Concept Of Hotel Accountancy

Hotel Accountancy

Lesson 1 Financial Accounting: Contents 1.1 Introduction 1.2 Need for Accounting 1.3 Objectives of Accounting 1.4 Functions of Financial Accounting 1.5 Bookkeeping V/s Accounting Objective The objective is to familiarize the students with due purpose of accounting. After going through this section should be able to understand as to why should study the subject and its importance in the long run. 1.1 Introduction Recording the financial aspects of a transaction and event of a business enterprise refers to accounting. Normally the financial aspects, when recorded relate to financial accounting, whereas if the cost aspects of transactions are recorded it is called Cost accounting. Cost accounting is used to analyze the costing information by the management for cost control purposes whereas analyzing the financial aspects of the transactions and reporting them to the shareholders is the financial accounting. 1.2 Need for accounting Accounting is the language of the business. Language should always be lucid and easy to communicate. Similarly accounting is a mode of communication to the interested parties, like investors, creditors, proprietors, government and other agencies. The need for accounting is felt not only by the businessmen but also by small grocer’s shop. It is essential for any businessman to know: 1) What is the deployment of funds? 2) What he owns? 3) What he owes? 4) Where he has earned profit and where he has suffered loss? 5) What is his financial position? The answers to all these questions are supplied to the small or big businessman through the language of financial accounting, which has adequate communication power. Even a housewife needs to record expenses and income of her household to track her financial position. 1.3 Objectives of Financial accounting Objectives of financial accounting can be: 1) To keep a record of transactions 2) To disclose the true and fair view of the state of a business 3) To disclose the operating results 4) To intimate the interested parties about the financial position of the business.

1

Hotel Accountancy

1.4 Functions of Financial Accounting The analysis of financial accounting provides the following function: 1) Recording: this function ensures that the transactions of financial nature are recorded properly in the journal book. Depending on the type of transactions the journals are further subdivided into purchase journal (records credit purchase of goods). Sales journal (for recording credit sale of goods) etc. The number of subsidiary books to be maintained is according to nature and size of the business. 2) Classifying: classification is concerned with systematic analysis of the recorded data, with a view to group transactions or entries of a particular nature at one place. The classification is done in the books called ledger. In this book, different pages contain individual account-heads under which all financial transactions of similar nature are collected. For example; there may be separate account heads fro traveling expenses, printing & stationary, advertising etc. All expenses under these head after being recorded in the journal will be classified under separate heads in the ledger. This will help in finding total expenditures incurred under different heads. 3) Summarizing: the various transactions are summarized in the final statements like trial balance, income statement, and balance sheet. These summarized statements are useful not only for the internal users but also the external end-users. 4) Interpretation: the recorded data is interpreted to analyze the profitability, growth and financial condition of the business. This is useful to prepare the future course of action for the business. Accounting Information and Its Users Accounting information is utilized by external and internal users, who are associated with the management of the concern and can generate an effective output because of the information so obtained. Financial Statements Internal user’s 1. Board of directors 2. Partners 3. Managers 4. Officers

External users 1. Investors 2. Lenders 3.Suppliers 4.Govt. agencies 5. Employees 6. Customers

1.5 Book keeping v/s Accounting Both these are synonymous terms for a layman but for a student of financial accounting they are different from each other. Book keeping is an art of recording transactions chronologically. A bookkeeper may keep all the record of a business or a minor segment and is mainly of clinical nature, which is accomplished through electronic devices. Accounting is designing the system for recording, classifying and summarizing the recorded data and interpreting them for the external and internal users. The responsibility of the accountant increases with the increase in the size of the firm. An accountant is required to have conceptualized knowledge of accounting and analytical skills than compared to a bookkeeper. 2

Hotel Accountancy

Questions: 1. Define accounting. Explain the scope of accounting. 2. Explain the objective & function of financial accounting. 3. Elucidate the difference between book keeping and accounting. 4. What is the need for accounting? Summary Proper recording of financial transactions of an organization is called financial accounting. It is important for the interested parties to know the actual condition of the business, which is disclosed through the language of the business, i.e financial accounting. Recording, classifying, summarization, interpretation are some of the core functions of financial accounting. Bookkeeping is only recording the transactions, whereas recording and analyzing the transactions are among the major functions of accounting.

3

Hotel Accountancy

Lesson 2 Objective This section is prepared to give an insight into the accounting principle. Contents 2.1 Accounting concepts 2.2 Accounting conventions 2.3 Systems of bookkeeping 2.3.1 Accounting equation approach 2.4 Important accounting terms Accounting principles are those defined parameters, which are universally followed for recording accounting transactions. These principles are necessary because in the absence of common principles every accountant would formulate his/her own principle thereby rendering the comparison of results of organizations impossible. In order to avoid such a chaotic situation it becomes mandatory to formulate common set of principles for all organizations. These principles can be classified into two categories: a) Accounting concepts (b) Accounting conventions GAAP (Generally accepted accounting principles) they are the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. They act as the foundation for presentation of accounts. GAAP is a conventional phenomenon and that is why it is generally accepted because they are evolved out of a experience, reason, custom, usage and hence of practical necessity. 2.1 Accounting concepts The term concept relates to those basic parameters on which the science of accounting is based. The following are the important accounting concepts: 1. Business entity concept. 2. Going concern concept 3. Money management concept 4. Cost concept 5. Dual Concept. 6. Accounting period concept 7. Realization concept 8. Matching concept Following are the important accounting conventions: Business entity conceptIn accounting, business is treated as a separate entity from its owners. A distinction is made between the personal and business transactions. Suppose a car dealer purchased a car for his own use and another one for business purpose. The first transaction is shown as drawing and the car bought for resale is shown as business transaction. Therefore the business and its owner are treated as separate entities. In the eyes of the law business and proprietor are two different legal entities. This makes it possible for business to sue the proprietor or for that matter proprietor to sue the business. 4

Hotel Accountancy

The capital belongs to the owner and is not payable to anyone still it is considered as a liability of the business. The proprietor extends capital to the business and in return he receives profits. So capital becomes a liability for the business towards the proprietor of the business. , that is why Capital + Liability = Assets. In case the private and the business transactions are not segregated, it will not be possible to determine profitability of the concern. Going concern concept – It is presumed that the business will continue to exist forever. The values of the assets are recorded at the price at which they are purchased and not at the market values. Since the business is not assumed to be liquidated in the near future so the market value of the assets has less significance. The concept implies that liabilities will be paid on maturity. The purchase and sales made in the ordinary course of time are written off in the same year. Only the unsold goods are taken to the next year as stock. The assets which are to be used over a period of time for the purpose of generating revenues are taken to next year. They are written off over an estimated period of time that is taken to be the life of the asset. This is only possible when business is taken as continuing one. The definition of capital and revenue expenditure becomes possible because of the going concern concept. The benefit of expenditure for a shorter period of time and longer period of time (normally amortized) is segregated because of the concept of going concern. Even the income received in advance is taken to the next period because of this concept. An investor will only invest money in the company only when he knows that the concern will continue. Cost concept – It states that the value of the asset is recorded on an objective basis and not on subjective basis. Such as, if an asset is purchased it is not recorded on the purchase price and not on the market price. This concept requires the uniform valuation of assets as in the absence of this concept value of the assets will be recorded at different figures by different individuals. So this concept is helpful in making truthful records. Thus the records become more reliable and comparable. Though assets are valued on the cost basis it does not mean that they are always shown at the same figure. Every year this asset diminishes in value due to wear and tear, so these are shown at cost less depreciation. The life of an asset is estimated and depreciation is based on this basis. So, approximation can also be avoided from this concept. Dual aspect concept: Accounting system is based on dual aspect concept. It is based in the principle that for every debit transaction there is a corresponding credit transaction. For every benefit provided by a person there exists a receiver of the benefit. Suppose a person purchases an Elmira worth Rs. 10,000; he will get the object and part with the cash for the similar amount. Dual aspect concept states that debit is always equal to credit. This concept has led to the formation of double entry system of book keeping. This can be explained with the help of an example: Mr. X started business with a Capital of Rs 10000. Cash will be debited and X’s capital account will be credited. Capital = Cash Rs 10000 = Rs 10000 If x purchases goods on credit for Rs 20000 the position becomes:

5

Hotel Accountancy

Liabilities Side Capital +Creditors 10000+20000

Assets Side Cash + Stock 10000+20000

= =

Money Measurement conceptMoney is a matter of functions of four – a medium, a measure, a standard and a share. The concepts state that transactions are recorded in accounting, which can be expressed in terms of money. As mentioned above money is a medium of exchange and a share of value, which make it easier to value all the transactions in terms of money. If the value of the asset is not stated in money terms the total asset or liability of the business cannot be determined. Accounting period concept: The concept states that the accounting is done for a specified period say fro six months or 1 year and the transaction related to that period are accounted for. Trading, profit & loss account, and even the balance sheet is prepared for a specified period. The owners, creditors, investors, govt. departments are interested in knowing the profitability at the end of the specific financial period. Therefore accounting period concept refers to a set frame of time within which all the financial transactions are recorded and disclosed to the stakeholders on the basis of which dividends or taxes are paid. Realization concept – It applies to the sale of product or rendering of services as because in either of them revenue is realized. As general principle revenue is considered to be realized when sale is made in case of goods and when service is performed in case of service contracts. The sale is treated when goods are delivered or title to goods is changed. Some people hold the view that cash or near cash assets should be considered for the purpose of realization whereas some hold the view that receipt of an asset in exchange constitutes realization. Matching concept – This refers to matching of cost to the revenue. The expenditure is matched against the revenue and the difference is accepted as the profit. When business is taken as a going concern then it becomes necessary to evaluate its performance periodically. The revenue and costs of same period are matched, when income of a particular accounting period is taken to profit & loss account then all expenses of that period whether paid or not is also debited to profit and loss account. The costs may be associated with particular product or services. In this case the revenue eared from the sale of that product or revenue received for providing service is matched to the cost of production of that product or service. There may be another situation where revenue and cost can be determined according to an accounting period and not according to a product. In such cases the costs are matched according to the period. Accounting Convention The conventions are those customs or traditions, which guide the accountant while preparing the accounting statements. Some of the accounting conventions are as: 6

Hotel Accountancy

1. Convention of consistency: This convention states that same accounting principle should be based for preparing financial statements for different periods. It enables the management to draw important conclusions regarding the working of the concern over a longer period. It allows comparison in the performance of different periods the concept of consistency does not mean that no change should be clearly stated. It will enable the reader to analyze information recording to new procedures. If a change is made in an accounting procedure, this should be disclosed clearly, i.e change in method of depreciation should be disclosed through a console. 2. Convention of Conservatism: The convention of conservatism can be disclosed through a one liner as ‘Provide for all possible losses and do not provide for possible incomes.’ The Convention states that accounting policy should be conservative and should make provisions for possible losses so that in times of contingency that acts as a cushion& should not hamper the working of the business. If an anticipated loss is not provided for then if that loss actually occurs during the course of the business then it would lead to withdrawal of money from the business i.e., the capital gets depleted which leads to violation of capital maintenance. 3. Convention of Disclosure: The convention states that for fair judgement of a person the financial statements, all the in formations should be disclosed. Events occurring after the preparation of balance sheet but before presentation of account should also be disclosed in the books. 4. Convention of Materiality: This convention states that only the significant details should be recorded and the others should be done away with. There is a thin line dividing the material & immaterial events and it is the judgement of the accountant as to what he constitutes as material & immaterial. There is still fair amount of ambiguity about the material and immaterial events and the convention of disclosure and convention of material seem to be contradicting each other. SYSTEMS OF BOOK-KEEPING Book- keeping is an art of recording transactions chronologically (Date wise). The recording of transactions can be done in any of the following systems: 1. Single Entry System: This system is normally followed by small businessman, as the complete records of the transaction are not available. The system is not error-proof since it is an incomplete double entry system where only the essential records are kept and therefore it does bring to light the intricate details. 2. Double Entry System: This system actually records the dual aspects of transactions. If somebody has sold a good then definitely there exists a person who has purchased that good; the concept of ‘Loss of one is the gain of the others’ holds good to a large extent in this system. The following accounting equation may very well explain the system: Proportion Owned by Business= Rights of the Creditors+ Rights of the Owner Assets = Liabilities + Capital Or, Assets – Liabilities = Capital Accounting Equation approach The resources of a business unit are provided by its proprietors and outsiders;

7

Hotel Accountancy

The claim of the proprietor is known Capital while the contribution of the outsider is called liabilities. The total assets of a business entity are equal to its Capital & Liabilities, that is denoted by Capital + Liability = Asset Suppose, Ram started business with Rs. 1, 00,000 cash. The accounting equation will be as follows:Capital + Liability = Asset Ram’s Capital cash 1, 00,000 1, 00,000 he buys furniture from S.K. & Co. on credit for Rs. 12,000. Now the accounting equation will be as follows: Capital + Liability = Asset Ram’s Capital + S.K.& co cash + Furniture 1, 00,000+ 12,000 1, 00,000+ 12,000 Further suppose Ram buys for cash goods in trade for Rs. 50,000. The new equation will be :Capital + Liability = Asset Ram’s Capital + S.K & .co cash + Furniture + Goods in trade 1, 00,000+ 12,000 50,000+ 12,000+50,000 [ Note : Because the goods were purchased in cash and therefore cash balance diminished and goods in trade increased.] Example of an accounting equation with respect to transactions of a business: Assets = Liabilities + capital 1. PR starts business with cash Rs 100,000 100000 = 0 + 100000 2. Purchases goods on credit for Rs 2000 2000 = 2000 + 0 ---------------------------------New Equation 1, 02,000= 2000 + 102000 3. Purchased goods for cash Rs 10,000 (+) 10,000 = 0 + 0 (-) 10,000 ------------------------------------------New Equation 1, 02,000 = 2000+1, 00,000 4. Purchased furniture for cash Rs 5,000 (+) 5,000 (-) 5,000 = 0 + 0 ` --------------------------------------------New Equation 1, 02,000 =2000+100,000 5. Withdrew cash for private use Rs 7000 (-) 7000= 0 (-) 7000 ------------------------------------New Equation 95,000=2000+93000 6. Paid to creditors Rs 1,000 (-)1000 =(-)1000+0 --------------------------------New Equation 94,000=1000+93000

Important accounting terms

1. Capital & Revenue Profit is result of economic activity of business and apparently it is the excess of what is received i.e. income over what is paid i.e. expenses. Thus profit for a period means excess of 8

Hotel Accountancy

income of the said period over expenses for that period. Now what constitutes income or expenses for a period calls for attention. Suppose a machine is purchased during a year. The cost of the machine cannot be regarded as expense of the year of acquisition. The reason is, since the machine is expected to serve for a number of years to come, the income generated by the use of the machine is likely to be spread over number of future years. This means, the cost of the machine should likewise be spread over a number of future years, preferably a proportion of income generated by the machine. In the first year operations, when a great deal of equipment is purchased and possibly the business done, this seems to be vital. However, this should not be taken to suggest that, it is unimportant for other years. Following above, an expenditure, benefit from which is not exhausted in short time, is spread over the number of year during which the benefit is expected. These are called the capital expenditure, as distinguished from other expense called revenue expenditure. Capital expenditure is incurred in purchasing or constructing property which is intended to assist in the production of profit, or in permanently improving, enlarging or extending existing property, in order to increase it s profit earning capacity. It is the expenditure, the direct profit of which will extend over general trading periods and which replaces cash by permanent asset. Example of capital expenditure includes purchase or extension of buildings. The capital expenditure is debited to concerned asset account. Charge against profit/approximation of profit Profit is excess of income over expense incurred to generate that income. Thus only such expenses are to be deducted from income to arrive at profit and are called charges against profit. Following this, cost of a machine is not charged against profit, but depreciation, which represents wear and tear of the machine, through use in business in charge against profit. Approximation of profit, are deduction from profit (note, charge are deduction form income) to break the profit in different parts, e.g. transfer to reserve, representing profits retained in business, share of profit of each partners, representing profit available for partners etc. Charges against profits are debited in the income statement above the line i.e in manufacturing/trading/ profit & loss a/c. appreciation on the other hand are debited below the line i.e. in P&L Appropriation a\c . 3. Deferred revenue expenditure The benefit of income expected from certain types of expenditure does not accrue immediately. There is usually a “lag” between the expenditure and the income which it produces. In such cases it is proper to charge only a part of the total cost to the current year’s profit and loss a/c, carry the balance forward as deferred revenue expenditure, which will be charged to revenue over the period during which the benefit is expected to be derived. For example, expenditure on advertisement may be apportioned over say, four years in the proportion of benefits in each of the said four years. 4. Non cash charges Certain charges e.g provision for doubtful debts, depreciation etc, do not involve any of cash, the difference between the two, called cash profit, represent net inflow of cash. However net profit in cash minus non cash charges. Thus, non cash charges reduce profit availability for drawings/dividends without reducing available cash. As a result of which, a part of available cash can go out of business by way of drawings/dividend, and is retained in business.

9

Hotel Accountancy

Summary The universally accepted parameters are divided into accounting concepts and conventions. Accounting concepts are basic accounting parameters that guide the accounting procedure whereas accounting conventions are traditions which guide the accountants. Disclosure says disclose the transactions and materiality says disclose material items, which are contradictory in nature. The fundamental accounting equation of asset = capital + liabilities change after every transaction but follows the double entry system of accounting. The capital and revenue expenditure are differentiated on the basis of benefits and non-cash charges refer to nonoutflow of cash. The lag between the benefit and the expenditure is variated overtime is called deferred revenue expenditure.

10

Hotel Accountancy

Lesson 3 Accounting Standards Objective: Is to familiarize the standards with the basic accounting standards issued and to intimate them about the prevailing guidelines regarding the accounting standards. Contents 3.1. International Accounting standards 3.2 Accounting standards in India 3.2.1 Introduction 3.2.2 List of accounting standards in India 3.1 International Accounting Standards The International Accounting Standard Committee (IASC) was formed in 1973. The leading accounting institutes joined their hands to form the committee to lay out a systematic accounting procedure namely Australia, Canada, France, Germany, Japan, Mexico, Netherlands, U.K. & Ireland and U.S.A. List of International accounting standards are: IAS1. Disclosure of Accounting Policies. IAS2. Valuation & presentation of inventories in the context of the historical cost system. IAS3. Consolidated financial statement. IAS4. Depreciation accounting IAS5. Information to be disclosed in financial statements. IAS6. Withdrawn IAS7. Statement of change in financial position IAS8. Unused & prior period items and changes in accounting policies. IAS9. Accounting for research and development costs. IAS10. Contingencies and events occurring after the balance sheet date. The above is the list of first ten international accounting standards and the list goes on to disclose 29 international accounting standards. 3.2 Accounting Standards in India 3.2.1 Introduction In order to facilitate a better Presentation of accountants and to remove the ambiguity that may arise on account of conflicting which states the presentation of accounts should be ‘true and fair.’ Accounting standard board clarifies the concept of ‘true & fair view’. (ASB). Of India which was formed on 21st April 1977 by Institute of Chartered Accountants of India (ICAI). The main function of ASB is to formulate different accounting standards after taking into consideration the applicable laws, customs, usage and business environment. 11

Hotel Accountancy

3.2.2 List of accounting standards The Accounting Standards Board of the Institute of Chartered Accountants of India has so far issued the following accounting standards:-

Sl. No. 1

Accounting Standard No. AS – 1

2. 3. 4.

AS – 2 AS – 3 AS – 4

5.

AS – 5

6. 7.

AS – 6 AS – 7

8

AS – 8

9 10

AS – 9 AS – 10

11

AS – 11

12

AS – 12

13

AS – 13

14

AS –14

15

AS – 15

16 17 18

AS – 16 AS – 17 AS -18

19

AS – 19

20 21

AS –20 AS – 21

22

AS –22

Title of the accounting standards Disclosure of Accounting policies( Mandatory on or after 1.4.1991) Valuation of inventories Changes in financial position Contingencies and events occurring after the balance sheet date ( Mandatory on or after 1.1.1987 ) Prior period and extraordinary items and change in accounting policies ( Mandatory on or after 1.1.1987) Depreciation accounting Accounting for construction contracts ( Mandatory on or after 1.4.1991) Accounting for Research & Development ( Mandatory on or after 1.4.1991) Rename recognition ( Mandatory on or after 1.4.1991) Accounting for fixed assets ( Mandatory on or after 1.4.1991) Accounting for the effects of change in foreign exchange rates( Mandatory on or after 1.4.1991) Accounting for Govt. Grants ( Mandatory on or after 1.4.1994) Accounting for investments ( Mandatory on or after 1.4.1995) Accounting for Amalgamations ( Mandatory on or after 1.4.1995) Accounting for retirement benefits in the financial statements of Employers ( Mandatory on or after 1.4.1995) Borrowing costs ( Mandatory on or after 1.4.2000) Segment reporting ( Mandatory on or after 1.4.2001) Related party disclosures ( Mandatory on or after 1.4.2001) Leases ( Mandatory in respect of all assets leased during accounting period commencing on or after 1.4.2001 Earning for shares ( Mandatory on or after 1.4.2001) Consolidated financial statements ( Mandatory on or after 1.4.2001) Accounting for taxes on income( Refer note no 1. below) 12

Hotel Accountancy

23

AS –23

24

AS –24

25

AS –25

26 27

AS –26 AS –27

28

AS –28

Accounting for investments in associates in consolidated financial statements ( Mandatory on or after 1.4.2002) Discontinuing operations (Effective & Mandatory on or after 1.4.2004) Interior financial reporting ( Mandatory on or after 1.4.2002) Intangible assets ( Mandatory on or after 1.4.2003) Financial reporting of interests in joint ventures( mandatory on or after 1-04-2002 Impairment of assets (effective and mandatory on or after 1-4-2004

Note 1. All the accounting periods commencing on or after 1-4-2001, in respect of the following: i) Enterprises whose equity debt securities are listed on a recognized stock exchange in India and enterprises that are in the process of issuing equity or debt securities that will be listed on a recognized stock exchange in India as evidenced by the board of directors’ resolution in this regard. ii) All the enterprises of a group, if the parent presents consolidated financial statements and the accounting standards is mandatory in nature in respect of any of the enterprises of that group in terms of the (i) above. 2) All the accounting periods commencing on or after 01-04-2002 in respect of companies not covered by (1) above. 3) All the accounting periods commencing on or after 1-4-2003 in respect of all other enterprises

Lesson 4 Journal Objective: The objective is to familiarize the students with the rules of debit and credit to get them acquainted with the golden rules of journalism, classification of accounts and passing the final journal entry in the books. Contents: 4.1 Classifications of accounts 4.1.1 Rules of debit and credit 4.2 Journals

13

Hotel Accountancy

4.1 Classification of accounts Accounts

Personal account e.g. XYZ Co A/c

Impersonal account Real account e.g. Cash, Furniture

Nominal account e.g. expense, loss gain

As the chart explains above, there is basically 3classifications of accounts i.e. personal accounts, real accounts and nominal accounts 4.1.1. Rules of debit and credit The rules of debit & credit are guided by three golden rules of accounting, i,e, a. Debit the receiver, Credit the giver- Personal A/c b. Debit what comes in, Credit what goes out- Real A/c c. Debit expenses & losses, Credit incomes & gains – Nominal A/c Normally to record the transactions the first criteria is to find out the two accounts affected. Then it becomes necessary to clarify the amount and determine whether it belongs to Personal, Real or Nominal A/c. Finally, using the rules a particular A/c is debited or credited. Example 1: Purchased goods for cash. Two Accounts affected are: i) Goods A/c ii) Cash A/c Classify the Accounts: i) Goods A/c – Real A/c ii) Cash A/c – Real A/c Nature of transaction is: Goods come in, Cash goes out. Using the rules of Real A/c ‘What comes in is debited & what goes out is debited.’ So, Goods A/c is debited and as the cash goes out, the cash A/c is credited. Example 2: Sold goods for cash. Goods go out , Cash comes in. Goods A/c – Credit (Real A/c) Cash A/c – Debit (Real A/c) Example 3: Purchased goods from X Goods come in – X is the giver. Goods A/c – Debit, X A/c – Credit Example 4. Received cash for interest Cash comes in, Interest is an income Cash A/c – Real A/c, Interest A/c – Credit (Nominal A/c) 4.2 Journal A Journal records the daily transaction in the order in which they occur. It is the book under which the transactions are recorded first of all under the double entry system. Ledger follows after a transaction is recorded I the journal. 14

Hotel Accountancy

Date A

Particulars B

L/F C

Debit D

Credit E

A) Date: the date on which the transaction takes place is recorded here. B) Particulars: the two aspects of the transaction recorded in this column, i.e. the details regarding the accounts, which have to be debited and credited. C) L.F: I t means ledger folio. The transactions entered in the journals are later on posted in the ledger. D) Debit: the amount to be debited is entered. E) Credit: the amount to be credited is entered. Notes 1. When trader purchases different articles for resale then all the different articles are grouped into a single item called ‘purchase’. If a chair and a table is purchased then it can be grouped into a single item called ‘furniture’. 2. Instead of passing two journal entries it is possible that a single journal entry can be passed. E.g. Date A

Particulars B Salary A/c Dr To cash (Being the salary paid) Purchase a/c Dr To Cash (Being the purchase made)

L/F C

Debit D 300

Credit E 300

700 700

These two entries may be combined in the following form: Date Particulars l/f Debit A B C D Salary A/c Dr 300 Purchase A/c Dr 700 To cash (Being the salary paid & purchase made)

Credit E 1000

Note: i) The date of the transaction has to be same when the combined entry is passed ii) Either the debit or the credit for the two transactions should be for the same a/c. 15

Hotel Accountancy

Illustration : Journalize the following transactions in the books of a trader. Debit balance on Jan 2003: Cash in hand Rs 8000, cash at bank Rs 25000, stock of goods Rs 20000, furniture Rs 2000, buildings Rs 10000, sundry debtors – Ankit (Rs 2000), Rohit (Rs 1000) and Sweta (Rs 2000) Credit balance on Jan 2003: Sundry Creditors - Rishi (Rs 5000), loan from Bina Rs 10000 Following were the further transactions in the month of Jan 2003: a) Jan 1, purchased goods Worth Rs 5000 for cash less 20% trade discount and 5% cash discount. b) Jan 4 – received Rs 1980 from Ankit and allowed him Rs 20 as discount Solution Sl. No 1

2

3

Date

Particulars

L.F Debit (Rs)

01/01/03 Cash A/c Dr Bank A/c Dr Stock A/c Dr Furniture A/c Dr Building A/c Dr Ankit A/c Dr Rohit A/c Dr Sweta A/c Dr To Rishi A/c To Bina’s loan A/c To capital A/c (being balances brought forward From last year) 01/01/03 Purchased A/c Dr To cash A/c To discount (being goods purchased for Cash worth Rs 5000 allowed 20% trade discount and 5% cash Discount on Rs 4000 04/01/03 Cash A/c Dr Discount A/c Dr To Ankit A/c (Being cash received from Ankit Allowed Rs 20 as discount) Total

16

Credit (Rs

8000 25000 20000 2000 10000 2000 1000 2000 5000 10000 55000

4000 3800 200

1980 20 2000

76000

76000

Hotel Accountancy

Lesson 5 Ledger and Trial Balance Objective: The concept of transferring form journal to ledger and how an account is balanced in ledger. Trial balance preparation and the purpose of preparing the same. Concept: 5.1 Ledger 5.1.1Introduction 5.1.2 Ledger posting 5.1.3 Rules regarding posting 5.1.4 Classification of ledger accounts 5.2 Trial balance 5.2.1 Introduction 5.1 Ledger 5.1.1 Introduction This is a book of ultimate entry, contains details of pecuniary transactions. The word ‘ledger’ is derived from the word ‘ledger’. The prime entry made in the journal books is ultimately recorded in the ledger. The method of entering the transactions from the journal to the ledger is known as posting. The ledger is classified into personal ledgers and impersonal ledgers which contains all other accounts. Fictitious and nominal accounts are maintained in the nominal ledger, which is also a subdivision of impersonal ledger. A type of general ledger is also in vogue which homes all other accounts like property or real accounts. It is also customary to subdivide the ledger or personal ledger, general ledger and nominal ledger. First of all, opening entry should be posted as it indicates the balance with which assets and liabilities start the new period. The way to post the opening entry is to write on the debit side of various assets (which have to be debited according to the opening entry). ‘to balance brought down’ or just to ‘balance forward’ and then enters the amount against this. In the case of liabilities and capital accounts, the entry is ‘by balance brought down’ or just ‘by balance brought forward’ and then the amount is written against it. The ledger rulings are as follows: Dr. Cr. Date Particulars JF Amount Dat Particulars JF Amount e The ledger is a very valuable record of great importance and significance. The entries made in it cannot be scrumptiously altered or erased. This is a questionable practice. If any correction has to be done it is to be passed through a separate journal entry. 5.1.2 Ledger Posting The term posting means transferring the debit and credit items form the journal to their respective account in the ledger. Exact names are to be carried to the ledger. For example, if in the journal, expenses account has been debited, it would not be correct to debit the office expenses account in the ledger, though in the journal, it might have been indicated clearly in the narration that it is an item of office expense. The correct course would have been to record the amount to the office expenses account in the journal as well as in the ledger. Posting may be done at any time. However it should be completed before the financial statements are 17

Hotel Accountancy

prepared. It is advisable to keep the more active accounts posted to date. The examples of such accounts are the cash account, personal accounts of various parties etc. The bookkeeper from the journal to the ledger may do the posting by any of the following methods: i) He may take a particular side first, for example, he may take the debits first and make the complete postings of all debits from the journal to the ledger. ii) He may take a particular account and post all debits and credits relating to that account appearing on one particular page of the journal. He may then take some other account and follow the same procedure. iii) He may complete postings of each journal entry before proceeding to the next entry. It is better to follow the last method. One should post each debit and credit item as it appears in the journal. The ledger folio (L/F) column in the journal is used at he time when debits and credits are posted to the ledger. The page number of the ledger on which the posting has been done is mentioned in the L.F column of the journal. 5.1.3 Rules regarding posting The following rules should be observed while posting transactions in the ledger from the journal: 1) Separate accounts should be opened in the ledger for posting transactions relating to different accounts recorded in the journal. For example, separate accounts may be opened for sales, purchases, sales returns, purchases returns, salaries, rent, cash etc. 2) The relevant account, which has been debited in the journal, should also be debited in the ledger. However, a reference should be made of the other account, which has been credited in the journal. For example, for salaries paid, the salaries account should be debited in the ledger, but references should be given of the cash account, which has been credited in the journal. 3) The relevant account, which has been credited in the journal, should also be credited in the ledger. However, a reference should be made of the other account, which has been debited in the journal. It will be credited in the ledger also, but reference will be given of the salaries account in the ledger “To and By” It is customary to use words ‘to’ and ‘by’ while making postings in the ledger. The word ‘to’ be used with the account which appears on the debit side of a ledger book. Double entry affect of the transaction is maintained because for energy debit there assist a corresponding credit. Classification of ledger accounts Ledger accounts | Personal Account

| Impersonal account (Impersonal ledger)

Debtor Creditor Accounts Accounts (Debtor (creditor Ledger) ledger) To facilitate easy reference there are separate ledger. They are 18

Hotel Accountancy

(1) The Debtors ledger (2) Creditors ledger (3) Impersonal ledger as the debtors account arise out of credit sale, it is also known by the name “sales ledger”, similarly creditors ledger is also known as “Bought ledger”. The other name for the impersonal ledger is “general ledger”. Illustration From the following transactions of Mr. Lal, you are required to write up the journal, post the entries in the ledger account and balance the accounts at the end of the month and prepare trial balance. 2003 Jan 1 Lal commenced business with furniture Rs 1000, stock rs 6000 and cash Rs 3000 Jan 2 purchase from Sal Rs 600 Jan 4 Sold goods for cash Rs 3000 Jan 5 Returned goods to Sal Rs 700 Jan 7 Purchased goods fro cash Rs 3000 Jan 8 sold goods to Raja Rs 4000 Jan 11 Raja returned goods Rs 600 Jan 13 Paid cash to Sal Rs 2060 and allowed discount Rs 40 Jan 15 sold goods to Balaram Rs 2600 Jan 17 received cash from raja Rs 1080 and allowed discount Rs 20 Jan 18 purchased stationery Rs 300 Jan 19 received cash from Balaram Rs 1600 Jan 21 Sold old furniture for cash Rs 100 Jan23 Paid commission Rs 100 Jan 25 Sal withdrew cash Rs 1000 Jan 27 Paid salary Rs 900 and office rent Rs 300 Jan 30 Postage stamp purchased for Rs 50 Jan 31 received cash from Balaram Rs 1000 Solution: Journal Date Jan 1

Jan2

Jan 4

Jan 5

Jan 7

Jan 9

Jan 11

Jan 13

Particulars Furniture A/c Dr Stock A/c Dr Cash A/c Dr To Capital A/c Cr (being the assets bought in as capital) Purchase A/c Dr To Sal’s A/c Cr (being the goods purchased on credit) Cash A/c Dr To Sal’s A/c Cr (being the goods sold for cash) Sal’s A/c Dr To purchase return A/c Cr (being the goods returned to Sal) Purchase A/c Dr To Cash A/c Cr (being the goods purchased for cash) Raja’s A/c Dr To cash A/c Cr (being the the goods sold on credit to Raja) Sales Returns A/c Dr To Raja’s A/c Cr (being the goods returned by Raja) Sal’s A/c Dr

L.F

Debit (Rs) 1000 6000 3000

Credit (Rs)

10000 6000 6000 3000 3000 700 700 3000 3000 4000 4000 600 600 2100

19

Hotel Accountancy

Jan 15

Jan 17

Jan 18

Jan 19

Jan 21

Jan 23

Jan 25

Jan 27

Jan 30

Jan31

To Cash A/c Cr To Discount A/c Cr (being the cash paid to Sal and discount Allowed to us) Balaram’a A/c Dr To Sales A/c Cr (being the goods sold on credit to Balaram) CAs A/c Dr Discount A/c Dr To Raja’s A/c Cr (Being the entry for cash received from Raja and discount allowed) Stationery A/c Dr To Cash A/c Cr (being the stationery purchased) Cash A/c Dr To Balaram’s A/c Cr (being the cash received from Balaram) Cash A/c Dr To furniture A/c Cr (being the sale of furniture) Commission A/c Dr To Cash A/c Cr (being the commission paid) Drawings A/c Dr To Cash A/c Cr (being the drawings made by the proprietor) Salary A/c Dr Rent A/c Dr To Cash A/c Cr (being the salary & rent paid) Postage A/c Dr To Cash A/c Cr (Being the purchase of postage stamps) Cash A/c Dr To Balaram’s A/c Cr (being the cash received from Balaram)

2060 40

2600 2600 1080 20 1100 300 300 1600 1600 100 100 100 100 1000 1000 900 300 1200 50 50 1000 1000

LEDGER NO 1 Debtor’s Ledger Page 1 Raja’s Account Dr. Date 2003 Jan 9

Feb 1

Particulars To Sales A/c

To balance b/d

J Amount F ( Rs) 4000

_____ 4000 2300

Date 2003 Jan 11 17 17 31

20

Particulars By Sales return A/c By Cash A/c By Discount A/c By balance c/d

Cr. J Amount F ( Rs) 600 1080 20 2300 4000

Hotel Accountancy

Page 2 Balaram’s A/c Dr. Date 2003 Jan 15

Particulars To Sales A/c

J Amount F ( Rs) 2600 _____ 2600

Date 2003 Jan 1

Particulars

31

By Cash A/c

By Cash A/c

Cr. J Amount F ( Rs) 1600 1000 2600

LEDGER NO 2 Creditor’s Ledger Page 1 Sad’s A/c Dr. Date 2003 Jan 5 5 31

Particulars To Purchase Return A/c To Cash A/c To Discount A/c To balance c/d

J Amount F ( Rs) 700

Date 2003 Jan 2

Particulars By Purchase A/c

2060 40 3200 6000 Feb 1

By balance b/d

Cr. J Amount F ( Rs) 6000

_____ 6000 3200

LEDGER NO 3 General Ledger Page 1 Furniture A/c Dr. Date 2003 Jan 1 Feb 1

Particulars To Capital A/c

To balance b/d

J Amount F ( Rs) 1000 _____ 1000 900

Date 2003 Jan 21 31

Particulars By Cash A/c By balance b/d

Cr. J Amount F ( Rs) 100 900 1000

Page 2 Stock A/c Dr. Date 2003 Jan 15

Particulars To Capital A/c

To balance b/d

J Amount F ( Rs) 6000

Date 2003 Jan 31

_____ 6000 6000

Particulars By balance c/d

Cr. J Amount F ( Rs) 6000 _____ 6000

21

Hotel Accountancy

Cash A/c Dr. Date 2003 Jan 1 4 17 19 21 31

Feb 1

Particulars To Capital A/c

J Amount F ( Rs) 3000

Date 2003 Jan 7

Particulars

By Sad’s A/c By Stationary A/c By Commissions A/c By Drawings A/c By Salary A/c By Rent A/c By Postage A/c By Balance c/d

To Sales A/c To Raja’s A/c To Balaram’s A/c

3000 1080 1600

5 23 25

To Furniture A/c To Balaram’s A/c

100 1000

25 27 31

To balance b/d

_____ 9780 2070

By Purchase A/c

Cr. J Amount F ( Rs) 3000 2060 300 100 1000 900 300 50 2070 9780

Page 4 Capital A/c Dr. Date 2003 Jan 31

Particulars To balance c/d

J Amount F ( Rs) 10000 _____ 10000

Date 2003 Jan 1 1 1

Particulars By Furniture A/c By Cash A/c By Stock A/c

Feb 1

By balance b/d

Cr. J Amount F ( Rs) 1000 3000 6000 10000 10000

Page 5 Purchase A/c Dr. Date 2003 Jan 2 7 Feb 1

Particulars To Sad’s A/c To Cash A/c To balance b/d

J Amount F ( Rs) 6000

Date 2003 Jan 31

3000__ 9000 9000

Particulars By balance c/d

Cr. J Amount F ( Rs) 9000 _____ 9000

22

Hotel Accountancy

Page 6 Sales A/c Dr. Date 2003 Jan 31

Particulars To balance c/d

J Amount F ( Rs) 9600

Date 2003 Jan 4 9 15

_____ 9600

Feb 1

Particulars By Cash A/c By Raja’s A/c By Balaram’s A/c By balance b/d

Cr. J Amount F ( Rs) 3000 4000 2600 9600 9600

Page 7 Purchase Return A/c Dr. Date 2003 Jan 31

Particulars To balance c/d

J Amount F ( Rs) 700 700

Date 2003 Jan 1

Particulars

Feb 1

By balance b/d

By Sad’s A/c

Cr. J Amount F ( Rs) 700 700 700

Page 8 Sales Return A/c Dr. Date Particulars 2003 Jan 31 To Raja’s A/c To balance b/d

J Amount F ( Rs) 600

Date 2003 Jan 31

Particulars By balance c/d

600 600

Cr. J Amount F ( Rs) 600 600

Page 9 Discount A/c Dr. Date Particulars 2003 Jan 31 To Raja’s A/c To balance c/d

J Amount F ( Rs) 20

Date 2003 Jan 31

Particulars By Sad’s A/c

20 40 Feb 1

23

By balance b/d

Cr. J Amount F ( Rs) 40 ____ 40 20

Hotel Accountancy

Page 10 Stationery Account Dr. Date Particulars 2003 Jan 18 To Cash A/c To balance b/d

J Amount F ( Rs) 300

Date 2003 Jan 31

Particulars By balance c/d

300 300

Cr. J Amount F ( Rs) 300 300

Page 11 Commission Account Dr. Date Particulars 2003 Jan 23 To Cash A/c To balance b/d

J Amount F ( Rs) 100

Date 2003 Jan 31

Particulars By balance c/d

100 100

Cr. J Amount F ( Rs) 100 100

Page 12 Drawings A/c Dr. Date Particulars 2003 Jan 28 To Cash A/c To balance b/d

J Amount F ( Rs) 1000

Date 2003 Jan 31

Particulars By balance c/d

1000 1000

Cr. J Amount F ( Rs) 1000 1000

Page 13 Salary A/c Dr. Date Particulars 2003 Jan 28 To Cash A/c To balance b/d

J Amount F ( Rs) 900

Date 2003 Jan 31

Particulars By balance c/d

900 900

Cr. J Amount F ( Rs) 900 900

Page 14 Rent A/c Dr. Date Particulars 2003 Jan 27 To Cash A/c To balance b/d

J Amount F ( Rs) 300

Date 2003 Jan 31

300 300

Particulars By balance c/d

Cr. J Amount F ( Rs) 300 300

24

Hotel Accountancy

Page 15 Postage A/c Dr. Date Particulars 2003 Jan 30 To Cash A/c To balance b/d

J Amount F ( Rs) 50

Date 2003 Jan 31

50 50

Particulars By balance c/d

Cr. J Amount F ( Rs) 50 50

5.2 Trial Balance 5.2.1 Introduction The financial results of the business are analyzed through preparation of financial statements like profit and loss A/c and the balance sheet. But before preparation of the financial statements it becomes necessary to analyze that the accounts are arithmetically accurate and they are verified through the preparation of trial balance. The preparation of trial balance serves this important purpose. It guaranties the fact that the accounts are fairly accurate. A trial balance is prepared out of the ledger account. We have already noted the fact that the ledgers follow the double entry concept and therefore fro every debit posting there is a corresponding credit posting. Therefore the debit totals of all the ledger accounts put together should be equal to the credit totals of all the ledger accounts. The debit total should balance itself with the credit total if there is no error in the postings and the totals are correctly made. If however it does not do so, the existences of errors is implied and efforts must be directed towards the rectification and thereby setting right the trial balance. In certain cases, the time factor is likely to weigh heavily against the detection of errors and the agreement of the trial balance. In all such cases, the trial balance must be tallied for the time being, by including in the ledgers and the trial balance, an account called the suspense account or Difference in the Books Account having a balance equal to the object in the Trial balance. As and when the errors are subsequently deleted this suspense account will be automatically written off. Objectives of preparing Trial Balance 1. It is a summary of the ledgers and therefore gives a clear picture relating to the ledgers. 2. It checks the arithmetical accuracy of the accounts and the errors relating to them become evident when the total of the debit is not equal to the total of the credits. 3. It is the basis of the financial statements because the preparation of the financial statements initiates from the process of the preparation of trial balance. Errors of Trial Balance It may happen that certain errors of the trial balance come to light through the preparation of the trial balance but there are certain errors as well that do not come to light through preparation of the trial balance. a) Errors not disclosed by trial balance i) Errors of total omission from the subsidiary books ii) Posting to the right side of the wrong account iii) Compensating errors, which exist together without affecting the agreement of the trial balance. iv) Errors in regard to the subsidiary book itself or the amount involved. In short any error in a subsidiary book, other than the one involving wring carry forward and totaling will not affect the agreement of the trial balance. b) Errors disclosed by the trial balance are: 25

Hotel Accountancy

i) Omission to post ii) Duplication of postings iii) Errors by way of wrong postings, to wrong side or of wrong amounts. iv) Totaling mistakes or the mistakes in carry forwards. Illustration Prepare the Trial Balance on the basis of Ledger A/c given as a illustration in ledger chapter-first illustration. Solution Trial Balance (as on 31st January , 2003) Particulars

Debit Amount(Rs.)

Raja’s A/c Sad’s A/c Furniture A/c Stock A/c Cash A/c Capital A/c Purchases A/c Sales A/c Purchase return A/c Sales return A/c Discount A/c Stationery A/c Commission A/c Drawings A/c Salary A/c Rent A/c Postage A/c TOTAL

2300

Credit Amount (Rs.) 3200

900 6000 2070 10000 9000 9600 700 600 20 300 100 1000 900 300 50 23520

23520

1) What is a Trial Balance and what purpose does it serve? 2) Trial Balance cheeks only the arithmetical accuracy of accounts. Is this true? If yes, how? 3) Prepare the trial balance from the following details: Particulars Rs Capital Account 50000/Freight 10000/Rent paid 9000/Motor lorry 14000/Petty Expenses 1040/Drawings 48000/Wages& Salary 17000/Trade Debtors 19000/Mortgage 2640/Advertising 2000/Carriage outward 2600/Purchase 210000/Office expenses 800/26

Hotel Accountancy

Trade expense Goodwill Cash on hand Stock (1-1-02) Sales Discount Received Building Roles paid Commission Received Bills payable

200/20000/500/20000/320000/11500/20000/4800/860/13940/-

(Ans:-Trial Balance total Rs 398940).

4. From the following Ledger Balance prepare a Trial Balance:-Bills Receivable Rs 1500/,Bad Debts Rs 140; Discount earned Rs 395; Rates, Taxes, and Insurance Rs 370,General expenses Rs 210, Sundry receipts Rs 30, Coal Rs 150, Manufacturing Expenses Rs 700, Sale Rs 16500, Bills Payable Rs 1400, Cash on deposit Rs 300, Cash on current Account Rs 700, Sundry Creditors Rs 6000, Planets Rs 1000, Office furniture Rs 800, Plant & Machinery Rs 2500 Drawings Rs 1500, Interest on deposit Rs 100, Rent earned Rs 50. Traveling expenses Rs 300, Discount allowed Rs 280, Office salaries Rs 1200, Gas& water Rs 180,Renewals & Replacement Rs 250,Purchase Rs 9600, Mortgage Loan Rs 800, Loan to Antario Rs 2000, Cash on hand Rs 95, Sundry Debtors Rs 7500, Patterns & Models Rs1200, Stock in Trade Rs 4500, Freehold property Rs 2000, Capital Rs 15000, (Ans:- Trial Balance Total Rs 39275) 5) Correction of wrong Trial Balance. Correct the following Trial Balance : Debit Balances

Amount Credit Balances Amount Rs Rs =============================================================== Return Outward 16000 Debtors 15000 Opening Stock 34200 Carriage Outward 5000 Salaries 12000 Capital 55200 Creditors 28000 Machinery 18000 Bank 6000 Return Inwards 3000 Carriage Inwards 3000 Discount Received 4000 Rent Received 2000 Trade Expenses 6000 Discount allowed 2000 Sales 140000 Purchase 100000 Building 20000 Bills Payable 20000 _____________________ 266200 ===================

________________ 266200 =============== 27