Recording Of Transaction

Book-keeping, Accounting & Accountancy Book-keeping: - It is a simplest form of accounting, or we can say, it is the record-making phase of accounting. It records the financial data relating to the business operations in a significant and orderly manner. It covers the following:    

Identifying the transactions and events; Measure them; Record them in proper books of accounts; and Classify them in proper Ledger.

Accounting: - Accounting is that language of business through which a business house communicates with the outside world. It is the process of recording financial transactions in a proper format. The main objective of accounting is to reflect the true and fair picture of profitability and financial position which helps management to take corrective actions and future decisions. In addition to the functions of book-keeping, accounting covers the following:  Summarizing the classified transactions in the form of income statements and position statements;  Analyzing and interpreting the summarized results; and  Communicating the interpreted information to the interested parties. Thus we can say, accounting is a service-based and measurement discipline.

Accountancy: - It refers to a systematic knowledge of accounting. It explains the reasons and the processes of accounting.

Book-keeping (Record keeping phase of accounting)

Accounting (Refers to the actual process of preparing accounts)

Accountancy (Refers to a systematic knowledge of Accounting)

Golden Rule Of Accounts Keeping in view the previous classification of Accounts, the rules of DEBIT and CREDIT are summarized below :-

Types of Accounts

Personal Accounts

Real Accounts

Nominal Accounts

DEBIT

The Receiver

What comes in

All expenses and loses

CREDIT

The giver

What goes out

All incomes and gains

Useful Fundamental Equations of Accounting :• Increase in asset-- debit, decrease in asset-- credit • Increase in asset-- debit, decrease in liability– credit • Decrease in asset-- credit, increase in asset– debit • Increase in liability-- credit, decrease in liability-debit

Recording of Transaction The recording of transactions in the books of accounts may be represented as follows :Recording of Transaction Cash Transaction Recorded in Cashbook

Non-Cash Transaction Recorded in Journal

Ledger (Classified summary of all Transaction)

Journal A journal records all daily transactions of a business in the order of their occurrence. A journal may, therefore, be defined as a book containing a chronological record of transactions. It is a book in which transactions are recorded first of all under the double entry system. Thus, journal is a book of the original records. A journal does not replace but precedes the ledger. The process of recording transactions on the basis of rules of double entry system in a journal is termed as “journalizing.” The record of a business transaction in journal is called journal entry. The proforma of a journal is as follows: In the books of……………… Journal entries for the month / period of ……… Date Particulars L/F Dr (Rs) Cr (Rs)

Advantages of Journal The recording of business transactions in journal book on the basis of double entry system has following advantages: 1. Complete Information about the Business The journal gives complete information about business transactions in a chronological order. Accounts to be debited and credited are recorded at once in one place. 2. Explanation of the Transaction An entry in the journal book includes a brief explanation of the transaction called narration. 3. Minimum Errors Double entry system used for recording is clearly visible in journal as both debit and credit aspects are recorded at one place. It also makes posting into ledger accounts easier. This ultimately reduces possibility of errors.

Ledger Ledger contains a classified summary of all transactions recorded in cashbook and journal. It is the main book of account. Ledger can also be called Principal book as final information pertaining to the financial position of a business emerges only from the account. Steps in ledger posing : Enter the date of the transaction in the left-hand side of the A/c  Particulars column records the title of the other account affected  Journal folio (J/F) column records the page number of the journal from which the posting to the ledger has taken place  Amount column records the amount mentioned in the journal against title of the account under consideration For posting of the account to be credited, above mentioned steps are followed but with one difference. Name of the a/c in particulars column on the debit and credit side are preceded by the words ‘To’ and ‘By’ respectively.

Cash received from Geet & Co. of Rs.1000/- on 7/1/2008 Date

Particulars

L/F Dr (Rs)

7/1/08 Cash A/c Dr To Geet & Co A/c (being cash received from Geet & Co)

Cr (Rs)

1000 1000

Cash A/c Dr Cr Date

Particular

J/F

7/1/08 To Geet & Co

Amount

Date

Particular

1000

31/1

By balance c/d

J/F Amount 1000

Geet & Co A/c Dr Date Cr

Particular

31/1

To balance c/d

J/F

Amount

Date

Particulars

1000

7/1/08

By Cash A/c

J/F

Amount 1000

Trial Balance A Trial Balance is a statement compiled at the end of a specific accounting period. It is a summary of all the General Ledger Balances outstanding as a particular date. All the debit balances from the ledger are shown on one side and all the credit balances are shown on the other side. A Trial Balance is a five-column schedule listing the names and balances of all the ledger a/cs. The different columns of the Trial Balance are:  Serial number  Heads of Accounts  Ledger Folio  Debit balance, and  Credit balance. A debit balance in a general ledger account indicates an excess of debit side over the credit side of the ledger. Similarly, a credit balance in a general ledger account indicates an excess of credit side over the debit side.

Errors Disclosed by a Trial Balance The disagreement of a Trial Balance indicates the presence of one or more of the following errors in the books of accounts.  Omission to post an Amount in the Ledger :- If a cash receipts of Rs.500 from Mr.X has been properly recorded in Cash Book, but has not been posted in X’s a/c, the Trial Balance will fall short by Rs.500. 

Debit or Credit Entries are not posted at all or Posted Twice :- If stationery purchased on credit from Mr.Y for Rs.300 has been properly recorded in the stationery a/c but not in the account of Y, the Trial Balance will fail to agree. Similarly, if Y’s a/c is correctly credited but stationery a/c has been wrongly debited twice, the trial balance will not agree.

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Debits are wrongly Posted as Credits and Vice-Versa :- If a cash receipts of Rs.1000 as interest is properly debited in the cash book but has been recorded on the debit side of the interest a/c by mistake, then credit side of the Trial Balance will fall short by Rs.2000.

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Wrong Totaling of Subsidiary Books :- If the total of nay subsidiary books has been cast wrongly, it will cause a disagreement in the trial balance.

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Difference in Amount between the Entries :- If different values of an item are posted in two different accounts, the Trial Balance will not agree.

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Errors in the Computation of an Account Balance :- If the balance of an account is not correctly computed, the balance of the ledger will not show the true position and will cause disagreement of the Trial Balance.

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Omission of Account Balance :- If the balance an account is not listed in the Trial Balance at all, it will fail to agree.

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Balance of an Account Wrongly Recorded in the Trial Balance :- If the balance of an account is wrongly recoded in the Trial Balance, it will not agree. If the balance of purchase a/c of Rs.1000 has been wrongly posted as Rs.100 in the Trial Balance, the debit side of Trial Balance will fall short by Rs.900.

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Errors in Extraction of the Trial Balance :- The Trial Balance will not tally if any or both the columns are wrongly totaled.

Errors Not Disclosed by a Trial Balance 

Errors in Omission :- If a particular transaction is omitted altogether from the journals, it will not disturb the agreement of the Trial Balance.

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Errors of Principle :- This type of error arise because of an incorrect application of the principles of accounting.

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Compensating Errors :- These are a group of errors, the total effect of which is not reflected in the Trial Balance. One error is compensated by another error or by errors of an opposite nature.

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Recording Wrong Amount in Journal :- If a transaction is wrongly recorded in the books of original entry and is subsequently carried through the ledgers. It will not cause any disagreement in the Trial Balance.

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Errors in Recording a Transaction on the Correct Side of a Wrong A/c :- If a transaction is recorded on the correct side of a wrong a/c, it will not cause a disagreement in the Trial Balance.