Accounting: Basic Records

• Whatever event transpires i the business, it must be possible to capture that event in the balance sheet in such a way that the liabilities ( Sources) and assets ( Uses) remain equal. It is based on the duality concept that the sources of funds must be always equal to the uses of funds
• The accounts maintained by a business organization are classified into three types:
  • Personal Accounts: It deals with the accounts of the individuals like the creditors, debtors, bank etc – the rule debit the receiver and credit the giver
  • Real Accounts: It represents assets like the plant and machinery, land and buildings, goodwill, etc – the rule debit whatever comes in and credit whatever goes out
  • Nominal accounts: It consists of different types of expenses or incomes or loss or profits – the rule debit all expenses and losses, credit all income and gains
• Recording the dual aspects of transaction is known as journalizing. A business organization maintains three important books of accounts:
  • Cash Book: To record cash receipts and payments including receipts and payments through a bank. A separate book is kept to record petty cash expenses. The petty cash book is recorded by imprest system
  • Journal: To record non cash transactions like credit sales, credit purchases, sales returns, purchase returns, year end adjustments if any. The journal is used as the book of first entry for all transactions which cannot be recorded in the cash book. These books are also called subsidiary books. Some of the subsidiary books are purchase book, purchase return book, sales book, sales return book, bills receivable book, bills payable book, journal book.
  • Ledger: A ledger is not an independent record. It contains a classified summary of all transactions recorded in cashbook and journal.
• The subject of final accounting is based on the double entry system of accounting using debits and credits. Cash transactions are entered in the cash book. Credit transactions ( Non cash) are entered in the journal. The transactions of cashbook and journal are integrated into the ledger which is a summary of all cash and credit entries. When all the ledger accounts are tabulated as a summary statement it is known as ‘Trial Balance’. Trial balance establishes the arithmetical accuracy of the accounting records. From the trial balance two separate accounting documents are produced mainly Profit and Loss account and Balance Sheet. All the income and expenditure is taken to Profit and Loss account. All assets and liabilities are taken to balance sheet.
• The net result of Profit and Loss account namely profit or loss is taken to Balance Sheet. Thus balance sheet tallies.
• Bank reconciliation statement is an aid used to ensure the accuracy of transactions appearing in the bank column of the cash book. A bank reconciliation statement helps in detecting the errors of omissions, wrong recording of transactions, delay in collections, reuces the chances of embezzlement, and helps in completion of the cash book.