Hotel Accountancy

Lesson 1
Financial Accounting:

Contents
1.1 Introduction
1.2 Need for Accounting
1.3 Objectives of Accounting
1.4 Functions of Financial Accounting
1.5 Bookkeeping V/s Accounting

Objective
The objective is to familiarize the students with due purpose of accounting. After going through
this section should be able to understand as to why should study the subject and its
importance in the long run.

1.1 Introduction
Recording the financial aspects of a transaction and event of a business enterprise refers to
accounting. Normally the financial aspects, when recorded relate to financial accounting,
whereas if the cost aspects of transactions are recorded it is called Cost accounting. Cost
accounting is used to analyze the costing information by the management for cost control
purposes whereas analyzing the financial aspects of the transactions and reporting them to the
shareholders is the financial accounting.

1.2 Need for accounting

Accounting is the language of the business. Language should always be lucid and easy to
communicate. Similarly accounting is a mode of communication to the interested parties, like
investors, creditors, proprietors, government and other agencies. The need for accounting is
felt not only by the businessmen but also by small grocer’s shop. It is essential for any
businessman to know:
1) What is the deployment of funds?
2) What he owns?
3) What he owes?
4) Where he has earned profit and where he has suffered loss?
5) What is his financial position?

The answers to all these questions are supplied to the small or big businessman through the
language of financial accounting, which has adequate communication power. Even a
housewife needs to record expenses and income of her household to track her financial
position.

1.3 Objectives of Financial accounting

Objectives of financial accounting can be:
1) To keep a record of transactions
2) To disclose the true and fair view of the state of a business
3) To disclose the operating results
4) To intimate the interested parties about the financial position of the business.

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1.4 Functions of Financial Accounting

The analysis of financial accounting provides the following function:

1) Recording: this function ensures that the transactions of financial nature are recorded
properly in the journal book. Depending on the type of transactions the journals are
further subdivided into purchase journal (records credit purchase of goods). Sales
journal (for recording credit sale of goods) etc. The number of subsidiary books to be
maintained is according to nature and size of the business.
2) Classifying: classification is concerned with systematic analysis of the recorded data,
with a view to group transactions or entries of a particular nature at one place. The
classification is done in the books called ledger. In this book, different pages contain
individual account-heads under which all financial transactions of similar nature are
collected. For example; there may be separate account heads fro traveling expenses,
printing & stationary, advertising etc.
All expenses under these head after being recorded in the journal will be classified
under separate heads in the ledger. This will help in finding total expenditures incurred
under different heads.
3) Summarizing: the various transactions are summarized in the final statements like trial
balance, income statement, and balance sheet. These summarized statements are
useful not only for the internal users but also the external end-users.
4) Interpretation: the recorded data is interpreted to analyze the profitability, growth and
financial condition of the business. This is useful to prepare the future course of action
for the business.

Accounting Information and Its Users

Accounting information is utilized by external and internal users, who are associated with the
management of the concern and can generate an effective output because of the information
so obtained.

Financial Statements

Internal user’s External users

1. Board of directors 1. Investors
2. Partners 2. Lenders
3. Managers 3.Suppliers
4. Officers 4.Govt. agencies
5. Employees
6. Customers

1.5 Book keeping v/s Accounting

Both these are synonymous terms for a layman but for a student of financial accounting they
are different from each other. Book keeping is an art of recording transactions chronologically.
A bookkeeper may keep all the record of a business or a minor segment and is mainly of
clinical nature, which is accomplished through electronic devices.
Accounting is designing the system for recording, classifying and summarizing the recorded
data and interpreting them for the external and internal users. The responsibility of the
accountant increases with the increase in the size of the firm. An accountant is required to
have conceptualized knowledge of accounting and analytical skills than compared to a
bookkeeper.

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Questions:
1. Define accounting. Explain the scope of accounting.
2. Explain the objective & function of financial accounting.
3. Elucidate the difference between book keeping and accounting.
4. What is the need for accounting?

Summary
Proper recording of financial transactions of an organization is called financial accounting. It is
important for the interested parties to know the actual condition of the business, which is
disclosed through the language of the business, i.e financial accounting. Recording,
classifying, summarization, interpretation are some of the core functions of financial
accounting. Bookkeeping is only recording the transactions, whereas recording and analyzing
the transactions are among the major functions of accounting.

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Lesson 2
Objective
This section is prepared to give an insight into the accounting principle.

Contents
2.1 Accounting concepts
2.2 Accounting conventions
2.3 Systems of bookkeeping
2.3.1 Accounting equation approach
2.4 Important accounting terms

Accounting principles are those defined parameters, which are universally followed for
recording accounting transactions.
These principles are necessary because in the absence of common principles every
accountant would formulate his/her own principle thereby rendering the comparison of results
of organizations impossible. In order to avoid such a chaotic situation it becomes mandatory to
formulate common set of principles for all organizations. These principles can be classified into
two categories: a) Accounting concepts (b) Accounting conventions

GAAP (Generally accepted accounting principles) they are the conventions, rules, and
procedures necessary to define accepted accounting practice at a particular time. They act as
the foundation for presentation of accounts. GAAP is a conventional phenomenon and that is
why it is generally accepted because they are evolved out of a experience, reason, custom,
usage and hence of practical necessity.

2.1 Accounting concepts

The term concept relates to those basic parameters on which the science of accounting is
based. The following are the important accounting concepts:
1. Business entity concept.
2. Going concern concept
3. Money management concept
4. Cost concept
5. Dual Concept.
6. Accounting period concept
7. Realization concept
8. Matching concept

Following are the important accounting conventions:

Business entity concept-

In accounting, business is treated as a separate entity from its owners. A distinction is made
between the personal and business transactions. Suppose a car dealer purchased a car for
his own use and another one for business purpose. The first transaction is shown as drawing
and the car bought for resale is shown as business transaction. Therefore the business and its
owner are treated as separate entities.
In the eyes of the law business and proprietor are two different legal entities. This makes it
possible for business to sue the proprietor or for that matter proprietor to sue the business.

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The capital belongs to the owner and is not payable to anyone still it is considered as a liability
of the business. The proprietor extends capital to the business and in return he receives profits.
So capital becomes a liability for the business towards the proprietor of the business. , that is
why Capital + Liability = Assets.
In case the private and the business transactions are not segregated, it will not be possible to
determine profitability of the concern.

Going concern concept –

It is presumed that the business will continue to exist forever. The values of the assets are
recorded at the price at which they are purchased and not at the market values. Since the
business is not assumed to be liquidated in the near future so the market value of the assets
has less significance. The concept implies that liabilities will be paid on maturity. The purchase
and sales made in the ordinary course of time are written off in the same year. Only the unsold
goods are taken to the next year as stock. The assets which are to be used over a period of
time for the purpose of generating revenues are taken to next year. They are written off over an
estimated period of time that is taken to be the life of the asset. This is only possible when
business is taken as continuing one.
The definition of capital and revenue expenditure becomes possible because of the going
concern concept. The benefit of expenditure for a shorter period of time and longer period of
time (normally amortized) is segregated because of the concept of going concern. Even the
income received in advance is taken to the next period because of this concept. An investor
will only invest money in the company only when he knows that the concern will continue.

Cost concept –

It states that the value of the asset is recorded on an objective basis and not on subjective
basis. Such as, if an asset is purchased it is not recorded on the purchase price and not on the
market price. This concept requires the uniform valuation of assets as in the absence of this
concept value of the assets will be recorded at different figures by different individuals. So this
concept is helpful in making truthful records. Thus the records become more reliable and
comparable.
Though assets are valued on the cost basis it does not mean that they are always shown at the
same figure. Every year this asset diminishes in value due to wear and tear, so these are
shown at cost less depreciation. The life of an asset is estimated and depreciation is based on
this basis. So, approximation can also be avoided from this concept.

Dual aspect concept:

Accounting system is based on dual aspect concept. It is based in the principle that for every
debit transaction there is a corresponding credit transaction. For every benefit provided by a
person there exists a receiver of the benefit. Suppose a person purchases an Elmira worth Rs.
10,000; he will get the object and part with the cash for the similar amount. Dual aspect
concept states that debit is always equal to credit. This concept has led to the formation of
double entry system of book keeping. This can be explained with the help of an example:
Mr. X started business with a Capital of Rs 10000. Cash will be debited and X’s capital
account will be credited. Capital = Cash
Rs 10000 = Rs 10000
If x purchases goods on credit for Rs 20000 the position becomes:

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Liabilities Side Assets Side

Capital +Creditors = Cash + Stock
10000+20000 = 10000+20000

Money Measurement concept-

Money is a matter of functions of four – a medium, a measure, a standard and a share. The
concepts state that transactions are recorded in accounting, which can be expressed in terms
of money.
As mentioned above money is a medium of exchange and a share of value, which make it
easier to value all the transactions in terms of money. If the value of the asset is not stated in
money terms the total asset or liability of the business cannot be determined.

Accounting period concept:

The concept states that the accounting is done for a specified period say fro six months or 1
year and the transaction related to that period are accounted for. Trading, profit & loss
account, and even the balance sheet is prepared for a specified period. The owners, creditors,
investors, govt. departments are interested in knowing the profitability at the end of the specific
financial period. Therefore accounting period concept refers to a set frame of time within which
all the financial transactions are recorded and disclosed to the stakeholders on the basis of
which dividends or taxes are paid.

Realization concept –

It applies to the sale of product or rendering of services as because in either of them revenue is
realized. As general principle revenue is considered to be realized when sale is made in case
of goods and when service is performed in case of service contracts. The sale is treated
when goods are delivered or title to goods is changed. Some people hold the view that cash
or near cash assets should be considered for the purpose of realization whereas some hold
the view that receipt of an asset in exchange constitutes realization.

Matching concept –

This refers to matching of cost to the revenue. The expenditure is matched against the
revenue and the difference is accepted as the profit. When business is taken as a going
concern then it becomes necessary to evaluate its performance periodically.
The revenue and costs of same period are matched, when income of a particular
accounting period is taken to profit & loss account then all expenses of that period whether
paid or not is also debited to profit and loss account.
The costs may be associated with particular product or services. In this case the revenue
eared from the sale of that product or revenue received for providing service is matched to
the cost of production of that product or service. There may be another situation where
revenue and cost can be determined according to an accounting period and not according
to a product. In such cases the costs are matched according to the period.

Accounting Convention

The conventions are those customs or traditions, which guide the accountant while preparing
the accounting statements. Some of the accounting conventions are as:

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1. Convention of consistency:
This convention states that same accounting principle should be based for preparing financial
statements for different periods. It enables the management to draw important conclusions
regarding the working of the concern over a longer period. It allows comparison in the
performance of different periods the concept of consistency does not mean that no change
should be clearly stated. It will enable the reader to analyze information recording to new
procedures.
If a change is made in an accounting procedure, this should be disclosed clearly, i.e change in
method of depreciation should be disclosed through a console.
2. Convention of Conservatism:
The convention of conservatism can be disclosed through a one liner as ‘Provide for all
possible losses and do not provide for possible incomes.’ The Convention states that
accounting policy should be conservative and should make provisions for possible losses so
that in times of contingency that acts as a cushion& should not hamper the working of the
business. If an anticipated loss is not provided for then if that loss actually occurs during the
course of the business then it would lead to withdrawal of money from the business i.e., the
capital gets depleted which leads to violation of capital maintenance.
3. Convention of Disclosure:
The convention states that for fair judgement of a person the financial statements, all the in
formations should be disclosed. Events occurring after the preparation of balance sheet but
before presentation of account should also be disclosed in the books.
4. Convention of Materiality:
This convention states that only the significant details should be recorded and the others
should be done away with. There is a thin line dividing the material & immaterial
events and it is the judgement of the accountant as to what he constitutes as material &
immaterial.
There is still fair amount of ambiguity about the material and immaterial events and the
convention of disclosure and convention of material seem to be contradicting each other.

SYSTEMS OF BOOK-KEEPING
Book- keeping is an art of recording transactions chronologically (Date wise). The recording of
transactions can be done in any of the following systems: -
1. Single Entry System: This system is normally followed by small businessman, as the
complete records of the transaction are not available. The system is not error-proof since it is
an incomplete double entry system where only the essential records are kept and therefore it
does bring to light the intricate details.
2. Double Entry System: This system actually records the dual aspects of transactions. If
somebody has sold a good then definitely there exists a person who has purchased that good;
the concept of ‘Loss of one is the gain of the others’ holds good to a large extent in this system.
The following accounting equation may very well explain the system: -
Proportion Owned by Business= Rights of the Creditors+ Rights of the Owner
Assets = Liabilities + Capital
Or, Assets – Liabilities = Capital

Accounting Equation approach

The resources of a business unit are provided by its proprietors and outsiders;

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The claim of the proprietor is known Capital while the contribution of the outsider is called
liabilities. The total assets of a business entity are equal to its Capital & Liabilities, that is
denoted by Capital + Liability = Asset
Suppose, Ram started business with Rs. 1, 00,000 cash. The accounting equation will be as
follows:-
Capital + Liability = Asset
Ram’s Capital cash
1, 00,000 1, 00,000

he buys furniture from S.K. & Co. on credit for Rs. 12,000. Now the accounting equation will
be as follows:
Capital + Liability = Asset
Ram’s Capital + S.K.& co cash + Furniture
1, 00,000+ 12,000 1, 00,000+ 12,000
Further suppose Ram buys for cash goods in trade for Rs. 50,000. The new equation will be :-
Capital + Liability = Asset
Ram’s Capital + S.K & .co cash + Furniture + Goods in trade
1, 00,000+ 12,000 50,000+ 12,000+50,000
[ Note : Because the goods were purchased in cash and therefore cash balance diminished
and goods in trade increased.]
Example of an accounting equation with respect to transactions of a business:
Assets = Liabilities + capital
1. PR starts business with cash Rs 100,000 100000 = 0 + 100000
2. Purchases goods on credit for Rs 2000 2000 = 2000 + 0
----------------------------------
New Equation 1, 02,000= 2000 + 102000
3. Purchased goods for cash Rs 10,000 (+) 10,000 = 0 + 0
(-) 10,000
------------------------------------------New Equation
1, 02,000 = 2000+1, 00,000
4. Purchased furniture for cash Rs 5,000 (+) 5,000
(-) 5,000 = 0 + 0
` ---------------------------------------------
New Equation 1, 02,000 =2000+100,000
5. Withdrew cash for private use Rs 7000 (-) 7000= 0 (-) 7000
-------------------------------------
New Equation 95,000=2000+93000
6. Paid to creditors Rs 1,000 (-)1000 =(-)1000+0
---------------------------------
New Equation 94,000=1000+93000

Important accounting terms

1. Capital & Revenue

Profit is result of economic activity of business and apparently it is the excess of what is
received i.e. income over what is paid i.e. expenses. Thus profit for a period means excess of

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income of the said period over expenses for that period. Now what constitutes income or
expenses for a period calls for attention.
Suppose a machine is purchased during a year. The cost of the machine cannot be regarded
as expense of the year of acquisition. The reason is, since the machine is expected to serve for
a number of years to come, the income generated by the use of the machine is likely to be
spread over number of future years. This means, the cost of the machine should likewise be
spread over a number of future years, preferably a proportion of income generated by the
machine. In the first year operations, when a great deal of equipment is purchased and
possibly the business done, this seems to be vital. However, this should not be taken to
suggest that, it is unimportant for other years.
Following above, an expenditure, benefit from which is not exhausted in short time, is spread
over the number of year during which the benefit is expected. These are called the capital
expenditure, as distinguished from other expense called revenue expenditure.
Capital expenditure is incurred in purchasing or constructing property which is intended to
assist in the production of profit, or in permanently improving, enlarging or extending existing
property, in order to increase it s profit earning capacity. It is the expenditure, the direct profit of
which will extend over general trading periods and which replaces cash by permanent asset.
Example of capital expenditure includes purchase or extension of buildings. The capital
expenditure is debited to concerned asset account.

Charge against profit/approximation of profit

Profit is excess of income over expense incurred to generate that income. Thus only such
expenses are to be deducted from income to arrive at profit and are called charges against
profit. Following this, cost of a machine is not charged against profit, but depreciation, which
represents wear and tear of the machine, through use in business in charge against profit.
Approximation of profit, are deduction from profit (note, charge are deduction form income) to
break the profit in different parts, e.g. transfer to reserve, representing profits retained in
business, share of profit of each partners, representing profit available for partners etc.
Charges against profits are debited in the income statement above the line i.e in
manufacturing/trading/ profit & loss a/c. appreciation on the other hand are debited below the
line i.e. in P&L Appropriation a\c .

3. Deferred revenue expenditure

The benefit of income expected from certain types of expenditure does not accrue immediately.
There is usually a “lag” between the expenditure and the income which it produces. In such
cases it is proper to charge only a part of the total cost to the current year’s profit and loss a/c,
carry the balance forward as deferred revenue expenditure, which will be charged to revenue
over the period during which the benefit is expected to be derived. For example, expenditure
on advertisement may be apportioned over say, four years in the proportion of benefits in each
of the said four years.
4. Non cash charges
Certain charges e.g provision for doubtful debts, depreciation etc, do not involve any of cash,
the difference between the two, called cash profit, represent net inflow of cash. However net
profit in cash minus non cash charges. Thus, non cash charges reduce profit availability for
drawings/dividends without reducing available cash. As a result of which, a part of available
cash can go out of business by way of drawings/dividend, and is retained in business.

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Summary
The universally accepted parameters are divided into accounting concepts and conventions.
Accounting concepts are basic accounting parameters that guide the accounting procedure
whereas accounting conventions are traditions which guide the accountants. Disclosure says
disclose the transactions and materiality says disclose material items, which are contradictory
in nature. The fundamental accounting equation of asset = capital + liabilities change after
every transaction but follows the double entry system of accounting. The capital and revenue
expenditure are differentiated on the basis of benefits and non-cash charges refer to non-
outflow of cash. The lag between the benefit and the expenditure is variated overtime is called
deferred revenue expenditure.

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Lesson 3

Accounting Standards

Objective:

Is to familiarize the standards with the basic accounting standards issued and to intimate them
about the prevailing guidelines regarding the accounting standards.

Contents

3.1. International Accounting standards

3.2 Accounting standards in India
3.2.1 Introduction
3.2.2 List of accounting standards in India

3.1 International Accounting Standards

The International Accounting Standard Committee (IASC) was formed in 1973. The leading
accounting institutes joined their hands to form the committee to lay out a systematic
accounting procedure namely Australia, Canada, France, Germany, Japan, Mexico,
Netherlands, U.K. & Ireland and U.S.A.
List of International accounting standards are: -
IAS1. Disclosure of Accounting Policies.
IAS2. Valuation & presentation of inventories in the context of the historical cost
system.
IAS3. Consolidated financial statement.
IAS4. Depreciation accounting
IAS5. Information to be disclosed in financial statements.
IAS6. Withdrawn
IAS7. Statement of change in financial position
IAS8. Unused & prior period items and changes in accounting policies.
IAS9. Accounting for research and development costs.
IAS10. Contingencies and events occurring after the balance sheet date.
The above is the list of first ten international accounting standards and the list goes on
to disclose 29 international accounting standards.

3.2 Accounting Standards in India

3.2.1 Introduction
In order to facilitate a better Presentation of accountants and to remove the ambiguity that
may arise on account of conflicting which states the presentation of accounts
should be ‘true and fair.’ Accounting standard board clarifies the concept of ‘true & fair
view’. (ASB). Of India which was formed on 21st April 1977 by Institute of Chartered
Accountants of India (ICAI).
The main function of ASB is to formulate different accounting standards after taking into
consideration the applicable laws, customs, usage and business environment.

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3.2.2 List of accounting standards

The Accounting Standards Board of the Institute of Chartered Accountants of India has
so far issued the following accounting standards:-

Sl. No. Accounting Title of the accounting standards

Standard
No.
1 AS – 1 Disclosure of Accounting policies( Mandatory on or after
1.4.1991)
2. AS – 2 Valuation of inventories
3. AS – 3 Changes in financial position
4. AS – 4 Contingencies and events occurring after the balance
sheet date ( Mandatory on or after 1.1.1987 )
5. AS – 5 Prior period and extraordinary items and change in
accounting policies ( Mandatory on or after 1.1.1987)
6. AS – 6 Depreciation accounting
7. AS – 7 Accounting for construction contracts ( Mandatory on or
after 1.4.1991)
8 AS – 8 Accounting for Research & Development ( Mandatory on
or after 1.4.1991)
9 AS – 9 Rename recognition ( Mandatory on or after 1.4.1991)
10 AS – 10 Accounting for fixed assets ( Mandatory on or after
1.4.1991)
11 AS – 11 Accounting for the effects of change in foreign exchange
rates( Mandatory on or after 1.4.1991)
12 AS – 12 Accounting for Govt. Grants ( Mandatory on or after
1.4.1994)
13 AS – 13 Accounting for investments ( Mandatory on or after
1.4.1995)
14 AS –14 Accounting for Amalgamations ( Mandatory on or after
1.4.1995)
15 AS – 15 Accounting for retirement benefits in the financial
statements of Employers ( Mandatory on or after
1.4.1995)
16 AS – 16 Borrowing costs ( Mandatory on or after 1.4.2000)
17 AS – 17 Segment reporting ( Mandatory on or after 1.4.2001)
18 AS -18 Related party disclosures ( Mandatory on or after
1.4.2001)
19 AS – 19 Leases ( Mandatory in respect of all assets leased
during accounting period commencing on or after
1.4.2001
20 AS –20 Earning for shares ( Mandatory on or after 1.4.2001)
21 AS – 21 Consolidated financial statements ( Mandatory on or
after 1.4.2001)
22 AS –22 Accounting for taxes on income( Refer note no 1. below)

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23 AS –23 Accounting for investments in associates in consolidated

financial statements ( Mandatory on or after 1.4.2002)
24 AS –24 Discontinuing operations (Effective & Mandatory on or
after 1.4.2004)
25 AS –25 Interior financial reporting ( Mandatory on or after
1.4.2002)
26 AS –26 Intangible assets ( Mandatory on or after 1.4.2003)
27 AS –27 Financial reporting of interests in joint
ventures( mandatory on or after 1-04-2002
28 AS –28 Impairment of assets (effective and mandatory on or
after 1-4-2004

Note
1. All the accounting periods commencing on or after 1-4-2001, in respect of the following:
i) Enterprises whose equity debt securities are listed on a recognized stock exchange
in India and enterprises that are in the process of issuing equity or debt securities
that will be listed on a recognized stock exchange in India as evidenced by the board
of directors’ resolution in this regard.
ii) All the enterprises of a group, if the parent presents consolidated financial
statements and the accounting standards is mandatory in nature in respect of any of
the enterprises of that group in terms of the (i) above.
2) All the accounting periods commencing on or after 01-04-2002 in respect of companies
not covered by (1) above.
3) All the accounting periods commencing on or after 1-4-2003 in respect of all other
enterprises

Lesson 4

Journal

Objective: The objective is to familiarize the students with the rules of debit and credit to get
them acquainted with the golden rules of journalism, classification of accounts and
passing the final journal entry in the books.

Contents:
4.1 Classifications of accounts
4.1.1 Rules of debit and credit
4.2 Journals

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4.1 Classification of accounts

Accounts

Personal account Impersonal account

e.g. XYZ Co A/c

Real account Nominal account

e.g. Cash, Furniture e.g. expense, loss gain

As the chart explains above, there is basically 3classifications of accounts i.e. personal
accounts, real accounts and nominal accounts

4.1.1. Rules of debit and credit

The rules of debit & credit are guided by three golden rules of accounting, i,e,
a. Debit the receiver, Credit the giver- Personal A/c
b. Debit what comes in, Credit what goes out- Real A/c
c. Debit expenses & losses, Credit incomes & gains – Nominal A/c
Normally to record the transactions the first criteria is to find out the two accounts affected.
Then it becomes necessary to clarify the amount and determine whether it belongs to
Personal, Real or Nominal A/c. Finally, using the rules a particular A/c is debited or credited.

Example 1: Purchased goods for cash.

Two Accounts affected are: i) Goods A/c ii) Cash A/c
Classify the Accounts:
i) Goods A/c – Real A/c ii) Cash A/c – Real A/c
Nature of transaction is: Goods come in, Cash goes out.
Using the rules of Real A/c ‘What comes in is debited & what goes out is debited.’ So,
Goods A/c is debited and as the cash goes out, the cash A/c is credited.
Example 2: Sold goods for cash.
Goods go out , Cash comes in.
Goods A/c – Credit (Real A/c)
Cash A/c – Debit (Real A/c)
Example 3: Purchased goods from X
Goods come in – X is the giver.
Goods A/c – Debit, X A/c – Credit
Example 4. Received cash for interest
Cash comes in, Interest is an income
Cash A/c – Real A/c, Interest A/c – Credit (Nominal A/c)

4.2 Journal
A Journal records the daily transaction in the order in which they occur. It is the book
under which the transactions are recorded first of all under the double entry system.
Ledger follows after a transaction is recorded I the journal.

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Date Particulars L/F Debit Credit

A B C D E

A) Date: the date on which the transaction takes place is recorded here.
B) Particulars: the two aspects of the transaction recorded in this column, i.e. the details
regarding the accounts, which have to be debited and credited.
C) L.F: I t means ledger folio. The transactions entered in the journals are later on posted
in the ledger.
D) Debit: the amount to be debited is entered.
E) Credit: the amount to be credited is entered.

Notes
1. When trader purchases different articles for resale then all the different articles are
grouped into a single item called ‘purchase’. If a chair and a table is purchased then it
can be grouped into a single item called ‘furniture’.
2. Instead of passing two journal entries it is possible that a single journal entry can be
passed. E.g.

Date Particulars L/F Debit Credit

A B C D E
Salary A/c Dr 300
To cash 300
(Being the
salary paid)
Purchase a/c
Dr 700
To Cash 700
(Being the
purchase
made)

These two entries may be combined in the following form:

Date Particulars l/f Debit Credit
A B C D E
Salary A/c Dr 300
Purchase A/c Dr 700
To cash 1000
(Being the salary paid
& purchase made)

Note: i) The date of the transaction has to be same when the combined entry is passed
ii) Either the debit or the credit for the two transactions should be for the same a/c.

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Illustration :

Journalize the following transactions in the books of a trader.

Debit balance on Jan 2003:
Cash in hand Rs 8000, cash at bank Rs 25000, stock of goods Rs 20000, furniture Rs 2000,
buildings Rs 10000, sundry debtors – Ankit (Rs 2000), Rohit (Rs 1000) and Sweta (Rs 2000)
Credit balance on Jan 2003:
Sundry Creditors - Rishi (Rs 5000), loan from Bina Rs 10000
Following were the further transactions in the month of Jan 2003:
a) Jan 1, purchased goods Worth Rs 5000 for cash less 20% trade discount and 5%
cash discount.
b) Jan 4 – received Rs 1980 from Ankit and allowed him Rs 20 as discount

Solution

Sl. Date Particulars L.F Debit (Rs) Credit (Rs

No
1 01/01/03 Cash A/c Dr 8000
Bank A/c Dr 25000
Stock A/c Dr 20000
Furniture A/c Dr 2000
Building A/c Dr 10000
Ankit A/c Dr 2000
Rohit A/c Dr 1000
Sweta A/c Dr 2000
To Rishi A/c 5000
To Bina’s loan A/c 10000
To capital A/c 55000
(being balances brought
forward
From last year)
2 01/01/03 Purchased A/c Dr 4000
To cash A/c 3800
To discount 200
(being goods purchased for
Cash worth Rs 5000 allowed
20% trade discount and 5%
cash
Discount on Rs 4000
3 04/01/03 Cash A/c Dr 1980
Discount A/c Dr 20
To Ankit A/c 2000
(Being cash received from
Ankit
Allowed Rs 20 as discount)
Total 76000 76000

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Lesson 5
Ledger and Trial Balance
Objective:

The concept of transferring form journal to ledger and how an account is balanced in
ledger. Trial balance preparation and the purpose of preparing the same.

Concept:
5.1 Ledger
5.1.1Introduction
5.1.2 Ledger posting
5.1.3 Rules regarding posting
5.1.4 Classification of ledger accounts
5.2 Trial balance
5.2.1 Introduction
5.1 Ledger

5.1.1 Introduction

This is a book of ultimate entry, contains details of pecuniary transactions. The word ‘ledger’ is
derived from the word ‘ledger’. The prime entry made in the journal books is ultimately
recorded in the ledger. The method of entering the transactions from the journal to the ledger is
known as posting. The ledger is classified into personal ledgers and impersonal ledgers which
contains all other accounts. Fictitious and nominal accounts are maintained in the nominal
ledger, which is also a subdivision of impersonal ledger. A type of general ledger is also in
vogue which homes all other accounts like property or real accounts. It is also customary to
subdivide the ledger or personal ledger, general ledger and nominal ledger.
First of all, opening entry should be posted as it indicates the balance with which assets and
liabilities start the new period. The way to post the opening entry is to write on the debit side of
various assets (which have to be debited according to the opening entry). ‘to balance brought
down’ or just to ‘balance forward’ and then enters the amount against this. In the case of
liabilities and capital accounts, the entry is ‘by balance brought down’ or just ‘by balance
brought forward’ and then the amount is written against it.
The ledger rulings are as follows:
Dr. Cr.
Date Particulars JF Amount Dat Particulars JF Amount
e

The ledger is a very valuable record of great importance and significance. The entries made in
it cannot be scrumptiously altered or erased. This is a questionable practice. If any correction
has to be done it is to be passed through a separate journal entry.

5.1.2 Ledger Posting

The term posting means transferring the debit and credit items form the journal to their
respective account in the ledger. Exact names are to be carried to the ledger. For example, if in
the journal, expenses account has been debited, it would not be correct to debit the office
expenses account in the ledger, though in the journal, it might have been indicated clearly in
the narration that it is an item of office expense. The correct course would have been to record
the amount to the office expenses account in the journal as well as in the ledger. Posting may
be done at any time. However it should be completed before the financial statements are
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 Hotel Accountancy

prepared. It is advisable to keep the more active accounts posted to date. The examples of
such accounts are the cash account, personal accounts of various parties etc.
The bookkeeper from the journal to the ledger may do the posting by any of the following
methods:
i) He may take a particular side first, for example, he may take the debits first and make the
complete postings of all debits from the journal to the ledger.
ii) He may take a particular account and post all debits and credits relating to that account
appearing on one particular page of the journal. He may then take some other account and
follow the same procedure.
iii) He may complete postings of each journal entry before proceeding to the next entry. It is
better to follow the last method. One should post each debit and credit item as it appears in the
journal.
The ledger folio (L/F) column in the journal is used at he time when debits and credits are
posted to the ledger. The page number of the ledger on which the posting has been done is
mentioned in the L.F column of the journal.

5.1.3 Rules regarding posting

The following rules should be observed while posting transactions in the ledger from the
journal:
1) Separate accounts should be opened in the ledger for posting transactions relating to
different accounts recorded in the journal. For example, separate accounts may be opened for
sales, purchases, sales returns, purchases returns, salaries, rent, cash etc.
2) The relevant account, which has been debited in the journal, should also be debited in the
ledger. However, a reference should be made of the other account, which has been credited in
the journal. For example, for salaries paid, the salaries account should be debited in the ledger,
but references should be given of the cash account, which has been credited in the journal.
3) The relevant account, which has been credited in the journal, should also be credited in the
ledger. However, a reference should be made of the other account, which has been debited in
the journal. It will be credited in the ledger also, but reference will be given of the salaries
account in the ledger
“To and By”
It is customary to use words ‘to’ and ‘by’ while making postings in the ledger. The word ‘to’ be
used with the account which appears on the debit side of a ledger book. Double entry affect of
the transaction is maintained because for energy debit there assist a corresponding credit.
Classification of ledger accounts
Ledger accounts

| |
Personal Impersonal
Account account

(Impersonal ledger)

Debtor Creditor
Accounts Accounts
(Debtor (creditor
Ledger) ledger)

To facilitate easy reference there are separate ledger. They are

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 Hotel Accountancy

(1) The Debtors ledger

(2) Creditors ledger
(3) Impersonal ledger
as the debtors account arise out of credit sale, it is also known by the name “sales ledger”,
similarly creditors ledger is also known as “Bought ledger”. The other name for the impersonal
ledger is “general ledger”.

Illustration
From the following transactions of Mr. Lal, you are required to write up the journal, post the
entries in the ledger account and balance the accounts at the end of the month and prepare
trial balance.
2003
Jan 1 Lal commenced business with furniture Rs 1000, stock rs 6000 and cash Rs 3000
Jan 2 purchase from Sal Rs 600
Jan 4 Sold goods for cash Rs 3000
Jan 5 Returned goods to Sal Rs 700
Jan 7 Purchased goods fro cash Rs 3000
Jan 8 sold goods to Raja Rs 4000
Jan 11 Raja returned goods Rs 600
Jan 13 Paid cash to Sal Rs 2060 and allowed discount Rs 40
Jan 15 sold goods to Balaram Rs 2600
Jan 17 received cash from raja Rs 1080 and allowed discount Rs 20
Jan 18 purchased stationery Rs 300
Jan 19 received cash from Balaram Rs 1600
Jan 21 Sold old furniture for cash Rs 100
Jan23 Paid commission Rs 100
Jan 25 Sal withdrew cash Rs 1000
Jan 27 Paid salary Rs 900 and office rent Rs 300
Jan 30 Postage stamp purchased for Rs 50
Jan 31 received cash from Balaram Rs 1000

Solution:
Journal
Date Particulars L.F Debit (Rs) Credit (Rs)
Jan 1 Furniture A/c Dr 1000
Stock A/c Dr 6000
Cash A/c Dr 3000
To Capital A/c Cr 10000
(being the assets bought in as capital)
Jan2 Purchase A/c Dr 6000
To Sal’s A/c Cr 6000
(being the goods purchased on credit)
Jan 4 Cash A/c Dr 3000
To Sal’s A/c Cr 3000
(being the goods sold for cash)
Jan 5 Sal’s A/c Dr 700
To purchase return A/c Cr 700
(being the goods returned to Sal)
Jan 7 Purchase A/c Dr 3000
To Cash A/c Cr 3000
(being the goods purchased for cash)
Jan 9 Raja’s A/c Dr 4000
To cash A/c Cr 4000
(being the the goods sold on credit to Raja)
Jan 11 Sales Returns A/c Dr 600
To Raja’s A/c Cr 600
(being the goods returned by Raja)
Jan 13 Sal’s A/c Dr 2100

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 Hotel Accountancy

To Cash A/c Cr 2060

To Discount A/c Cr 40
(being the cash paid to Sal and discount
Allowed to us)
Jan 15 Balaram’a A/c Dr 2600
To Sales A/c Cr 2600
(being the goods sold on credit to Balaram)
Jan 17 CAs A/c Dr 1080
Discount A/c Dr 20
To Raja’s A/c Cr 1100
(Being the entry for cash received from Raja and discount
allowed)
Jan 18 Stationery A/c Dr 300
To Cash A/c Cr 300
(being the stationery purchased)
Jan 19 Cash A/c Dr 1600
To Balaram’s A/c Cr 1600
(being the cash received from Balaram)
Jan 21 Cash A/c Dr 100
To furniture A/c Cr 100
(being the sale of furniture)
Jan 23 Commission A/c Dr 100
To Cash A/c Cr 100
(being the commission paid)
Jan 25 Drawings A/c Dr 1000
To Cash A/c Cr 1000
(being the drawings made by the proprietor)
Jan 27 Salary A/c Dr 900
Rent A/c Dr 300
To Cash A/c Cr 1200
(being the salary & rent paid)
Jan 30 Postage A/c Dr 50
To Cash A/c Cr 50
(Being the purchase of postage stamps)
Jan31 Cash A/c Dr 1000
To Balaram’s A/c Cr 1000
(being the cash received from Balaram)

LEDGER NO 1
Debtor’s Ledger
Page 1
Raja’s Account
Dr. Cr.
Date Particulars J Amount Date Particulars J Amount
2003 F ( Rs) 2003 F ( Rs)
Jan To Sales A/c 4000 Jan By Sales return 600
9 11 A/c
17 By Cash A/c 1080
17 By Discount A/c 20
_____ 31 By balance c/d 2300
4000 4000
Feb To balance b/d 2300
1

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Page 2
Balaram’s A/c
Dr. Cr.
Date Particulars J Amount Date Particulars J Amount
2003 F ( Rs) 2003 F ( Rs)
Jan To Sales A/c 2600 Jan 1 By Cash A/c 1600
15
_____ 31 By Cash A/c 1000
2600 2600

LEDGER NO 2
Creditor’s Ledger
Page 1
Sad’s A/c
Dr. Cr.
Date Particulars J Amount Date Particulars J Amount
2003 F ( Rs) 2003 F ( Rs)
Jan To Purchase 700 Jan 2 By Purchase A/c 6000
5 Return A/c
5 To Cash A/c 2060
To Discount A/c 40
31 To balance c/d 3200 _____
6000 6000
Feb 1 By balance b/d 3200

LEDGER NO 3
General Ledger
Page 1
Furniture A/c
Dr. Cr.
Date Particulars J Amount Date Particulars J Amount
2003 F ( Rs) 2003 F ( Rs)
Jan To Capital A/c 1000 Jan By Cash A/c 100
1 21
_____ 31 By balance b/d 900
1000 1000
Feb To balance b/d 900
1

Page 2
Stock A/c
Dr. Cr.
Date Particulars J Amount Date Particulars J Amount
2003 F ( Rs) 2003 F ( Rs)
Jan To Capital A/c 6000 Jan By balance c/d 6000
15 31
_____ _____
6000 6000
To balance b/d 6000

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 Hotel Accountancy

Cash A/c
Dr. Cr.
Date Particulars J Amount Date Particulars J Amount
2003 F ( Rs) 2003 F ( Rs)
Jan To Capital A/c 3000 Jan 7 By Purchase A/c 3000
1
4 To Sales A/c 3000 5 By Sad’s A/c 2060
17 To Raja’s A/c 1080 23 By Stationary A/c 300
19 To Balaram’s A/c 1600 25 By Commissions 100
A/c
21 To Furniture A/c 100 25 By Drawings A/c 1000
31 To Balaram’s A/c 1000 27 By Salary A/c 900
By Rent A/c 300
By Postage A/c 50
_____ 31 By Balance c/d 2070
9780 9780
Feb To balance b/d 2070
1

Page 4
Capital A/c
Dr. Cr.
Date Particulars J Amount Date Particulars J Amount
2003 F ( Rs) 2003 F ( Rs)
Jan To balance c/d 10000 Jan 1 By Furniture A/c 1000
31
1 By Cash A/c 3000
_____ 1 By Stock A/c 6000
10000 10000
Feb 1 By balance b/d 10000

Page 5
Purchase A/c
Dr. Cr.
Date Particulars J Amount Date Particulars J Amount
2003 F ( Rs) 2003 F ( Rs)
Jan To Sad’s A/c 6000 Jan By balance c/d 9000
2 31
7 To Cash A/c 3000__ _____
9000 9000
Feb To balance b/d 9000
1

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 Hotel Accountancy

Page 6
Sales A/c
Dr. Cr.
Date Particulars J Amount Date Particulars J Amount
2003 F ( Rs) 2003 F ( Rs)
Jan To balance c/d 9600 Jan 4 By Cash A/c 3000
31
9 By Raja’s A/c 4000
_____ 15 By Balaram’s A/c 2600
9600 9600
Feb 1 By balance b/d 9600

Page 7
Purchase Return A/c
Dr. Cr.
Date Particulars J Amount Date Particulars J Amount
2003 F ( Rs) 2003 F ( Rs)
Jan 31 To balance c/d 700 Jan 1 By Sad’s A/c 700
700 700
Feb 1 By balance b/d 700

Page 8
Sales Return A/c
Dr. Cr.
Date Particulars J Amount Date Particulars J Amount
2003 F ( Rs) 2003 F ( Rs)
Jan 31 To Raja’s A/c 600 Jan By balance c/d 600
31
600 600
To balance b/d 600
Page 9
Discount A/c
Dr. Cr.
Date Particulars J Amount Date Particulars J Amount
2003 F ( Rs) 2003 F ( Rs)
Jan 31 To Raja’s A/c 20 Jan By Sad’s A/c 40
31
To balance c/d 20 ____
40 40
Feb 1 By balance b/d 20

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 Hotel Accountancy

Page 10
Stationery Account
Dr. Cr.
Date Particulars J Amount Date Particulars J Amount
2003 F ( Rs) 2003 F ( Rs)
Jan 18 To Cash A/c 300 Jan By balance c/d 300
31
300 300
To balance b/d 300

Page 11
Commission Account
Dr. Cr.
Date Particulars J Amount Date Particulars J Amount
2003 F ( Rs) 2003 F ( Rs)
Jan 23 To Cash A/c 100 Jan By balance c/d 100
31
100 100
To balance b/d 100

Page 12
Drawings A/c
Dr. Cr.
Date Particulars J Amount Date Particulars J Amount
2003 F ( Rs) 2003 F ( Rs)
Jan 28 To Cash A/c 1000 Jan By balance c/d 1000
31
1000 1000
To balance b/d 1000

Page 13
Salary A/c
Dr. Cr.
Date Particulars J Amount Date Particulars J Amount
2003 F ( Rs) 2003 F ( Rs)
Jan 28 To Cash A/c 900 Jan By balance c/d 900
31
900 900
To balance b/d 900

Page 14
Rent A/c
Dr. Cr.
Date Particulars J Amount Date Particulars J Amount
2003 F ( Rs) 2003 F ( Rs)
Jan 27 To Cash A/c 300 Jan By balance c/d 300
31
300 300
To balance b/d 300

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 Hotel Accountancy

Page 15
Postage A/c
Dr. Cr.
Date Particulars J Amount Date Particulars J Amount
2003 F ( Rs) 2003 F ( Rs)
Jan 30 To Cash A/c 50 Jan By balance c/d 50
31
50 50
To balance b/d 50

5.2 Trial Balance

5.2.1 Introduction
The financial results of the business are analyzed through preparation of financial statements
like profit and loss A/c and the balance sheet. But before preparation of the financial
statements it becomes necessary to analyze that the accounts are arithmetically accurate and
they are verified through the preparation of trial balance. The preparation of trial balance
serves this important purpose. It guaranties the fact that the accounts are fairly accurate.
A trial balance is prepared out of the ledger account. We have already noted the fact that the
ledgers follow the double entry concept and therefore fro every debit posting there is a
corresponding credit posting. Therefore the debit totals of all the ledger accounts put together
should be equal to the credit totals of all the ledger accounts. The debit total should balance
itself with the credit total if there is no error in the postings and the totals are correctly made.
If however it does not do so, the existences of errors is implied and efforts must be directed
towards the rectification and thereby setting right the trial balance. In certain cases, the time
factor is likely to weigh heavily against the detection of errors and the agreement of the trial
balance. In all such cases, the trial balance must be tallied for the time being, by including in
the ledgers and the trial balance, an account called the suspense account or Difference in the
Books Account having a balance equal to the object in the Trial balance. As and when the
errors are subsequently deleted this suspense account will be automatically written off.

Objectives of preparing Trial Balance

1. It is a summary of the ledgers and therefore gives a clear picture relating to the ledgers.
2. It checks the arithmetical accuracy of the accounts and the errors relating to them
become evident when the total of the debit is not equal to the total of the credits.
3. It is the basis of the financial statements because the preparation of the financial
statements initiates from the process of the preparation of trial balance.

Errors of Trial Balance

It may happen that certain errors of the trial balance come to light through the preparation of
the trial balance but there are certain errors as well that do not come to light through
preparation of the trial balance.
a) Errors not disclosed by trial balance
i) Errors of total omission from the subsidiary books
ii) Posting to the right side of the wrong account
iii) Compensating errors, which exist together without affecting the agreement of
the trial balance.
iv) Errors in regard to the subsidiary book itself or the amount involved. In short
any error in a subsidiary book, other than the one involving wring carry
forward and totaling will not affect the agreement of the trial balance.
b) Errors disclosed by the trial balance are:
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 Hotel Accountancy

i) Omission to post
ii) Duplication of postings
iii) Errors by way of wrong postings, to wrong side or of wrong amounts.
iv) Totaling mistakes or the mistakes in carry forwards.

Illustration
Prepare the Trial Balance on the basis of Ledger A/c given as a illustration in ledger
chapter-first illustration.

Solution
Trial Balance
(as on 31st January , 2003)

Particulars Debit Amount(Rs.) Credit Amount

(Rs.)
Raja’s A/c 2300
Sad’s A/c 3200
Furniture A/c 900
Stock A/c 6000
Cash A/c 2070
Capital A/c 10000
Purchases A/c 9000
Sales A/c 9600
Purchase return A/c 700
Sales return A/c 600
Discount A/c 20
Stationery A/c 300
Commission A/c 100
Drawings A/c 1000
Salary A/c 900
Rent A/c 300
Postage A/c 50
TOTAL 23520 23520

1) What is a Trial Balance and what purpose does it serve?

2) Trial Balance cheeks only the arithmetical accuracy of accounts. Is this true? If yes, how?
3) Prepare the trial balance from the following details:
Particulars Rs
Capital Account 50000/-
Freight 10000/-
Rent paid 9000/-
Motor lorry 14000/-
Petty Expenses 1040/-
Drawings 48000/-
Wages& Salary 17000/-
Trade Debtors 19000/-
Mortgage 2640/-
Advertising 2000/-
Carriage outward 2600/-
Purchase 210000/-
Office expenses 800/-

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 Hotel Accountancy

Trade expense 200/-

Goodwill 20000/-
Cash on hand 500/-
Stock (1-1-02) 20000/-
Sales 320000/-
Discount Received 11500/-
Building 20000/-
Roles paid 4800/-
Commission Received 860/-
Bills payable 13940/-

(Ans:-Trial Balance total Rs 398940).

4. From the following Ledger Balance prepare a Trial Balance:--

Bills Receivable Rs 1500/,Bad Debts Rs 140; Discount earned Rs 395; Rates,
Taxes, and Insurance Rs 370,General expenses Rs 210, Sundry receipts Rs
30, Coal Rs 150, Manufacturing Expenses Rs 700, Sale Rs 16500, Bills
Payable Rs 1400, Cash on deposit Rs 300, Cash on current Account Rs 700,
Sundry Creditors Rs 6000, Planets Rs 1000, Office furniture Rs 800, Plant &
Machinery Rs 2500 Drawings Rs 1500, Interest on deposit Rs 100, Rent earned
Rs 50. Traveling expenses Rs 300, Discount allowed Rs 280, Office salaries Rs
1200, Gas& water Rs 180,Renewals & Replacement Rs 250,Purchase Rs
9600, Mortgage Loan Rs 800, Loan to Antario Rs 2000, Cash on hand Rs 95,
Sundry Debtors Rs 7500, Patterns & Models Rs1200, Stock in Trade Rs 4500,
Freehold property Rs 2000, Capital Rs 15000,
(Ans:- Trial Balance Total Rs 39275)
5) Correction of wrong Trial Balance.

Correct the following Trial Balance :

Debit Balances Amount Credit Balances Amount

Rs Rs
===============================================================
Return Outward 16000 Debtors 15000
Opening Stock 34200 Carriage Outward 5000
Salaries 12000 Capital 55200
Creditors 28000 Machinery 18000
Bank 6000 Return Inwards 3000
Carriage Inwards 3000 Discount Received 4000
Rent Received 2000 Trade Expenses 6000
Discount allowed 2000 Sales 140000
Purchase 100000 Building 20000
Bills Payable 20000

_____________________ ________________
266200 266200
=================== ===============

27