books of accounts & accounting records

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Books of Accounts & Accounting Records

Study Note - 2


This Study Note includes

●●●●● Introduction●●●●● Basic Documents used in Accounting●●●●● Books of Accounting Record●●●●● Trial Balance●●●●● Trial Balance-Utility and Interpretation●●●●● Trial Balance and Errors●●●●● Accounting in Practice●●●●● Comprehensive Illustrations

2.0 Introduction

In the last study note the student was taken through the basic concepts of accounting and howthe accounting treatment is decided based on the golden rules. In the section 1.6 of the previouschapter, a sequential listing of accounting process was given. For the purpose of convenience,it is repeated here.

(a) Consider whether an event qualifies to be entered in books of accounts in money terms

(b) If the answer to the above is ‘yes’, then assess the two aspects of the transaction

(c) Determine what type of ‘account’ is affected by each of the aspects

(d) Apply the golden rule of ‘Debit’ and ‘credit’

(e) Prepare the basic document such as invoice, voucher, debit note or credit note

(f) Record the transaction in the primary books or subsidiary books

(g) Carry out the posting into the ledger

(h) Prepare the list of all ledger balances and ensure it tallies

(i) Rectify the errors, if any

(j) Pass adjustment entries

(k) Prepare adjusted Trial Balance

(l) Prepare the financial statements – the income statement and balance sheet

We discussed steps (a) to (d) in the previous study note. In study note 2, we will dwell upon theremaining aspects of the accounting process.

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2.1 Basic Documents used in Accounting

All records in the books of accounts must be based on facts and true information and with theminimum element of subjectivity. Accordingly, all accounting entries should be supported byand verifiable with documentary evidence such as vouchers, receipts, invoices, debit notes,credit notes, bank advices, goods received note, goods returned note, delivery challans, statementof accounts, cheques, withdrawal slips, pay-in slips etc. There are certain other documentsgiven by outside agencies such as bill of entry or bill of lading from customs department, lorryreceipt by transporter, tax challans, demand notes etc. These are referred to as ‘Source Documents’based on which the entries are made. These documents are always preserved for future reference.In fact, the documents may be required to be preserved for a certain number of years as perlaws e.g. the Income Tax act requires the documents to be preserved for a period of 8 years, asthese documents bear testimony to the occurrence of the transactions.

For want of space, the formats are not covered in this study material. These formats are notstandard and every business may have its own formats to suit the needs of the organization.Students are advised to refer to these formats on their own.

What these documents have in common are certain details such as date, amount, reference ofpayment like cheque or draft number, bank details, brief description of transaction, names ofparties involved, signature of authority sanctioning the transaction, signature of the receiver,revenue stamp wherever applicable, acknowledgement etc. In short these documents providesufficient details to the accountant for booking transactions in the set of books.

In modern days, organizations generally use computerised accounting packages. These packagescome with built in formats which could be used for data entry. The formats can also becustomized to suit the needs of different organizations. The document numbers are alsogenerated automatically by the system to ensure serial control.

Generally, the documents used for accounting entry are retained in accounts department. Theycould be made available for the purpose of reference, audit by the auditors, examination by taxauthorities and as evidence in the court of law. Therefore, there has to be proper house-keepingof these documents. Large organizations scan these documents to preserve them for longerperiod in electronic form.

2.2 BOOKS OF ACCOUNTING RECORD

Preparation of source documents and recording them in books of account are continuouslydone. The books of accounts normally comprise of

(a) Journal and subsidiary books

(b) Ledger

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2.2.1 Journal

A journal is often referred to as the book of original entry. In this book transactions are recordedin their chronological order. The process of recording transaction in a journal is called as‘Journalisation’. The entry made in this book is called a ‘journal entry’. As the events are recordedchronologically, it is easy to find entries based on dates. There is little chance to miss the entry.Both effects of transaction are simultaneously recorded by showing the debit and credit effectsthereof. A brief narration describing the transaction is also written.

There is, however, one limitation that if the number of transactions is too large the journalwould become bulky and unwieldy.

The specimen of a journal book is shown below.

All the columns are filled in at the time of entering the transaction except for the column ofledger folio. This is filled at the time of posting of the transaction to ‘ledger’. This process isexplained later in this chapter.

Illustration 1

Let us illustrate the journal entries by taking the seven transactions from our example given inthe chapter one. These transactions were:

(1) Mr. Vikas and Mrs. Vaibhavi who are husband and wife start consulting business bybringing in their personal cash of Rs 500000 and Rs 250000 respectively.

(2) They buy office furniture of Rs 25000 for cash

(3) They open a current account with Citi bank by depositing Rs 100000

(4) They pay office rent of Rs 15000 for the month by cheque drawn on their Citi Bank toM/s Realtors Properties.

(5) They buy a motor car worth Rs 450000 from Millennium Motors by making a downpayment of Rs 50000 by cheque drawn on Citi Bank and the balance by taking a loanfrom HDFC Bank.

(6) Vikas and Vaibhavi carried out a consulting assignment for Avon Pharmaceuticals andraise a bill for Rs 1000000 as consultancy fees. Avon Pharmaceuticals have immediately

Date Particulars Voucher number

Ledger folio

Debit amount

(Rs.)

Credit amount

(Rs.)

dd-mm-yy Name of a/c to be debited Name of a/c to be credited (narration describing the transaction)

-----------

Reference of page number of the a/c in ledger

--------------

---------------

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settled Rs 250000 by way of cheque and the balance will be paid after 30 days. Thecheque received is deposited into Citi Bank.

(7) They have employed two receptionist on a salary of Rs 5000 per month and one officerat a salary Rs 10000 per month. The salary for the current month is payable to them.

The entries for these transactions in a journal will look like:Date Particulars Voucher

number L.F Debit

Amount(Rs.)

Credit Amount

(Rs.)

01-04-2005 Cash a/c Dr. To Vikas’s Capital a/c To Vaibhavi’s capital a/c (Being capital brought in by the owners)

750000 500000 250000

10-04-2005 Furniture a/c Dr. To Cash a/c (Being cash paid for purchase of furniture)

25000 25000

11-04-2005 Citi Bank a/c Dr. To Cash a/c (Being current a/c opened with Citi Bank by depositing cash)

100000 100000

15-04-2005 Rent a/c Dr. To Citi Bank a/c (being rent paid to realtors properties for the month)

15000 15000

20-04-2005 Motor Car a/c Dr. To Citi Bank a/c To Loan from HDFC Bank a/c (Being car purchased from Millennium Motors by paying down payment and loan arrangement)

450000 50000

400000

25-04-2005 Citi Bank a/c Dr. Avon Pharma a/c Dr. To Consultancy fees a/c (Being amount received and revenue recognized for fees charged)

250000 750000

1000000

30-04-2005 Salary a/c Dr. To Salary payable a/c (Being the entry to record salary obligation for the month)

15000 15000

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Please note that dates have been assumed while entering the transactions. Also, observe theconvention of entry. Accounts to be debited are written first with ‘Dr’ as a suffix, and accountsto be credited are written subsequently with a prefix ‘To’.

2.2.2 Subsidiary Books

Although once understood, the entries are easy to be written, but if transactions are too many,it may become difficult to manage them and retrieve. Imagine there are 25 purchase transactionsin a day. Because the journal will record all transaction chronologically, it may be possible thatthe purchase transactions could be scattered i.e. they may not all come together one after theother. Now, at the end of the day if the owner wants to know the total purchases made duringthe day, the accountant will spend time first to retrieve all purchase transactions from journaland then take total. This is waste of time and energy.This being the greatest limitation of journal, it is generally sub-divided into more than onejournal. On what logic is such a sub-division made? It is done on the basis of similar transactionswhich are clubbed in a single book e.g. purchase transactions, sales transaction etc. The sub-division of journal is done as follows:

Let us see the formats for each of these and examples as illustration.

Transaction Subsidiary Book

All cash and bank transactions Cash Book - has columns for cash, bank and cash discount

All credit purchase of goods – only those Goods that are purchased for resale are covered here.

Purchase book or Purchase register

All credit sale of goods Sales book or sales register

All purchase returns – i.e. return of goods back to suppliers due to defects

Purchase Return book

All sales returns – i.e. return of goods back from customers

Sales return book

All bill receivables – these are bills accepted by customers to be honoured at an agreed date. This is dealt with in depth later in the study note

Bills Receivable book

All bills payable - these are bills accepted by the business to be honoured by paying to suppliers at an agreed date.

Bills Payable book

For all other transactions not covered in any of the above categories – i.e. purchase or sale of assets, expense accruals, rectification entries, adjusting entries, opening entries and closing entries.

Journal Proper

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2.2.2.1 Cash Book

The cash book has two sides’ viz. receipts and payments. All receipt of cash and money intobank are recorded on the receipt side, whereas all payment of cash and money out of chequeare recorded on the payment side. To show both cash and bank transaction, cash as well asbank columns are provided on both the sides. Remember, there could be more than one bankcolumns if the business has more than one bank account. Also, the business may receive andgive cash discounts. Hence, discount columns are also provided on both sides.

Let us see an illustration for the following cash and bank transactions in the books of Mr.Abhishek

January 1 Opening cash balance was Rs 3800 and bank balance was Rs 27500

January 4 Wages paid in cash Rs 1500January 5 received cheque of Rs 19800 from KBK enterprises after allowing discount of Rs

200January 7 Paid to consultancy charges by cheque for Rs 7500January 10 Cash of Rs 2500 withdrawn from bank

Please note that the balance of discount columns is not taken and these are posted directly tothe respective ledger account separately. The balance of cash and bank columns are posted intocash and bank accounts periodically. The posting into ledger is explained later in this chapter.

Specimen of three column Cash Book Receipt Side Payment side

Date Particulars L.F. Discount Allowed Cash Bank Date Particulars L.F.

Discount received Cash Bank

Cash Book in the books of Mr. Abhishek Receipt Side Payment side

Date Particulars L.F. Discount Allowed Cash Bank Date Particulars L.F.

Dis. recd Cash Bank

1-Jan Opening Balance 3800 27500 4-Jan wages paid 1500

5-Jan Recd from KBK 200 19800 7-Jan

consultancy fees 7500

10-Jan Cash withdrawn 2500 10-Jan

cash withdrawn 2500

Closing balance 4800 37300

200 6300 47300 0 6300 47300

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2.2.2.2 Purchase Book

The purchase book records the transactions related to credit purchase of goods only. It followsthat any cash purchase or purchase of things other than goods is not recorded in the purchasebook. Periodically, the totals of Purchase book are posted to Purchase account in the ledger.The specimen Purchase book is given below:

The format for Purchase Return is exactly the same; hence separate illustration is not given.

Let us see an illustration for following transactions for a furniture shop:

1. Bought 20 tables @ Rs 500 per table from Majestic Appliances on credit @ 12% tradediscount as per invoice number 22334 on 2nd March

2. Purchased three dozen chairs @ Rs 250 each from Metro chairs as per invoice number1112 on 4th march.

3. Second hand furniture bought from Modern Furnitures on credit as per invoice number375 for Rs 1200 on 7th March

4. Purchased seven book racks from Mayur Furnitures for Rs 4900 paid for in cash on 6th

March.5. Purchased Machinery for Rs 30000 from Kirloskar Ltd on 9th March as per invoice number

37.

Purchase Book in the books of -------------

Date Supplier's name Invoice reference L. F. Amount Remarks

Purchase Book in the books of Furniture Shop

Date Supplier's name Invoice reference

L. F. Amount

2nd March Majestic Appliances

20 tables@ 500 and 12% trade discount 22334 8800

(20 * 500)= 10000 less 12% discount 4th march Metro Chairs 3 dozen chairs @ 250 1112 9000 7th March Modern Furnitures 375 1200 Total 19000

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Please note that the transaction for purchase of book rack will not be entered in the purchasebook as it is not purchased on credit. (Where will it go then? it will go to the cash book!).Similarly purchase of machinery will not form part of purchase book. It will be entered inJournal Proper.

2.2.2.3 Sales Book

The sales book records transaction of credit sale of goods to customers. Sale of other things,even on credit, will not be entered in the sales book but will be entered in Journal Proper. Ifgoods are sold for cash, it will be entered in cash book. Total of sales book is periodicallyposted to sales account in the ledger. The specimen of a sales book is given below.

The format of sales return book is exactly the same; hence a separate illustration is not given.

Let us see how will be the following transaction recorded in the books of a cloth Merchant.

1st July Sold Tip Top clothing 50 suits of Rs 2200 each on two months credit on invoice number -211th July Sold to New India Woolen 100 sweaters @ 250 each on invoice number 5513th July received an order from Modern clothing for 100 trousers @ 500 at trade discount of 10%17th July sold 50 sarees to Lunkad brothers @ 750 each25th July sold T-shirts at exhibition hall for cash for Rs 7500

Sales Book in the books of Cloth Merchant

Date Supplier's name Invoice reference L. F. Amount

1st July Tip Top Clothing

50 suits @ 2200 2 110000

11th July New India Woolen

100 sweaters @ 250 55 25000

17th July Lunkad brother 50 sarees @ 750 37500

Total 172500

Sales Book in the books of -------------

Date Customer's name Invoice reference L. F. Amount Remarks

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Here again, cash sales at exhibition hall are not recorded. Also, merely getting an order forgoods is not a transaction to be entered in sales book.

2.2.2.4 Journal Proper

Credit transactions that cannot be entered in any other subsidiary book are entered in journalproper. It will cover purchase or sale of assets, expense accruals, rectification entries, adjustingentries, opening entries and closing entries. The format of journal proper is exactly the same asgiven in the section 2.2.1. The entries here recorded in the same way as shown in that illustra-tion.

2.2.3 Ledger Accounts, posting to ledger accounts and balancing them

Ledger is the main book or principal book of account. The entries into ledger accounts travelthrough the route of journal and subsidiary books. The ledger book contain all accounts viz.assets, liabilities, incomes or gains, expenses or losses, owner’s capital and owner’s equity. Theledger is the book of final entry and hence is a permanent record. There is a systematic way inwhich transactions are posted into a ledger account. Once the transactions are posted for anaccounting period, the ledger accounts are balanced (i.e. the difference between debit side andcredit side is calculated). These balances are used to ultimately prepare the financial statementlike Profit and Loss a/c and Balance sheet. The ledger may also be divided as General ledgerand Sub-ledgers. While the General Ledger will have all ledger accounts, the sub-ledgers willhave individual accounts of customers and suppliers. If there are 10 customers, the generalledger will not have 10 individual accounts for each customer. Instead, these 10 customer accountwill exist in what is called as ‘Receivables or Debtors Ledger’ and the general ledger will haveonly one account that represents the customers. This is named as Debtors Control Account.Similar is the case of supplier accounts. Such sub-ledgers are necessary for better control overindividual accounts. Also, this will avoid the general ledger from becoming too big, especiallywhen number of customers and suppliers is large.

The specimen of a typical ledger account is given below.

Let us now understand the mechanism of posting transaction into the ledger account. Considerthe transaction Rent paid in cash for Rs 10000. The journal entry for this transaction would be:

Jan 15 Rent a/c Dr 10000To Cash a/c 10000

Dr Ledger-Account Cr

Date Particulars J. F. Amount (Rs) Date Particulars

J. F. Amount (Rs)

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We will open two ledger accounts namely Rent a/c and Cash a/c. Let us see how the posting ismade

Please observe the following conventions while posting a transaction into ledger accounts.Note that both the effects of an entry must be recorded in the ledger accounts simultaneously.

1) The posting in the account which is debited, is done on the debit side by writing thename of the account or accounts that are credited with the prefix ‘To’.

2) The posting in the account which is credited, is done on the credit side by writing thename of the account or accounts that are debited with the prefix “By’.

Let us now see how we can create ledger account for the seven journal entries that we passedfor Illustration 1

CASH ACCOUNT

Dr. Cr.


J. F. Amount (Rs)

Jan15 By Rent a/c 10000

Rent-Account Dr. Cr.


J. F. Amount (Rs)

Jan15 To Cash a/c 10000

Dr. Cash Account Cr.


J. F. Amount (Rs)

To Vikas’s capital 500000 By Furniture 25000

To Vaibhavi’s capital 250000

By Citi Bank 100000

By balance c/d 625000

750000 750000

To Balance b/d 625000

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Dr. Mr. Vikas’s Capital Account Cr.


J. F. Amount (Rs)

To Balance c/d 500000 By Cash 500000

500000 500000

By Balance b/d 500000

Dr. Furniture Account Cr.


J. F. Amount (Rs)

To cash 15000

Dr. Citi Bank Account Cr.


J. F. Amount (Rs)

To cash 100000 By Rent 15000

To Consultancy Fees 250000

By Motor Car 50000

Dr. Mrs. Vaibhavi’s Capital Account Cr.


J. F. Amount (Rs)

By Cash 250000

Dr. Rent Account Cr.


J. F. Amount (Rs)

To CITI bank 15000

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Dr. Motor Car Account Cr.


J. F. Amount (Rs)

To Citi Bank 50000

To Loan from HDFC Bank 400000

Dr. Loan from HDFC Bank Account Cr.


J. F. Amount (Rs)

By Motor Car 400000

Dr. Avon Pharmaceuticals Account Cr.


J. F. Amount (Rs)

To Consultancy Fees 750000

Dr. Consultancy Fees Account Cr.


J. F. Amount (Rs)

By Citi Bank 250000

By Avon Pharma 750000

Dr. Salary Account Cr.


J. F. Amount (Rs)

To Salary payable 15000

Dr. Salary Payable Account Cr.


J. F. Amount (Rs)

By Salary 15000

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Please carefully observe the posting of journal entries into various ledger accounts. Do you seesome further calculation in the cash a/c and Mr. Vikas’s Capital a/c? What is done is that afterposting all transactions to these accounts, the difference between the debit and credit sides iscalculated. This difference is put on the side with smaller amount in order to tally grand totalsof both sides. The convention is to write “To Balance c/d” or “By balance c /d” as the case maybe. This procedure is normally done at the end of an accounting period. This process is called as“balancing of ledger accounts’.

Once the ledgers are balanced for one accounting period, the balance needs to be carried forwardto the next accounting period as a running balance. This is done by writing “To Balance b/d”or “By balance b/d” as the case may be after the grand totals. This is also shown in the Cash a/c and Mr. Vikas’s Capital account.

Could you now attempt to balance the other ledger accounts and carry the balances to the nextaccounting period?

Important note: Please remember the balances of personal and real accounts only are carried down to thenext accounting period as they represent resources and obligations of the business which will continue tobe used and settled respectively in future. Balances of nominal accounts (which represent incomes orgains and expenses or losses) are not carried down to the next period. These balances are taken to theProfit and Loss account (or Income statement) prepared for the period. The net result of the P & Laccount will show either net income or net loss which will increase or decrease the owner’s equity.

In the above example, please note that the balances of Rent a/c, consultancy Fees account and salaryaccount will not be carried down to the next period, but to the P & L account of that period. As illustration,we have shown it for Rent a/c.

2.2.4 Posting to Ledger Accounts from Subsidiary books

In the above section, we explained posting to ledger accounts directly on the basis of journalentries. In practice, however, we know that use of subsidiary books is in vogue. Let us see howthe posting to ledger accounts is done based on these records.

For each of the subsidiary books, there is a ledger account e.g. for purchase book, there isPurchase account, for sales book there’s sales a/c, for cash book there will be cash a/c as wellas Bank a/c and so on.

Let us continue with illustration seen in the section 2.2.2.1 to 2.2.2.3 above and post the totalsinto respective ledger accounts.

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2.2.5 Typical Ledger Account balances

We have seen how to balance various ledger accounts. It can be seen that while some accountswill show debit balance, while the other will show credit balance. Is there any relationshipbetween the type of account (whether it is the account of asset, liability, capital, owner’s equity,incomes or gain, expenses or losses) and the kind of balance (debit or credit) it should show?

The answer is generally ‘Yes’. You may test to find the following are typical relationships.

Dr. Cash Account Cr.


J. F. Amount (Rs)

To Balance b/d 3800

By sundries as per cash book 1500

To sundries as per cash book 2500

By Balance c/d 4800

Dr. Purchases Account Cr.


J. F. Amount (Rs)

To sundries as per purchase book 19000

By transfer to P & L a/c 19000

Dr. Sales Account Cr.


J. F. Amount (Rs)

To transfer to P & L a/c 172500

By sundries as per sales book 172500

Type of Account Type of balance All asset accounts Debit balance All liability accounts Credit balance Capital & Owner’s equity account

Credit balance

Expenses or loss accounts Debit balance Incomes or gain accounts Credit accounts

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Let us test these possibilities for confirmation. How does one go about testing this? Consider‘cash a/c’. Whenever business receives cash we debit it, and whenever it is paid we credit it. Isit possible to see a situation that credits to cash are more than debits? In other words could wehave negative cash in hand? No. Cash account will therefore always show a debit balance. So istrue for all real asset accounts. After solving problems, if the contrary is observed, there isevery chance that an error has been made while passing the accounting entries.

2.2.6 The structure of ledger

In practice, for the sake of convenience and ease of operations, the ledger is subdivided asfollows:

a) General Ledger: This contains all main ledger accounts excepting individual accountsof customers, vendors and employees. For these categories there will be only one repre-sentative account in the general ledger e.g. for customers – Trade Debtors a/c (or TradeReceivables control a/c), for suppliers – Trade Creditors a/c (or Trade Payables a/c)etc.

b) Sub-Ledgers: These are primarily, Customers’ Ledger, Suppliers Ledger, Employeesledger etc. The customer ledger will have all individual accounts of all customers. Sup-pliers’ ledger will have all individual accounts of all suppliers. Employee ledger willhave individual accounts of all employees.

The balances of all individual accounts must tally with the balance reflected in the representa-tive a/c in the general ledger. For this a periodical reconciliation is a must.

For example, if business has 3 customers A, B, and C; then an a/c for each of them is opened inthe sub-ledger called Customers ledger and General Ledger will have only one a/c by thename of Trade Debtors a/c. All transactions with each of them will be recorded in the indi-vidual accounts as well as the control ledger. See the following:

Such separation is made for better control. A person in charge of customer accounting is givenresponsibility of all individual customer accounting in the Customers sub-ledger, whereas

T ra n sactio n C u sto m e rs’ Su b-le d ger G e n e ra l le d g e r

A ’s a/ c – D ebit R s. 10 000

B ’s a/ c – D ebit R s. 20 000

C ’s a / c – D ebit R s. 15 000

T rad e D ebto rs a/ c – D eb it R s 450 00

C red it sa le s to A R s. 1 00 00 C red it sa le s to B R s. 2 00 00 C red it sa le s to C R s. 1 50 00

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another person be given responsibility for Suppliers’ sub-ledger. In bigger organizations thisdivision of labour is an absolute necessity. The person looking after General ledger is different.

Simultaneous posting of transactions into sub-ledgers a/cs and representative a/cs in generalledger may be quite tedious in manual accounting. But computerised accounting automatesthis process as well.

2.3 TRIAL BALANCE

After the transactions are posted to various ledger accounts (either from journal or fromsubsidiary books) and they are balanced, the next stage is to draw up the list of all balances. Weknow that some ledger accounts will show ‘debit balance’ (debit side greater than the creditside), while the other will reflect a ‘credit balance’ (credit side being higher than debit side). Allaccount balances are listed to ensure that the total of all debit balances equals the total of allcredit balances. Why does this happen? Remember the dual aspect concept studied in chapter1. According to this concept, every debit has equal corresponding credit.

As this is merely a listing of balances, this will always be as on a particular date. Further it mustbe understood that Trial Balance does not form part of books of account, but it is a reportprepared by extracting balances of accounts maintained in the books of accounts.

When this list with tallied debit and credit balances is drawn up, the arithmetical accuracy ofbasic entries, ledger posting and balancing is ensured. However, it does not guarantee that theentries are correct in all respect. This will be explained later in this chapter.

Although it is supposed to be prepared at the end of accounting period, computerized accountingpackages are capable of providing instant Trial Balance reports even on daily basis, as thetransactions are recorded almost on line.

Let us prepare the trial balance for the ledger accounts from the illustration shown in the section2.2.3.

Trial Balance as on————————

Account name Debit Rs. Credit Rs

Cash a/c 625000 Vikas’s capital a/c 500000 Vaibhavi’s capital a/c 250000 Furniture a/c 25000 Citi Bank a/c 285000 Rent a/c 15000 Motor Car 450000 Loan from HDFC a/c 400000 Avon Pharmaceuticals 750000 Consultancy fees a/c 1000000 Salary a/c 15000 Salary payable a/c 15000 Total 2165000 2165000

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It can be seen that the totals of debit and credit balances is exactly matching. This is the result ofdouble entry book-keeping wherein every debit has equal corresponding credit. Here couldyou check for yourself, the relationship between type of account and type of balance explainedin section 2.2.5 above?

2.4 TRIAL BALANCE – UTILITY AND INTERPRETATION

The utility of Trial balance could be found in the following:

(1) It forms the basis for preparation of Financial statements i.e. Profit and loss account andbalance sheet.

(2) A tallied trial balance ensures the arithmetical accuracy of the entries made. If the trialbalance does not tally, the errors can be found out, rectified and then financial statementscan be prepared.

(3) It acts as a quick reference. One can easily find out the balance in any ledger a/c withoutactually referring to the ledger.

(4) If the listing of ledger accounts is systematically done in the trial balance, one can doquick time analysis. Hence, listing is usually done in the sequence of Asset accounts,liability accounts, Capital accounts, Owner’s equity accounts, Income or gain accountsand Expenses or losses accounts in that order.

One can draw some quick inferences from trial balance by interpreting the same. If one plotsmonthly trial balances side by side, one can analyse the movement of balances in variousaccounts e.g. one can see how expenses are increasing or decreasing or showing a trend ofmovements. By comparing the owner’s equity balances as on two dates, one can interpret thebusiness result e.g. if the equity has gone up, one can interpret that business has earned netprofit and vice versa.

2.5 TRIAL BALANCE AND ERRORS

We have seen that a tallied T. B. ensures arithmetical accuracy. What does it mean? It meansentries have been passed as per double entry, that every debit has equal corresponding credit.If the T.B. does not tally, there could be errors in transaction entry. Such errors are called ‘Errorsaffecting trial balance’. These can be:

(a) Only one effect of a transaction is posted to ledger e.g. for rent paid in cash, if entry isposted to cash but not to rent account, then obviously the TB will not match.

(b) Posting of wrong amount in one of the ledger accounts e.g. rent of Rs 1000 is paid incash. The posting to rent a/c is done for Rs 1000, cash a/c is recorded at Rs 10000. TheTB will not tally.

(c) If one of the posting is entered twice, TB will not match.(d) If the balance in a ledger is not correctly taken to the TB e.g. the rent a/c has a balance

of Rs 1000, but while taking it to the TB it is taken as Rs 100, the TB will through updifference.

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(e) Taking balance to the wrong side in the TB e.g. a debit balance of Rs 500000 in debtorsa/c is taken as credit balance in the TB, then there will be a mismatch.

(f) Wrong carry forwards also will result in the TB mismatch.

No financial statements can be prepared if the TB does not tally. Hence, the errors will have tobe rectified before proceeding further. The accountants therefore endeavour to minimize errorsby being more careful and by doing periodical scrutiny of the entries.

There are certain type of errors that will not affect tallying of the TB i.e. it will tally but stillthere will be errors. These are as follows:

(a) Error of omission: if any entry is totally missed, the TB will tally but will be incorrectand incomplete.

(b) Compensating error: if there are two errors that are compensating each other, still theTB will tally but not accurate.

(c) Wrong a/c head: if entry for insurance paid is wrongly debited to commission a/c,tallying of TB will not be affected.

(d) Error of duplication: if a transaction is recorded twice, again the TB will match.(e) Error of principle: if interest received is wrongly entered as debit to interest and credit

to cash, there won’t be any mismatch in the TB

For the above type of errors, the identification process is very time consuming. Only strict vigiland ongoing audit of entries could minimize such errors. Of course, the computerised accountingpackages do provide built mechanisms to avoid occurrence of these mistakes.

After preparation of TB, if the difference not major, it is temporarily transferred to “suspensea/c’ until the errors are located and corrected.

2.6 ACCOUNTING IN PRACTICE

These are days of computerised accounting. Even smaller firms like sole proprietors useaccounting packages like Tally 9.0 which are very strong. At this stage it is necessary tounderstand the practical aspects of how accounting is actually done by these packages. Basedon years of experience, they come with a standard chart of account. The chart of account isnothing but master ledger accounts and they are numerically coded for quick and easyidentification and reporting. There are customized screens made to enter different transactions.Hence, the user can not by mistake put a purchase transaction into sales book. The customersand vendors are also alpha-numerically coded for ease of identification. Once the basicdocuments are entered, the job of posting, balancing and trial balance is all automated. Soactually, most of the potential errors given below can be avoided.

There is an increased feeling among students that when there are automated systems available,why should one go through the study of manual processes. This is absolutely essential forgrasping basic concepts. Once, you thoroughly understand them, it will be easy to operate anycomputerised accounting package in practice.

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2.7 COMPREHENSIVE ILLUSTRATIONS:

To enable the students to get complete grasp of this process, comprehensive examples are givenbelow.

Illustration 1:

Journalize the following transactions in the books of Gaurav, post them into ledger and preparetrial balance for June 2006:-

June 1: Gaurav started business with Rs. 1000000 of which 25% amount was borrowedfrom wife.

June 4: Purchased goods from Aniket worth Rs. 40000 at 20% TD and 1/5th amount paid incash.

June 7: Cash purchases Rs. 25000.June 10: Sold goods to Vishakha Rs. 30000 at 30% TD and received 30% amount in cash.June 12: Deposited cash into bank Rs. 20000.June 15: Uninsured goods destroyed by fire Rs. 5500.June 19: Received commission Rs. 3500.June 22: Paid to Aniket Rs. 25500 in full settlement of a/c.June 25: Cash stolen from cash box Rs. 1000.June 27: Received from Vishakha Rs. 14500 and discount allowed Rs. 200.June 30: Interest received Rs. 2400 directly added in our bank account.

Answer:In the books of Gaurav

JournalDate Particulars L.F. Dr.(Rs.) Cr.(Rs.) 2006

1-Jun Cash A/C Dr

1,000,000

To Capital A/C

750,000

To Loan from wife A/C

250,000

(Being capital brought into business)

4-Jun Purchases A/C Dr

32,000

To Cash A/C

6,400

To Aniket's A/C

25,600

(Being goods purchased at 20% TD & 1/5th amount paid in cash)

�� A 47

Date Particulars L.F. Dr.(Rs.) Cr.(Rs.) 2006

22-Jun Aniket's A/C Dr

25,600

To Cash A/C

25,500

To Discount A/C

100

(Being paid to Aniket in full settlement & discount received)

25-Jun Loss by Theft A/C Dr

1,000

To Cash A/C

1,000 (Being cash stolen)

7-Jun Purchases A/C Dr

25,000

To Cash A/C

25,000 (Being cash purchases)

10-Jun Cash A/C Dr

6,300

Vishakha's A/C Dr

14,700

To Sales A/C

21,000

(Being goods sold at 30% TD & 30% amount received in cash)

12-Jun Bank A/C Dr

20,000

To Cash A/C

20,000 (Being cash deposited in bank)

15-Jun Loss by Fire A/C Dr

5,500

To Purchases A/C

5,500 (Being uninsured goods lost by fire)

19-Jun Cash A/C Dr

3,500

To Commission A/C

3,500 (Being commission received)

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Ledger

(Being cash stolen) Date Particulars L.F. Dr.(Rs.) Cr.(Rs.) 27-Jun Cash A/C Dr 14,500 Discount A/C Dr 200

To Vishakha's A/C

14,700

(Being amount received from Vishakha & discount allowed)

30-Jun Bank A/C

2,400

To Interest A/C

2,400

(Being interest received directly added into bank account)

Total Rs. 1,150,700

1,150,700

Dr. Cash A/C Cr Date Particulars J.F. Amt.(Rs.) Date Particulars J.F. Amt.(Rs.) 1/6/06 To Capital A/C 750000 4/6/06 By PurchasesA/C 6400

1/6/06 To Loan from Wife A/C 250000 7/6/06

By Purchases A/C 25000

10/6/06 To Sales A/C 6300 12/6/06 By Bank A/C 20000

19/6/06 To Commission A/C 3500 22/6/06 By Aniket's A/C 25500

27/6/06 To Vishakha's A/C 14500 25/6/06

By Loss by Theft A/C 1000

30/6/06 By Balance c/d 946400 Total Rs. 1024300 Total Rs. 1024300 1/7/06 To Balance b/d 946400

Dr. Capital A/C Cr. Date Particulars J.F. Amt.(Rs.) Date Particulars J.F. Amt.(Rs.) 30/6/06 To Balance c/d 750000 1/6/06 By Cash A/C 750000 1/7/06 By Balance b/d 750000

Dr. Loan from Wife A/C Cr. Date Particulars J.F. Amt.(Rs.) Date Particulars J.F. Amt.(Rs.) 30/6/06 To Balance c/d 250000 1/6/06 By Cash A/C 250000 1/7/06 By Balance b/d 250000

�� A 49

Dr. Purchases A/C Cr. Date Particulars J.F. Amt.(Rs.) Date Particulars J.F. Amt.(Rs.) 4/6/06 To Cash A/C 6400 15/6/06 By loss by fire 5500 4/6/06 To Aniket's A/C 25600 30/6/06 By Bal c/d 51500 7/6/06 To Cash A/C 25000 Total Rs. 57000 Total Rs. 57000 1/7/06 To Balance b/d 57000

Dr. Aniket's A/C Cr Date Particulars J.F. Amt.(Rs.) Date Particulars J.F. Amt.(Rs.) 22/6/06 To Cash A/C 25500 4/6/06 By PurchasesA/C 25600 22/6/06 To Discount A/C 100 Total Rs. 25600 Total Rs. 25600

Dr. Vishakha's A/C Cr. Date Particulars J.F. Amt.(Rs.) Date Particulars J.F. Amt.(Rs.) 10/6/06 To Sales A/C 14700 27/6/06 By Cash A/C 14500 27/6/06 By Discount A/C 200 Total Rs. 14700 Total Rs. 14700

Dr. Bank A/C Cr. Date Particulars J.F. Amt.(Rs.) Date Particulars J.F. Amt.(Rs.) 12/6/06 To Cash A/C 20000 30/6/06 By Balance c/d 22400 30/6/06 To Interest A/C 2400 Total Rs. 22400 Total Rs. 22400 1/7/06 To Balance b/d 22400

Dr. Sales A/C Cr Date Particulars J.F. Amt.(Rs.) Date Particulars J.F. Amt.(Rs.) 30/6/06 To Balance c/d 26500 10/6/06 By Cash A/C 6300

10/6/06 By Vishakha's A/C 14700

Total Rs. 26500 Total Rs. 26500 1/7/06 By Balance b/d 26500

Dr. Loss by Fire A/C Cr. Date Particulars J.F. Amt.(Rs.) Date Particulars J.F. Amt.(Rs.) 15/6/06 To Purchases A/C 5500 30/6/06 By Balance c/d 5500 1/7/06 To Balance b/d 5500

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Dr. Commission A/C Cr. Date Particulars J.F. Amt.(Rs.) Date Particulars J.F. Amt.(Rs.) 30/6/06 To Balance c/d 3500 19/6/06 By Cash A/C 3500 1/7/06 By Balance b/d 3500

Dr. Discount A/C Cr. Date Particulars J.F. Amt.(Rs.) Date Particulars J.F. Amt.(Rs.) 27/6/06 To Vishakha's A/C 200 22/6/06 By Aniket's A/C 100 30/6/06 By Balance c/d 100 Total Rs. 200 Total Rs. 200 1/7/06 To Balance b/d 100

Dr. Loss by Theft A/C Cr. Date Particulars J.F. Amt.(Rs.) Date Particulars J.F. Amt.(Rs.) 25/6/06 To Cash A/C 1000 30/6/06 By Balance c/d 1000 1/7/06 To Balance b/d 1000

Dr. Interest A/C Cr. Date Particulars J.F. Amt.(Rs.) Date Particulars J.F. Amt.(Rs.) 30/6/06 To Balance c/d 2400 30/6/06 By Bank A/C 2400 1/7/06 By Balance b/d 2400

Trial Balance

Name of Account Dr. Bal.(Rs.) Cr. Bal.(Rs.) Cash A/C 946400 ----- Capital A/C ----- 750000 Loan from Wife A/C ----- 250000 Purchases A/C 51500 ----- Aniket's A/C ----- ----- Vishakha's A/C ----- ----- Sales A/C ----- 21000 Bank A/c 22400 ----- Loss by Fire A/C 5500 ----- Commission A/C ----- 3500 Discount A/C 100 ----- Loss by Theft A/C 1000 ----- Interest A/c ----- 2400 Total Rs. 1026900 1026900

�� A 51

Illustration 2:

Journalize the following transactions in the books of M/s Kothari & Sons, post them into led-ger and prepare trial balance for April 2005:

Apr. 1: Commenced business with Rs.40000.Apr. 4: Bought goods for cash Rs.4000Apr. 7: Sold goods Rs.700Apr. 10: Bought goods from M/s Bhandari Bros. Rs.3000 at 10% trade discount.Apr. 14: Purchased machinery of Rs.5000 from M/s Kirloskar Bros.Apr. 16: Paid for transportation of machinery Rs.500 & installation charges Rs.300 on it.Apr. 20: Paid quarterly interest on borrowed amount of Rs. 5000 at 12% p.a.Apr. 24: Supplied goods to M/s Kunal & Sons Rs.3500.Apr. 27: Paid to M/s Bhandari Bros. Rs.2600 in full settlement of account.Apr. 28: M/s Kunal & Sons returned goods worth Rs.300 & paid for Rs.1200 on account.Apr. 29: Received commission Rs.250.Apr. 30: Paid conveyance to manager Rs.450.

Answer: In the books of M/s Kothari and Sons

Journal

Date Particulars L.F. Amt(Dr.) Amt(Cr.) 2005 1-Apr Cash A/C Dr 40,000

To Capital A/C

40,000 (Being cash introduced as capital) 4-Apr Purchases A/C Dr 4,000

To Cash A/C

4,000 (Being bought goods for cash) 7-Apr Cash A/C Dr 700

To Sales A/C

700 (Being sold goods for cash) 10-Apr Purchases A/C Dr 2,700

To M/s Bhandari Bros. A/C

2,700 (Being purchased goods at 10% TD) 14-Apr Machinery A/C Dr 5,000

To M/s Kirloskar Bros. A/C

5,000

(Being purchased machinery on credit)

��A 52


Date Particulars L.F. Amt(Dr.) Amt(Cr.) 2005 16-Apr Machinery A/C Dr 800

To Cash A/C

800

(Being transportation & installation charges on machinery paid)

20-Apr Interest A/C Dr 150

To Cash A/C

150

(Being paid quarterly interest on borrowed amt. of Rs. 5000 at 12% p.a.)

24-Apr M/s Kunal & Sons A/C Dr 3,500

To Sales A/C

3,500 (Being goods sold on credit) 27-Apr M/s Bhandari Bros. A/C Dr 2,700

To Cash A/C

2,600

To Discount A/C

100

(Being paid in full settlement & discount received)

28-Apr Return Inwards A/C Dr 300 Cash A/C Dr 1,200

To M/s Kunal & Sons A/C

1,500

(Being goods returned & received on account)

29-Apr Cash A/C Dr 250

To Commission A/C

250 (Being commission received) 30-Apr Conveyance A/C Dr 450

To Cash A/C

450

(Being conveyance paid to manager)

Total Rs. 61,750

61,750

�� A 53

Ledger Dr. Cash A/C Cr.

Date Particulars J.F Amt.(Rs.) Date Particulars

J.F

Amt. (Rs.)

1/4/05 To Capital A/C 40000 4/4/05 By Purchases A/C 4000 7/4/05 To Sales A/C 700 16/4/05 By Machinery A/C 800

28/4/05 To M/s Kunal & Sons A/C 1200 20/4/05 By Interest A/C 150

29/4/05 To Commission A/C 250 27/4/05

By M/s Bhandari Bros. A/C 2600

30/4/05 By Conveyance A/C 450


Dr. Capital A/C Cr.

Date Particulars J.F. Amt.(Rs.) Date Particulars J.F. Amt. (Rs.)

30/4/05 To Balance c/d 40000 1/4/05 By Cash A/C 40000 1/5/05 By Balance b/d 40000

Dr. Purchases A/C Cr.

Date Particulars J.F. Amt. (Rs.) Date Particulars J.F.

Amt. (Rs.)

4/4/05 To Cash A/C 4000 30/4/05 By Balance c/d 6700

10/4/05

To M/s Bhandari Bros. A/C 2700

Total Rs. 6700 Total Rs. 6700 1/5/05 To Balance b/d 6700

Dr. Sales A/C Cr.


Amt. (Rs.)

30/4/05 To Balance c/d 4200 7/4/05 By Cash A/C 700

24/4/05 By M/s Kunal & Sons A/C 3500

Total Rs. 4200 Total Rs. 4200 1/5/05 By Balance b/d 4200

��A 54


Dr. M/s Bhandari Bros. A/C Cr.


Amt. (Rs.)

27/4/05 To Cash A/C 2600 10/4/05 By Purchases A/C 2700 27/4/05 To Discount A/C 100 Total Rs. 2700 Total Rs. 2700

Dr. Machinery A/C Cr.


Amt. (Rs.)

14/4/05 To M/s Kirloskar Bros. A/C 5000 30/4/05 By Balance c/d 5800

16/4/05 To Cash A/C 800 Total Rs. 5800 Total Rs. 5800 1/5/05 To Balance b/d 5800

Dr. M/s Kirloskar Bros. A/C Cr.


Amt. (Rs.)

30/4/05 To Balance c/d 5000 14/4/05 By Machinery A/C 5000 1/5/05 By Balance b/d 5000

Dr. Interest A/C Cr.


Amt.(Rs.)

20/4/05 To Cash A/C 150 30/4/05 By Balance c/d 150

1/5/05 To Balance b/d 150

�� A 55

Dr. M/S Kunal & Sons A/C Cr.


Amt.(Rs.)

24/4/05 To Sales A/C 3500 28/4/05 By Return Inwards A/C 300

28/4/05 By Cash A/C 1200 30/4/05 By Balance c/d 2000 Total Rs. 3500 Total Rs. 3500 1/5/05 To Balance b/d 2000

Dr. Discount A/C Cr.

Date Particulars J.F. Amt

.(Rs.) Date Particulars J.F. Amt

.(Rs.) 30/4/05 To Balance c/d 100 27/4/05 By M/s Bhandari 100 Bros. A/C 1/5/05 By Balance b/d 100

Dr. Return Inwards A/C Cr.


Amt. (Rs.)

28/4/05 To M/s Kunal & Sons A/C 300 30/4/05

By Balance c/d 300


Dr. Commission A/C Cr.

Date Particulars J.F. Amt.(Rs.) Date Particulars J.F.

Amt. (Rs.)

30/4/05 To Balance c/d 250 29/4/05 By Cash A/C 250

1/5/05 By Balance b/d 250

Dr. Conveyance A/C Cr.


Amt. (Rs.)

30/4/05 To Cash A/C 450 30/4/05

By Balance c/d 450


��A 56


Illustration 3:

Enter the following transactions in the proper subsidiary books and post them to ledger ac-counts. Also prepare trial balance: 2005

Jan. 1: Purchased goods worth Rs.6000 from M/s Akshaykumar & Sons.

Jan. 5: Sold goods to M/s Vinaykumar Rs.2000.

Jan. 7: Purchased goods from M/s Vinod Bros. Rs.4000 at 5% TD.

Jan. 9: Sold goods to Pravinkumar on cash Rs.500.

Jan. 12: Bought goods from Jayant Kumar Rs.3500 at 10% TD.

Jan. 17: Supplied goods to M/s Rajnikant Rs.2500 at 5% TD.

Jan. 20: Sold furniture to M/s Narendrakumar worth Rs.1200.

Jan. 22: Returned goods to M/s Vinod Bros. Rs.500 gross.

Jan. 25: M/s Vinaykumar returned goods worth Rs.500.

Jan. 27: Sent debit note to M/s Akshaykumar for Rs.200.

Jan. 30: Sold goods to Narendrakumar worth Rs.9000 and received half amount on the spot.

Name of Account

Dr. Bal.(Rs.)

Cr. Bal.(Rs.)

Cash A/C 34150 ----- Capital A/c ----- 40000 Purchases A/C 6700 ----- Sales A/C ----- 4200 M/s Bhandari Bros. A/C ----- ----- Machinery A/C 5800 ----- M/s Kirloskar Bros. A/C ----- 5000 Interest A/C 150 ----- M/s Kunal & Sons A/C 2000 ----- Discount A/C ----- 100 Return Inwards A/C 300 ----- Commission A/C ----- 250 Conveyance A/C 450 ----- Total Rs. 49550 49550

�� A 57

Answer: Purchases Book

Date Name of Supplier Inward Invoice No. L.F Amt(Rs.)

1/1/05 M/s Akshaykumar 6000

7/1/05 M/s Vinod Bros. (4000 - 5% TD) 3800

12/1/05 Jayant Kumar (3500 - 10% TD) 3150

Total Rs. 12950

Sales Book

Date Name of Customer Outward Invoice No. L.F Amt(Rs.)

5/1/05 M/s Vinaykumar 2000

17/1/05 M/s Rajnikant (2500 - 5% TD) 2375

30/1/05 M/s Narendrakumar 4500 Total Rs. 8875

Return Inwards Book

Date Name of Customer Credit Note No. L.F Amt(Rs.)

25/1/05 M/s Vinaykumar 500 Total Rs. 500

Return Outwards Book Date Name of Supplier Debit Note No. L.F Amt(Rs.)

22/1/05 M/s Vinod Bros. (4000 - 5% TD) 475

27/1/05 M/s Akshaykumar 200 Total Rs. 675

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Dr. Cash Book Cr.

Date Particulars J.F. Amt.(Rs.) Date Particulars J.F. Amt. (Rs.)

9/1/05 To Sales A/C 500 31/1/05 By Balance c/d 5000

(Being cash sales)

30/1/05 To Sales A/C 4500

(Being cash sales)

Total Rs. 5000 Total Rs. 5000 1/2/05 To balance b/d 5000

Dr. Purchases A/C Cr.


Amt. (Rs.)

31/1/05

To Sundries as per purchases book 12950 31/1/05 By Balance c/d 12950

12950

Dr. Sales A/C Cr. Date Particulars J.F. Amt.(Rs.) Date Particulars J.F. Amt.(Rs.)

31/1/05 To Balance c/d 13875 31/1/05 By Sundries as per sales book 8875

9/1/05 By Cash A/C 500 30/1/05 By Cash A/C 4500 Total Rs. 13875 Total Rs. 13875


Dr. Return Inwards A/C Cr. Date Particulars J.F. Amt.(Rs.) Date Particulars J.F. Amt.(Rs.)

31/1/05

To Sundries as per return inwards book 500 31/1/05 By Balance c/d 500


�� A 59

Dr. Jayant Kumar A/C Cr.


Amt. (Rs.)

31/1/05 To Balance c/d 3150 12/1/05



Dr. M/s Vinod Bros. A/C Cr.


Amt. (Rs.)

22/1/05

To Return Outwards A/C 475 7/1/05


31/1/05 To Balance c/d 3325

Total Rs. 3800 Total Rs. 3800


Dr. M/s Akshaykumar A/C Cr.


Amt. (Rs.)

27/1/05

To Return Outwards A/C 200 1/1/05


31/1/05 To Balance c/d 5800



Dr. Return Outwards A/C Cr.


Amt. (Rs.)

31/1/05 To Balance c/d 675 31/1/05

By Sundries as per return outwards book 675


��A 60


Dr. M/s Narendrakumar A/C Cr.

Date Particulars J.F. Amt.(Rs.) Date Particulars J.F. Amt.(Rs.)

20/1/05

To Furniture A/C 1200 31/1/05

By Balance c/d 5700

30/1/05 To Sales A/C 4500



Dr. M/s Vinaykumar A/C Cr. Date Particulars J.F. Amt.(Rs.) Date Particulars J.F. Amt.(Rs.)

5/1/05 To Sales A/C 2000 25/1/05 By Return Inwards A/C 500


Dr. M/s Rajnikant A/C Cr. Date Particulars J.F. Amt.(Rs.) Date Particulars J.F. Amt.(Rs.) 17/1/05 To Sales A/C 2375 31/1/05 By Balance c/d 2375 1/2/05 To Balance b/d 2375

Dr. Furniture A/C Cr.


Amt. (Rs.)

31/1/05 To Balance c/d 1200 20/1/05

By M/s Narendra kumar A/C 1200


�� A 61

Trial Balance

Name of Account Dr.

Bal.(Rs.) Cr.

Bal.(Rs.) Cash A/C 5000 ----- Purchases A/C 12950 ----- Sales A/C ----- 13875 Return Inwards A/C 500 ----- Return Outwards A/C ----- 675 M/s Akshaykumar A/C ----- 5800 M/s Vinod Bros. A/C ----- 3325 Jayant Kumar A/C ----- 3150 M/s Vinaykumar A/C 1500 ----- M/s Rajnikant A/C 2375 ----- M/s Narendrakumar A/C 5700 ----- Furniture A/C ----- 1200 Total Rs. 28025 28025

2.8 Conclusion

In this chapter, we saw the entire accounting process till preparation of the trial balance.In short the basic steps are:

a) Prepare source document

b) Enter them in journal or subsidiary books

c) Post them to ledger accounts

d) Balance the ledger accounts

e) Prepare trial balance

Now, the next step is to prepare the financial statements viz. the Profit and Loss accountand the Balance sheet. But before we embark on this final destination, there are somemore steps to be taken. Those are discussed in the next chapter.