to be quoted to the customers based on latest purchase cost.

Weighted Average Cost

Weight average is an average calculated by assigning each quantity to be averaged a weight. These weights determine the relative importance of each quantity on the average. This method averages prices after multiplying them by their quantities on each new purchase. A new average price has to be worked out on each purchase of material.

Example : national stores bought cups from KR glassware company. The details of the purchase are given in the table below.

SL. NO. DATE QUANTITY RATE TOTAL VALUE1 4-6-2005 5 10 502 15-6-2005 10 12 1203 20-6-2005 20 11 220

TOTAL 35 33 390

Calculation of average prices is done as given below

Standard cost

Under this method, a standard price is set for each material and issues for a period are made at this price. At the end of the period, variances between actual and standard are booked to reflect the real position. In the other valuation methods, comparison of two jobs is not possible due to market fluctuations. Standard pricing method overcomes this defiency.

Inventory System

Quantity vs. value records

Quantity and value records are used to record the movement of stock. The inventory is usually maintained in a factory or godowns which are strategically located to achieve timely delivery, reduce cost of holding and so on.

Note: totally enables maintaining of stock quantity records as well as value based records with ease.

Perpetual and periodic inventory systems

Periodic inventory system

In this method, a physical inventory is usually taken only at the end or at regular intervals. The inventory on hand and the cost of goods sold are determined by means of a physical count at periodic intervals or at the end of the period.

Organisations may not feel the need for systematic recording of every movement of goods.

When there is a strong physical control over the movement of goods.When physical verification of stock is easier.When price movement of materials is insignificantWhen movement at stores level cannot be recorded or there are no stores

In such situations, the cost of recording stock movement may outweigh the benefit of recording stock and the organization opts for periodic inventory valuation.

Note: in tally, periodic inventory system is applicable when integrate accounts with inventory in F11 : Features is set to No.

Simple Average Price= Total rate/Total number of transactions=33/3=11

Weight Average Price = Total value/Total quantity = 390/35=11.14

Perpetual inventory system

Perpetual inventory method where the inventory accounting is kept up-to-date. It involves the recording of receipts to delivery of materials on a daily basis. This method is applicable to businesses where there are a number of sales transactions every day and the sales are of high value.

Perpectual system of inventory is preferable in cases where

There is a strong system control over movement of goods.Physical verification of stock is difficult.Price movement of material is significant.Movement at stores level can be recorded.Stock is converted to finished goods in stages.

Note: in tally, periodic inventory system is applicable when integrate accounts with inventory in F11 : Features is set to yes.

Points to remember

Trading organization is an organization that is involved in the process of buying and selling.A purchase for a business means buying goods, primarily with the intention of selling them to customers.Sales are transactions that involves transfer of goods or services for money.Credit period is the time frame for which the supplier agrees to provide the customer with credit.Trade discount is a discount allowed from the list price of a commodity to assist increase of sales.Cash discount is a discount allowed as an inducement/incentive to the customers for prompt payments.Returns are the tota value of merchandise returned by customers for unsatisfactory goods and services.Cost of goods available for sale is the closing stock on a given date.Cost of goods sold represents direct costs incurred by business in the process of selling goods.Gross profit is the profit earned out of core actities like buying and selling.Operating expenses are periodic expenses incurred in the course of running the business.Operating profit is the net income before income befor income tax income tax expense and interest expense.Inventory is a repository of raw materials, items available for sale or in the process of being made ready for sale (w-i-p)

Lesson 2

PURCHASES AND SALES

Lesson Objectives

On compleation of this lesson, you will be able to

Define cash and credit purchases and differentiate between them.Define cash and credit sales and differentiate between them.Understand the application of bills of exchange.Understand the process of purchase and sales returns.Understand the principles of revenue recognition and the concept of price levels.

Cash and credit purchases

When payment is mede on a purchase instantly, either by cash or cheque, it is known as a cash purchase. However, when both parties involved in the transaction agree upon a later date as the date of payment for goods purchased it is known as a credit purchase.

If the goods are purchased in smaller units, the buyer need not bother about supplier details, required for vendor management. This usually happens when the product is standardized and when the buyer has to deal with lots of one-time suppliers. If the buyer orders on a regular basis, it is better to route the order through a vendor account. This helps the buyer to

Record payments that will be affected in futureNegotiate trade and cash discountsBargain for credit period

Cash and credit sales

When payment is received on goods sold instantly, either by cash or cheque, it is known as cash sales. However, when both parties involved in the transaction agree upon a later date as the date of payment for the goods sold, it is known as credit sales.

If the quantity if goods sold is in smaller units, then the seller need not bother about the buyer details. This usually happens when the product is standredised and when the seller has to deal with lots of one-time buyer. Of the supplier receives regular orders, it is better to route the order through customer account. This helps to keep track of the business done with the customers.

Purchase returns

Goods purchased can be returned to a supplier of the goods do not measure up to the terms and conditions agreed upon by the buyer and the supplier, at the time of return of goods (from buyer’s perspective) a document called the debit note is prepared showing the date of return, name of the supplier to whom the goods have been returned,details of goods returned and reasons for returning the goods. It informs the supplier that his account has been debited with the value of the goods returned. Of discount is allowed by the supplier, this should be taken into consideration while calculating the value of the goods returned.

Debit note is a note that indicates and accounts for an amount owed by a person or a company. The scope of the debit note is not limited to accounting for an amount owed by a person or a company. The scope of the debit note is not limited to accounting for purchase returns only. It can be issued when

The buyer does not agree with the sales invoice sent by the supplier after booking of purchases.The supplier informs the buyer that an interest is due delayed payments.The supplier accounts for and intimates the buyer that expenditure incurred on his behalf is recoverable .

Sales return

Goods can be returned to a supplier by buyer if the goods supplied are not according to terms and conditions agreed by both the buyer and supplier, a document called the credit note is prepared at the time of return of goods (from supplier’s perspective) to record the quantity and value of goods returned by buyers.

Credit note is a note that acknowledges and accounts for an amount owned by a person or a company. It is a simple and efficient system to inform the supplier of all receipts due. The buyer acknowledges to the supplier that interest

is due for delayed payments and acknowledges reimbursement of expenditures incurred by the supplier on his behalf.

Bill of exchange

Bill of exchange is an instrument in writing, containing an unconditional order, signed by the maker (drawer), directing a certain person (drawee) to pay a certain sum of money only to, the order of, a certain person or to the bearer (payee) of the instrument. it must be accepted by the drawee as will as dated and properly stamped.

Specimen of bill of exchange

Bills receivable and bills payable

A bill of exchange can be bills of receivable as well as bills payable. When the drawee accepts the bill and sends it back to the drawer it becomes a bills receivable to the drawer as the money is receivable by him on the bill. Therefore, it becomes an asset to him. On the other hand, it becomes a bills payable to the drawee if money is payable by him on the bill, in which case it is a liability for him.

The drawer can make use of the bill in any of the following ways

Retain the bill till the date of maturity and collect the money from the drawee.Endorse the bill to his creditor. Discount the bill with the banker.Send the bill to the banker for collection.

Revenue recognition principles

As per the principles of revenue recognition, revenue can be recognized when

Significant risks and rewards of ownership of goods are transferred to the buyer.Seller retains no effective control over the goods usually associated with ownership.No significant uncertainty exists regarding the amount of consideration to be received.Note : Trade discounts and volume rebates received are not eccompassed in the definition of revenue.

Price Levels

Products are sold in different markers for different prices and to different customer segements based on the demand and supply for the product and competation from other organizations dealing in similar products. The diversity followed in assigning different values for the same product is known as setting up of proce levels.

The price level feature in tally allows setting up of different price lists for the same items. One can prepare invoices with different prices for different customers for the same product, with ease.

Points to remember

When payment is make for a purchase instantly, either by cash or cheque, it is known as cash purchase.When both parties involved in the transaction agree upon a later date as the date of payment for the goods purchased it is known as credit purchase.

When payment is received on goods sold instantly, either by cash or cheque, it is known as a cash sales.When both parties involved in the transaction agree upon a later date as the date of payment for the goods sold, it is known as credit sales.Debit note is a note that indicates and accounts for an amount owed by a person or a company to you.Credit note is a note that acknowledges and accounts for an amount owed to a person or a company by you.Bill of exchange is an instrument in writing, containing an unconditional order, signed by the maker i.e drawer directing a certain person i.e. drawee to pay a certain sum of money only to or to the order of a certain person or to the bearer(payee) of the instrument.Bills receivable is a bill of exchange due for payment at a future date.

Power of Simplicity

L E S S O N 3

LESSON OBJECTIVES

On completion of this lesson, you will be able to

Recognize tally’s capability to improve effeiciency in trading organization.Understand appropriate features and configuration settingsRecord transactions through accounting vouchers

Tally’s capability for a trading organization

Prepare invoiceView balance sheet at any given point of time.Prepare profit and loss account for any required period.

View stock valuation under multiple methods and estimate their effect on profit.View periodic movement of cash and funds in business.Maintain stock details location-wise.Track the pending orders that need to ve delivered.Maintain an account of pending invoices of orders delivered.Follow up pending payments against invoices.Identify slow-moving and fast-moving items and take necessary remedial action.Identify stocks batch wise, if necessary.Keep track of expiry dates for inventory items.Avail information of alternate products using stock groups and category.Calculate interest on payments pending beyond due dates.Physical stock can be reconciled with stock records.Set different price lists for different customer segments.Set volume based discount and trade discount for different customer segments.Set credit and credit limits for customers.Record credit periods availed from suppliers.Accommodate free samples and replacement stocks.Create a company

To start working with tally, create a company.

Go to gateway of tally>company info>create company

Use the following table to enter the information in the fields available in company creation screen.

Use enter or tab to navigate between the fields. You can also use the mouse.

Company creation-microshop systemsFIELD DATA TO BE ENTEREDDirectory Accept what is displayed on the screenName Microshp systemsMailing name Microshp systemsAddress 45,nua bazaar,angul orisssaState OrissaPin code 759001Email address contactssys@microshop.comUse Indian VAT? Set to Yes for the companies which are located in the state where VAT is applicable. If VAT is not applicable, the field is set to no

Yes

Application form:enter the data from which VAT Is applicable 1-4-2010Note : only if VAT is activated, the field applicable from appears on the screen.Vat TIN:Enter the VAT TIN number. The Taxpayer’s Identification number consists of 11 digits. The first 2 digits represents state code as used by the Union Ministry of Home Affairs

117dd2547887

Local sale tax number Skips field automaticallyInter-state sales tax Skip field-don’t enter any detailsIncome tax number Abcde12345fVAT regn. Number Skip field don’t enter any detailsCurrency symbol Rs.Maintain Accounts with inventory

maintainOption DescriptionAccounts only Financial accounts of the company onlyAccounts with inventory Both financial accounts and inventory recorded of the

company

Figure 3.1-Company creation screen-maintain field sub-window

Financialyear from 1-4-2005Books beginning form 1-4-2005Use security control NoTally vault password Skip field donot enter any details hereUse security control NoBase currency informationField DescriptionBase currency sympol Preset as default currency

Formal name Type in the name for the currency symbol by default this is set to Indian repees

Numver of decimal places By default thi is set to 2Show amounts suffixed to amounts Tally caters to currencies where the different parts of large

amounts are called by special names by default this is set to no

Is symbol suffixed to amounts By default this is set to no in india the rs symbol is placed in front of amounts

Put a space between amounts By default this is set to yesThe completed company creation screen appears as shown below

Figure 3.2-company creation screen completed

Accept the screen to save the company, microshop systems

F11:features is used to modify the various features of a company. This button is available in most applications of tally. The company features are specific to the current company only and theus each company may have different features activated.

Ensure that the company details are as shown below,

Figure 3.F11- features company operations alteration

Intergrate accounts and inventory?

If accounts are not integrated with nventory, inventory vouchers will not have any impact on the valance sheet stock figures will be maintained separately. How ever, if the accounts and inventory are intergrated by setting this field to YES, the inventory entries automatically updated the balance sheet stock figures. In other words the perpetual inventory system is activated.

Allow multi-currency?

Tally has multi-currency option. Transactions canbe recorded in foreign currency required.

Invoices, bank accounts or ledgers can be maintained in foreing exchange.

Allow invoicing?

Invoicing is generally used for sale of stock where the details of the items sold are listed option for price lists becomes available only if the invoicing is allowed.

Enter purchases in invoice format?

Set this field to Yes to create purchase vouchers in invoice mode. The suppliers’ invoices can be entered in the same way as theyphysically appear. In invoice mode, purchases are allocated to cost purchases allows manual allocation of purchases to cost centre’s.

Maintain billwise details?

This field has to ve activated to make it available for ledger accounts. Each ledger account can be set individually for the feature as required. The other features will be explained as and when required.

Alteration of a company

This allows to modify or change information of the company created.

F12: configuration

USE F12:to configure settings for various applications available in tally before you start working with the company created. Configuration settings affect all companies maintained in the same data directory andsettings configuration for one company will affect other companies in that data directory.

Master configuration

Master configuration is used to set the details that shoukd appear in the accounts and inventory master. This is available in the accounts and inventory master screens through the F12 :configure button and can be modified as per requirement.

Go to gateway of tally .F12:configure>accts/inv info

Figure 3.4 F12:configure- master configuration

Ensure that the master configuration settings are as shown in figure

Allow aliases aling with names?

An alias is another name for an account head. This field can be used to enter codes, if required. If an alias is given, both name and alias are available while entering a voucher, either of them can be used.

Allow advanced entries in masters?

If this field is set to yes, fields requiring advanced settings are displayed in the group creation and ledger creation screen.

The following fields are dislayed in group creation screen.

Group behaves like a sub-ledger? If this is set to yes, the group behaves like a control account for its ledgers, only the group balance will be displayed, not the individual ledger balances.Used for calculation(e.g. taxes, discounts)? (for sales invoice entry) this field is set to yes if the ledger under this group have percentages for discounts/ taxes to be used for invoice entry. Only voucher entry in invoice mode used the automatic calculation capability.Method to allocate when used in purchase invoice? In this field’ allocation method’ needs to have assigned if applicable. In other words, when the user enters purchase transaction using the invoice mode, the values given for the selected group’s legers in the entry can be apportioned or appropriated or allocates base on the purchases value or purchases.Net debit/credit balances for reporting? If this field is set to yes amounts are displayed as a net figure instead of separate debit credit balances in reports,.

Add notes for ledger accounts? Use addresses for ledger accounts? Use contacy details for ledger accounts?

These three fields are self explanatory. If thes are set to Yes, user can fill in the mailing and other related details along with essential notes for a ledger account head.

The other features will ve explained as and when required.

Voucher configuration

This is used to configure features while making voucher entry.

Go to gateway of tally>F12 configure>voucher entry