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Recording of business transaction Recording of business transaction Chapter number -four.

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1 Recording of business transaction Recording of business transaction Chapter number -four

2 Journal Journal is a book of original entry in which business transactions are recorded date wise and serial wise according to double entry system. Journal is a book of original entry in which business transactions are recorded date wise and serial wise according to double entry system. “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 “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

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

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

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

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

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

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

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

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

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

12 CLASSIFICATION OF GOODS ACCOUNT Purchase account Purchase account Sales account Sales account Purchase return account Purchase return account Sales return account Sales return account

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

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

15 LEDGER

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

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

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

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

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

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

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

23 Method of preparing trial balance TOTAL METHOD TOTAL METHOD BALANCE METHOD BALANCE METHOD

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

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

26 Limitations of trial balance no guarantee of complete accuracy no guarantee of complete accuracy costly system costly system

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

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

29 CHAPTER NUMBER - 5

30 CAPITAL AND REVENUE ITEMS According to Cartor….. According to Cartor….. Capital 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. Capital 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.

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

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

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

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

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

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

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

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

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

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

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

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

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


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