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Accounting- Meaning and Definitions

Accounting- Meaning and Definitions. “Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character and interpreting the results thereof.”. Accounting Cycle. Journal.

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Accounting- Meaning and Definitions

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  1. Accounting- Meaning and Definitions • “Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character and interpreting the results thereof.”

  2. Accounting Cycle

  3. Journal

  4. Introduction “The Journal is a book of original entry in which are recorded transactions not provided for in socialized journals.” --Eric. .Kohler “A Journal is a chronological record of accounting transactions showing the names of the accounts that are to be debited or credited, the amounts of debits and credits, and any useful supplementary information about the transactions. It is analogous, to a diary.”

  5. Features of Journal • The following are the main characteristics of journal : • It is a book of original entry because transaction is recorded at first stage in this book. • It is also known as day book or diary because transactions are recorded in it-on day to day basis as and when they take place. 3. The Journal is only a subsidiary book, subordinate to the ledger which is the principal book of accounts.

  6. Contd. • 4. It keeps a chronological record of all transactions i.e., arranged according to the o occurrence. • 5. The Journal gives a complete picture of each business transaction and thus, moil the identity of the transaction. • 6. Amount of transaction is recorded on both debit and credit columns side by ei helps in maintaining arithmetical accuracy of the books of account. • 7. The Journal reflects the relation that exists between two aspects (debit and involved in a transaction. • 8. Every entry in the Journal is followed with narration which describes briefly the nature and context of the transaction

  7. Need for Journal • The transactions can directly be recorded in the proper accounts in the ledger hut procedure will be difficult and confusing, if number of transactions is large. Journal is needed in the following respects. • Convenient recording of the transactions • Maintaining and preserving the identity of the transactions • Ascertaining the true nature of transactions with the help of narrations: and • Maintaining permanent record of information.

  8. Functions of Journal • Journal performs the following functions..- • To maintain the identity of each transaction as a permanent source of information : • To analyze each transaction into debit mid credit, so as to enable their Posting in the ledger: and • To arrange transactions chronologically i.e.. in order of date.

  9. Format of Journal The following is the specimen of Journal:

  10. Advantages of Journal • Journal is known as a book of original/prime record. Maintaining journal gives the following advantages to the entity concerned • (1) Transactions recorded date-wise with explanation. All business monetary transactions are entered in journal in chronological order occurrence. Thus, chances of omitting a transaction are reduced. Moreover, each entry carries brief explanation known as narration which makes understanding of the real meaning of the transaction at a future date easier. • (2) Process of classification at convenience. Since transactions are recorded in journal as and when these take place, it ensures that nothing shall be omitted which should be recorded. Process of posting into ledger can be scheduled at the convenience of the entity.

  11. Advantages of Journal • (3) Ensures that double entry rules have been followed. Each transaction. before it is recorded in journal, is analyzed for the aspects involved: accounts to be debited and credited and also the debit and credit amount. Totaling of amount columns on each page ensures that the basic rule of 'debit having equal and corresponding credit' has been followed. • (4) Reliable evidence. As the transactions taking place and recording are at the same time, therefore, chances of cooking or manipulating the facts are minimized. Thought out alterations or insertions are not possible. Therefore. courts regard the evidential quality o journal much better as compared to secondary records, say, ledger. • (5) Sub-division enables division of labour. Now a days, most of the entities follow what is known as "Practical system of book-keeping". Under this system, more than one journal a maintained (system shall be discussed in a subsequent chapter) to record one type transactions in a separate journal, say, separate journals to record purchases, sales etc., In sic a case, different sub-journals can be handled by different persons, thus, each person acquires the expertise, and total efficiency increases.

  12. Limitations of Journal • Journal suffers from the following limitations: • 1- Long and unveiled. The journal will be long and unveiled, if the business has too many transactions. • 2- Daily cash balance not possible. It is not possible to ascertain daily cash balance from journal. Separate book is to be maintained for this purpose. • 3- Difficult to locate a transaction. It is difficult and time consuming to locate a transaction in the journal, if date of transaction is forgotten. • 4- Time consuming posting. It is time consuming to post each and every transaction from the journal to the ledger.

  13. Journalizing Proces • Journalizing Process • The process of recording a business transaction in the .journal in a systematic and scientific manner is called Journalizing. It is always done on the principles of double entry system. • “The process of recording a transaction in a Journal is called Journalizing the transaction." • Melgs and Meigs and Johnson • “ The technique of writing a transaction in its twofold aspect with proper description in Journal is called Normalization." • H.Chakarborty. • The form or manner in which a transaction is recorded in the journal is called ; Journal Entry;

  14. Rules Under Traditional Approach at a Glance

  15. ILLUSTRATION 5. Some Specimen Transactions • (1) Amar started business with Rs. 5,00,000 (2) Out of the above, Rs. 40,000 are deposited in the bank.

  16. (3) Purchased office Furniture for cash • worth Rs 30,000 (4) Purchased goods for cash Rs. 15,000

  17. (5) Sold goods for cash Rs 35,000 (6) Received salaries Rs. 5,000

  18. Treatment of receipt on personal/Income account Received Rs 800 from Tarun on account Received Rs 800 from Tarun as commission The entries are: (1) Cash account Dr, 800 To Tarun (ii) Cash account Dr. 800 To Commission account • Treatment of trade discount • (1) Sold goods to Raman of the list Price Rs 1000, Trade discount 10% • Raman Dr 900 • To Sales account 900

  19. Treatment of bad debts recovered • Chandji remitted Rs 400 against the amount previously written off as bad. • Cash a/c Dr. 400 • To Bad debts recovered account 400 • INTEREST ON CAPITAL • Interest on capital account Dr 5,000 • To Capital Account 5,000

  20. Interest on Drawings • Interest charged from the proprietor on drawings Rs 500 Drawing A/c Dr. 500 To Interest on drawings A/c 500 Depreciation charged on fixed assets • Plant purchased for Rs 70,000 provide depreciation @ 10% p.a Depreciation A/c Dr. 7000 To Plant A/c 7000

  21. Goods costing Rs 3,000 sold for 3,500 Cash account Dr 3,500 To Sale 3,500 • A. Furniture costing Rs 18,000 is sold for Rs 16,000 • B. Shares purchased for Rs 12,000 sold for Rs 15,000. Brokerage on sale Rs 500 Journal entry for (A) above will be Cash account Dr 16,000 Loss on sale of furniture account Dr. 2,000 To furniture account 18,000 Journal entry for (B) above will be Cash investments account Dr. 14,500 To investments account 12,000 To profit on sale of investment account 2,500

  22. Miscellaneous Receipts • Amount received from sale of old newspaper and magazines R s140. Cash account Dr. 140 To Miscellaneous receipts account 140 • Miscellaneous Expenditures • For example : for newspapers. Magazines and periodicate Rs100 • Miscellaneous expenditure account Dr. 100 • To Cash account 100

  23. Loan taken and Loan advanced A. Borrowed Rs 10,000 from Jennifer B. Lent Rs 15,000 to Sania. Journal entry for (a) above will be Cash account To Jennifer’s loan account Dr. 10,000 10,000 Journal entry for (b) above will be Loan to Sania account Dr. 15,000 To Cash account 15,000

  24. ILLUSTRATION 6. Journalize the following transactions: 2007 Rs Jan. 1 Started business with cash 20,000 Jan. 3 Paid into Bank 15,000 Jan. 5 Purchased Furniture 5,000 Jan. 8 Purchased goods from Sham Brother for cash 8,000 Jan 10 Sold goods for cash 7,000 Jan.12 Paid telephone rent for one month 400 Jan 13 Sold goods to Vandana 500 Jan 14 Withdrew from bank for private use 1000 Jan 14 Withdrew from Bank for office use 2,000 Jan 16 Goods purchased from Neetu 1,000 Jan 18 Received cash from Vandana 470 And discount allowed 30 Jan 25 Paid cash to neetu in full settlement of her account 980 Jan. 31 Paid wages 700 Jan. 31 Paid for stationary 50

  25. Compound Journal Entry • ILLUSTRATION. ( Compound entry) 2009 • April 15 Salaries Paid Wages Paid Interest Paid • April 18 Goods Purchased for Cash Stamps Purchased Machinery Purchased • April 20 Rent Received • Divided received

  26. Opening Entry • Example 1. Following balances appeared in the books of a trader on December 31, 2009: • Cash 15,000 • Bank 25,000 • Stock 20,000 • Detors 30,000 • Building 40,000 • Furniture 5,000 • Sundry Creditors 15,000 • Bills Payable 20,000 • Loan from bank 25,000 Pass a journal entry to record the above balances in the beginning of the next accounting year. i.e. Janurary 1, 2010

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