handout of managing business accounts

8/21/2019 Handout of Managing Business Accounts

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Chapter One : Introduction to business accounting.......................................................3

1.1 Introduction....................................................................................................................3

1.2 Definitions:....................................................................................................................3

Module Code: CIII MBA - 02

Module Name: Managing

business accountsCourse Name: CIII in ofcemana ement and administration

www.cyryxcollege.edu.m I in!o"cyryxcollege.edu.m I


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1.3 Objectives of Accounting:..............................................................................................4

1.4 Basic Terms used in Accounting.....................................................................................5

Chapter Two : Accounting concepts and conventions.....................................................8

Chapter Three : Process of accounting...........................................................................13

3.1 Accounting rocess:.....................................................................................................13

3.2 Accounting !"uation....................................................................................................14

3.3 #$assification of Accounts............................................................................................14

3.4 %u$es of accounting......................................................................................................15

Chapter Four : ourna!....................................................................................................1"

4.1 &eaning and definitions:..............................................................................................1'

4.2 #(aracteristics of )ourna$.............................................................................................1*

4.3 Advantages of )ourna$:.................................................................................................1*

4.4 Objective of journa$s:...................................................................................................1+

4.4.1 ,tes to )ourna$i-ing..............................................................................................1+

4.4.2 %u$es of journa$ising:.............................................................................................1

4.5 /ormat of journa$ entries..............................................................................................1

Chapter Five : #edger......................................................................................................$%

5.1 &eaning.......................................................................................................................20

5.2 /eatures of $edger.........................................................................................................20

5.3 Imortance and advantages of edger:.........................................................................21

5.4 osting of journa$ entries into $edger:...........................................................................21

5.5 /ormat of $edger...........................................................................................................23

Chapter &i' : Tria! (a!ance.............................................................................................$)

'.1 &eaning and definition................................................................................................24

'.2 /eatures of tria$ ba$ance...............................................................................................25

'.3 rearation of Tria$ Ba$ance.........................................................................................25

'.4 /ormat of tria$ ba$ance statement.................................................................................2'

Chapter &even : &ubsidiar* boo+s..................................................................................$,

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Chapter 1: Introduction to business accounting

1.1 Introduction

T(e main urose of accounting is to ascertain rofit or $oss during a secified

eriod to s(o financia$ condition of t(e business on a articu$ar date and to (ave

contro$ over t(e firms roert6. ,uc( accounting records are re"uired to be maintained

to measure t(e income of t(e business and communicate t(e information so t(at is ma6

be used b6 managers oners and ot(er interested arties. Accounting is a disci$ine

(ic( records c$assifies summari-es and interrets financia$ information about t(e

activities of a co-ener so t(at inte$$igent decisions can be made about t(e concern.

1.$ -efinitions:

Accounting is a rofession. It is a means of communication of accounting

information t(roug( rofit 7 $oss account and ba$ance s(eet to t(e users of

suc( information. According to ,mit( and As(burne 8Accounting is a means of measuring and

reorting t(e resu$ts of economic activities.9 According to &a$c(man and ,$avin 8Accounting is t(e rocess of recording t(e

c(anges in terms of increases and decreases in roert6 or in t(e rig(t to

roert6 and t(e ana$6sis and interretations of financia$ transactions.9 According to t(e American Institute of #ertified ub$ic Accountants AI#A;

8Accounting is t(e Art of recording c$assif6ing and summari-ing in a significant

manner and in terms of mone6 transactions and events (ic( are in art at

$east of a financia$ c(aracter and interreting t(e resu$ts t(ereof.9

On ana!*ing these definitions we find that accounting process invo!ves:

%ecording: !ntering t(e business transactions in boo


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1.3 Ob/ectives of Accounting:

T(e fo$$oing are t(e main objectives of accounting

To ceeds t(e revenue

t(ere is said to be a $oss.

To ascertain t(e financia$ osition of t(e business: T(e rofit and oss account

gives t(e amount of rofit or $oss made b6 t(e business during a articu$ar

eriod. ?oever it is not enoug(. T(e business man must


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,(eet is a statement of assets and $iabi$ities of t(e business on a articu$ar date.

It serves as barometer for ascertaining t(e financia$ (ea$t( of t(e business.

To faci$itate rationa$ decision maressed

in monetar6 terms. Assets are t(ings of va$ue used b6 t(e business in its oerations.

iabi$ities: T(ese are t(e ob$igations or debts t(at t(e enterrise must a6 in mone6 or

services at sometime in t(e future. T(erefore reresent creditors c$aims against assets

of t(e firms. Bot( sma$$ and big businesses find it necessar6 to borro mone6 at some

time or t(e ot(er and to urc(ase goods on credit.

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#aita$: Investment b6 t(e oners for t(e use in t(e firm is enses: T(ese are costs incurred b6 a business in t(e rocess of earning revenues.

=enera$$6 e>enses are measured b6 t(e cost of assets consumed or services used

during an accounting eriod.

oss: oss is t(e gross decreases in t(e assets or gross increases in t(e $iabi$ities. It is

t(e e>cess of e>enses over revenues. It reresents reduction in oners e"uit6 due to

inabi$it6 of t(e firm to recover t(e assets used in t(e business.

Income: Income is t(e increase in t(e net ort( of t(e organi-ation eit(er from

business activit6 or ot(er activities. Income is a comre(ensive term (ic( inc$udes

rofit a$so. In accounting income is t(e ositive c(ange in t(e ea$t( of t(e firm over a

eriod of time.

rofit: It is t(e e>cess of revenues over e>enses during an accounting 6ear. It

increases t(e oners e"uit6.

Draings: It is t(e amount of cas( or ot(er assets it(dran b6 t(e oner for (is

ersona$ use.

urc(ases: urc(ases are tota$ amounts of goods rocured b6 a business on credit and

for cas( for use or sa$e. In a manufacturing concern ra materia$s are urc(ased

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rocessed furt(er into finis(ed goods and t(en so$d. urc(ases ma6 be cas( urc(ases

or credit urc(ases.

,toc


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concets and conventions. T(ese are foundations of rearing and maintaining accounting

records. T(ere are certain ru$es t(at an accountant s(ou$d fo$$o (i$e recording business

transactions and rearing accounts. T(ese ma6 be termed as accounting concet.

Accounting concet refers to t(e basic assumtions and ru$es and rinci$es (ic( orerience and t(us t(e6 are universa$$6 acceted ru$es. /o$$oing are t(e various accounting

concets t(at (ave been discussed in t(e fo$$oing sections:

Business entit6 concet

&one6 measurement concet =oing concern concet

Accounting eriod concet

#ost concet

Dua$it6 asect concet

%ea$i-ation concet

Accrua$ concet

&atc(ing concet

Business entit6 concet: T(is concet assumes t(at for accounting uroses t(e

business enterrise and its oners are to searate indeendent entities. T(us t(e

business and ersona$ transactions of its oner are searate. /or e>am$e (en t(e

oner invests mone6 in t(e business it is recorded as $iabi$it6 of t(e business to t(e

oner. ,imi$ar$6 (en t(e oner taense. T(us t(e accounting records are

made in t(e booenses incurred b6 oner for (imse$f or (is fami$6 from

business i$$ be considered as e>enses and it i$$ be s(on as draings.

&one6 measurement concet: T(is concet assumes t(at a$$ business transactions

must be in terms of mone6 t(at is in t(e currenc6 of a countr6. T(us as er t(e mone6

measurement concet transactions (ic( can be e>ressed in terms of mone6 are

recorded in t(e booressed in

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monetar6 terms are not recorded in t(e booam$e sincerit6

$o6a$t6 (onest6 of em$o6ees are not recorded in boo


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%ea$i-ation concet: T(is concet states t(at revenue from an6 business transaction

s(ou$d be inc$uded in t(e accounting records on$6 (en it is rea$i-ed. T(e term

rea$i-ation means creation of $ega$ rig(t to receive mone6. ,e$$ing goods is rea$i-ation

receiving order is not. T(e concet of rea$i-ation states t(at revenue is rea$i-ed at t(e

time (en goods or services are actua$$6 de$ivered. In s(ort t(e rea$i-ation occurs

(en t(e goods and services (ave been so$d eit(er for cas( or on credit. It a$so refers

to inf$o of assets in t(e form of receivab$es.

Accrua$ concet: T(e meaning of accrua$ is somet(ing t(at becomes due esecia$$6 an

amount of mone6 t(at is 6et to be aid or received at t(e end of t(e accounting eriod.

It means t(at revenues are recogni-ed (en t(e6 become receivab$e. T(oug( cas( is

received or not received and t(e e>enses are recogni-ed (en t(e6 become a6ab$et(oug( cas( is aid or not aid. Bot( transactions i$$ be recorded in t(e accounting

eriod to (ic( t(e6 re$ate. T(e accrua$ concet under accounting assumes t(at

revenue is rea$i-ed at t(e time of sa$e of goods or services irresective of t(e fact (en

t(e cas( is received.

Accounting convention refers to common ractices (ic( are universa$$6 fo$$oed in

recording and resenting accounting information of t(e business entit6. T(e6 are fo$$oed $i


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ractices are used for rearing financia$ statements of different 6ears t(en t(e resu$t

i$$ not be comarab$e.

#onvention of fu$$ disc$osure: #onvention of fu$$ disc$osure re"uires t(at a$$ materia$

and re$evant facts concerning financia$ statements s(ou$d be fu$$6 disc$osed. /u$$

disc$osure means t(at t(ere s(ou$d be fu$$ fair and ade"uate disc$osure of accounting

information. Ade"uate means sufficient set of information to be disc$osed. /air

indicates an e"uitab$e treatment of users. /u$$ refers to com$ete and detai$ed

resentation of information. T(us t(e convention of fu$$ disc$osure suggests t(at ever6

financia$ statement s(ou$d fu$$6 disc$ose a$$ re$evant information.

#onvention of materia$it6: T(e convention of materia$it6 states t(at to ma


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Chapter 3: Process of accounting

3.1 Accounting process:

T(e accounting rocess is a series of activities t(at begins it( a transaction and ends it( t(e

c$osing of t(e boo


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T(e above stes are erformed t(roug(out t(e accounting eriod as transactions occur or in

eriodic batc( rocesses. T(e fo$$oing stes are erformed at t(e end of t(e accounting

eriod:

reare t(e tria$ ba$ance to maam$e not recording a transaction or

recording it in t(e rong account ou$d not cause an imba$ance. #orrect an6 discreancies in t(e tria$ ba$ance. If t(e co$umns are not in ba$ance $ooenses gains and $osses.Ba$ance s(eet: reared from t(e assets $iabi$ities and e"uit6 accounts.

rearing adjusted financia$ statement it( a$$ c$osing entries.

3.$ Accounting 2uation

T(e e"uation t(at is t(e foundation of doub$e entr6 s6stem accounting. T(e accounting

e"uation dis$a6s t(at a$$ assets are eit(er financed b6 borroing mone6 or a6ing it( t(emone6 of t(e coman6s s(are(o$ders. T(us t(e accounting e"uation is:

Assets G iabi$ities H ,(are(o$der !"uit6.

T(e ba$ance s(eet is a com$e> dis$a6 of t(is e"uation s(oing t(at t(e tota$ assets of a

coman6 are e"ua$ to t(e tota$ of $iabi$ities and s(are(o$der e"uit6. An6 urc(ase or sa$e b6 an

accounting e"uit6 (as an e"ua$ effect on bot( sides of t(e e"uation or offsetting effects on t(e

same side of t(e e"uation. T(e accounting e"uation is a$so ritten as

iabi$ities G Assets ,(are(o$der !"uit6 and

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,(are(o$der !"uit6 G Assets iabi$ities

3.3 C!assification of Accounts

An account is a summari-ed record of business transactions and account can be c$assified into3 t6es

ersona$ Account: T(e accounts (ic( re$ate to an individua$ firm coman6 are

ca$$ed ersona$ accounts. %ea$ Accounts: T(e accounts of a$$ t(ings (ose va$ue can be measured in terms of

mone6 are enses and incomes. /or e>am$e

commission earned rent aid bad debts rent received etc.

3.) u!es of accounting

ersona$ ACc:

Debit t(e receiver.

#redit t(e giver.

%ea$ ACc:

Debit (at comes in.

#redit (at goes out.

Fomina$ aCc:

Debit a$$ !>enses and $osses.

#redit a$$ incomes and gains.

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Chapter ): ourna!

).1 4eaning and definitions:

T(e ord J /ourna!J (as been derived from t(e /renc( ord JjourJ. )our means

da6. ,o journa$ means dai$6. Transactions are recorded dai$6 in journa$ and (ence it (as been

named so. It is a boo< of origina$ entr6 to record c(rono$ogica$$6 i.e. in order of date; and in

detai$ t(e various transactions of a trader. It is a$so


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transaction in journa$ is


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,ince t(e transactions are


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co$umn and t(e amount to be debited in t(e Kdebit amount co$umn against t(e name

of t(e account. ,te *: rite t(e name of t(e account to be credited in t(e ne>t $ine receded b6 t(e

ord KTo at a fe saces toards rig(t in Karticu$ars co$umn and t(e amount to be

credited in t(e Kcredit amount co$umn against t(e name of t(e account. ,te +: rite Knarration i.e. a brief descrition of t(e transaction; it(in bract $ine in Karticu$ars co$umn Dra a $ine across t(e entire Karticu$ars co$umn to searate one )ourna$ !ntr6 from

t(e ot(er.

4.4.2 %u$es of journa$ising:

T(e act of recording transactions in journa$ is ca$$ed journa$i-ing. T(e ru$es ma6 be

summari-ed as fo$$os:

Lse to searate $ines for riting t(e names of t(e to accounts concerned in eac(

transaction. rite t(e name of t(e debtor or account to be debited in t(e first $ine and t(e name of

t(e creditor or t(e account to be credited in t(e ne>t $ine rite t(e name of t(e account to be debited c$ose to t(e $ine starting t(e articu$ars

co$umn and t(at of t(e account to be credited at a s(ort distance from t(is $ine. Lse JDrJ after eac( debit item and JToJ before eac( credit. T(e term J#r.J after a

credit item is unnecessar6 as if one account is debtor t(e ot(er must be creditor. To searate one entr6 from anot(er a $ine is dran be$o ever6 entr6 to cover

articu$ars co$umn on$6. T(e $ine does not e>tend to amount co$umn.

).6 For0at of /ourna! entries

Date

(1)

Particulars

(2)

L.F.

(3)Dr. Amount Cr. Amount

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Chapter 6: #edger

6.1 4eaning

edger is bound boo< it( ages consecutive$6 numbered. It ma6 a$so be a bund$e of

s(eets. A$$ t(e accounts identified on t(e basis of transactions recorded in different

journa$sCboo


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Mno$edge of Business resu$ts: edger rovides detai$ed information about revenues

and e>enses at one $ace. (i$e finding out business resu$ts t(e revenue and

e>enses are matc(ed it( eac( ot(er. Mno$edge of boo< va$ue of assets: edger records ever6 asset searate$6. ?ence 6ou

can get t(e information about t(e Boo< va$ue of an6 asset (enever 6ou need. Lsefu$ for management: T(e information given in different $edger accounts i$$ (e$

t(e management in rearing budgets. It a$so (e$s t(e management in


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Ba$ancing of an account: It is t(e difference beteen t(e tota$ of debits and tota$ of credits of

an account. If debit side tota$ is more t(an t(e credit side t(e account s(os a debit ba$ance.

,imi$ar$6 t(e ba$ance i$$ be credit if t(e credit side tota$ of an account is more t(an t(e debit

side tota$. T(is rocess of ascertaining and riting t(e ba$ance of eac( account in t(e $edger is

ca$$ed ba$ancing of an account.

T(e fo$$oing stes are to be fo$$oed in ba$ancing t(e edger account:

Tota$ u t(e to sides of an Account on a roug( s(eet.

Determine t(e difference beteen t(e to sides. If t(e credit side is more t(an t(e

debit side t(e ba$ance ca$cu$ated is a credit ba$ance. ut t(e difference on t(e K,(orter

side of t(e account suc( t(at t(e tota$s of t(e to sides of t(e account are e"ua$. If t(e difference amount is ritten on debit side i.e. if credit. side is bigger; t(en

rite as 8Ba$ance cCd9 cCd stands for carried don;. If difference is ritten on t(e

credit side i.e. if debit side is bigger; t(en rite it as 8Ba$ance cCd. /ina$$6 at t(e end of t(e 6ear a$$ t(e $edger accounts are c$osed b6 tat eriod. If t(e difference as ut on credit side as 8Ba$ance cCd9 it s(ou$d

no be ritten on t(e debit side of t(e account as 8Ba$ance bCd9 bCd stands for

broug(t don; and viceaversa. T(us debit ba$ance i$$ automatica$$6 be broug(t

don on t(e debit side and a credit ba$ance on t(e credit side.

6.6 For0at of !edger

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

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Chapter ": Tria! (a!ance

".1 4eaning and definition

Tria$ ba$ance is an imortant statement reared under t(e doub$eentr6 s6stem. T(e

fundamenta$ rinci$e of t(e doub$eentr6 s6stem is t(at for ever6 amount of debit t(ere is an

e"ua$ amount of credit and vice versa. T(is rinci$e rovides a c(ec< on arit(metica$

accurac6 of t(e recording of financia$ transactions in different boo


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Tria$ ba$ance is a statement (ic( is reared b6 using t(e debit and credit tota$s or

ba$ances of a$$ $edger accounts it( a vie to ascertain t(e arit(metica$ accurac6 of t(e

recordings of t(e financia$ transactions of t(e business. Tria$ ba$ance is reared after c$osing

a$$ t(e $edger accounts and draing ba$ances t(ere from a certain date. A$$ t(e debit and credit

tota$s or ba$ances are arranged in debit and credit co$umn toget(er it( t(e (eads of account

in a searate s(eet of aer so as to ascertain (et(er t(e tota$s of debit and credit co$umns

agree. If t(e to tota$s of tria$ ba$ance agree it is assumed t(at recordings of financia$

transactions in t(e journa$ and t(e $edger are arit(metica$$6 accurate. T(e tria$ ba$ance can a$so

be used to reare t(e fina$ accounts of t(e business.

According to #arter JTria$ Ba$ance is t(e $ist of debit and credit ba$ances ta


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=enera$$6 tria$ ba$ance is reared at t(e end of accounting 6ear but it can a$so be

reared mont($6 (a$f 6ear$6 or "uarter$6.

".3 Preparation of Tria! (a!ance

Tria$ Ba$ance ma6 be reared eit(er ta


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,a$aries Account 1000

*40 *40

Chapter ,: &ubsidiar* boo+s

,.1 4eaning

,ubsidiar6 boo< ma6 be defined as a boo< of rime entr6 in (ic( transactions of a

articu$ar categor6 are recorded. In ot(er ords in order to save time and energ6 t(e

transactions (ic( are of simi$ar c(aracter are recorded in searate boo


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a$$ business transactions. In ractica$ s6stem of boo


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It becomes eas6 to access t(e detai$ed information re$ating to a articu$ar transaction

as t(e transactions re$ating to one (ead are recorded in a searate boo


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handout of managing business accounts

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