Chapter 16-1. Chapter 16-2 CHAPTER 16 PROCESS COSTING PROCESS COSTING Accounting, Fouth Edition.
Chapter 5 Accounting Process
Transcript of Chapter 5 Accounting Process
Chapter Index
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Reference
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Slide
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1 Learning Objectives 3
2 Topic 1 Accounting Process 4-9
3 Topic 2 Debit and Credit Rules 10-12
4 Topic 3 Journal 13-16
5 Topic 4 Ledger 17-23
6 Topic 5 Subsidiary Books 24-30
Learning Objectives
Discuss and explain the process of accounting
Examine various stages in the accounting process
Describe the traditional approach for recording transactions
Explain the meaning of transaction analysis
Discuss the rules of debit and credit
Explain the meaning and format of a journal
Discuss the process of journalising
Discuss the process of ledger balancing
Examine the relation between a journal and a ledger
Describe various types of subsidiary books of accounts
Accounting Process
The accounting process starts when any financial transaction is made by an
organisation.
You can say that the main objective of this process is recording financial
transactions systematically and accurately in the journal and process them to
prepare financial statements.
The accounting process results in various financial statements, such as
balance sheet, profit and loss account and other statements.
The process of financial accounting involves a number of steps.
Stages in Accounting Process
The process of accounting starts with the identification of financial transactions.
Next, it records transactions in the books of accounts.
Then, the process classifies and summarises the information and prepares a trial
balance and financial statements.
Preparation of Trial Balance and Financial Statements
Posting to the Ledger
Recording Entries in the Books of Original Entry
Preparation of Vouchers
Identification of Financial Transactions
The steps involved in the accounting process are
Traditional And Modern Approach For Recording Transactions
According to the traditional approach, various accounts are classified as
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Personal Account
Natural Personal Accounts
Artificial Personal Accounts
Representative Personal Accounts
Real Account Tangible Real Accounts
Intangible Real Accounts
Nominal Account
According to the modern approach, all the accounts are classified under various heads
which are as follows:
Types of Accounts
Assets Liabilities Capital Account
Revenue Account
Expenses Account
Transaction Analysis
Every business organisation involves a large number of transactions on a daily basis,
for example, issue of shares, purchase of raw material, rent paid, wages paid, salary
paid, sale of finished goods, etc.
All these transactions lead to changes in three basic elements, which are assets,
liabilities and share capital.
Transaction analysis provides a clear view of the owner’s original investment by
applying an accounting equation.
An accounting equation shows a relationship between assets (valuable resources
owned by the organisation), liabilities (present obligations of the organisation) and
share capital (the owners’ equity required to operate a business).
This relationship can be expressed by a mathematical equation which is as follows:
Assets = Liabilities + Capital
This mathematical equation must be balanced to match the assets and liabilities side of
a balance sheet.
Debit and Credit Rules
Debit and credit are the most fundamental concepts of accounting, which represent two
sides of each transaction recorded in the books of accounts. As explained earlier, every
transaction has receiving and giving aspects.
The aspect of receiving (increase in assets) is known as the debit aspect and the aspect
of giving (decrease in assets) is known as the credit aspect.
The debit and credit aspects of a transaction form the basis of the double entry
bookkeeping system and are two opposite actions.
(Any Account Title)
Left side Right side
Debit Credit
Pattern of Recording the Debit and Credit in an Account are
Three Golden Rules of Accounting is shown in the Table
Accounts Debit Credit
Personal The receiver The giver
Real What comes in What goes out
Nominal All expenses and losses All incomes and gains
Increases (+) in assets are debits and decreases (–) in assets are credits.
Increases (+) in liabilities are credits and decreases (–) in liabilities are debits.
Increases (+) in capital are credits and decreases (–) in capital are debits.
Increases (+) in expenses/losses are debits and decreases (–) in expenses/ losses are credits.
According to the modern approach, the rules of debit and credit that are used to record
increases and decreases in balances of accounts are as follows:
Increases (+) in incomes/gains are credits and decreases (–) in incomes/gains are debits.
Journal
A journal refers to a primary book of accounts in which all transactions of a business
are recorded.
A journal can also be defined as a chronological record of business transactions.
The format of a journal is shown in Table
The process of recording a transaction in a journal is known as journalising.
Date Particulars L.F. Debit
Amount (Rs.)
Credit
Amount (Rs.)
Name of the debited account Dr. To
Name of the credited account
(Narration)
Format of Journal
Process of Journalising
We have mentioned that a journal entry is the basic record of
business transactions.
It becomes easy to journalise business transactions when you
understand the rules of debit and credit.
When you journalise a transaction, one account receives the
benefits and another account gives the benefits.
The steps are performed to enter a transaction in the journal are:
2. Ascertaining the nature of the account which is affected.
1. Ascertaining that the accounts are affected by the transaction.
3. Ascertaining the account to be debited and the account to be credited by
applying the rules of debit and credit.
4. Ascertaining the amount by which the accounts are to be debited and
credited.
5. Recording the date and month of the transaction in the date column and the
year at the top.
7. Recording the name of the account to be credited in the ―Particulars‖
column. The name of the account to be credited should be written in the
next line preceded by the word ―To‖. The word ―To‖ is written towards the
right after leaving a few spaces. Write the amount to be credited in the
―Credit Amount‖ column.
6. Recording the name of the account to be debited in the ―Particulars‖
column. Along with the name of the account, the abbreviation ―Dr.‖ should
also be written in the same line against the name of the account. Write the
amount to be debited in the ―Debit Amount‖ column.
8. Recording a brief description of the transaction starting from the next line in
the ―Particulars‖ column. This brief description of the transaction is termed
as narration.
9. Drawing a line across the ―Particulars‖ column to separate one journal entry
from the other.
Ledger
A ledger refers to a book or register in which financial transactions are permanently
recorded after being summarised and classified.
You need to arrange a ledger account under particular headings.
Ledgers help in preparing a trial balance, after which the final statement is prepared.
A ledger is also known as the principal book. Although a journal provides a complete
listing of the daily transactions of a business; it does not provide information about a
specific account in one place.
Each side is further divided into four columns.
The left side of the ledger is called the debit side, whereas the right side of the
ledger is called the credit side.
In a ledger, each account is divided into two sides—the debit side and the credit
side.
Format of a Ledger Account
Date Particulars J.F. Amount (Rs.) Date Particulars J.F. Amount (Rs.)
Dr. Name of Account Cr.
Parting transaction of a Journal to a Ledger
A ledger is often referred to as T-account due to its resemblance to the letter T.
The left side of the ledger is debit, whereas the right side is credit.
Transactions are posted to a ledger periodically, such as on a weekly or monthly
basis, according to convenience.
4. Similarly, posting the credited transaction of the journal entry on the debit
side of the account, which is debited in the journal entry.
5. Beginning the debit side with ―To‖ and the credit side with ―By‖.
2. Entering the date of a transaction in the ―Date‖ column.
3. Posting the debited transaction of the journal entry on the credit side of the
account. This is credited in the journal entry.
6. Entering the page number of the journal from where the transaction is
transferred to the ledger in the ―J.F.‖ column.
1. Creating the ledger accounts. These accounts are based on the accounts
recorded in the corresponding journal.
Perform the following steps to post transactions of a journal to a ledger:
Ledger Balancing
For example, if the credit side is greater than the debit side, the difference of
both sides is recorded in the debit side.
On the other hand, if the debit side is greater than the credit side, the difference
is recorded in the credit side.
Ledger balancing means totalling the amount of both sides (that is, the credit
side and the debit side) of the account and writing the difference to the side
whose total is less.
Following steps need to be performed to balance an account:
1. Calculate the amount of both the debit and credit sides of the account
separately.
2. Calculate the difference between both sides. If there is no difference, it
means that the balance is nil. If the total of the debit side is greater than the
total of the credit side, the difference is written on the credit side; and if the
total of the credit side is greater than the total of the debit side, the difference
is written on the debit side.
3. Type the balance as ―To Balance c/d‖, if the difference is on the debit side.
The word ―c/d‖ means carried down to the next period. Similarly, type
the balance as ―To Balance b/d‖ if the difference is on the credit side. The
word ―b/d‖ means brought down from an earlier period. A period refers
to any duration, such as a month or three months (quarterly), according to
convenience.
4. Calculate the credit and debit totals at their respective sides of the
account.
Relation between Journal and Ledger
The relation between a journal and a ledger can be described by
the following points:
Both the journal and the ledger are the books used for recording
transactions in a double entry accounting system.
A journal is prepared in chronological order, whereas the ledger is
prepared as an analytical record.
Recording activity starts with the passing of entries in the journal. The
ledger is the secondary book prepared from the journal.
In case of legal disputes related to financial transactions, the journal holds
more value than the ledger.
Subsidiary Books
In a real-life scenario, a large number of business transactions take place in an
organisation. Therefore, it becomes difficult to record all transactions in one prime book.
To overcome this difficulty, a separate book is maintained for similar types of transactions,
such as one book for receipts and payments of cash and another book for sales of goods
and their purchases.
Subsidiary books are prepared on the basis of the book of original entry.
As transactions are directly recorded in such subsidiary books, there would not be any
requirement of the journal entry or making entries in the book of original entry.
Cash Book
A cash book includes records of all the receipts and payments made by cash and
cheques.
The cash book, which is used to record cash as well as bank transactions,
is also known as cash book with bank column.
The cash book has two sides, namely the left side that records all cash receipts,
and the right side that records all cash payments.
The special feature of the cash book is that it functions as a journal and
a ledger with regard to the cash and bank transactions, respectively.
Purchase Book
Purchase book involves the records of the credit purchases of
goods.
The cash purchases of goods or the credit purchases of assets are
not recorded in this book.
The format of the purchase book is shown in Figure
Sales Book
Sales book involves records of all credit sales of goods.
Sales book does not record the cash sales of goods or credit sales of assets. It
is also known as sales journal.
The format of the sales book is shown in Figure
Purchase Returns Book
The purchase returns book includes the records of
the return of goods and materials
sent back to suppliers. It is also called the return
outward book.
The format of the purchase returns book is shown in Figure
The sales returns book includes the records of the returns of the credit sales
received back from customers. It is also known as the return inwards book.
The format of the sales return book is shown in Figure
Sales Returns Book
In the next chapter, you will learn about:
The concept of a trial balance
The primary objectives of preparing a trial balance
How to prepare a trial balance
Various limitations of a trial balance
Ways of rectifying errors of a trial balance
The preparation of final accounts of sole proprietorship firms
The journal entries for year-end adjustments
Till now, you have learned about:
The process of accounting
Various stages in the accounting process
The traditional approach for recording transactions
The meaning of transaction analysis
The rules of debit and credit
The meaning and format of a journal
The process of journalizing
The process of ledger balancing
The relation between a journal and a ledger
Various types of subsidiary books of accounts