Chapter number four Recording of business transaction Journal

Chapter number -four Recording of business transaction

Journal l Journal is a book of original entry in which business transactions are recorded date wise and serial wise according to double entry system. l “A journal is a book, employed to classify or sort out transactions in a form convenient for their subsequent entry in the ledger. ”………L. C. COPPER

FORMAT OF JOURNAL l Date|particulars|ledger l | | folio|dr. Rs. |cr. Rs. | |

RULES OF JOURNALISING l PERSONAL ACCOUNT: l Rule. . ”Dr. the receiver, cr. The giver. ” l Example. . l Ravi a/c Dr. 2000 To cash 2000 (paid 2000 rs. to Ravi )

REAL ACCOUNT l Rule …. Debit what comes in , Cr. What goes out. l Example…. Computer was purchased for rs. 30000. l Entry …. computer account dr. 30000 To cash 30000 (being computer purchased for cash)

NOMINAL ACCOUNT l RULE…. . DR. ALL EXPENDITURES AND LOSSES, CR. ALL INCOMES AND GAINS. l Example…Rs. 2000 paid as salary. SALARY ACCOUNT DR. 2000 TO CASH 2000 ( being 2000 rs. Paid as salary )

DISCOUNT l MEANING. . it means received or paid less amount after deduction from purchase price. l Example. . Fan purchased at rs. 800 (print price rs. 1000) so discount received by customer is 200 Rs.

TYPE OF DISCOUNT TRADE DISCOUNTdiscount which is given for promoting sales at a certain percentage on sales. example. . A seller sold goods for rs. 20000 @10% It is not recorded in the books and deducted from invoice price. cash account dr. 18000 To sales 18000 l

Cash discount l The discount which is given to debtor by creditor for early payment of price of goods. l It is recorded. l It is a nominal account. l Discount allowed is a loss so debited l Discount received is a gain so credited.

DIFFERENCE BETWEEN TRADE DISCOUNT AND CASH DISCOUNT l l l Trade discount Given at the time of sales. Purpose-to increase the sales. Not recorded in the books. Deducted from the invoice prices. l l l Cash discount Given for early payment. Purpose-early payments. Recorded in the books. Not deducted from invoice price.

MEANING OF GOODS l THE THINGS WHICH ARE PURCHASED BY TRADER FOR THE PURPOSE OF RESALE AT A PROFIT. FOR THIS “GOODS ACCOUNT” IS OPENED.

CLASSIFICATION OF GOODS ACCOUNT l Purchase l Sales account return account

IMPORTANCE OF JOURNAL l l l To understand double entry system Less possibility of errors Date wise accounting Proof Helpful in formation of ledger

LIMITATIONS OF JOURNAL l Limited use l More useful for small businesses l Lack of business information

LEDGER

Meaning of ledger l The book in which a trader’s transcations are recorded in a classified , permanent record is called a ledger. l L. C. COPPER

Format of ledger dateparticularsj. f. amountdateparticularsj. f. a mount

Rules of posting l Name of account at the top l Two sides DR. and CR. Written at the top of account. l All the dr. with TO, all the cr. With BY l Writing of ‘account’ word with personal account is not compulsory.

Importance of ledger l It provides different information: E. G. : l How much goods sold l how much puchased l How much paid to others l How much received l Expenditure and income received l Profit or losses during a certain time.

Advantage of ledger l Helpful in preparing trial balance l Helpful in preparing final accounts l Knowledge of financial position l Overcoming the limitations of journal l Knowledge of business result.

Difference between journal and ledger l l l l Journal Book-priliminary Process-recording Narration Basis-ledger Final accounts-not prepared after it Datewise recording l l l l Ledger Book-main Process –posting No narration Basis- trial balance Final account prepared Recording account wise

TRIAL BALANCE l according to J. r. batliboi…. Trial balance is a statement prepared with the debit and credit balances of ledger acounts to verfy the airthmatical accuracy of the books. l

Method of preparing trial balance l l TOTAL METHOD BALANCE METHOD

ACCOUNTING ERRORS l Errors not disclosed by trial balance l 1} error of commision l 2}error of ommision l 3}error of principles l 4}wrong enteries in the books of original records l Compensating errors

Errors disclosed by trial balance l l l l l Wrong totaling wrong posting entering wrong amount double posting Wrong entry in trial balance ommision of any amount from trial balance Ommision of posting of one aspect of the entry Error in casting and balance of accounts Error in the total of trial balance

Limitations of trial balance no guarantee of complete accuracy costly system

Sub-division of journal l Cash book l Purchase book l Sales book l Purchase return book l Sales return book l Bills receivable book l Bills payble book l Journal proper

Suspense account l Suspence account is that account which tells about the gap between dr. and cr. balances of trial account when it is not matched.

CHAPTER NUMBER - 5

CAPITAL AND REVENUE ITEMS l According l Capital to Cartor…. . items are those items whose profit is received in many accounting years but revenue items are those items whose complete profit is received in related years.

CLASSIFICATION OF CAPITAL AND REVENUE ITEMS Capital expenditure and revenue expenditure l Capital receipt and revenue receipt l Capital losses and revenue losses l Capital profit and revenue profits

CAPITAL EXPENDITURE l Expenditure which are made to yields benefits over a long period and which are related to any fixed asset are called capital expenditure.

examples l Purchase of fixed assets l Exp. On expantion and modification of fixed assets. l On aquiring the right to carry business e. g. purchase of patent , goodwill l Acquiring of capital e. g. exp. On issue of shares, prospectus. l On establishment

REVENUE EXPENDITURE l Incurred for the operaton of business l Benefits of these for the current year l For smooth running of business

Examples l Incured for the operation of businesswages, salary legal exp. administrative exp. l On ordinery repairs of fixed assets to maintain the capacity l For production of goods or for resale of goods-cost of raw material, production exp. l Interest on loan l Depriciation on assets

Difference between capital and revenue exp. l l l Capital exp. Nature-related to fixed assets Accounting –assets side of balance sheet Profit-for many years for increase in profits To pay the capital liability Revenue exp l Routine exp. l Related to production And resale accounting –trading and profit and losses Profit-for current year Settlement of revenue liability l

DEFFERED REVEUE EXPENDITURE l EXPENDITURE- incurred in advance, l Benefits receive in future l Examplesl preliminary expences l advertisement expences l expences on issue of shares l expences on issue of debentures

CAPITAL RECEIPT AND REVENUE RECEIPT l CAPITAL RECEIPTSl amount received from fixed assets or investment. l Amount received by company from issue of shares. l Amount received as loan l Amount received as compensation from accident of assets

Revenue receipts l Amount received from sale of goods l Fees received from the services provided by the business l Interest and dividend received on investment l Routine incomes

Capital loss l Capital loss- which occurred in relation to fixed assets. e. g. l Loss from sale of fixed assets l Loss from accident of fixed asets l Losses not from normal nature

Reveue losses l Losses from the normal nature l from the normal operation l Loss from bad debts l Loss from destroy of goods l Loss from selling of goods l Froad by any employee l Theft of goods or cash

Capital profit and revenue profits l Profit from sale of fixed assets is capital profits. l Revenue profits-which are normally earned by business. e. g. l commission received l discount received l rent received

Business income l Meaning-remaining balance in a certain period after deducting operating expences. l measurement – l net worth method l profit and loss account method