Unit 2: Book Keeping: Structure

Book Keeping 21
Unit 2: Book Keeping

Notes
Structure
2.1 Introduction
2.2 Concept
2.3 Objectives of Book-Keeping
2.4 Utility of Book- Keeping
2.5 Book- Keeping and Accountancy
2.6 Accounting System
2.6.1 Single Entry System
2.6.2 Double Entry System
2.7 Cash System of Accounting
2.8 Books of Prime Entry
2.8.1 Account
2.9 Rules of Debit and Credit
2.10 Subsidiary Books
2.11 Recording of Cash and Bank Transactions
2.12 Preparation of Ledger Accounts
2.13 Preparation of Trial Balance
2.14 Summary
2.15 Check Your Progress
2.16 Questions and Exercises
2.17 Key Terms
2.18 Further Readings
Objectives
After studying this unit, you should be able to:
z Understand the Concept and meaning of Book Keeping
z Discuss the double entry system, books of prime entry, subsidiary books,
recording of cash and bank transactions
z Explain the preparation of ledger accounts, preparation of trial balance –
interpretation and usefulness
2.1 Introduction
In all activities (whether business activities or non-business activities) and in all
organizations (whether business organizations like a manufacturing entity or trading
entity or non-business organizations like schools, colleges, hospitals, libraries, clubs,
temples, political parties) which require money and other economic resources,
accounting is required to account for these resources. In other words, wherever money
is involved, accounting is required to account for it. Accounting is often called the
language of business. The basic function of any language is to serve as a means of
communication. Accounting also serves this function.
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22 Accounting & Financial Management
2.2 Concept
Notes Book- keeping includes recording of journal, posting in ledgers and balancing of
accounts. All the records before the preparation of trail balance are the whole subject
matter of bookkeeping. Thus, bookkeeping many be defined as the science and art
of recording transactions in money or money’s worth so accurately and systematically,
in a certain set of books, regularly that the true state of businessman’s affairs can be
correctly ascertained. Here it is important to note that only those transactions related to
business are recorded which can be expressed in terms of money.
Meaning
The oxford dictionary defines Book-keeping as “The activities of keeping records of
financial dealings”.
J.R. Batiboi defines book-keeping as, “Book-keeping is the art of recording business
dealings in set of Books”.
R.N. Carter defines book-keeping as “The science and art of correctly recording in
the books of accounts. All those business transactions and events inset of books, as
and when such transactions take place. It is a systematic recording in terms of money in
set of books.”
2.3 Objectives of Book-Keeping

The main objectives of Book-keeping are given below:
z To maintain the permanent records of the business transactions.
z To ascertain the profit earned or loss suffered during accounting period.
z To know various business Assets and liabilities apart from the above main
objectives.
z To know amount due to businessman from his customers.
z To know amount payable to Suppliers.
z To know various taxes and duties payable to government.
z To defect and prevent errors and frauds committed by employees and other person.
z To provide valuable information for taking for taking various decisions.
z To take decision on significant business matters.
z To compare and measure the optional efficiency of his business with other firm,
companies in same type of Industry.
z To review the progress of the business from year to year.
z To maintain permanent record of all transactions of business for future reference.
z To excise effective control on various expenses, incomes earned over business
assets, business liabilities.
z Other firms, Companies and within the firm compare current year with previous
years. Such comparison is known as infra-firm comparison.
2.4 Utility of Book- Keeping

Utility means usefulness. The utilities to different persons and entities are as under:
z Businessman: The owner who invest his money and assets into his business. He
must know the profitabilities, financial stability. The owner can take various
decisions on the basis of the valuable information obtained from books of accounts.
z Evidence: Books of Accounts can be produced as evidence in a court of law in
case of disputes.

Book Keeping 23
z Book-keeping ensures proper calculation of Income Tax, Sales Tax, VAT and other
tax liabilities.
z Lenders: On the basis of information from books, it is possible to obtain additional
Notes
finance for business and working capital. On the basis of such information, lender
can be provided any additional information along with various financial statements.
z Trade Union: On the basis of financial statement Trade union can insist like in
Wages, Bonus etc.
z Prospective Investors: Prospective Investor can take investment decision by
studying financial statements.
z Comparative Study: Financial statement of business enterprise may be compared
over a period of years inter firm and can be compared with two or more business
enterprise in same type of Business over period of years. This is known as inter firm
comparison. Such comparison helps businessman to judge profitabilities and
efficient of his business.
2.5 Book- Keeping and Accountancy

Book-keeping and Accounting they are differ from each other. Book-keeping is mainly
concern with recording of financial data relating to business operations in a significant
and orderly manner. It is mechanical and repetitive. Accounting is a broader and more
analytical subject. It includes the design of accounting system which book-keepers use
to preparation of financial statement, audit, cost studies, Income tax, value added tax
etc. Analysis and interpretation of accounting information for internal and external end
users as on aid to making business decision.
Book-keeping provides the basis of accounting.
2.6 Accounting System

There are two accounting system of keeping records.
2.6.1 Single Entry System

The single entry system appears to be time saving and economical but it is unscientific,
having number of defects. Under single Entry system only few personal accounts are
kept, as nothings; Expenses / Income accounts are totally ignored. This system is
followed by sole proprietor, having total control on cash as well as on goods. However
this system is not generally followed by any trader.
Single entry accounting systems record only one side of every transaction. This
happens because they use one entry to record every transaction. Therefore single entry
system does not use nominal and real accounts. The emphasis is on cash and
accounts receivable.
Single entry accounting system can be described as a system that businesses use
to get by rather than something that companies may find desirable.
Small Firms
Single entry system is used by small firms that have just started business. Such firms
do not have the resources that are required to put up a full-fledged accounting system

in place. Hence they begin with a single entry accounting system. However as and
when their business grows most firms are compelled to adopt the double entry system.
Notes This is because the single entry system is highly inefficient and can be used only by
sole proprietors when the scale of business is very small and the transactions to be
undertaken are not very complicated.
Incomplete Records
The biggest problem with single entry bookkeeping system is that of incomplete
records. Single entry system records only transactions that the firm is undertaking with
external parties. There are numerous transactions within the firm that are of vital
importance and need a place in the financial statements. However, the single entry
system ignores these needs and gives incomplete information to the management.
No Reconciliation
Single entry accounting system does not have provisions for reconciliation of accounts.
This means that the system does not have inbuilt error detection. Therefore, if a clerk is
doing the task of making entries in the book, the system may be prone to clerical errors.
This could lead to management having insufficient information or no information when
they have to make decisions.
Possibility of Fraud
Single entry accounting system is highly prone to frauds and embezzlement. There is
only one book of account rather than an elaborate accounting system. Hence, the
internal checks are few. In fact they are non-existent. The person making the accounts
could single handedly manipulate the books of accounts and misappropriate the
resources of the firm.
2.6.2 Double Entry System

The Double entry system is based on scientific principle and is used universally by most
of business organisations. This system recognises the fact that every transaction has
two aspects and records both aspects of each and every transaction. Every business
transaction involves exchange of equal values or benefits. Exchange means the act of
giving or receiving one thing in return of the other thing or service or benefit. Thus every
transaction has two aspects i.e. receiving and giving. The receiving aspect is also
known as the incoming aspect (Debit) and going aspect is known as the outgoing
aspect (credit). Under double entry system books of accounts can be maintained by
either cash basis or accrual basis.
The double entry system of bookkeeping is said to have revolutionized growth in
modern business. It is only because businesses are able to keep track of their growing
scale of transactions efficiently that they grow further. This has been facilitated by a well
designed, error preventing accounting system called the double entry system. Here are
more details about this system:
What Is Double Entry System?

In a double entry bookkeeping system there are two sides to every transaction. The
sides are equal in magnitude i.e. the debits must always equal the credits.
Large Firms
When a firm grows beyond a certain size it has to use double entry system of
accounting. This is both because it is mandated by law as well as because it is the most
efficient system.
Complete Records
Double entry accounting system keeps a record of all major accounting transactions.
These could be transactions outside the firm with third parties. Or they could be intra
Book Keeping 25
firm transactions where raw material has now been converted to Work In Progress
(WIP). By making sure every record about credit as well as intra firm transactions is
being accounted for, double entry system provides the most accurate record. Notes
Automatic Reconciliation
As the scale of a business grows, it becomes more prone to clerical errors. A clerk
accounting for a large number of transactions all day is bound to make some mistakes.
However, the double entry system does not allow these mistakes to have a cascading
effect. This is because the system is constantly checking whether total debits equal total
credits. When they are not, accountants know they are dealing with an error. They can
then find out the error, correct it and then move forward. This saves a lot of time and
builds incredible accuracy in the system.
However the double entry accounting system is not 100% error proof. There is a
possibility that an entry may have been completely omitted or that there may have been
compensating errors done while passing the entry.
Fraud is Difficult
Just like reconciliation, when a business grows, more and more responsibilities need to
be entrusted to workers. Many times this leads to frauds by the workers as they
embezzle cash and make use of resources for personal benefits. However, the double
entry accounting system, when used correctly prevents such situations from arising.
The system has strong inbuilt controls to avoid misuse of any resources.
2.7 Cash System of Accounting

Under cash system of accounting entries are made only when cash is received or paid.
No entry is made when amount is due for receipts or payments. Income is received is
accounted irrespective of period for which relates. Similarly expenses are restricted to
the actual payments made in cash, during the current period is immaterial whether the
payments have been made for previous year or subsequent year.
The financial statement prepare under this system do not present a true and fair
view of Income, operating results of enterprise. However it is suitable in following cases.
z For very small business organisation.
z For individual to record his own transactions.
z For professionals like Doctors, Lawyers, Chartered Accountant etc.
In cash system financial statements are prepared on the basis of Receipts and
payments accounts. Accrual System of Accounts This is also known as mercantile
system of accounts. Under this system business transactions are recorded as and when
it take place irrespective of amount / cash received or paid. Income earned as well as
expenses incurred are recorded related to the Particular period.
The following are the essential features of accrual basis.
z Revenue is recognised on it is earned irrespective of whether cash is received or
not.
z Costs are matched against revenues on the basis of relevant time period to
determined periodic income.
z Costs which are not charged to income are carried forward. Any cost that lost its
utility is written off as a loss.
2.8 Books of Prime Entry

The word ‘ledger’ means a book. In accounting systems there are usually three
ledgers:

z The general or nominal ledger, which records all the ‘T’ accounts, such as wages,
sales, purchases, electricity, travel, advertising, rent, insurance, repairs,
Notes receivables, payables and non-current assets. The cash and bank accounts are
technically part of this ledger but are usually physically kept in a separate book
because cash and bank transactions are so numerous.
z The payables ledger (also known as the creditors’ ledger and sometime the
purchase ledger). Although the total amount owed to suppliers is recorded in the
general ledger, details of exactly what is owed to whom are also recorded here.
There is a separate account for each supplier. The sum of the amounts owing in
this ledger should agree with the payables balance in the general ledger.
z The receivables ledger (also known as the debtors’ ledger and sometimes the
sales ledger). Although the total amount owed by customers is recorded in the
general ledger, details of exactly what is owed from whom are also recorded here.
There is a separate account for each credit customer. The sum of the amounts
owing in this ledger should agree with the receivables balance in the general ledger.
z A prime entry record (or book of prime entry) is where a transaction is first
recorded.
These records consist of:
z The cash book: this records amounts paid into and out of the bank account
z The petty cash book: These records small amounts of cash paid for day to day
expenses, such as buying postage stamps and teas or coffee for the office.
z The sales day book: sales invoices issued to credit customers
z The purchases day book: purchase invoices received from suppliers
z The journal: where adjustments, such as correcting errors, are first recorded.
z Some businesses also have sales returns and purchases returns day books.
z The books of prime entry serve to ‘capture’ transactions as soon as possible so that
they are not subsequently lost or forgotten about.
z The cash book and the petty cash book are part of the double entry system and
record cash coming in and going out.
z The day books and journal are not part of the double entry system, and entries are
made from there to the ledgers.
The functions and benefits of a computerised accounting system
Most accounting information is numerical and, of course, computers excel at
dealing with that type of data. Computerised accounting systems should offer the
following advantages over manual systems:
z faster provision of information
z provision of information that would not be easily available without a computerised
accounting system
z once the system is set up, cheaper information
z more accurate information because arithmetic and certain other errors will be
eliminated.
Of course sometimes things go wrong and systems break down or incorrect
information is produced. In particular, if incorrect data is entered, incorrect information
will be produced (garbage-in, garbage-out, GIGO).

Book Keeping 27
A computerised accounting system can be represented as:
Notes
For example:
z Input: Orders are input over the internet
z Processing: Prices are accessed on a product file and the order value worked out.
The customers’ account in the receivables ledger (now held on a computer file) is
debited. Inventory records (now on a computer file) are updated.
z Output: An invoice is printed for the customer. Despatch information is displayed
on a screen in the warehouse to show the goods that have to be sent.
There are several important pieces of terminology that you should know:
z File: A group of similar records. So, a receivables ledger file contains records for
each customer.
z Record: Each record refers to a single entity. So, a customer record will hold all the
information about a customer; a product record will hold all the information about a
product. Records are collected together into files.
z Field: (Also known as an attribute.) Each field holds a separate piece of data
relating to a record. Thus a customer record would have fields for: name, address,
telephone number, credit limit, invoices outstanding, etc.
z Key field: The field that uniquely identifies a record. For example, a part code or an
employee number.
z Character: Characters make up fields and are typically a – z, 0 – 9.
Often a character holds no meaning on its own, but occasionally a character will be
the whole field. For example M or F for male or female.
The type of data held can be divided into:
z Transaction data: this records information about each transaction and this data
changes often as transaction progress and are completed.
z Standing or reference data: data that is relatively permanent such as names and
addresses, descriptions and prices of products.
In general, there are two types of processing that can be carried out: batch
processing and real-time on-line processing.
z Batch processing: transactions are accumulated into batches and then all
processed together. Because transactions have to be accumulated it means that
there is a delay in processing them so the information held in the accounting system
is generally out-of-date. For example, if sales transactions were accumulated during
the week and processed to the receivables file on the last day of the week, for most
of the time the balances shown owing from each customer would be understated.
The balances would be correct only just after processing. Batch processing is not
so common now.
z Real-time, on-line processing: ‘real-time’ means that files are updated as
transaction happen; ‘on-line’ means that the files are permanently accessible to be
updated. For example, when you withdraw cash from a cash machine, the machine
can access your bank account record (it is on-line) to see if you have the funds.

When you take the money out your bank account is immediately updated (real-
time).
Notes
2.8.1 Account
An account is summarised record or statement of all transactions relating to a particular
person or to an Assets or liability or income or expense. According to Kohler’s
Dictionary for accounts, an account has been defined as a formal record of a particular
type of transaction expressed in money. Each account is divided into two parts by the
vertical line drawn in the middle.
Dr. ………………. Account Cr.
Date Particulars JF Amount Date Particulars JF Amount
The left hand side is termed as Debit (Dr.) side and the right hand side is termed as
credit (cr.) side. In order to keep full record of all the transactions the business has to
keep.
An account of each head of expenses or income earned by the business and
An account of each property which belongs to the business and
An account of each party with whom business deals.
Classification of Accounts
Accounts are classified into two classes: Personal Accounts Impersonal Accounts
Impersonal Accounts are further sub divided into:
1. Real Accounts
2. Nominal Accounts
3. Valuation Accounts
Thus all accounts can be classified into Personal, Real and Nominal Accounts.
Personal Accounts
These accounts show the transactions with customers, suppliers, Money lenders, the
banks and the owner. For example: Mohan’s A/c, Rajesh’s A/c, M/s XY and Co.
Reliance Industries Ltd., Apna Bazar Co-operative Society Ltd., Mumbai University,
Dena Bank etc.
Real Accounts
Real accounts may be the following types.
z Tangible real Accounts: These are accounts of such things which are tangible i.e.
which can be seen touched or felt physically. Example: Land, Building, Furniture,
Cash etc.
z Intangible real Accounts: These accounts represent such things which cannot be
touched, seen or felt physically. Example: Goodwill, Trade marks, Patent right etc.
Nominal Accounts
Nominal Accounts includes accounts of all expenses, losses, incomes and gains.
Nominal Accounts represent only services or uses.
Valuation Accounts
Valuation accounts are accounts open to adjust values of assets e.g. provision for
Depreciation, Stock Reserve, Provision for doubtful debt A/c.

Book Keeping 29
Notes
2.9 Rules of Debit and Credit

The two sides of any account are arbitrarily distinguished. The left hand side of an
Account is called Debit side and Right hand side is called the Credit side When entry on
the left side is made it is called account is debited, and an Entry made on the right hand
side of account is called account is credited. An account is capable of receiving and
giving values. When an account receives a value / benefit. It is debited and when it
gives a value / benefit it is credited. Each business transactions affect at least two
accounts. One account receives benefit of certain value, another account would give
the benefit of the same value. The difference between the total debits and total credits
in the accounts is considered as balance
Personal Accounts
The personal Account which receives the benefit is debited, while the personal account
which gives the benefit is credited. The fundamental rule of Debit and Credit regarding
personal Account is Debit the Receiver And Credit the Giver The rule means, if a
person receives anything from the business, his account will be debited in the books of
business, and if person gives anything to the business, his account will be credited.
Illustrations 1: Suppose Goods sold on credit to Sunil from the view point of
business Sunil is a receiver because he receives goods and therefore Sunil’s Account
will be debited. Subsequently cash is received from Sunil. Mr. Sunil becomes a giver
because he gives cash and hence his account will be credited.
Real Accounts: As a thing either comes in into business or goes out of business.
Debit-What Comes In Credit-What Goes Out Real account relates to things or property.
Hence the above rule says if anything is coming into business, account of thing is to be
debited and anything is going out of business account of that thing is to be credited. In
the Illustration goods are sold to Mr. Sunil on credit. Goods are going out of business
and therefore ‘Goods A/c’ is to be credited subsequently cash is received from Sunil.
Cash is comes in therefore cash Account is to be debited.

Nominal Accounts being the accounts of losses and expenses or gains and
incomes. Debit Expenses and Losses Credit Incomes and Gains
Notes
Dr. Normal Accounts Cr.
Payment of Salary, rent loss on sale of Received Commission.
Assets. Bad Debts etc. Interest Discount etc.
Debit losses and expenses. Credit incomes and Gains
The accounts of expenses or losses of the business are to be debited where as the
accounts of Incomes or profits are to be credited Exp. Paid salaries. Here Salary is on
expenditure of the business and there fore Salary account is to be debited. In the
transaction “Received Interest from A & Co” Interest is an Income of the business and
hence Interest Account is to be credited.
2.10 Subsidiary Books

Subsidiary Books are those books of original entry in which transactions of similar
nature are recorded at one place and in chronological order. In a big concern, recording
of all transactions in one Journal and posting them into various ledger accounts will be
very difficult and involve a lot of clerical work.
This is avoided by sub-dividing the journal into various subsidiary journals or books.
The subdivisions of journal into various subsidiary journals for recording transactions of
similar nature are called as ‘Subsidiary Books.’
The different subsidiary books and their purpose are shown below:
1. Purchases Day Book – for recording credit purchase of goods only. Cash purchase
or assets purchased on credit are not entered in this book.
2. Sales Day Book – for recording credit sales of goods only. Assets sold or cash
sales are not recorded in this book.
3. Purchases Returns Book – for recording the goods returned to the suppliers when
purchased on credit.
4. Sales Returns Books – for recording goods returned by the customers when sold on
credit.
5. Bills Receivable Book – for recording the bills received [Bills Receivables] from
customers for credit sales.
6. Bills Payables Book – for recording the acceptances [Bills Payables] given to the
suppliers for credit purchases.
7. Cash Book – for all receipts and payments of cash.
8. Journal Proper – for recording any transaction which could not be recorded in the
above-mentioned subsidiary books. For example, assets purchased or sold on
credit and opening entry etc., are entered in this book.
Advantages of Subsidiary Books

The following are the advantages of Subsidiary books or Special journal:
1. Saving of Clerical Labour: Subsidiary books effect considerable saving of clerical
labour in postings and narration. Transactions of any one class such as credit
purchases, credit sales, cash transactions etc., are recorded through separate
subsidiary journals and there is no need for giving narration.
For example, by recording the transactions in the Purchase Day book 50% of the
labour in postings is saved. The periodical total of this book is to be debited to the
Purchases a/c. Only the personal accounts of the suppliers are to be credited.
2. Division of Clerical Work: As separate journals are used for recording the
transactions of each particular type, the division of clerical labour amongst several

Book Keeping 31
office clerks becomes possible. This makes speedy record of day-to-day
transactions practicable.
3. Minimizes Frauds: These books make possible the introduction of internal check
Notes
system under which the system of rotation of writing up books can be adopted. This
helps minimizing errors and detecting frauds.
4. Facilitates Further Reference: As transactions of similar nature are grouped
together in a separate book, the further reference to any particular item is
considerably facilitated.
Preparation of Purchase Day Book

This book is maintained mainly to record credit purchases of goods. The term ‘goods’
refers to all such commodities and services in which the firm normally deals. Hence,
cash purchase of goods or purchases of assets are not recorded in this book. Entries
are made in this book from inward invoices of credit purchases.
The ruling of this book is given below:
Date Particulars (Names of Invoice No. L.F. Details Amount

suppliers) (`) (`)
Date column records the date of purchase.

In the particulars column, the name of the supplier of goods is entered and the
details of goods purchased are also given in this column.
Invoice number refers to the number of Inward Invoice.
Ledger Folio refers to the page number of the ledger.
In the Details column, the amount of purchase of each type of goods is given.
In the amount column, the total amount for a given transaction is recorded.
The total of this book will give the total credit purchases made during the month.
Postings: Each Supplier’s personal account is credited in the ledger with its
respective amount with the words “By Purchases a/c.” The monthly total of this book is
debited to Purchases a/c in the ledger with the words ‘To Sundries” as per Purchases
Book.
Illustration 1:
From the following particulars, prepare the Purchase Book of a general merchant:
2001,
December 1 Bought from K & Bros., at 10% trade discount:
3 doz pens at ` 120 per doz.
20 doz ink bottle at ` 30 per doz.
December 7 Purchased for cash 50 reams of ruled paper at `.40 per ream from RS
Paper House.
December 11 Purchased from Mani Stores:
6 doz packets Glucco biscuits at ` 5 per packet.
15 doz. Packets salto biscuits at ` 2.5 per packet.

December 18 Purchased from Saraswathi Stores:
Notes 6 doz. packets Deluxe erasers at ` 2.40 per packet.

20 doz. Penholders at ` 7.50 per doz.
December 27 Bought from Deluxe Furniture Mart on credit:
12 Godrej chairs at ` 200 per chair
Solution:
PURCHASES DAY BOOK
Date Particulars Invoice L.F. Details Amount
No. (`) (`)
2001 K & Bros:
Dec.1 3 doz. Pens @ 120 per doz. 360.00
20 doz. Ink bottles @ ` 30 per 600.00
doz.
960.00
96.00 864.00
Mani Stores:
11 6 doz. Packets biscuits at ` 5 per 360.00
packet
15 doz packets salt biscuits at
` 2.50 per packet 450.00 810.00
Saraswati Stories:
18 6 doz. Packets Deluxe erasers 172.80
at ` 2.40 per packet
20 doz. Penholders at ` 7.50 per 150.00 322.80
doz.
1996.80
The transaction on 7this cash purchases and on 27this assets purchased. Hence
these transactions are not entered in the Purchases Day Book.
Preparation of Sales Day Book:

This book is maintained mainly to record credit sales of goods. Hence, the cash sales of
goods and assets sold are not entered in this book. Entries in this book are made from
the ‘outward invoice’ of credit sales.
The ruling of this book is similar to that of Purchases Book. In the Particulars
column of Sales Book, the name of the customer together with details of sales made to
him will be entered.
The invoice number in this book refers to the number of Outward Invoice sent to the
customer. The total of this book will show the total credit sales made during the period.
Postings
Each customer’s personal account is debited in the ledger with its respective amount
with the words “To Sales a/c”. The periodical total of this Book is credited to Sales a/c
with the words “By Sundries” as per Sales Book.

Book Keeping 33
Illustration 2:
Prepare the Sales Day Book from the following particulars extracted from the books of Notes
Meenu Electricals.
2002,
January 6 Sold on credit to Malathi:
100 Phillip lamps at ` 50 per lamp.
200 Mysore lamps at ` 45 per lamp.
Sylvania lamps at ` 40 per lamp.
January 10 Sold to Rani for cash:
10 electric iron boxes at ` 180 per iron box.
5 electric stoves at ` 156 per stove.
January 14 Sold to Viji:
6 table lamps at ` 30 per lamp.
6 Orient fans at ` 400 per fan.
12 Kaissal [36″] fans at ` 480 per fan.
January 18 sold furniture to Amala on credit ` 1000.
January 30 Sold to Janshi Traders:
10 Toasters at ` 90 per toaster.
12 Phillips tube at ` 50 per tube.
10 Table lamps at ` 30 per lamp.
Solution:
SALES DAY BOOK
Date Particulars Invoice L.F. Details Amount
No. (`) (`)
2002
Jan. 6 Malathi:
100 Phillip lamps @ ` 50.00 5000
200 Mysore lamps @ ` 45.00 per lamp 9000
200 Sylvania lamp @ ` 40.00 per lamp 8000 22000
Vijli:
14 6 table lamps @ ` 30 180
6 Orient fans @ ` 400 2400
12 Kassels fans @ ` 480 7560
8340
Less 5% trade discount 417 7923
Janshi Traders:
30 10 Toasters @ ` 90 900
12 Phillip tubes @ ` 50 600
10 Table lamp @ ` 30 300 1800
31723

Preparation of Returns Outward or Purchase Returns Book:
Notes This book is maintained to record the returns of goods purchased earlier from the
suppliers on credit. When goods are returned, a debit note is made out and sent to the
supplier to whom goods are returned. Entries are made in this book from the debit note
giving a reference to the number of debit note.
Purchase Returns Book
Date Particulars Debit L.F. Amount

Note No. (`)
Postings
Each supplier’s account mentioned in the Purchase Returns Book is debited in the
ledger with its respective amount with the words “To Purchase Returns a/c”. The
periodical total of this book is credited to the Purchase Returns a/c with the words “By
Sundries” as per Purchase Returns Book.
Preparation of Returns Inward or Sales Returns Book:
This book is maintained mainly the returns of goods sold to customers on credit. On
receipt of the goods, the firm prepares a ‘Credit Note’ in the name of the customer and
sends its original copy to the customer. Entries are made from Credit Note Book into the
Sales Returns Book.
The ruling of Sales Returns Book is given below:
Sales Returns Book
Date Particulars Credit Note L.F. Amount

No. (`)
Posting
Each customer’s personal account [as given in the Sales Returns Book] is credited with
the amount of goods returned by him with the words “By Sales Returns a/c”. The sales
returns a/c in the ledger gets the debit with the periodical total of Sales Returns Book
with the words ‘To Sundries” as per Sales returns Book.
Preparation of Bills Receivables Book:
This book is maintained to keep a detailed record of all the bills receivable received
by the firm. This book provides a medium for posting bills receivable transactions.
Bills Receivable Book
Date Drawer Acceptor Where Date Term Due Amount Remarks

when payable of date (`)
received bill LF

Book Keeping 35
Postings
The personal account of the person from whom the bill is received, is credited with the Notes
amount of that bill and the periodical total of the Bills Receivable Book is debited to Bills
Receivable a/c in the ledger.
Preparation of Bills Payable Book:
This book is maintained to keep a detailed record of all bills payables accepted by
the firm.
Bills Payable Book
Date of To Payee Where Date Term Due L.F. Amount Remarks
acceptance whom payable of date (`)
given bill
Postings
The personal account of the person whose bill is accepted is debited with the amount of
that bill and the periodical total of the Bills Payables Book is credited to Bills Payables
a/c in the ledger.
Illustration 3:
Enter the following transactions in the proper subsidiary books and post them in the
ledger.
Bills Payable Book
2002
January
1 Bought goods from Bala ` 15,000

2 Sold goods to Prem ` 25,000 and for cash ` 10,000
9 Sanjay sold goods to us ` 10,000 at a trade discount of 10%
14 Sold goods to Mahesh ` 12,000
18 Received goods returned by Prem ` 500
20 Returned goods to Sanjay worth ` 900
31 Returned goods by Mahesh ` 1,200.
Solution:
Purchases Book
Date Particulars L.F. Inward Amount

Invoice No. (`)
2002
January 1 Bala 15,000
9 Sanjay 9,000
24,000

Sales Book
Notes Date Particulars L.F. Inward Amount

Invoice No. (`)
2002
January 2 Prem 25,000
14 Mahesh 12,000
37,000
Purchases Returns Book

Invoice No. (`)
2002
January 20 Sanjay 900
900
Sales Returns Book

Invoice No. (`)
2002
January 18 Prem 500
31 Mahesh 1,200
1,700
Ledger
Bala A/c
Date Particulars J.F. Amount Date Particulars J.F. Amount
(`) (`)
2002 By Purchases a/c 15,000
Jan. 1
Sanjay A/c
(`) (`)
2002 To Purchases 900 2002 By Purchases 9,000
Jan. Returns a/c Jan. 9
20
Prem A/c
(`) (`)
2002 To Sales a/c 25,000 2002 By Sales Returns 500
Jan. 2 Jan. 18 a/c
Mahesh A/c
(`) (`)
2002 To Sales a/c 12,000 2002 By Sales Returns 12,000
Jan. 14 Jan. 31 a/c

Book Keeping 37
Purchases A/c
Notes
(`) (`)
2002 To Sundries 24,000
Jan. 31
Sales A/c
(`) (`)
2002 By Sundries 37,000
Jan. 31
Purchase Returns A/c

(`) (`)
2002 By Sundries 900
Jan. 31
Sales Returns A/c

(`) (`)
2002 To Sundries 1,700
Jan. 21
2.11 Recording of Cash and Bank Transactions

All financial transactions are ultimately settled in cash. Some transactions are settled
immediately after purchase and sale and the rest are after few days. In fact, business
transactions are settled sooner or later either in cash or through bank. Usually, small
sums are settled in cash and large sums are settled through bank. There is a greater
chance of misappropriating cash while performing cash and banking transactions. Cash
can be misappropriated by showing no record or less record of cash receipts. Similarly,
it can be misappropriated by showing more or fictitious record of payments. Hence, in
order to have proper information and control over cash and banking transactions, every
business maintains a separate cash book.
Cash Transaction
Cash transactions refer to cash receipts and payments. The receipts of cash from
various sources and payment of cash on various heads are important routine
transactions of a business. The main sources of cash receipts are sale of goods and
services, sale of old assets, contribution of capital, loan borrowed, interest, rent,
commission and other receipt from customers. The main heads of payments are
purchase of goods, wages, rent, stationary, interest on loan borrowed, drawing,
repayment of liabilities, advertising and payment to suppliers.
Banking Transaction
Banking transactions refer to all receipts and payment made through bank. It is
inconvenient and risky affair to get and make payment of large sum directly in cash. A
modern business operates bank account to settle all receipts and payment. It issues
cheque for making payments accepts cheques for getting amount. It may also instructs
its bank to pay and collect amount on its behalf. In fact, the bank is treated by the
business as its agent for collecting all receipts and making all payments. Except the
balance in petty cash account, no cash balance is maintained in the office of a modern
business.

With sophisticated accounting software and inexpensive computers, it is no longer
practical for most businesses to manually enter transactions into journals and then to
Notes post to the general ledger accounts and subsidiary ledger accounts. Today, software
such as QuickBooks* will update the relevant accounts and provide more information
with a minimum of data entry.
*QuickBooks is a registered trademark of Intuit Inc. Accounting Coach LLC is not
affiliated with Intuit Inc. and does not receive any affiliate marketing commissions from
Intuit.
In this section we will highlight how the accounting software will capture financial
transactions and then automatically update the general ledger and store the information
for management's future use.
Accounts Payable
When accounting software is used to enter the invoices received from suppliers (vendor
invoices), the software will update Accounts Payable and will require that the account or
accounts that should be debited be entered as well. The accounting software's vendor
files also allow a company to prepare purchase orders, receiving tickets and to pay the
vendors' invoices.
A company should have internal controls so that only legitimate invoices are
recorded and paid.
Check Writing
When the accounting software is used to write checks, the software will automatically
credit the Cash account and will require that another account be designated for the
debit. An additional benefit is that the amounts will move electronically and the account
balances will be automatically calculated with speed and accuracy.
Again, a company should have internal controls to ensure that only legitimate
payments are processed.
Sales on Credit
When the accounting software is used to prepare a sales invoice for a customer who
purchased on credit, the customer's detail will be updated, the general ledger account
Sales will be credited and the general ledger account Accounts Receivable will be
debited. Statements for each customer and an aging of all of the accounts receivable
can be printed with the click of a button.
Payroll
Another source of financial transactions is the company's payroll. While many
companies process payroll on their accounting software, others opt to outsource payroll
to companies such as ADP, Paychex, Intuit, or local firms.
(Accounting Coach is not affiliated with any of these companies and it does not
receive affiliate marketing commissions from any of them.
Bank Reconciliation
The purpose of the bank reconciliation is to be certain that the financial statements are
reporting the correct amount of cash and the proper amounts for any related accounts
(since every transaction affects a minimum of two accounts).
The bank reconciliation process involves:
z Comparing the following amounts
z The balance on the bank statement

Book Keeping 39
The balance in the company's general ledger account. (The account title might be
Cash - checking.)
Notes
Determining the reasons for the difference in the amounts shown in 1.
The common reasons for a difference between the bank balance and the general
ledger book balance are:
1. Outstanding checks (checks written but not yet clearing the bank)
2. Deposits in transit (company receipts that are not yet deposited in the bank)
3. Bank service charges and other bank fees
4. Check printing charges
5. Errors in entering amounts in the company's general ledger
The outstanding checks and deposits in transit do not involve errors by either the
company or the bank. Since these items are already recorded in the company's
accounts, no additional entries to the company's general ledger accounts will be needed.
Bank charges, check printing fees and errors in the company's accounts do require
the company to make accounting entries. The company should make the entries before
the financial statements are prepared since a minimum of two accounts have the
incorrect balances (due to double-entry accounting). Here is an entry for a bank service
charge that was listed on the bank statement:
Bank Fees Expense 34.00
Cash – Checking Account 34.00
If the reconciliation reveals that an incorrect amount has been recorded in the
company's Cash account, perhaps the easiest way to correct the error is to remove the
incorrect amount and then enter the correct amount.
Accounting software is likely to include a feature for reconciling the bank statement.
Cash Book:
Cash Book records all receipts of and payments in cash. Usually the deposits into bank
accounts maintained by a business firm, withdrawals from such accounts and cheque
payments are also recorded in the Cash Book. Sometimes a separate book for
recording receipts and payments by cheques/DDs etc., is kept, known as the Bank
Book. A Cash Book which is used to record both cash and bank transactions is referred
to as a Two-Column Cash Book.
The format of this cash book is given below:
Cash Discounts
Sometimes, in order to encourage early payments due from customers, a company may
offer a certain percentage of the amount as a discount. For example, if a customer
owes the company ` 1,000, the company may allow 2% discount if the payment is

made before a certain date. In such a case, the customer would pay an actual cash of
` 980 only (` 1,000-2% of ` 1,000) and ` 20 would be treated as discount expense by
Notes the company.
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In the same way, a company might be given some discounts by its creditors for early
payment of the amounts payable by it. A cash discount may be distinguished from a
trade discount which is given on the invoice price, especially when orders for large
quantities are placed. The trade discount is therefore reflected as a reduction in the sale
price itself.
A Cash Book can also be used to record the cash discounts that are allowed to
customers for prompt payments and the cash discounts that are received on payments
made to suppliers within a stipulated time period.
Since discounts will be allowed to customers at the time of receipt of money and
received from suppliers at the time of payment of dues, it is convenient to maintain the
column for discounts allowed on the receipts side of the Cash Book and the column for
discount received on the payments side. A Cash Book in which the cash and bank
transactions and the details of cash discounts are recorded is referred to as a Three-
Column Cash Book.
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An illustrative format of this type of Cash Book is given below:
The Cash Book normally also carries Columns for Cash Memo No., Ledger Folio,
Vouchers No. etc.
The unique feature of the Cash Book is that it performs the functions of a Journal
and the General Ledger with regard to the Cash and Bank transactions. In other words,
Cash Book is the book of first entry for all such transactions and the ledger accounts for
cash in hand and cash at bank will not be maintained in the General Ledger.
Petty Cash Book:

When the petty cash fund is operated as an imprest fund, the recording of the petty
expenses paid will be made in the petty cash book. This would also avoid recording too
many small value transactions in the main cash book. The petty cash book would
contain a number of analytical columns for grouping the various expenses under a few
classifications which would facilitate subsequent posting into the General Ledger.

Book Keeping 41
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A specimen petty cash book is given below:
Notes
The Imprest System

When an analytical petty cash book is maintained for recording the petty expenses, it
will be practically more convenient to consider the petty cash as a separate account and
take cheques issued for the petty cash imprest as a debit to petty cash account and all
petty expenses paid as credits in petty cash account.
The journal entries in the months of April and May 2012 in the books of Ramesh
Co. will be as follows:
If credit for all the expenses is also given in the Cash Account (or Bank A/c) then
the Cash A/c will be understated (due to two credits-one in respect of release of imprest
and the other in respect of actual expenses), and to counterbalance the
understatement, the balance in Petty Cash Account must be added to that of the Cash
Account.

Journal
Notes The Books of Accounts maintained by an organisation other than the cash book may be
classified into Journals and Ledgers. The Journal is used as the book of first entry for all
transactions which cannot be recorded in the Cash Book. In other words, all non-cash
transactions should be recorded in the journal. For practical convenience the journal is
maintained by using a number of books called the subsidiary books.
For example, the following subsidiary books may constitute the journal for an
enterprise:
z Purchase Book
z Purchase Returns Book
z Sales Book
z Sales Returns Book
z Bills Receivable Book
z Bills Payable Book
z Journal Proper.
Specimen formats of these books and brief explanations regarding their use are given
in the following sections:
Purchases Book
Also known as the Purchases Journal, this book is used to record credit purchases of
goods only. The term ‘goods’ covers only those items procured by the business for
resale.
Purchase Returns Book

This subsidiary book is used to record the goods purchased on credit and sent back to
suppliers as they are found not conforming to specifications or for any other reason.
Sales Book
Also known as the Sales Journal, this subsidiary book is used to record all sales of
goods on credit.

Book Keeping 43
Notes
Sales Returns Book

This book is used to record the transactions relating to goods sold on credit and
received back from the customers as not conforming to the specifications or for any
other reason.
Bills Receivable Book

The Bills Receivable of an enterprise consists of all Promissory Notes given or Bills of
Exchange accepted by customers in respect of amounts due from them. The Bills
Receivable Book is used to record all such Promissory Notes given or such Bills of
Exchange accepted by customers.
Bills Payable Book

The Bills Payables consist of all Promissory Notes given or Bills of Exchange accepted
by the business in respect of amounts owing to its suppliers. The Bills Payable Book is
used to record all such Promissory Notes given or Bills of Exchange accepted by the
business.

Journal Proper
Notes This Book is used to record all transactions which cannot be included in the cash book
or any of the other six subsidiary books discussed above. The transactions that will be
recorded in Journal Proper are: purchase or sale of fixed assets and investments on
credit, adjusting entries, rectification entries etc.
Illustration 1:
From the following transactions of M/s J Choudhary, write up his cash book (three-
column form) bringing down the balance as on May 31, 2012.
May 1 Balance at bank 1, 50,000
May 2 Drew from bank for office use 50,000
May 3 Bought office furniture for cash 32,000
May 8 Paid wages in cash 15,000
May 14 Drew from bank from office use 25,000
May 16 Sold goods for cash 22,000
May 19 Received a cheque from B Batiwala & Co in settlement of their account of `
75,000 less 5 per cent
May 23 Bought goods for cash 45,000
May 25 Drew cheque for self 40,000
May 31 Paid Agrawal’s account ` 40,000 by cheque less 2½ percent
Solution:
Illustration 2:
Enter the following transactions in the purchase day book:
2012:

Book Keeping 45
Jan. 2 Bought of G Saha and Co. 60 yards of long cloth @ ` 140 per yard.
Jan. 8 Purchased from B Chandra & Co. piece goods for ` 20,000.
Notes
Jan. 16 Purchased from A. Basu & Co. 100 yards of shirting @ ` 300 per yard less
trade discount @2%
Jan. 28 Bought of SK Sarkar & Sons, 200 yards of terycot @ ` 1,200 per yard less
2½ per cent trade discount.
Illustration 3:
Prepare a sales day book from the following transactions:
Jan. 2, 2012 Sold to Nilima, spices worth ` 80,000 less 10% trade discount.
July 4, 2012 Sold to Sadhana, sugar worth ` 40,000, extra charges ` 1,000.
July 5, 2012 Sold to Mohan, wheat worth ` 20,000 forwarding expenses ` 1,500.
Illustration 4:
Prepare the sales day book from the following transactions:
2012:
Feb. 1 Sold goods to Ram, 200 metres cloth @ `100 per metre less trade discount
7%.
Feb. 3 Sold to Rahim, 500 metres cloth @ ` 200 per metre less trade discount 5%
packing charges ` 3,000.
Feb. 4 Sold to Shyam, 2,000 metres cloth @ ` 200 per metre less trade discount
5% other charges made of ` 2,500.
Feb. 7 Sold to Jadu, 300 metres cloth @ ` 250 per metre less trade discount of
10%.

Notes
Illustration 5:
Prepare purchase returns book (returns outward) from the following particulars:
July 1 Returned to Sumit Prakash 50 m of cloth @ ` 20 per metre
July 15 Bharat Kumar & Sons 10 sarees @ ` 300 per saree
July 20 Prem Chandra 200 m of cloth @ ` 70 per metre
July 31 Bihari Brothers 100 m of cloth @ ` 100 per metre
Illustration 6:
Enter the following transactions in the appropriate book:
2012:
Aug. 01 Returned to us by Harish Gupta & Co. 200 bags coffee @ ` 100 per bag.
Aug. 17 Returned by Bipin Pal & Brothers, 300 chests of tea @ ` 70 per chest.
Aug. 31 Returned by Bhagwan Das 50 tins of ghee @ ` 1,000 per tin.

Book Keeping 47
Illustration 7:
Enter the following transactions in the sales book of M/s Prem Kumar of New Delhi:
Notes
2012:
May 7 Sold to Manish Gupta, Delhi
100 bags of rice @ ` 450 per bag
10 bags of wheat @ ` 500 per bag
May 9 Sold to Rajinder Singh, Patiala
Trade discount allowed @ 10%
May 11 Sold to Ranvir Singh, Agra
100 bags of wheat @ ` 550 per bag
Trade discount allowed 10%
Illustration 8:
Enter the following transactions in the purchases book of M/s Vijay Chandra:
2012
May 7 Bought of Prem Das, Delhi; on credit:
100 copies of Principles of Accounting Part I by C.L. Khanna @ ` 50 per copy
Trade discount allowed 10%
May 11 Bought of P. Chand and Co. Delhi on credit:
200 copies of Mercantile Law by P.S. Guglani @ ` 60 per copy
Less: 10% trade discount
May 13 Bought of Ravinder Kumar, Agra, on credit:
100 copies of History of India Part I
by Mohan Das @ ` 70 less 10% discount

Notes
Illustration 9:
Prepare a Cash Book from the following transactions:

Book Keeping 49
Illustration 10:
Enter the following in the purchases journal of M/s Modern Furniture Suppliers, Poona: Notes
April Bought on credit from M/s Prakash and Company at a Trade Discount of 10%:
12 dozen Easy chairs at the rate of ` 1,150 per dozen.
6 dozen Folding chairs at the rate of ` 1,250 per dozen
10 dining Tables at the rate of ` 1,450 each.
April 15 Purchases from Shetten and Company, Hubli:
20 Steel cupboards at the rate of ` 1,450 each at a Trade Discount of 10% plus
Transport charges Rs. 900.
Solution:
In the Books of M/s Modern Furniture Suppliers.
Illustration 11:
Compile a cash book with cash and Bank columns from the following transactions:

Illustration 12:
Notes Write out an analytical petty cash book from the following transactions:
2012:
August 1 Issued a cheque for ` 10,000 to the petty cashier.
2 Paid electricity charges ` 325
4 Paid telephone charges ` 250
8 Paid for printing ` 375
15 Paid for stationery ` 600
20 Purchased post cards ` 300
2.12 Preparation of Ledger Accounts

The journal provides a complete listing of the daily transactions of a business. But it
does not provide information about a specific account in one place. For example, to
know how much cash balance we have, the accounting clerk would have to check all
the journal entries in which cash is involved, and this is very laborious job; because
there are hundreds or even thousands of cash transactions recorded on different pages
of journal. To avoid this difficulty, the debit and credit of journalized transactions are
transferred to ledger accounts. Thus all the changes for a single account are located in
one place - in a ledger account. This makes it easy to determine the current balance of
any account.
Definition and Explanation of Ledger

The book in which accounts are maintained is called ledger. Generally, one account is
opened on each page of this book, but if transactions relating to a particular account are
numerous, it may extend to more than one page. All transactions relating to that
account are recorded chronologically. From journal each transaction is posted to at
least two concerned accounts - debit side of one account and credit side of another
account. Remember that, if there are two accounts involved in a journal entry, it will be
posted to two accounts in the ledger and if the journal entry consists of three accounts
(compound entry) it will be posted to three different accounts in the ledger. The process
of transferring information from journal to ledger accounts is known as posting. The goal
of all transactions is ledger. Ledger is known as the destination of entries in journal but
it must be remembered that transactions cannot be recorded directly in the ledger - they
must be routed through journal. This concept is illustrated below:

Book Keeping 51
Transaction
↓ Notes
Journal
↓
Ledger
So, the books in which all the transactions of a business concern are finally
recorded in the concerned accounts in a summarized form is called ledger.
Characteristics of Ledger Account

The ledger has the following main characteristics:
z It has two identical sides - left hand side (debit side) and right hand side (credit
side).
z Debit aspect of all the transactions are recorded on the debit side and credit
aspects of all the transactions are recorded on credit side according to date.
z The difference of the totals of the two sides represents balance. The excess of debit
side over credit side indicates debit balance, while excess of credit side over debit
side indicates the credit balance. If the two sides are equal, there will be no
balance.
z Generally the balance is drawn at the year end and recorded on the lesser side to
make the two sides equal. This balance is known as closing balance.
z The closing balance of the current year becomes the opening balance of the next
year.
Types or Forms of Ledger Accounts

There are two forms of ledger accounts. These are:
z Standard form
z Self-balancing form
Standard Form of Ledger Account

To understand clearly as to how to write the accounts in ledger, the standard form of an
account is given below with two separate transactions:
Date Particulars J.R Amount Date Particulars J.R Amount
2005 2005
Dec. 17 Cash A/C 1,200 Dec. 17 Purchases 2,000
A/C
It appears that each account in the ledger has two similar sides - left hand side is
called debit side (briefly Dr.) and right hand side (briefly Cr.) side. Nowadays these two
words are not used, because it is obvious that the left hand side is debit side and right
hand side is credit side.
Posting Procedure:
Transferring information i.e. entries from journal to ledger accounts is called
posting. The procedure of posting from journal to ledger is as follows:
z Locate the ledger account from the first debit in the journal entry.
z Record the date in the date column on the debit side of the account. The date is the
date of transaction rather than the date of the posting.

z Record the name of the opposite account (account credited in entry) in the
particular (also know as reference column, description column etc) column.
Notes z Record the page number of the journal in the journal reference (J.R) column from
where the entry is being posted.
z Record the amount of the debit in the "amount column"
z Locate the ledger account for the first credit in the journal and follow the same
procedure.
Balancing An Account:
The difference between the two sides of an account is its balance. The balance is
written on the lesser side to make the two sides equal. The process of equalizing the
two sides of an account is known as balancing.
The rules for balancing an account are stated as below:
z Add up the amount columns of both the sides of an account and write the totals in a
separate slip of paper.
z Find out the difference of the two totals.
z Write down the difference on the lesser side of the account.
z Now total up both the sides and write the totals and draw double lines under them.
z Again write the difference on the opposite side below the double line.
If the debit side of an account is heavier, its balance is known as debit balance. and
if the credit side of an account is heavier its balance is know as credit balance. If the
two sides are equal, that account will show zero balance. The rules for determining the
balance is as follows:
Total debit = More than total credit = Debit balance

Total credit = More than total debit = Credit balance
Total debit = Total credit = Nil balance
It may be noted that at the time of balancing an account debit balance is placed on
the credit side and credit balance on debit site. This balance is known as closing
balance. What is closing balance in this year, is the opening balance of the next year.
Example:
Enter the following transactions in journal and post them into ledger:
2005
Jan. 1 Mr. Javed started business with cash $100,000
2 He purchased furniture for $20,000
3 He purchased goods for $60,000
5 He sold goods for cash $80,000
6 He paid salaries $10,000
Solution:
Journal
Date Particular L.F Amount Amount
2005
Jan. 1 Cash A/C ...........................................Dr. 9 100,000
Capital 11 100,000
Amity Directorate of Distance & Online Education Contd…/-

Book Keeping 53
(Being capital brought in)
2 Furniture A/C......................................Dr. 13 20,000 Notes
Cash A/C 9 20,000
(Being furniture purchased for cash)
3 Purchases A/C..................................Dr. 15 60,000
Cash A/C 9 60,000
(Goods purchased for cash)
5 Cash A/C....................................Dr. 9 80,000
Sales A/C 17 80,000
(Sold goods for cash)
6 Salaries A/C...............................Dr. 19 10,000
Cash A/C Return 9 10,000
(Salaries paid)
Ledger
Cash Account (No.9)
Date Particular J.R Amount Date Particulars J.R Amount
2005 2005
Jan.1 Capital A/C 1 100,000 Jan.2 Furniture A/C 1 20,000
Jan.5 Sales A/C 1 80,000 Jan.3 Purchases 1 60,000
A/C
Jan.6 Salaries A/C 1 10,000
Balance c/d 90,000
Total 180,000 Total 180,000
Capital Account (No.11)

2005 2005
Jan.6 Balance c/d 100,000 Jan.1 Cash A/C 1 100,000
Total 100,000 Total 100,000
Furniture Account (No.13)

2005 2005
Jan.2 Cash A/C 1 20,000 Jan.6 Balance c/d 20,000
Total 20,000 Total 20,000
Purchases Account (No.15)

2005 2005

Sales Account (17)
Notes Date Particular J.R Amount Date Particulars J.R Amount

2005 2005
Jan.6 Balance c/d 80,000 Jan.5 Cash A/C 1 80,000
Salaries Account (19)

2005 2005
Self Balancing Form of Ledger Accounts

In practice the standard form of the ledger account is not used. But it is usually used for
examination purposes.
In practice, the self balancing form of ledger accounts is used. The advantage of
this type of ledger account is that the balance of the account after each transaction is
available at a glance from the last column. So, much time and labor is saved. In the
following example self balancing ledger accounts have been used.
Example:
Enter the following transactions in journal and post them into the ledger and also
prepare a trial balance.
2005
Jan. 1 Mr. X started business with cash $80,000 and furniture $20,000.
Jan. 2 Purchased goods on credit worth $30,000 from Y.
Jan. 3 Sold goods for cash $16,000.
Jan. 4 Sold goods on credit to S for $10,000
Jan. 8 Cash received from S $9,800 in full settlement of his account.
Solution:
Journal
Date Particulars L.F Dr. Cr.

2005 Amount Amount
($) ($)
Jan. 1 Cash A/C 5 80,000
Furniture A/C 7 20,000
Capital A/C 9 1,00,000
(Owner invested cash and furniture)
Jan. 2 Purchases Account 11 30,000
Y 13 30,000
(Bought goods on credit)
Contd…/-
Book Keeping 55
Jan. 3 Cash A/C 5 16,000
Sales A/C 15 16,000 Notes
(Sold goods for cash)
Jan. 4 S A/C 17 10,000
Sales A/C 15 10,000
(Sold goods on credit)
Jan. 8 Cash A/C 5 9,800
Discount A/C 19 200
S A/C 17 10,000
(Cash received and discount allowed)
Ledger
Cash Account (No.5)
Date references J.R Debit Credit Balance
2005 Dr. Cr.
Jan. 1 Capital A/C 5 80,000 80,000
Jan. 3 Sales A/C 5 16,000 96,000
Jan. 8 S A/C 5 9,800 105,800
Furniture Account (No.7)

2005
Dr. Cr.
Jan. Capital A/C 5 20,000 20,000
1
Capital Account (No.9)

2005 Dr. Cr.
Jan. Cash A/C 5 80,000 80,000
1
Jan. Furniture A/C 5 20,000 1,00,000
1
Purchases Account (No.11)

2005 Dr. Cr.
Jan. 2 Y A/C 5 30,000 30,000
Y Account (No.13)
2005
Dr. Cr.
Jan. 2 Purchases A/C 5 30,000 30,000

Sales Account (No.15)
Notes Date references J.R Debit Credit Balance

2005
Dr. Cr.
Jan. 3 Cash A/C 5 16,000 16,000
Jan. 4 S A/C 5 10,000 26,000
S Account (No.17)

2005
Dr. Cr.
Jan. 4 Sales A/C 5 10,000 10,000
Jan. 8 Cash A/C 5 9,800
Jan. 8 Discount A/C 5 200 Nil
Discount Account (No.19)

2005
Dr. Cr.
Jan. 8 S A/C 5 200 200
2.13 Preparation of Trial Balance

Trial Balance is a list of closing balances of ledger accounts on a certain date and is the
first step towards the preparation of financial statements. It is usually prepared at the
end of an accounting period to assist in the drafting of financial statements. Ledger
balances are segregated into debit balances and credit balances. Asset and expense
accounts appear on the debit side of the trial balance whereas liabilities, capital and
income accounts appear on the credit side. If all accounting entries are recorded
correctly and all the ledger balances are accurately extracted, the total of all debit
balances appearing in the trial balance must equal to the sum of all credit balances.
Purpose of a Trial Balance

Trial Balance acts as the first step in the preparation of financial statements. It is a
working paper that accountants use as a basis while preparing financial statements.
Trial balance ensures that for every debit entry recorded, a corresponding credit
entry has been recorded in the books in accordance with the double entry concept of
accounting. If the totals of the trial balance do not agree, the differences may be
investigated and resolved before financial statements are prepared. Rectifying basic
accounting errors can be a much lengthy task after the financial statements have been
prepared because of the changes that would be required to correct the financial
statements.
Trial balance ensures that the account balances are accurately extracted from
accounting ledgers.
Trail balance assists in the identification and rectification of errors.
Example
Following is an example of what a simple Trial Balance looks like:

Book Keeping 57
ABC LTD
Trial Balance as at 31 December 2011 Notes
Debit Credit
Account Title
$ $
Share Capital 15,000
Furniture & Fixture 5,000
Building 10,000
Creditor 5,000
Debtors 3,000
Cash 2,000
Sales 10,000
Cost of sales 8,000
General and Administration Expense 2,000
Total 30,000 30,000
Title provided at the top shows the name of the entity and accounting period end for
which the trial balance has been prepared.
Account Title shows the name of the accounting ledgers from which the balances
have been extracted.
Balances relating to assets and expenses are presented in the left column (debit
side) whereas those relating to liabilities, income and equity are shown on the right
column (credit side).
The sum of all debit and credit balances is shown at the bottom of their respective
columns.
Limitations of a Trial Balance

Trial Balance only confirms that the total of all debit balances match the total of all credit
balances. Trial balance totals may agree in spite of errors. An example would be an
incorrect debit entry being offset by an equal credit entry. Likewise, a trial balance gives
no proof that certain transactions have not been recorded at all because in such case,
both debit and credit sides of a transaction would be omitted causing the trial balance
totals to still agree. Types of accounting errors and their effect on trial balance are more
fully discussed in the section on Suspense Accounts.
How to Prepare a Trial Balance

Following Steps are involved in the preparation of a Trial Balance:
z All Ledger Accounts are closed at the end of an accounting period.
z Ledger balances are posted into the trial balance.
z Trial Balance is cast and errors are identified.
z Suspense account is created to agree the trial balance totals temporarily until
corrections are accounted for.
z Errors identified earlier are rectified by posting corrective entries.
z Any adjustments required at the period end not previously accounted for are
incorporated into the trial balance.

Closing Ledger Accounts
Ledger accounts are closed at the end of each accounting period by calculating the
Notes totals of debit and credit sides of a ledger. The difference between the sum of debits
and credits is known as the closing balance. This is the amount which is posted in the
trial balance.
How closing balances are presented in the ledger depends on whether the account
is related to income statement (income and expenses) or balance sheet (assets,
liabilities and equity). Balance sheet ledger accounts are closed by writing 'Balance c/d'
next to the balancing figure since these are to be rolled forward in the next accounting
period. Income statement ledger accounts on the other hand are closed by writing
'Income Statement' next to the residual amount because it is being transferred to the
income statement as revenue or expense incurred for the period.
The steps involved in closing a ledger account may be summarized as below:
z Add the totals of both sides of a ledger
z The higher of the totals among the debit side and credit side must be inserted at the
end of BOTH sides. Closing balance is the balancing figure on the side with the
lower balance.
z In case of ledger accounts of assets, liabilities and equity, 'balance c/d' is written
next to the closing balance whereas in case of income and expenses ledger
accounts, 'Income Statement' is written next to the closing balance.
z The closing balances of all ledger accounts are posted into the trial balance.
Closing Expense Ledger Account

This is how an expense ledger looks like before closure:
Salaries Expense Account
Debit $ Credit $
Date Particular $ Date Particular $
15-12-11 Cash 2,000 - - -
31-12-11 Cash 3,000 - - -
In order to close the account, we must first total both sides. The debit side adds up
to $5000 where as the credit side does not have any balance. Therefore, as $5000 is
higher than the total of credit side, we write this amount at the end of both sides.
Closing figure is the balancing figure on the credit side which in this case is $5000.
Being an income statement ledger account, the closing balance will transferred at
the period end to income statement.
This is how the expense ledger will look like after closure:
Salaries Expense Account
Debit $ Credit $
Date Particular $ Date Particular $
15-12-11 Cash 2,000 31-12-11 Income Statement 5,000
31-12-11 Cash 3,000 - - -
5,000 5,000

Book Keeping 59
The closing balance amount of $5000 will be posted in the trial balance in respect of
salaries expense.
Notes
Closing Income Ledger Account
This is how an income ledger looks like before closure:
Sales Revenue Account (Income)
Debit $ Credit $
Date Particular Date Particular
- - - 15-12-11 Cash 7,500
- - - 31-12-11 Cash 7,500
In order to close the account, we must first total both sides. The credit side adds up
to $15,000 where as the debit side does not contain any balance. Therefore, as
$15,000 is higher than the total of debit side, we write this amount at the end of both
sides.
Closing figure is the balancing figure on the debit side which in this case is $15,000.
Being an income statement ledger account, the closing balance will transferred at
the period end to income statement.
This is how the income ledger will look like after closure:
Sales Revenue Account (Income)
Debit $ Credit $
31-12-11 Income Statement 15,000 15-12-11 Cash 7,500
- - - 31-12-11 Cash 7,500
15,000 15,000
The closing balance amount of $15,000 will be posted in the trial balance in respect
of sales revenue.
Closing Liability Ledger Account

This is how a liability ledger looks like before closure:
Bank Loan Account (Liability)
Debit $ Credit $
- - - 15-12-11 Cash 10,000
sides.

Being a balance sheet ledger account, the closing balance will be carried forward to
the next accounting period.
Notes
This is how the liability ledger will look like after closure:
Bank Loan Account (Liability)
Debit $ Credit $
31-12-11 Balance c/d 10,000 15-12-11 Cash 10,000
10,000 10,000
of the bank loan.
Closing Asset Ledger Account

This is how an asset ledger looks like before closure:
Cash Account (Asset)
Debit $ Credit $
01-12-11 Share Capital 10,000 15-12-11 Salaries Expense 2,000
15-12-11 Bank Loan 10,000 31-12-11 Salaries Expense 3,000
15-12-11 Sales Revenue 7,500 - - -
31-12-11 Sales Revenue 7,500 - - -
to $5,000 where as the debit side adds up to $35,000. Therefore, as $35,000 is higher
than the total of credit side, we write this amount at the end of both sides.
Closing figure is the balancing figure on the credit side which in this case is $30,000
(35000 - 2000 - 3000).
This is how the asset ledger will look like after closure:
Debit $ Credit $
01-12-11 Share Capital 10,000 15-12-11 Salaries Expense 2,000
15-12-11 Bank Loan 10,000 31-12-11 Salaries Expense 3,000
15-12-11 Sales Revenue 7,500 - - -
31-12-11 Sales Revenue 7,500 31-12-11 Balance c/d 30,000
35,000 35,000
of cash.
Book Keeping 61
Closing Equity Ledger Account
This is how an equity ledger looks like before closure: Notes
Debit $ Credit $
- - - 01-12-11 Cash 10,000
sides.
This is how the equity ledger will look like after closure:
Debit $ Credit $
31-12-11 Balance c/d 10,000 01-12-11 Cash 10,000
10,000 10,000
of share capital.
Posting Closing ledger balances into Trial Balance:

Closing Balance of all ledger accounts are posted into the trial balance. It is important to
remember that a debit closing balance in the ledger account appears on the credit side
but in the trial balance it is presented in the debit column and vice versa.
Posting of closing balances should be done carefully as many errors may occur
during the posting process such as Posting Error, Transposition Errors and Slide error.
Following is an example of a trial balance prepared from the closing balances of the
ledgers detailed above.
ABC LTD
Trial Balance as at 31 December 2011
Debit Credit
Account Title
$ $
Share Capital 10,000
Bank Loan 10,000

Contd…/-

Cash 30,000
Notes Salaries Expense 5,000
Sales Revenue 15,000
Total 35,000 35,000
2.14 Summary
Accounting has been clearly defined as "the measurement and communication process
of financial and economic data". The science of accounting is still in the evolutionary
process. The traditional accounting, later styled as single entry from of book-keeping,
was in vogue right from time immemorial. The modest beginning of accounting took the
form of Financial Accounting based on double entry system. Under this method all
business transactions were at first recorded in the books of prime entry, posted into
respective ledger accounts, balances were struck and the trial balances were prepared
from and out of which the annual Profit and Loss Account and Balance Sheet of a
business concern were prepared. The final accounts of a concern called as the
‘traditional package’, helped the management in the process of decision-making
Generally speaking, the science of management seeks to organize the quantitative
factors of a business decision, while the art of management consists in weighing the
qualitative factors in the scale of the manager’s judgement, experience and insight to
produce the best decision in the circumstances. Managers in the past, wholly relied on
their intuition and experience in making business decisions vitally affecting the survival
and success of their business units. But with the increase in the size and complexity of
business due to a variety of factors like large scale operation, application of
sophisticated modern technology, management has become more complex and
cumbersome. To cope up with the increasing needs of large-scale business, the
modern managers need meaningful and timely data for making decisions. Accounting
can be broadly classified into three types:
z financial accounting,
z cost accounting
z management accounting.
These three cannot be put in water-tight compartment classification; each one
supplements the other. In fact, financial accounting provides the basis for cost
accounting as well as management accounting and in the ultimate analysis
management accounting includes part of cost accounting.
The American Institute of Certified Public Accountants has defined Financial
Accounting as ‘the art of recording, classifying and summarising in a significant manner
and in terms of money, transactions and events which are in part at least of a financial
character, and interpreting the results thereof’.
Accounting is the language effectively employed to communicate the financial
information of a business unit to various parties interested in its progress such as
proprietors, creditors, investors, employees, consumers, the Government, etc. Financial
accounting concerns that part of accounting which is meant to serve all parties
externally to the operating responsibility of the firm, e.g., creditors, investors,
employees, regulatory bodies and the general public. But management accounting is
designed for use in the operational needs of the firm. Functions of Financial Accounting
Financial Accounting is supposed to perform the following functions:
z Recording: Since all business transactions cannot be kept in memory, they have
got to be systematically recorded and pass through journals, ledgers and work
sheets before they could take the forms of final accounts. This aspect of financial
accounting has assumed considerable importance with the limitation of human
memory.

Book Keeping 63
z Validating: With the universal acceptance and enforcement of accounting
principles, every recorded entry in the books of accounts maintained by a business
unit gives validity or authenticity to all such transactions so recorded. Notes
z Communicating: This is an important function of financial accounting. Accounting
serves as a language for communicating the financial facts about the enterprise or
activity most effectively to all concerned interested in using and interpreting them.
z Interpreting: This aspect helps in unfolding the total financial picture of an
undertaking and investing the same with more meaning. As Professor Theodore
Levitt of Harvard Business School remarked recently, “data do not yield information
except with the intervention of mind. Information does not yield meaning except with
the intervention of imagination”. The intervention of both mind and imagination are
needed to make the data meaningful. Limitations of Financial Accounting Financial
Accounting like any other branch of knowledge, is not without limitations.
z The fast changing conditions and environmental factors have brought the limitations
of financial accounting to the fore.
z Nature of business: All the business in modern times has undergone radical
changes and as the management needs a variety of data for decision making
purpose. Financial accounting is not in a position to meet the requirements of the
management in the important task of decision making process.
z Shift in emphasis: There is a shift in the emphasis in accounting in modern times
from what it was once– a mere record keeping in analysis and interpretation
necessitated by the management. As a result, the role of the accountant has been
changed from that of a mere book keeper to a more important role of a financial
advisor.
z Technological revolution: With the profile and advancement in science and
technology very minute and detailed break-up of all types of data concerning
various parts of a business unit have become a must for the management in its day-
to-day functioning. It is clear that financial accounting with its simple structure is not
in a position to cater to the requirements of the management on the above lines.
z Importance of budgeting and planning: The importance of budgeting and
planning in any business unit is realised in modern times. Financial accounting
furnishes only a postmortem of past records. It is an accepted principle that the past
is often of little or no guidance to the future; yet the latter is the main concern of
management, and therefore some aid, other than the, conventional financial
accounts is essential.
z Government regulations: Financial accounting is primarily concerned with
objectively quantifiable information and it does not take cognisance of sweeping
changes and conditions brought by the government regulations will have a far
reaching effect on the productivity as well as profitability of a business concern and
they cannot be ignored.
z Varying informational needs: The present day management is of three-tier
system. Accordingly the informational needs of the different levels of management
vary widely. They cannot be met wholly by the existing financial accounting. The
annual Profit and Loss Account and Balance Sheet considered as a ‘movie’ and a
‘still photograph’ of a company respectively have been an end in themselves even
though the story they tell is already out of date and is past history.
2.15 Check Your Progress

Multiple Choice Questions
1. In a manual bookkeeping system, transactions are first recorded in a …………...
(a) Cash book
(b) Journal
(c) Ledger
(d) None of them

2. A journal ………….. includes the date, accounts, and amounts.
(a) Entry
Notes
(b) Number
(c) Voucher
(d) Book
3. In a manual bookkeeping system, each amount in a journal is posted to a/an
…………...
(a) Ledger
(b) Account
(c) Report
(d) Loss and profit
4. A company's ………….. ledger contains all of the accounts such as Rent Expense,
Supplies, and Interest Payable.
(a) Sales
(b) Purchase
(c) General
(d) None of them
5. An internal document that is prepared to prove that the total of all the debit balances
is equal to the total of all the credit balances is a ………….. …………...
(a) Trial balance
(b) Balance sheet
(c) Income statement
(d) None of them
6. Historically, the final step of the …………..'s responsibilities was to prepare a trial
balance.
(a) Accountant
(b) Auditor
(c) Bookkeeper
(d) Cashier
7. Accounting ………….. has made the recording of transactions much more efficient.
(a) Books
(b) Software
(c) Notes
(d) Theory
8. Accounting software has eliminated many of the math and recording ………….. that
were common with a manual system.
(a) Errors
(b) Questions
(c) None of the above
(d) All of them
9. Because at least two accounts are involved in every transaction, the bookkeeping
system is referred to as ………….. entry bookkeeping.
(a) Single
(b) Double
(c) Triple
(d) Quad

Book Keeping 65
10. A ………….. entry is entered on the left side of an account.
(a) Debit
Notes
(b) Credit
(c) Double
(d) Journal
2.16 Questions and Exercises

1. Explain term, Book Keeping.
2. What is Account?
3. Distinguish between:
(a) Book-keeping and Accountancy (b) Personal Accounts and impersonal
Accounts (c) Real Accounts and Nominal Accounts (d) Single Entry system and
Double Entry system (e) Cash system of Accounts and Accrual system of Accounts.
4. Discuss the principles of debit and credit of Accounts.
5. Explain Journal & its utility.
6. What is Ledger?
7. What is a ledger Account?
8. Explain how a ledger account is balance? What is indicates by Debit or Credit
balance?
9. “By sub-division of journal, there will be a division of labour”. Explain.
2.17 Key Terms

z Expenditure: Expenditure takes place when an asset or service is acquired.
z Purchases: Buying of goods by the trader for selling them to his customers is
known as purchases.
z Sales: When the goods purchased are sold out, it is known as sales.
z Stock: The goods purchased are for selling, if the goods are not sold out fully, a
part of the total goods purchased is kept with the trader unlit it is sold out, it is said
to be a stock.
z Drawings: It is the amount of money or the value of goods which the proprietor
takes for his domestic or personal use. It is usually subtracted from capita.
Check Your Progress: Answers

1. (b) Journal
2. (a) Entry
3. (b) Account
4. (c) General
5. (a) Trial balance
6. (c) Bookkeeper
7. (b) Software
8. (a) Errors
9. (b) Double
10. (a) Debit
2.18 Further Readings

z Financial Accounting, V.K. Goyal - 2007
z A Textbook of Financial Accounting, Hanif 1986
z Financial Accounting, P.C. Tulsian - 2002
z Accounting for Beginners, Shlomo Simanovsky – 2010

Unit 2: Book Keeping: Structure

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Book Keeping 21

Unit 2: Book Keeping

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2.3 Objectives of Book-Keeping

2.4 Utility of Book- Keeping

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2.5 Book- Keeping and Accountancy

2.6 Accounting System

2.6.1 Single Entry System

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2.6.2 Double Entry System

What Is Double Entry System?

2.7 Cash System of Accounting

2.8 Books of Prime Entry

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2.9 Rules of Debit and Credit

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2.10 Subsidiary Books

Advantages of Subsidiary Books

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Preparation of Purchase Day Book

Date Particulars (Names of Invoice No. L.F. Details Amount

Date column records the date of purchase.

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Notes 6 doz. packets Deluxe erasers at ` 2.40 per packet.

Preparation of Sales Day Book:

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Date Particulars Debit L.F. Amount

Date Particulars Credit Note L.F. Amount

Date Drawer Acceptor Where Date Term Due Amount Remarks

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1 Bought goods from Bala ` 15,000

Date Particulars L.F. Inward Amount

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Notes Date Particulars L.F. Inward Amount

Purchases Returns Book

Sales Returns Book

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Purchase Returns A/c

Sales Returns A/c

2.11 Recording of Cash and Bank Transactions

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Petty Cash Book:

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The Imprest System

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Purchase Returns Book

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Sales Returns Book

Bills Receivable Book

Bills Payable Book