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Basic Accounting Course

PREFACE

Accountants always play an important role in the progress of an economy of any country, as they are responsible for proper book keeping and implementation of effective financial controls. As a result of revolutionary changes due to development of Accounting Standards and techniques of Strategic Management, the accountant of today is also required to develop his role as a manager so as to play an effective role in the process of decision making for the achievement of organizational goals.

In view of the changes in International Scenario and the development work started in Afghanistan after the fall of Taliban regime, millions of dollars have been donated by the International Aid Agencies involved in the rehabilitation and reconstruction work. Therefore, it has become an essential need to manage these funds effectively and utilize them efficiently, so that ultimate goal of making the country prosperous could be achieved in a successful manner. To achieve this objective, need is felt to make an effort to enhance the professional skills and capabilities of all those, who are related to the field of finance and accounts and those who are willing to become finance professionals.

This study course is designed after considering the needs for both the on job account officers as well accountancy students and for others who want to choose accountancy as their career. Practical and theoretical aspects have been discussed simultaneously.

We have made every possible effort to cover most of the topics and the practical problems that may arise during course of their work. However, there is always room of improvement and the suggestions and recommendations to improve this manual and effective training shall be highly appreciated.

AIBM Team

This material has been developed for the beginners of CAT qualification by Arif Aziz (Director-AIBM).

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Basic Accounting Course

Chapter 01

INTRODUCTION

The origin of accounting as a social study can be traced back to very ancient days. Indeed it is as old as the beginning of the use of money itself. Indians and Romans were the ones who are reported to have the oldest accounting systems. The modern accountancy and book keeping evolved in twentieth century with the industrial revolution which made it necessary for the world to have uniform accountancy practices.

FIELDS OF ACCOUNTING ACTIVITIES:

Accountants are engaged in various types of employment at different levels. Few of the major sectors are discussed below:

PRIVATE/COMMERCIAL:

Accountants are employed in a number of organizations involving manufacturers, wholesalers, retailers, services firms, Non Government Organizations and Civil Society Organizations etc. Depending on the size of such organization, duties of the accountants vary from recording, reporting and analyzing to decision-making. Accountants can perform duties of internal auditor to examine the records and procedures with a view to safeguard assets, improve operational efficiency and effective implementation of internal controls and report to the management.

PRACTICING FIRMS:

Qualified accountants can also practice independently and render services to provide independent opinion on the financial statements of the entity’s business. The practicing accountants also work as consultants advising their clients on accounting system, Taxation and managerial services.

GOVERNMENT:

The accounting records maintained and the financial statements prepared by the Government departments differ to a large extent as compared to the book keeping and accounting practices of other organizations. Accountants are working at different positions in Government sector from operational level to high-level financial decision and policy makers.

DEFINITIONS:

ACCOUNTING:

Accounting is a broader term than bookkeeping. It calls for a greater understanding of records obtained from bookkeeping and an ability to analyze and interpret the information provided by bookkeeping record. Accounting involves recording of economic activities, which accompany the complexity, and uncertainty of business. Therefore,

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Basic Accounting Course

while preparing timely accounting statements, estimates and professional judgments must be made.

Accounting is defined as “the art of recording, classifying and summarizing in a significant manner and in terms of money transactions and events of a financial character, and interpreting the results thereof.”

BOOK KEEPING:

Bookkeeping is an activity concerned with the recording of financial data relating to business operations in a significant and orderly manner. Bookkeeping is the record- making phase of accounting. Bookkeeping can therefore, be defined as “The science and art of correctly recording in books of account all those business transactions that result in the transfer of money’s worth”.

BUSINESS:

Any activity done for the sake of earning profit.

BUSINESS ENTITY:

A business entity is an organization of persons to accomplish an economic goal. An

entity is defined as an undertaking under the control of a single management. This may

include a sole proprietor, a partnership firm, a company or a non-profit making organization.

TRANSACTION:

A transaction is any dealing expressed in monetary terms that affect the financial

position of a business unit. A transaction involves transfer of something of value

between two or more entities.

ACCOUNT:

Account is defined as a summarized and classified record of transactions. The transactions recorded are analyzed to show their effects. It is the summary of transactions relating to a particular person or a specific thing.

ASSET:

Anything possessed by a business that has some value or can result in the economic benefit to the entity can be termed as asset. Such as land, building, machinery, cash, debtors etc. Assets can be classified as fixed and current.

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Basic Accounting Course

LIABILITY:

Any claim against the assets of the business either by outsiders or owners is called liability.

PURCHASES:

Any item purchased for utilization in the operations and to be retained for a long term in business is called purchases. This may include goods, furniture, machinery, stationery

etc

SALES:

Any item sold to generate income, which may result in the inflow of economic benefits to the business entity. This may include sale of goods.

DEBTOR/CREDITOR:

A

person or business from which money or other economic benefit is owing/receivable

is

termed as Debtor while the person or business to which money or other economic

benefit is owing/payable is known as creditor.

OWNERS EQUITY/CAPITAL:

As the assets of the business belongs to owners and liabilities of business are their obligations. Thus, net of assets and liabilities is called as owners’ equity. Capital is the total investment/contribution of the owner in any business.

BUSINESS DOCUMENT / VOUCHER:

Each transaction is recorded in documents providing all the information of the transaction. Voucher is a documentary evidence to record the monetary amounts at which transactions are recorded and also that the transaction is properly authorized. There may be payment, receipt and journal vouchers.

ACCOUNTING PRINCIPLES:

A

generally accepted set of rules can provide a unity of understanding and also a unity

of

approach in the practice of accounting. Accounting principles can be divided into two

kinds:

a) Accounting Concepts

b) Accounting Conventions

a) ACCOUNTING CONCEPTS:

In developing the structure of accounting theory and to relate the theory to accounting practice, there are some agreed basic concepts.

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Basic Accounting Course

Following are the important accounting concepts:

1. Business Entity Concept

2. Going Concern Concept

3. Money Measurement Concept

4. Historical Cost Concept

5. Dual Aspect Concept

6. Periodicity Concept

7. Matching Concept

8. Realization Concept

9. Prudence Concept

BUSINESS ENTITY CONCEPT:

In accounting, business is treated as a separate entity from its owners. Accounts are prepared to give information about the business and not about those who own it. The distinction between the owner and the business unit has helped accounting in reporting profitability more objectively and fairly.

GOING CONCERN CONCEPT:

Accounting is based on the assumption that the business unit is to remain in operation in the foreseeable future in pursuit of its goals and objectives. Hence, it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations. This concept relates to the future which is, by definition, uncertain. Therefore, many factors can be used to determine whether a business unit is a going concern. Such as liquidity, capital structure, market and management ability.

MONEY MEASUREMENT CONCEPT:

Money has been adopted by the accounting system as its basic unit of measurement, as it is the monetary expression of economic events. In other words, an event that cannot be translated into monetary terms cannot be called a transaction and, therefore, cannot be recorded.

HISTORICAL COST CONCEPT:

It is a fundamental concept of accounting, which is based on the historical record of the transaction. Historical cost refers to the cost at the time of acquisition. This concept provides uniformity in accounting records under conditions of stable prices.

DUAL ASPECT CONCEPT:

This concept states that every time a transaction takes place, there is always a two- sided effect. This concept expresses the relationship that exists among assets, liabilities, and the capital, in the form of an accounting equation, which is expressed in the following simplest form as:

ASSETS

=

LIABILITIES

5

+

CAPITAL

Basic Accounting Course

PERIODICITY CONCEPT:

The periodicity concept requires that an income statement/profit & loss account and a balance sheet should be prepared at regular intervals. It is usually of a year. Since the going concern concept states that the business will keep functioning continuously, accountants choose some convenient segment of time to ascertain results for that period.

MATCHING CONCEPT:

Businesses are meant for profit earning. The ascertainment of the profit is the result of matching the revenue to its cost. The figure is obtained by deducting cost of production and other ancillary costs from the sale figure. Matching concept is mandatory for all going concern businesses whose performance needs to be evaluated periodically.

REALIZATION CONCEPT:

Revenue should be taken into account when realized.

PRUDENCE CONCEPT:

All losses present and anticipated should immediately be taken into account while revenues should only be taken when and only when they realize. The main theme behind this concept is to give a pessimistic view of the business performance.

b) ACCOUNTING CONVENTIONS:

Financial statements are prepared following certain traditions/customs. These traditions/customs are termed as accounting conventions.

Following are the important accounting conventions.

1. Disclosure.

2. Materiality.

3. Consistency.

DISCLOSURE:

Financial statements should disclose all material information to facilitate the stakeholders in proper understanding, evaluation and decision making.

MATERIALITY:

Materiality refers to the relative importance of an item or event. Those items and events, which have significant bearings on users decisions, should be reflected in the preparation of financial statements.

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Basic Accounting Course

CONSISTENCY:

All policies and procedures should remain unchanged from one accounting period to the other.

ACCOUNTING CYCLE:

Cycles shows complete sequence of accounting procedures which are repeated in same order during each accounting period. It includes recording transactions in the journal classifying the entries and posting in ledgers and the final stage is of summarizing where the financial statements are prepared to ascertain the profit or loss during a trading period and the financial position of the business on a specific date.

DOUBLE ENTRY BOOK KEEPING:

Double Entry Book keeping involves recording both aspects of the transactions (debit and credit). It ensures the completeness and accuracy of transactions.

FINANCIAL STATEMENTS:

Financial Statements are prepared to ascertain the financial position and evaluate the financial performance of a particular period.

A Financial Statement includes:

1. The balance sheet, which describes the overall financial position of an organization at a particular time.

2. The income statement describes the financial performance of a particular period.

3. Statement of changes in financial position describes the flow of funds and changes in financial position during a particular period.

ELEMENTS OF FINANCIAL STATEMENTS:

Balance Sheet comprises

1. Assets.

2. Liabilities.

3. Owner Equity/Capital.

Income Statement comprises:

4. Revenues

5. Expenses

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Basic Accounting Course

ASSETS:

Assets are the resources controlled by the organization as a result of past transactions, from which, the economic benefit is expected to flow to entity.

Accounting Treatment:

Debit: Increase in Assets. Credit: Decrease In Assets.

Classification:

Assets are further classified as:

Fixed Assets: These assets are used by the organization for a long period. Examples include Land, Building, Furniture, Vehicle, Computer, Generator, Photocopier, Electrical Equipment.

Current Assets: These assets are used by organization for a short period. Examples include Stock, Account Receivables, Cash, Bank, Prepayments, Advances, Deposits etc.

LIABILITIES:

A liability is a present obligation, arising from past transaction, the settlement of which is expected to result in outflow of resources from the entity embodying economic benefits.

Accounting Treatment:

Debit: Decrease in Liabilities:

Credit: Increase in Liabilities:

Classification:

Liabilities are further classified as:

LONG TERM: Those liabilities, which are expected to be paid after more than one year e.g. Long Term Loan,

SHORT TERM: Those liabilities, which are due to be paid within one year.

OWNER EQUITY:

It means the claims of owner of the business against the assets of the firm.

Accounting Treatment:

Debit: Decrease in Equity. Credit: Increase in Equity.

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Basic Accounting Course

REVENUES:

It means any type of income of the business.

Accounting Treatment:

Debit: Decrease in Revenue. Credit: Increase in Revenue.

Revenue received from sale, donation, and interest on deposits etc.

EXPENSES:

Expense means the expenditure whose benefit is finished or enjoyed.

Accounting Treatment:

Debit: Increase in Expenses. Credit: Decrease in Expenses.

Examples:

Salaries, Wages, Honoraria, Consultancy Charges, Audit Fee, Printing and Stationery, Photocopies, Entertainment Exp, Meeting and Seminars, Transportation Cost, POL, TA/DA, Passport Visa fee, Purchases of materials etc

SUMMARY OF RULES OF DEBIT AND CREDIT

Account

Increase

Decrease

Assets

Debit

Credit

Liabilities

Credit

Debit

Owner’s Equity

Credit

Debit

Revenues

Credit

Debit

Expenses

Debit

Credit

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Basic Accounting Course

CHAPTER 02

BOOKS OF ACCOUNTS:

The business transactions from primary data are recorded in the books of accounts. How an accounting cycle runs, Can briefly be described in the following steps:

Step.1 A business document is prepared for each transaction incurred, called voucher.

Step.2 Information from the voucher is recorded in General journal.

Step.3 The entries from the General journal are posted to the individual accounts in the ledger.

Step4. A trial balance is prepared at the end of a particular period to insert all the closing balances taken from individual accounts maintained in the ledger.

Step.5 Adjustment if required is made in the books of accounts or in a separate work sheet so as to work out the final balances.

BOOKS OF ORIGINAL ENTRY:

Initial recording of transaction takes place in the books of original entry. Particulars that should be recorded in the books of original entry include

Date of transaction,

Names of accounts to be debited or credited to record each transaction and

Amount.

JOURNAL:

Journal, a book of original entry and contains all the financial information that is required in a book of original entry. It can take the form of either General journal or a special journal (Cash journal, Sales journal, and purchase journal etc.). General journal is used to record transactions, which cannot be recorded in the special journals.

ENTRIES IN THE JOURNAL:

The initial recording of transaction in the books of original entry is called entry. Entries in the Journal may be made in a manner that it contains all the required information in a classified manner, which could either be utilized for future reference and aggregate results at the end of accounting period.

FORM OF JOURNAL:

Following information is required to be entered in the journal as illustrated below:

1. Date of the transaction.

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Basic Accounting Course

2. Names of Accounts to be debited and credited.

3. Reference of the ledger page or code where the entry is to be posted.

4. Amounts in front of each account name to be debited in the debit column.

5. Amount in front of each account to be credited in the credit column.

Date

Particulars

L.F

Debit

Credit

To separate each entry a line is drawn at the end of each entry.

Illustration:

On November 01, 2004 Welfare Relief Committee received a donation of $ 75,000 and its transactions during the first month were as follows:

2004

$

NOV, 02

Paid rent of the shop for the month

5,000

NOV, 03

Purchased furniture for cash

10,000

NOV, 10

Goods Purchased from Ameer & Co

30,000

NOV, 15

Goods Purchased from XYZ limited

45,000

NOV, 16

Cash received as membership

9,000

NOV, 20

Cash received as membership

15,000

NOV, 30

Cash paid to Ameer & Co

20,000

Required: Record these transactions in the journal

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Basic Accounting Course

JOURNAL OF WELFARE RELIEF COMMITTEE

   

L.

Debit

Credit

Date

Particulars

F

$

$

2004

Cash To Donation Donation received

 

75,000

 

NOV 01

75,000

 

Rent

 

5,000

 

NOV 02

To cash

5,000

Rent paid

NOV 03

Furniture To cash Furniture purchased for cash

 

10,000

10,000

NOV 10

Purchases To Ameer & Co Goods purchased

 

30,000

30,000

NOV 15

Purchases To XYZ Ltd Goods purchased

 

45,000

45,000

NOV 16

Cash To Membership Fee Membership fee received

 

9,000

9,000

NOV 20

Cash To Membership Fee Membership fee received

 

15,000

15,000

NOV 30

Ameer & Co To Cash Paid to Ameer & Co

 

20,000

20,000

 

Total

 

209,000

209,000

From the above it may be seen that ledger folio column is left blank. It indicates the page number to which the respective debit or credit entry shall be posted. At the time of posting, page number will be recorded.

COMPOUND JOURNAL ENTRIES:

Compound journal entries are passed for those transactions where a single transaction affects a number of accounts. In such case a single entry is passed instead of separate entries.

ILLUSTRATION:

An International relief agency has received machinery valuing $25, 000, furniture worth $6,000 and Cash $25,000 from its donor. Entries in the journal of Welfare Relief Committee would appear as follows:

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Basic Accounting Course

     

Debit

Credit

Date

Particulars

L.F

$

$

 

Cash Machinery Furniture To Donation Donation received from donor

 

25,000

 

25,000

6,000

56,000

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Basic Accounting Course

CHAPTER 03

LEDGER:

A book of account where transactions are classified and grouped according to its nature

to form separate accounts. Distinction between ledger and journal can be made as

follows:

 

JOURNAL

 

LEDGER

 

It is a book of original entry

It is a book of second entry.

 

The process

of recording

The process

of recording

transaction in the journal is called journalizing.

transaction in the ledger is called posting.

The unit of classification is the date of transaction.

The

unit

of

classification

is

the

account.

 

It contains entries in chronological order and total effect in an individual account is not known.

It contains entries in classified form showing the total effect in an individual account at any stage.

The previous illustration shows a number of transactions affecting cash but one can’t see the net movement and effects on the cash account. This is possible in ledger.

A ledger may be a book, a loose-leaf binder or a computer disc. In case of a book or

loose-leaf binder, each page is used for a separate account.

Posting to ledger is made at frequent intervals, such as the end of each week, month, etc.

Form of a ledger:

Debit

Title of Account

(A/C No…) Credit

Date

Particular

Folio

$

Date

Particulars

Folio

$

From the above, it may be seen that ledger folio has two parts debit side & credit side. Sometimes the format of the ledger is not like the above but it contains all the relevant information.

Posting is made in the following steps:

1. Location of the account in the ledger.

2. Entering information in the respective columns and giving the folio number of ledger.

3. Entering the account number reference in the journal to which the entry has been posted.

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Basic Accounting Course

ILLUSTRATION:

The illustration of International Relief Agency is used to understand the posting process.

Required: Post the entries of Journal of illustration of International Relief Agency in the respective ledgers account.

SOLUTION:

Ledger Accounts of Welfare Relief Committee.

 

Cash

Account No.1

Date

Particular

Folio

Debit

Date

Particulars

Folio

Credit

 

$

$

Nov,01

Donation

 

1 75,000

Nov,02

Rent

 

1 5,000

Nov,16

Membership

1 9,000

Nov,03

Furniture

1 10,000

fee

Nov,20

Membership

1 15,000

Nov, 30

Ameer & Co Balance C/F

1 20,000

fee

Nov, 30

64,000

   

99,000

     

99,000

 

Donation

Account No. 5

Date

Particular

Folio

Debit

Date

Particulars

Folio

Credit

$

$

Nov, 30

Balance C/F

 

75,000

Nov,01

Cash

 

1

75,000

     

75,000

     

75,000

 

Purchases

Account No. 15

Date

Particular

Folio

Debit

Date

Particulars

Folio

Credit

$

$

Nov, 10

Ameer & Co XYZ Ltd

1

30,000

       

Nov, 15

1

45,000

Nov, 30

Balance

75,000

     

75,000

     

75,000

 

Membership Fee

Account No. 20

Date

Particular

Folio

Debit

Date

Particulars

Folio

Credit

$

$

       

Nov,16

Cash

1

9,000

Nov, 30

Balance

24,000

Nov 20

Cash

1

15,000

     

24,000

     

24,000

 

Furniture

Account No. 10

Date

Particular

Folio

Debit

Date

Particulars

Folio

Credit

$

$

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Basic Accounting Course

Nov,03

Cash

1

10,000

Nov, 30

Balance C/F

 

10,000

     

10,000

     

10,000

 

Rent

Account No. 8

Date

Particular

Folio

Debit

Date

Particular

Folio

Credit

$

$

Nov, 02

Cash

1

5,000

Nov, 30

Balance

 

5,000

     

5,000

     

5,000

 

Ameer & Co.

Account No. 30

Date

Particular

Folio

Debit

Date

Particular

Folio

Credit

$

&

Nov, 30

Cash

1

20,000

Nov 10

Purchases

1

30,000

Nov, 30

Balance C/F

10,000

     

30,000

     

30,000

 

XYZ Ltd

Account No. 31

Date

Particular

Folio

Debit

Date

Particulars

Folio

Credit

$

$

Nov, 30

Balance C/F

 

45,000

Nov 15

Purchases

1

45,000

     

45,000

     

45,000

It can be seen that Ledger and journal are cross-referenced i.e. reference of the journal page1 has been given on each ledger entry in folio column. Similarly the reference of each ledger page (account number) is given in the folio column in journal. This facilitates in spotting any mistakes or wrong postings.

GENERAL& SUBSIDIARY LEDGERS:

Small organizations, where the numbers of transactions are usually small, maintain a simple ledger. Large organizations, maintain two types of ledger; a general ledger is maintained containing the major accounts. The details are kept in subsidiary ledgers. For instance, one account for debtors and creditors each is kept in the general ledger and account of individual debtors and creditors are kept in the subsidiary ledgers. The sum of the balances of the subsidiary ledgers at any given date equals to the balance of its related account appearing in the general ledger.

SUMMING UP THE ACOUNT BALANCES & PREPARATION OF TRIAL BALANCE:

After a particular period the debit and credit sides of all accounts are summed up. The difference in the debit and credit side is worked out. The difference is called a debit balance in case the credit side is lower. Similarly if the debit side is lower, it would be called a credit balance.

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Basic Accounting Course

After the balancing process is complete, a trial balance is prepared. Trial balance is a statement containing end balances of all the ledger accounts at a particular date. The total of the debit & credit side of the trial balance will be equal if all the postings have correctly been made. The trial balance verifies the mathematical accuracy of the debit and credit balances of the ledger accounts. It does not ensure the complete recording, proper journalizing and posting to the proper accounts. The trial balance however provides basic information to facilitate the adjusting entries and to properly utilize it in the financial statements.

Trial Balance is extracted from the illustration of the Welfare Relief Committee:

WELFARE RELEIF COMMITTEE:

Trial Balance as on 30-11-2004

 

Ledger Accounts

L.F.

Debit

Credit

$

$

Cash Donation Rent Furniture Purchases Membership Fee XYZ Ltd Ameer & Co

1

64,000

 

5

75,000

8

5,000

10

10,000

15

75,000

20

24,000

31

45,000

30

10,000

TOTAL

 

154,000

154,000

ADJUSTING ENTRIES:

At the end of each accounting period the accountant may realize that a number of transactions relating to the business might have incurred but remained unaccounted for. This may be due to a number of reasons e.g.

1. Any transaction which does not involve movement of cash during the

accounting period.

2. The cash transaction incurred may be for a smaller or larger period than the

accounting period.

3. Inventory adjustments

ADJUSTED TRIAL BALANCE:

As soon as the adjusting entries are passed in ledger accounts, a final or adjusted trial balance is prepared. The adjusted trial balance lists all the ledger balances after the adjusting entries have been posted.

We now have the basic data in the adjusted trial balance to facilitate the preparation of financial statements, mainly the Income and Expenditure Statement and the balance sheet.

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Basic Accounting Course

CHAPTER 04

SPECIAL JOURNALS:

As discussed earlier journals are of two types, a general journal and special journal. Examples of special journals are:

1 Cash Journal

2 Bank Journal

3 Purchases Journal

4 Purchases Return Journal

5 Sales Journal

6 Sales Return Journal

Advantages of maintaining special journals are:

1 Facilitate easy recording of transactions of a similar nature

2 Facilitate the posting process.

3 Facilitate future referencing and evidence.

4 Division of responsibilities amongst number of persons.

CASH BOOK:

Cash Book is a type of special journal, used to record all cash and bank transactions in chronological order. It also serves as a Ledger account for Cash Transactions.

FORMS OF CASH BOOK:

Cash Book can either be

1. Single Column Cash Book

2. Double Column Cash Book(A cash Column and a Bank Column).

3. Petty Cash Book

SINGLE COLUMN CASH BOOK:

Single column cash book is also called a simple Cash Book to record only Cash Receipts and Payments.

 

Receipts

   

Payments

 

Date

Particular

L.F

Amount

Date

Particular

L.F

Amount

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Basic Accounting Course

RECORDING DAILY TRANSACTIONS IN THE CASH BOOK:

The following step-by-step approach is followed to record transaction in the cashbook.

1. Previous day closing balance is brought forward at the beginning of each day and is recorded in the top left of the receipt side.

2. Daily receipts are recorded on the receipt side (usually left side) with dates, particulars, reference and amount.

3. Daily payments are recorded on the right side with dates, particulars, reference and amount.

4. At the end of each day cashbook is balanced to ascertain the closing balance.

ILLUSTRATION:

For

the

month

of

December

M/S

Hamid

Traders

incurred

the

following

cash

transactions:

 
 

Month

 

Date

 

Particulars

 

Amount

   

$

December 2004

 

1

Beginning balance

 

56,000

December 2004

 

3

Cash Sales

   

3,000

December 2004

 

6

Cash received from Khalil & Co

 

10,000

December 2004

 

10

Rent paid

 

5,000

December 2004

 

13

Cash paid to KSG Ltd

 

15,000

December 2004

 

18

Cash received from XYZ Ltd

 

30,000

December 2004

 

24

Cash paid to Ameer & Co

 

10,000

December 2004

 

28

Cash paid for electricity bill

   

3,000

December 2004

 

30

Cash Sales

 

14,000

Required: Enter these transactions in the cashbook.

Solution:

CASH BOOK

 

Date

Particular

L.F

Amount

Date

Particulars

 

Amount

$

L.F

$

2004

     

2004

     

Dec, 1

Balance B/F

56,000

Dec,10

Rent

8

5,000

Dec, 3

Sales

20

3,000

Dec,13

KSG Ltd

31

15,000

Dec,6

Khalil & Co

35

10,000

Dec,24

Ameer & Co

30

10,000

Dec, 18

XYZ Ltd

38

30,000

Dec, 28

Electricity

9

3,000

Charges

Dec, 30

Sales

20

17,000

       
         

Balance C/F

 

83,000

Total

 

116,000

     

116,000

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Basic Accounting Course

Note that cash book contains its page number and similarly account pages contain their own page numbers. While posting entries in cashbook, ledger folio of the account head is entered and similarly cashbook folio is entered in Ledger account.

DOUBLE COLUMN CASH BOOK

As its name implies, it contains two columns a cash column and a bank column.

RECORDING TRANSACTIONS IN THE BANK COLUMN:

1. Previous day closing balance: is brought forward at the beginning of each day

and is recorded in the top left of the receipt side in the Bank Column.

2. Cheques received and deposited the same day: Entered on the receipt side of

the cash book in the bank column.

3. Cheques received but not deposited in the bank: the amount is recorded in the

cash column.

4. Payment made by cheque: The amount is entered on the credit side of the cash

book in the bank column.

5. Cash deposited in the bank: Amount is entered in the cash column on the credit

side. On the debit side the corresponding entry is made and amount written in the bank column. The entry is called contra entry with no effect on the ledger account.

6. Closing Balance: At the end of each day both columns are balanced to ascertain

the closing balance.

POSTING TO LEDGER:

1. Contra entries: All contra entries are marked distinctly as “C” and are not posted.

2. Entries on the receipt side: All entries in the receipt side are posted to the credit

side in the ledgers of respective accounts.

3. Entries on the payment side: entries on payment side are posted to the debit of the

ledger accounts.

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Basic Accounting Course

ILLUSTRATION:

The following are the transactions of M/S Hamid Traders during the month of January

2005.

January 2005

 

Jan

 

AMOUNT

200

$

5

1

Cash beginning balance

80,000

2

Cash deposited in the bank

25,000

3

Purchases made for, paid by cheque

8,600

5

Cheque received from XYZ Ltd and paid in the bank

6,500

10

Paid cheque to ABC Ltd

10,900

$ 10,900

12

Cash sales

7,000

14

Cash deposited in bank

5,000

16

Cash purchases

9,000

20

Cash sales

15,000

22

Cash deposited in bank

10,000

24

Paid by cheque for cash purchas

3,000

28

Received cheque from XYZ Ltd

10,900

30

Paid cheque to ABC Ltd

5,900

Record these transactions in two-column cashbook.

CASH BOOK OF HAMID TRADERS

   

V.N

L.

Cash

Bank

   

V.N

L.

Cash

Bank

Date

Particular

o

F

$

$

Date

Particular

0

F

$

$

2005

         

2005

         

Jan,1

Balance

80,000

Jan,2

By bank

C

25,000

B/F

C

Jan,3

By purchases

8,600

Jan,2

To Cash

25,000

Jan,10

By ABC Ltd

10,900

Jan,5

To XYZ Ltd

6,500

Jan,14

By bank

C

5,000

Jan,12

To Sales

7,000

C

Jan,16

By purchases

9,000

Jan,14

To Cash

5,000

Jan,22

By bank

C

10,000

Jan, 20

To Sales

15,000

C

Jan,24

By Purchases

3,000

Jan, 22

To Cash

10,000

Jan 30

By ABC Ltd

5,900

Jan, 28

To XYZ Ltd

10,900

Jan,30

63,900

18,100

By Bal C/F

       

112,900

46,500

       

112,900

46,500

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Basic Accounting Course

 

Purchases

 

Account No.

 

Date

Particulars

Folio

Debit

Date

 

Particulars

 

Folio

 

Credit

$

   

$

Jan 3

Bank

 

8,600

       

Jan 16

Cash

 

9,000

       

Jan 24

Bank

 

3,000

       
 

ABC Limited

 

Account No.

Date

Particulars

Folio

Debit

Date

 

Particulars

 

Folio

 

Credit

 

$

 

$

Jan 10

Bank

 

10,900

         

Jan 30

Bank

 

5,900

         
 

SALES

 

Account No.

 

Date

Particulars

Folio

Debit

Date

Particulars

Folio

Credit

       

Jan 12

 

Cash

 

7,000

       

Jan 20

 

Cash

 

15,000

 

XYZ Limited

 

Account No.

 

Date

 

Particulars

Folio

Debit

Date

 

Particulars

Folio

Credit

 

$

 

$

       

Jan 5

 

Bank

 

6,500

       

Jan 28

Cash

   

10,900

PETTY CASH BOOK:

Petty Cash is the amount kept separately to meet day-to-day expenses (stationery, postage, local conveyance, office supplies etc) such expenses and the transactions so incurred are recorded in special cash book called petty cash book.

FORM OF PETTY CASH BOOK:

The petty cash book contains a column for recording receipts, date, particulars, voucher ref. A number of columns are then left for recording head wise payments. Every payment is recorded twice. 1 st in the total column and then in the head wise column. The total of the total column at any time would agree to the grand total of the total of each column. The difference between the receipts total and total of the payment column is petty cash in hand.

POSTING FROM PETTY CASH BOOK:

The posting to ledgers is normally made at the end of a month. The totals of each column of receipts and payment are made directly to respective ledger accounts.

IMPREST SYSTEM:

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Basic Accounting Course

This means a system where a certain amount of money called imprest is kept with a staff member to meet petty payments. Sometimes imprest is kept with more than one staff member working in different locations. Statement of payments supported with vouchers is prepared at frequent intervals and sent to the chief cashier. The amount spent is reimbursed to meet payments for the next period. Advantages of the petty cash or imprest is that

(a) Timely payments are possible at a place out of the reach of the main cashier. (b) The petty cashiers or imprest holder has to maintain up to date record to get timely reimbursement.

ILLUSTRATION:

Petty cashier of M/S Hamid Traders incurred the following transactions during the month of February 2005.

Feb

01

Cash Received from main cashier

$ 1,000

3

Paid for stationery

$

45

6

Paid for postage stamps

$

10

7

Paid for stationery

$

5

10

Wages paid

$

60

11

Taxi charges paid

$

25

14

Bus fair paid

$

15

20

Tea expenses paid

$

20

25

Food for office

$

25

28

Postage stamp purchased

$

35

28

Kitchen Expenses paid

$

550

Required: Enter the above transaction in the petty cash book of Hamid Traders.

 

PETTY CASH BOOK

 

Account No 38

Receiv

Dat

Particulars

V.N

Tot

Posta

Station

Wag

Conveya

Entertain

ed

e

o

al

ge

ary

es

nce

ment

1,000

Feb

To Cash

             

1

To Stationery

45

45

To Postage

10

10

3

To Stationery

5

5

To Wages

60

60

6

To

25

25

Conveyance

15

15

8

To

20

20

Conveyance

25

25

10

To

35

35

Entertainmen

550

550

11

t

To

210

14

Entertainmen

t

20

To Postage

To

25

Entertainmen

t

28

To Balance

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Basic Accounting Course

 

28

           

28

1,000

 

1,00

45

50

60

40

595

0

PURCHASE JOURNAL:

Purchase transactions can take either the form of cash transaction or credit transaction. Cash Purchases are recorded usually in the cashbook while credit Purchases in the book called purchases journal. Purchases journal is a book of original entry to record day-to-day credit purchases in chronological order. Purchases Journal is usually kept by large organizations where most of the transactions are of credit type.

FORM OF PURCHASE JOURNAL

The usual form of purchase journal is presented below.

     

L.

 

Date

Particular

Inv. No

F

Amount

POSTING TO LEDGER:

Entries from the Purchase Journal are posted to Ledger. Credit entries are posted individually to the respective Creditor Account. While the total of Debit entries for a particular period is posted to Purchase Account as a single Figure.

PURCHASES RETURN JOURNAL:

Purchase Return Book is also a book of original entry. Goods return note is the document prepared when goods are returned. All goods returned to supplier, are recorded in Purchase Return Book. Posting to ledger accounts is the same as that of purchases journal but to the reverse side. The total of the purchases returns is posted to the credit side of the purchase account whereas the individual entries are debited to the respective suppliers account. When the goods are returned, documents are prepared which are called the debit advice or Goods return note and contains Particulars and reasons for return of goods.

ILLUSTRATION:

The following transactions were incurred by the purchases deptt. of Hamid Traders during the month of November 2004.

Nov 06,

Purchases made from Ameer & Co.

$ 15,000

Nov 10,

Purchases made from ABC Ltd

$ 18,000

Nov 11

Purchases returns to Ameer & Co

$

2,000

Nov 16

Purchases made from ABC Ltd

$ 12,000

Nov 17

Purchases from Peshawar Traders

$ 10,000

Nov 25

Purchases returns to ABC Ltd

$

1,000

24

Basic Accounting Course

Nov 28

Purchases from Ameer & Co.

$

5,000

Nov 30

Purchases return to Peshawar Traders

$

2, 000

Enter transaction in the purchases journal and purchases returns journal and post to ledger.

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Basic Accounting Course

SOLUTION:

Purchases journal of Hamid Traders

Date

Particulars

Inv.No

L.F

Amount

$

2004

       

Nov 6

Ameer & Co ABC Ltd ABC Ltd Peshawar Traders Ameer & Co

15,000

Nov 10

18,000

Nov 16

12,000

Nov 17

10,000

Nov 28

5,000

       

60,000

Purchases returns Journal of Hamid traders

 

Date

 

Particulars

Debit

L.F

Amount

 

$

2004

       

Nov 11

Ameer & Co ABC Ltd Peshawar Traders

2,000

Nov 25

1,000

Nov 30

2,000

       

5,000

Ledger of Hamid Traders

Ameer & Co.

Account No. 30

Date

Particulars

F

Debit

 

Date

 

Particular

F

Credit

$

   

$

2004

       

2004

     

Nov 11

Purchases Returns

1

2,000

Nov 6

Purchases

 

1

15,000

Nov 28

Purchases

1

5,000

 

ABC Ltd

 

Account No. 31

Date

Particulars

F

Debit

Date

Particular

F

 

Credit

$

$

2004

     

2004

     

Nov 25

Purchases Returns

1

1,000

Nov 10

Purchases

1

 

18,000

Nov 16

Purchases

1

12,000

 

Peshawar Traders

Account No. 32

Date

Particulars

F

Debit

 

Date

Particular

 

F

 

Credit

$

 

$

2004

       

2004

     

Nov 30

Purchase Returns

1

2,000

Nov 11

Purchases

 

1

 

10,000

 

Purchases

 

Account No. 15

Date

Particulars

F

Debit

 

Date

 

Particular

 

F

 

Credit

$

   

$

2004

               

Nov

Sundry Creditors

1

60,000

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Basic Accounting Course

Purchases Returns

Account No. 16

Date

Particulars

F

Debit

Date

Particular

F Credit

$

$

       

Nov

Sundry

1 5,000

Creditors

SALES JOURNAL:

Like purchases, sales transactions are also of two types, cash sales and credit sales. All credit sales are recorded in sales journal in chronological order from sale invoices.

POSTING TO LEDGER:

Posting from sales book is normally done at the end of some specified period such as a month. Total of the sales during the month is posted in the credit of the sales account each individual entry is however posted to the debit of customers account.

SALES RETURNS JOURNAL:

Sales Return Journal is maintained to record all goods returned by the customers. All entries are made from the credit advice after issuing the same to the customer.

ILLUSTRATION

M/S Jan Traders incurred the following transactions during the month of December

2004

Dec 6

Sales made to M/S Karim & Co.

$17,000

Dec 9

Sales made to XYZ Ltd.

$10,000

Dec 13

Sales returns by Karim & Co

$

3,000

Dec 15

Sales returns by XYZ Ltd

$ 2,000

Dec 20

Sales to M/S Ali Enterprises

$

8,000

Dec 23

Sales to XYZ Ltd

$11,000

Dec 27

Sales returns by Ali Enterprises

$

1,000

Dec 30

Sales to Karim & Co.

$ 2,000

Make entries in the sales journal, sales returns journal and post to ledger accounts.

SALES JOURNAL OF HAMID TRADERS

     

L.

Page-1

Date

Particular

Inv.No

 

F

Amount

$

Dec 6

Karim & Co

   

17,000

Dec 9

XYZ Ltd

   

10,000

Dec 20

Ali Enterprises

   

8,000

Dec 23

XYZ Ltd

   

11,000

Dec 30

Karim & Co

   

2,000

       

48,000

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Basic Accounting Course

SALES RETURN JOURNAL OF HAMID TRADERS

     

L.

 

Page-1

Date

C.A

 
 

Particular

 

F

Amount

$

Dec 13

Karim& Co

     

3,000

Dec 15

XYZ Ltd

     

2,000

Dec 27

Ali Enterprises

     

1,000

         

6,000

LEDGER OF M/S HAMID TRADERS

 
 

Karim & Co

 
             

Credit

Date

Particulars

F

Debit

 

Date

Particular

F

$

Dec 6

Sales

 

17,000

 

Dec 13

Sales Return

 

3,000

Dec 30

Sales

2,000

 
 

XYZ Ltd

 
             

Credit

Date

Particulars

F

Debit

Date

Particular

F

$

Dec 9

Sales

 

10,000

Dec 15

Sales Return

 

2,000

Dec 23

Sales

11,000

 

Ali Enterprises

 

Date

Particulars

F

Debit

Date

Particular

F

Credit

$

Dec 20

Sales

 

8,000

Dec 27

Sales Return

 

1,000

Sales

Date

Particular

F

Credit

$

Dec 27

Sundry Debtors

48,000

Sales Return

Date

Particulars

F

Debit

Dec 30

Sundry Debtors

6,000

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Basic Accounting Course

CHAPTER 05

BANKING TRANSACTIONS:

There are two aspects of banking transactions. Bank Deposits and withdrawal. Following types of Account are maintained to handle these transactions.

a. CURRENT ACCOUNT:

Current Account is maintained for immediate cash deposits and withdrawal with no limit on amount and frequency of withdrawal. No interest is normally charged on current account. Businesses prefer this type of account to have immediate access to cash.

b. SAVING BANK ACCOUNT:

Saving Bank Account normally places a limit on the amount and frequency of withdrawal. Interest is paid to account holders. Individuals normally maintain this type of account.

c. FIXED DEPOSITS:

Fixed Deposit Account, as its name implies, require account holder to place the money for a fixed period usually, six month or a year or more than one year. Interest is paid by the bank, keeping in view the period of deposit. A penalty is normally imposed for premature withdrawal.

Besides

organizations.

taking

LOANS:

deposits

Banks

also

issue

loans

to

individuals

and

business

Funds issued to individuals and business organizations are called loans. Normally a high interest rate is charged on the loan than on deposits.

OVERDRAFTS:

Overdraft is the facility provided by the bank to business organizations, This facility is provided to current account holders to withdraw extra money than the deposited amount.

CHEQUE:

An instrument supplied by the bank to account holders. It is an instruction to the bank to pay a stated amount to a person or business named in the cheque. Cheque can either be (i) Open (can be cashed) or (ii) crossed (i.e. paid only into the account.)

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Basic Accounting Course

BANK DRAFTS:

Bank draft is instruments of transfer i.e. an instruction issued by the bank to one of its branch to pay a certain amount to the person concerned.

BANK STATEMENT or BANK PASS BOOK:

Bank Statement is a chronological record maintained by the bank for each individual account holder. The statement contains information about deposits, withdrawal, opening and closing balances for a particular period.

DISHONOUR OF CHEQUE:

Some cheques presented to the bank are not accepted, this is called dishonor of Cheque. Cheque may be dishonored due to the following reasons:

1. Unavailability of fund in the concerned account

2. Over writing

3. Faults in the signature

BANK RECONCILIATION STATEMENT:

Bank Record maintained in the entity Books is matched with the Bank statement issued by the bank on regular interval to spot out any differences. These differences are reflected in Bank reconciliation statement. The differences exist, each time, statement is prepared. The causes of these differences are:

1.

Un presented Cheques: Cheque issued by the entity at period end may be entered in the bankbook but may not be presented to bank for payment till the date of statement.

2.

Direct Collection: Bank might have taken credit of Cash, Cheque received directly into the entity account but intimation of the same might have been conveyed to the client after the period end.

3.

Direct Credits: Interest on savings account is credited by the bank, soon as entitlement arises, but may not be recorded in the entity books.

4.

Direct Debits: Interest charged on overdraft, or commission may be debited to the entity’ account, while the same remain unrecorded in the entity Books.

5.

The entity may have deposited cheques/drafts but bank might not have collected the same till the date of the statement.

6.

Some of the cheques/drafts deposited in the bank may have been dishonored and the effect of dishonor remained unknown and unrecorded in the entity record.

In order to examine whether the disagreement is due to certain genuine reasons as described above or there is some misappropriation of funds, a reconciliation statement is prepared and the causes of disagreement discovered.

30

Basic Accounting Course

PREPARATION OF BANK RECONCILIATION STATEMENT:

The following steps are involved in the preparation of a bank reconciliation statement.

1. Check all entries on receipts and payments side with the bank statement and tick them.

2. Prepare a list of unticked entries of the bank statement and record the same in the bank book so as to work out the correct balance of the bank book

3. Prepare a list of unticked entries in the bank book and prepare the reconciliation statement by using one of the following methods.

a) Starting from the cash book balance:

i. If there is a debit balance, deduct all cheques/drafts deposited in the bank but not credited by the bank, and add all the cheques issued but not given in the bank statement/bank statement (or not presented to bank for payment. The balance now would agree with the bank statement.

ii. If there is a credit balance, add all cheques/drafts deposited in the bank, but not credited in the bank and less all cheques issued but not presented to the bank for payment. The balance now would agree with the bank statement.

b) Starting from the bank statement:

If there is a credit balance in the bank statement, add to it all cheques/drafts deposited but not collected and credited by the bank and deduct all cheques issued but not presented to bank for payment

If there is a debit balance in the bank statement deduct all cheques/drafts deposited but not collected and credited by the bank and add to it all cheques issued but not presented to the bank for payment.

ILLUSTRATION:

On 31 st Dec 2004, the balance of cash at bank as shown by the cash book of International Relief Agency was $4,500/- and in the bank statement the balance was shown at $19,500.

On checking the cash book with the bank statement it was found that.

a. Cheque of $1,000 deposited in bank on 27 th Dec was not credited by the bank.

b. Two cheques issued to XYZ Limited amounting to $16,000 on 24 th Dec 2004 were not presented to the bank for payment.

Prepare bank reconciliation statement

SOLUTION:

Method 1 (starting from the cash book balance)

31

$

Basic Accounting Course

Balance as per cash book (debit)

4,500

Less cheques deposited but not collected

1,000

3,500

Add: cheques issued but not presented to the bank

16,000

Balance as per bank statements

(credit)

19,500

Method II (Starting from the bank statement/bank statement)

Balance as per bank statement (credit)

19,500

Less cheques issued but not presented

16,000

3,500

Add cheque deposited but not collected Balance as per cash book (debit)

1,000

4,500

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Basic Accounting Course

ILLUSTRATION:

From the following information of International Relief Agency prepare bank reconciliation statement on 30 th June 2004. Balance as per bank statement was 8,000.

i. Balance as per bank book

$ 9,200

 

ii. Bank charges & commission debited by bank but not taken in bank book

$

100

iii.

cheque received form Rahim & Co Deposited in bank on 20 th June but not Credited by bank.

$ 6,000

iv.

Cheque issued to XYZ Ltd on 27 th June but not presented to bank for Payment

$ 2,900

v.

Cheque issued for rent on 29 th June 2004 but not presented to bank for Payment

$ 2,000

SOLUTION:

International Relief Agency Bank Reconciliation Statement as on 30-6-2004

Balance as per bank book (debit)

ii)Less: Bank charges debited by bank iii)Less cheques deposited but not collected by bank

Add: cheques issued but not presented to bank

iv)

v)

27-6-04

27-6-04

Balance as per bank statement (credit)

33

Amount

9,200

100

6,000

$

3,100

2,900

2,000

4,900

8,000

Basic Accounting Course

CHAPTER 06

ACCOUNTING STATEMENTS FOR NON-TRADING CONCERNS:

Non-trading concerns usually maintain their accounts in double entry accounting system and periodically prepare their final accounts for submission to their members and donors. The method of preparing final accounts by non-trading concerns is different than trading concerns. As these accounts do not deals in any goods like trading concerns, so they can’t prepare trading and profit and loss account. At the end of the year they prepare an account called an income and expenditure account and balance sheet. The income and expenditure account serve the same purpose as of the profit and loss account in case of trading concerns and is made out exactly in the same manner.

Usually the non profit making institution do not maintain a full set of books but merely a cash book in which all the receipts and payments are entered. At the end of the year cashbook is summarized under suitable heading and the summary thus prepared is called a receipt and payment account.

RECEIPT AND PAYMENT ACCOUNT

It is a mere summary of cashbook for a year. It begins with cash in hand at the commencement and ends with that at the close of the year. Similarly to cash account, receipts are shown on the debit side while payments on the credit side, with out any distinction between capital and revenue. Moreover, it does not include unpaid expenditure or any unrealized income relating to the period under review and so fails to reveal the financial position of the concern.

INCOME AND EXPENDITURE ACCOUNT

It is another name for profit and loss account. This account is credited with all earnings (both realized and unrealized) and debited with all the expenses (both paid and Un- paid). The difference represents either surplus or deficit for a given period which is carried to the balance sheet.

DIFFERENCE BETWEEN INCOME AND EXPENDITURE ACCOUNT & RECEIPT AND PAYMENT ACCOUNT

RECEIPT AND PAYMENT ACCOUNT

INCOME

AND

EXPENDITURE

ACCOUNT

1.

It begins with opening

1. It does not commence with any

and ends with closing balance of

balance.

cash/bank.

2. It includes revenue items only.

2.

It records all sum

34

Basic Accounting Course

received and paid

 

whether they relate to revenue or

3. It includes the items relating only to

capital item.

the

year

for

which

it

is

prepared.

3.

It includes all sums

Provisions

are

made

for

all

actually received and paid during the

outstanding

expenses

and

accrued

year whether they relate to the past,

income.

 

the current or the next year.

4. Income is shown on the credit side

4.

The receipts are shown

and expenses on the debit side

 

on the debit side and the payments

5. It definitely shows whether there

on the credit side.

has been an excess of income over

5.

It simply ends with a

expenditure or vice versa.

 

closing balance of cash and does not

6. It

is

always

accompanied

by