Accounting For Accountants

Basic Accounting Course
PREFACE
Accountants always play an important role in the progress of an economy of any

country, as they are responsible for proper book keeping and implementation of
effective financial controls. As a result of revolutionary changes due to development of
Accounting Standards and techniques of Strategic Management, the accountant of
today is also required to develop his role as a manager so as to play an effective role in
the process of decision making for the achievement of organizational goals.
In view of the changes in International Scenario and the development work started in
Afghanistan after the fall of Taliban regime, millions of dollars have been donated by the
International Aid Agencies involved in the rehabilitation and reconstruction work.
Therefore, it has become an essential need to manage these funds effectively and
utilize them efficiently, so that ultimate goal of making the country prosperous could be
achieved in a successful manner. To achieve this objective, need is felt to make an
effort to enhance the professional skills and capabilities of all those, who are related to
the field of finance and accounts and those who are willing to become finance
professionals.
This study course is designed after considering the needs for both the on job account
officers as well accountancy students and for others who want to choose accountancy
as their career. Practical and theoretical aspects have been discussed simultaneously.
We have made every possible effort to cover most of the topics and the practical
problems that may arise during course of their work. However, there is always room of
improvement and the suggestions and recommendations to improve this manual and
effective training shall be highly appreciated.
AIBM Team
This material has been developed for the beginners of CAT qualification by Arif
Aziz (Director-AIBM).
1
Chapter 01
INTRODUCTION
The origin of accounting as a social study can be traced back to very ancient days.
Indeed it is as old as the beginning of the use of money itself. Indians and Romans were
the ones who are reported to have the oldest accounting systems.
The modern accountancy and book keeping evolved in twentieth century with the
industrial revolution which made it necessary for the world to have uniform accountancy
practices.
FIELDS OF ACCOUNTING ACTIVITIES:
Accountants are engaged in various types of employment at different levels. Few of the
major sectors are discussed below:
PRIVATE/COMMERCIAL:
Accountants are employed in a number of organizations involving manufacturers,

wholesalers, retailers, services firms, Non Government Organizations and Civil Society
Organizations etc. Depending on the size of such organization, duties of the
accountants vary from recording, reporting and analyzing to decision-making.
Accountants can perform duties of internal auditor to examine the records and
procedures with a view to safeguard assets, improve operational efficiency and effective
implementation of internal controls and report to the management.
PRACTICING FIRMS:
Qualified accountants can also practice independently and render services to provide
independent opinion on the financial statements of the entity’s business. The practicing
accountants also work as consultants advising their clients on accounting system,
Taxation and managerial services.
GOVERNMENT:
The accounting records maintained and the financial statements prepared by the
Government departments differ to a large extent as compared to the book keeping and
accounting practices of other organizations. Accountants are working at different
positions in Government sector from operational level to high-level financial decision
and policy makers.
DEFINITIONS:
ACCOUNTING:
Accounting is a broader term than bookkeeping. It calls for a greater understanding of

records obtained from bookkeeping and an ability to analyze and interpret the
information provided by bookkeeping record. Accounting involves recording of economic
activities, which accompany the complexity, and uncertainty of business. Therefore,
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while preparing timely accounting statements, estimates and professional judgments

must be made.
Accounting is defined as “the art of recording, classifying and summarizing in a

significant manner and in terms of money transactions and events of a financial
character, and interpreting the results thereof.”
BOOK KEEPING:
Bookkeeping is an activity concerned with the recording of financial data relating to

business operations in a significant and orderly manner. Bookkeeping is the record-
making phase of accounting. Bookkeeping can therefore, be defined as “The science
and art of correctly recording in books of account all those business transactions
that result in the transfer of money’s worth”.
BUSINESS:
Any activity done for the sake of earning profit.
BUSINESS ENTITY:
A business entity is an organization of persons to accomplish an economic goal. An

entity is defined as an undertaking under the control of a single management. This may
include a sole proprietor, a partnership firm, a company or a non-profit making
organization.
TRANSACTION:
A transaction is any dealing expressed in monetary terms that affect the financial
position of a business unit. A transaction involves transfer of something of value
between two or more entities.
ACCOUNT:
Account is defined as a summarized and classified record of transactions. The

transactions recorded are analyzed to show their effects. It is the summary of
transactions relating to a particular person or a specific thing.
ASSET:
Anything possessed by a business that has some value or can result in the economic
benefit to the entity can be termed as asset. Such as land, building, machinery, cash,
debtors etc. Assets can be classified as fixed and current.
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LIABILITY:
Any claim against the assets of the business either by outsiders or owners is called
liability.
PURCHASES:
Any item purchased for utilization in the operations and to be retained for a long term in
business is called purchases. This may include goods, furniture, machinery, stationery
etc
SALES:
Any item sold to generate income, which may result in the inflow of economic benefits to
the business entity. This may include sale of goods.
DEBTOR/CREDITOR:
A person or business from which money or other economic benefit is owing/receivable

is termed as Debtor while the person or business to which money or other economic
benefit is owing/payable is known as creditor.
OWNERS EQUITY/CAPITAL:
As the assets of the business belongs to owners and liabilities of business are their
obligations. Thus, net of assets and liabilities is called as owners’ equity. Capital is the
total investment/contribution of the owner in any business.
BUSINESS DOCUMENT / VOUCHER:
Each transaction is recorded in documents providing all the information of the

transaction. Voucher is a documentary evidence to record the monetary amounts at
which transactions are recorded and also that the transaction is properly authorized.
There may be payment, receipt and journal vouchers.
ACCOUNTING PRINCIPLES:
A generally accepted set of rules can provide a unity of understanding and also a unity
of approach in the practice of accounting. Accounting principles can be divided into two
kinds:
a) Accounting Concepts
b) Accounting Conventions
a) ACCOUNTING CONCEPTS:
In developing the structure of accounting theory and to relate the theory to accounting
practice, there are some agreed basic concepts.
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Following are the important accounting concepts:
1. Business Entity Concept

2. Going Concern Concept
3. Money Measurement Concept
4. Historical Cost Concept
5. Dual Aspect Concept
6. Periodicity Concept
7. Matching Concept
8. Realization Concept
9. Prudence Concept
BUSINESS ENTITY CONCEPT:
In accounting, business is treated as a separate entity from its owners. Accounts are
prepared to give information about the business and not about those who own it. The
distinction between the owner and the business unit has helped accounting in reporting
profitability more objectively and fairly.
GOING CONCERN CONCEPT:
Accounting is based on the assumption that the business unit is to remain in operation
in the foreseeable future in pursuit of its goals and objectives. Hence, it is assumed that
the entity has neither the intention nor the need to liquidate or curtail materially the scale
of its operations. This concept relates to the future which is, by definition, uncertain.
Therefore, many factors can be used to determine whether a business unit is a going
concern. Such as liquidity, capital structure, market and management ability.
MONEY MEASUREMENT CONCEPT:
Money has been adopted by the accounting system as its basic unit of measurement,
as it is the monetary expression of economic events. In other words, an event that
cannot be translated into monetary terms cannot be called a transaction and, therefore,
cannot be recorded.
HISTORICAL COST CONCEPT:
It is a fundamental concept of accounting, which is based on the historical record of the

transaction. Historical cost refers to the cost at the time of acquisition. This concept
provides uniformity in accounting records under conditions of stable prices.
DUAL ASPECT CONCEPT:
This concept states that every time a transaction takes place, there is always a two-
sided effect. This concept expresses the relationship that exists among assets,
liabilities, and the capital, in the form of an accounting equation, which is expressed in
the following simplest form as:
ASSETS = LIABILITIES + CAPITAL
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PERIODICITY CONCEPT:
The periodicity concept requires that an income statement/profit & loss account and a
balance sheet should be prepared at regular intervals. It is usually of a year. Since the
going concern concept states that the business will keep functioning continuously,
accountants choose some convenient segment of time to ascertain results for that
period.
MATCHING CONCEPT:
Businesses are meant for profit earning. The ascertainment of the profit is the result of
matching the revenue to its cost. The figure is obtained by deducting cost of production
and other ancillary costs from the sale figure. Matching concept is mandatory for all
going concern businesses whose performance needs to be evaluated periodically.
REALIZATION CONCEPT:
Revenue should be taken into account when realized.
PRUDENCE CONCEPT:
All losses present and anticipated should immediately be taken into account while
revenues should only be taken when and only when they realize. The main theme
behind this concept is to give a pessimistic view of the business performance.
b) ACCOUNTING CONVENTIONS:
Financial statements are prepared following certain traditions/customs. These

traditions/customs are termed as accounting conventions.
Following are the important accounting conventions.
1. Disclosure.
2. Materiality.
3. Consistency.
DISCLOSURE:
Financial statements should disclose all material information to facilitate the

stakeholders in proper understanding, evaluation and decision making.
MATERIALITY:
Materiality refers to the relative importance of an item or event. Those items and events,
which have significant bearings on users decisions, should be reflected in the
preparation of financial statements.
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CONSISTENCY:
All policies and procedures should remain unchanged from one accounting period to the
other.
ACCOUNTING CYCLE:
Cycles shows complete sequence of accounting procedures which are repeated in

same order during each accounting period. It includes recording transactions in the
journal classifying the entries and posting in ledgers and the final stage is of
summarizing where the financial statements are prepared to ascertain the profit or loss
during a trading period and the financial position of the business on a specific date.
DOUBLE ENTRY BOOK KEEPING:
Double Entry Book keeping involves recording both aspects of the transactions (debit
and credit). It ensures the completeness and accuracy of transactions.
FINANCIAL STATEMENTS:
Financial Statements are prepared to ascertain the financial position and evaluate the
financial performance of a particular period.
A Financial Statement includes:
1. The balance sheet, which describes the overall financial position of an

organization at a particular time.
2. The income statement describes the financial performance of a particular
period.
3. Statement of changes in financial position describes the flow of funds and
changes in financial position during a particular period.
ELEMENTS OF FINANCIAL STATEMENTS:
Balance Sheet comprises

1. Assets.
2. Liabilities.
3. Owner Equity/Capital.
Income Statement comprises:

4. Revenues
5. Expenses
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ASSETS:
Assets are the resources controlled by the organization as a result of past

transactions, from which, the economic benefit is expected to flow to entity.
Accounting Treatment:
Debit: Increase in Assets.
Credit: Decrease In Assets.
Classification:
Assets are further classified as:
Fixed Assets: These assets are used by the organization for a long period. Examples
include Land, Building, Furniture, Vehicle, Computer, Generator, Photocopier, Electrical
Equipment.
Current Assets: These assets are used by organization for a short period. Examples
include Stock, Account Receivables, Cash, Bank, Prepayments, Advances, Deposits
etc.
LIABILITIES:
A liability is a present obligation, arising from past transaction, the settlement of

which is expected to result in outflow of resources from the entity embodying
economic benefits.
Debit: Decrease in Liabilities:

Credit: Increase in Liabilities:
Classification:
Liabilities are further classified as:
LONG TERM: Those liabilities, which are expected to be paid after more than one year
e.g. Long Term Loan,
SHORT TERM: Those liabilities, which are due to be paid within one year.
OWNER EQUITY:
It means the claims of owner of the business against the assets of the firm.
Debit: Decrease in Equity.

Credit: Increase in Equity.
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REVENUES:
It means any type of income of the business.
Debit: Decrease in Revenue.

Credit: Increase in Revenue.
Revenue received from sale, donation, and interest on deposits etc.
EXPENSES:
Expense means the expenditure whose benefit is finished or enjoyed.
Debit: Increase in Expenses.

Credit: Decrease in Expenses.
Examples:
Salaries, Wages, Honoraria, Consultancy Charges, Audit Fee, Printing and Stationery,
Photocopies, Entertainment Exp, Meeting and Seminars, Transportation Cost, POL,
TA/DA, Passport Visa fee, Purchases of materials etc
SUMMARY OF RULES OF DEBIT AND CREDIT
Account Increase Decrease

Assets Debit Credit
Liabilities Credit Debit
Owner’s Equity Credit Debit
Revenues Credit Debit
Expenses Debit Credit
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CHAPTER 02
BOOKS OF ACCOUNTS:
The business transactions from primary data are recorded in the books of accounts.
How an accounting cycle runs, Can briefly be described in the following steps:
Step.1 A business document is prepared for each transaction incurred, called voucher.
Step.2 Information from the voucher is recorded in General journal.
Step.3 The entries from the General journal are posted to the individual accounts in the
ledger.
Step4. A trial balance is prepared at the end of a particular period to insert all the closing
balances taken from individual accounts maintained in the ledger.
Step.5 Adjustment if required is made in the books of accounts or in a separate work

sheet so as to work out the final balances.
BOOKS OF ORIGINAL ENTRY:
Initial recording of transaction takes place in the books of original entry. Particulars that
should be recorded in the books of original entry include
• Date of transaction,
• Names of accounts to be debited or credited to record each transaction and
• Amount.
JOURNAL:
Journal, a book of original entry and contains all the financial information that is required
in a book of original entry. It can take the form of either General journal or a special
journal (Cash journal, Sales journal, and purchase journal etc.). General journal is used
to record transactions, which cannot be recorded in the special journals.
ENTRIES IN THE JOURNAL:
The initial recording of transaction in the books of original entry is called entry. Entries in
the Journal may be made in a manner that it contains all the required information in a
classified manner, which could either be utilized for future reference and aggregate
results at the end of accounting period.
FORM OF JOURNAL:
Following information is required to be entered in the journal as illustrated below:
1. Date of the transaction.
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2. Names of Accounts to be debited and credited.

3. Reference of the ledger page or code where the entry is to be posted.
4. Amounts in front of each account name to be debited in the debit column.
5. Amount in front of each account to be credited in the credit column.
Date Particulars L.F Debit Credit
To separate each entry a line is drawn at the end of each entry.
Illustration:
On November 01, 2004 Welfare Relief Committee received a donation of $ 75,000 and
its transactions during the first month were as follows:
2004 $
NOV, 02 Paid rent of the shop for the month 5,000
NOV, 03 Purchased furniture for cash 10,000
NOV, 10 Goods Purchased from Ameer & Co 30,000
NOV, 15 Goods Purchased from XYZ limited 45,000
NOV, 16 Cash received as membership 9,000
NOV, 20 Cash received as membership 15,000
NOV, 30 Cash paid to Ameer & Co 20,000
Required: Record these transactions in the journal
11
JOURNAL OF WELFARE RELIEF COMMITTEE
L. Debit Credit
Date Particulars
F $ $
2004 Cash 75,000

NOV 01 To Donation 75,000
Donation received
Rent 5,000
NOV 02 To cash 5,000
Rent paid
Furniture 10,000
NOV 03 To cash 10,000
Furniture purchased for cash
Purchases 30,000
NOV 10 To Ameer & Co 30,000
Goods purchased
Purchases 45,000
NOV 15 To XYZ Ltd 45,000
Goods purchased
Cash 9,000
NOV 16 To Membership Fee 9,000
Membership fee received
Cash 15,000
NOV 20 To Membership Fee 15,000
Membership fee received
Ameer & Co 20,000
NOV 30 To Cash 20,000
Paid to Ameer & Co
Total 209,000 209,000
From the above it may be seen that ledger folio column is left blank. It indicates the
page number to which the respective debit or credit entry shall be posted. At the time of
posting, page number will be recorded.
COMPOUND JOURNAL ENTRIES:
Compound journal entries are passed for those transactions where a single transaction
affects a number of accounts. In such case a single entry is passed instead of separate
entries.
ILLUSTRATION:
An International relief agency has received machinery valuing $25, 000, furniture worth
$6,000 and Cash $25,000 from its donor. Entries in the journal of Welfare Relief
Committee would appear as follows:
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Debit Credit
Date Particulars L.F
$ $
Cash 25,000
Machinery 25,000
Furniture 6,000
To Donation 56,000
Donation received from donor
13
CHAPTER 03
LEDGER:
A book of account where transactions are classified and grouped according to its nature
to form separate accounts. Distinction between ledger and journal can be made as
follows:
JOURNAL LEDGER
• It is a book of original entry • It is a book of second entry.
• The process of recording • The process of recording
transaction in the journal is called transaction in the ledger is called
journalizing. posting.
• The unit of classification is the • The unit of classification is the
date of transaction. account.
• It contains entries in chronological • It contains entries in classified form
order and total effect in an showing the total effect in an
individual account is not known. individual account at any stage.
The previous illustration shows a number of transactions affecting cash but one can’t
see the net movement and effects on the cash account. This is possible in ledger.
A ledger may be a book, a loose-leaf binder or a computer disc. In case of a book or

loose-leaf binder, each page is used for a separate account.
Posting to ledger is made at frequent intervals, such as the end of each week, month,
etc.
Form of a ledger:
Debit Title of Account (A/C No…) Credit

Date Particular Folio $ Date Particulars Folio $
From the above, it may be seen that ledger folio has two parts debit side & credit side.
Sometimes the format of the ledger is not like the above but it contains all the relevant
information.
Posting is made in the following steps:

1. Location of the account in the ledger.
2. Entering information in the respective columns and giving the folio number of
ledger.
3. Entering the account number reference in the journal to which the entry has
been posted.
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ILLUSTRATION:
The illustration of International Relief Agency is used to understand the posting process.
Required: Post the entries of Journal of illustration of International Relief Agency in the
respective ledgers account.
SOLUTION:
Ledger Accounts of Welfare Relief Committee.
Cash Account No.1

Date Particular Folio Debit Date Particulars Folio Credit
$ $
Nov,01 Donation 1 75,000 Nov,02 Rent 1 5,000

Nov,16 Membership 1 9,000 Nov,03 Furniture 1 10,000
fee
Nov,20 Membership 1 15,000 Nov, 30 Ameer & Co 1 20,000
fee Nov, 30 Balance C/F 64,000
99,000 99,000
Donation Account No. 5

$ $
Nov, 30 Balance C/F 75,000 Nov,01 Cash 1 75,000
75,000 75,000
Purchases Account No. 15

$ $
Nov, 10 Ameer & Co 1 30,000
Nov, 15 XYZ Ltd 1 45,000 Nov, 30 Balance 75,000
75,000 75,000
Membership Fee Account No. 20

$ $
Nov,16 Cash 1 9,000
Nov, 30 Balance 24,000 Nov 20 Cash 1 15,000
24,000 24,000
Furniture Account No. 10

$ $
15
Nov,03 Cash 1 10,000 Nov, 30 Balance C/F 10,000
10,000 10,000
Rent Account No. 8

Date Particular Folio Debit Date Particular Folio Credit
$ $
Nov, 02 Cash 1 5,000 Nov, 30 Balance 5,000
5,000 5,000
Ameer & Co. Account No. 30

Date Particular Folio Debit Date Particular Folio Credit
$ &
Nov, 30 Cash 1 20,000 Nov 10 Purchases 1 30,000
Nov, 30 Balance C/F 10,000
30,000 30,000
XYZ Ltd Account No. 31

$ $
Nov 15 Purchases 1 45,000
Nov, 30 Balance C/F 45,000
45,000 45,000
It can be seen that Ledger and journal are cross-referenced i.e. reference of the journal
page1 has been given on each ledger entry in folio column. Similarly the reference of
each ledger page (account number) is given in the folio column in journal. This
facilitates in spotting any mistakes or wrong postings.
GENERAL& SUBSIDIARY LEDGERS:
Small organizations, where the numbers of transactions are usually small, maintain a
simple ledger. Large organizations, maintain two types of ledger; a general ledger is
maintained containing the major accounts. The details are kept in subsidiary ledgers.
For instance, one account for debtors and creditors each is kept in the general ledger
and account of individual debtors and creditors are kept in the subsidiary ledgers. The
sum of the balances of the subsidiary ledgers at any given date equals to the balance of
its related account appearing in the general ledger.
SUMMING UP THE ACOUNT BALANCES & PREPARATION OF TRIAL BALANCE:
After a particular period the debit and credit sides of all accounts are summed up. The
difference in the debit and credit side is worked out. The difference is called a debit
balance in case the credit side is lower. Similarly if the debit side is lower, it would be
called a credit balance.
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After the balancing process is complete, a trial balance is prepared. Trial balance is a
statement containing end balances of all the ledger accounts at a particular date.
The total of the debit & credit side of the trial balance will be equal if all the postings
have correctly been made. The trial balance verifies the mathematical accuracy of the
debit and credit balances of the ledger accounts. It does not ensure the complete
recording, proper journalizing and posting to the proper accounts. The trial balance
however provides basic information to facilitate the adjusting entries and to properly
utilize it in the financial statements.
Trial Balance is extracted from the illustration of the Welfare Relief Committee:
WELFARE RELEIF COMMITTEE:
Trial Balance as on 30-11-2004

Ledger Accounts L.F. Debit Credit
$ $
Cash 1 64,000
Donation 5 75,000
Rent 8 5,000
Furniture 10 10,000
Purchases 15 75,000
Membership Fee 20 24,000
XYZ Ltd 31 45,000
Ameer & Co 30 10,000
TOTAL 154,000 154,000
ADJUSTING ENTRIES:
At the end of each accounting period the accountant may realize that a number of
transactions relating to the business might have incurred but remained unaccounted for.
This may be due to a number of reasons e.g.
1. Any transaction which does not involve movement of cash during the
accounting period.
2. The cash transaction incurred may be for a smaller or larger period than the
accounting period.
3. Inventory adjustments
ADJUSTED TRIAL BALANCE:
As soon as the adjusting entries are passed in ledger accounts, a final or adjusted trial
balance is prepared. The adjusted trial balance lists all the ledger balances after the
adjusting entries have been posted.
We now have the basic data in the adjusted trial balance to facilitate the preparation of
financial statements, mainly the Income and Expenditure Statement and the balance
sheet.
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CHAPTER 04
SPECIAL JOURNALS:
As discussed earlier journals are of two types, a general journal and special journal.
Examples of special journals are:
1 Cash Journal
2 Bank Journal
3 Purchases Journal
4 Purchases Return Journal
5 Sales Journal
6 Sales Return Journal
Advantages of maintaining special journals are:
1 Facilitate easy recording of transactions of a similar nature

2 Facilitate the posting process.
3 Facilitate future referencing and evidence.
4 Division of responsibilities amongst number of persons.
CASH BOOK:
Cash Book is a type of special journal, used to record all cash and bank transactions in
chronological order. It also serves as a Ledger account for Cash Transactions.
FORMS OF CASH BOOK:
Cash Book can either be
1. Single Column Cash Book

2. Double Column Cash Book(A cash Column and a Bank Column).
3. Petty Cash Book
SINGLE COLUMN CASH BOOK:
Single column cash book is also called a simple Cash Book to record only Cash
Receipts and Payments.
Receipts Payments
Date Particular L.F Amount Date Particular L.F Amount
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RECORDING DAILY TRANSACTIONS IN THE CASH BOOK:
The following step-by-step approach is followed to record transaction in the cashbook.
1. Previous day closing balance is brought forward at the beginning of each day and
is recorded in the top left of the receipt side.
2. Daily receipts are recorded on the receipt side (usually left side) with dates,
particulars, reference and amount.
3. Daily payments are recorded on the right side with dates, particulars, reference
and amount.
4. At the end of each day cashbook is balanced to ascertain the closing balance.
ILLUSTRATION:
For the month of December M/S Hamid Traders incurred the following cash
transactions:
Month Date Particulars Amount

$
December 2004 1 Beginning balance 56,000
December 2004 3 Cash Sales 3,000
December 2004 6 Cash received from Khalil & Co 10,000
December 2004 10 Rent paid 5,000
December 2004 13 Cash paid to KSG Ltd 15,000
December 2004 18 Cash received from XYZ Ltd 30,000
December 2004 24 Cash paid to Ameer & Co 10,000
December 2004 28 Cash paid for electricity bill 3,000
December 2004 30 Cash Sales 14,000
Required: Enter these transactions in the cashbook.
Solution:
CASH BOOK
Date Particular L.F Amount Date Particulars Amount

L.F
$ $
2004 2004
Dec, 1 Balance B/F 56,000 Dec,10 Rent 8 5,000
Dec, 3 Sales 20 3,000 Dec,13 KSG Ltd 31 15,000
Dec,6 Khalil & Co 35 10,000 Dec,24 Ameer & Co 30 10,000
Dec, 18 XYZ Ltd 38 30,000 Dec, 28 Electricity 9 3,000
Charges
Dec, 30 Sales 20 17,000
Balance C/F 83,000
Total 116,000 116,000
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Note that cash book contains its page number and similarly account pages contain their
own page numbers. While posting entries in cashbook, ledger folio of the account head
is entered and similarly cashbook folio is entered in Ledger account.
DOUBLE COLUMN CASH BOOK
As its name implies, it contains two columns a cash column and a bank column.
RECORDING TRANSACTIONS IN THE BANK COLUMN:
1. Previous day closing balance: is brought forward at the beginning of each day
and is recorded in the top left of the receipt side in the Bank Column.
2. Cheques received and deposited the same day: Entered on the receipt side of
the cash book in the bank column.
3. Cheques received but not deposited in the bank: the amount is recorded in the
cash column.
4. Payment made by cheque: The amount is entered on the credit side of the cash
book in the bank column.
5. Cash deposited in the bank: Amount is entered in the cash column on the credit
side. On the debit side the corresponding entry is made and amount written in the bank
column. The entry is called contra entry with no effect on the ledger account.
6. Closing Balance: At the end of each day both columns are balanced to ascertain
the closing balance.
POSTING TO LEDGER:
1. Contra entries: All contra entries are marked distinctly as “C” and are not posted.
2. Entries on the receipt side: All entries in the receipt side are posted to the credit
side in the ledgers of respective accounts.
3. Entries on the payment side: entries on payment side are posted to the debit of the
ledger accounts.
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ILLUSTRATION:
The following are the transactions of M/S Hamid Traders during the month of January
2005.
January 2005
Jan AMOUNT
200 $
5
1 Cash beginning balance 80,000
2 Cash deposited in the bank 25,000
3 Purchases made for, paid by cheque 8,600
5 Cheque received from XYZ Ltd and paid in the bank 6,500
10 Paid cheque to ABC Ltd 10,900
$ 10,900
12 Cash sales 7,000
14 Cash deposited in bank 5,000
16 Cash purchases 9,000
20 Cash sales 15,000
22 Cash deposited in bank 10,000
24 Paid by cheque for cash purchas 3,000
28 Received cheque from XYZ Ltd 10,900
30 Paid cheque to ABC Ltd 5,900
Record these transactions in two-column cashbook.
CASH BOOK OF HAMID TRADERS
V.N L. Cash Bank V.N L. Cash Bank

Date Particular Date Particular
o F $ $ 0 F $ $
2005 2005
Jan,1 Balance 80,000 Jan,2 By bank C 25,000
B/F
C Jan,3 By purchases 8,600
Jan,2 To Cash 25,000
Jan,10 By ABC Ltd 10,900
Jan,5 To XYZ Ltd 6,500
Jan,14 By bank C 5,000
Jan,12 To Sales 7,000
C Jan,16 By purchases 9,000
Jan,14 To Cash 5,000
Jan,22 By bank C 10,000
Jan, 20 To Sales 15,000
C Jan,24 By Purchases 3,000
Jan, 22 To Cash 10,000
Jan 30 By ABC Ltd 5,900
Jan, 28 To XYZ Ltd 10,900
Jan,30
63,900 18,100
By Bal C/F
112,900 46,500 112,900 46,500
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Purchases Account No.

Date Particulars Folio Debit Date Particulars Folio Credit
$ $
Jan 3 Bank 8,600
Jan 16 Cash 9,000
Jan 24 Bank 3,000
ABC Limited Account No.

$ $
Jan 10 Bank 10,900
Jan 30 Bank 5,900
SALES Account No.

Jan 12 Cash 7,000
Jan 20 Cash 15,000
XYZ Limited Account No.

$ $
Jan 5 Bank 6,500
Jan 28 Cash 10,900
PETTY CASH BOOK:
Petty Cash is the amount kept separately to meet day-to-day expenses (stationery,
postage, local conveyance, office supplies etc) such expenses and the transactions so
incurred are recorded in special cash book called petty cash book.
FORM OF PETTY CASH BOOK:
The petty cash book contains a column for recording receipts, date, particulars, voucher
ref. A number of columns are then left for recording head wise payments. Every
payment is recorded twice. 1st in the total column and then in the head wise column.
The total of the total column at any time would agree to the grand total of the total of
each column. The difference between the receipts total and total of the payment column
is petty cash in hand.
POSTING FROM PETTY CASH BOOK:
The posting to ledgers is normally made at the end of a month. The totals of each
column of receipts and payment are made directly to respective ledger accounts.
IMPREST SYSTEM:
22
This means a system where a certain amount of money called imprest is kept with a
staff member to meet petty payments. Sometimes imprest is kept with more than one
staff member working in different locations. Statement of payments supported with
vouchers is prepared at frequent intervals and sent to the chief cashier. The amount
spent is reimbursed to meet payments for the next period. Advantages of the petty cash
or imprest is that
(a) Timely payments are possible at a place out of the reach of the main cashier.
(b) The petty cashiers or imprest holder has to maintain up to date record to get
timely reimbursement.
ILLUSTRATION:
Petty cashier of M/S Hamid Traders incurred the following transactions during the
month of February 2005.
Feb 01 Cash Received from main cashier $ 1,000

3 Paid for stationery $ 45
6 Paid for postage stamps $ 10
7 Paid for stationery $ 5
10 Wages paid $ 60
11 Taxi charges paid $ 25
14 Bus fair paid $ 15
20 Tea expenses paid $ 20
25 Food for office $ 25
28 Postage stamp purchased $ 35
28 Kitchen Expenses paid $ 550
Required: Enter the above transaction in the petty cash book of Hamid Traders.
PETTY CASH BOOK Account No 38

Receiv Dat V.N Tot Posta Station Wag Conveya Entertain
Particulars
ed e o al ge ary es nce ment
1,000 Feb To Cash
1 To Stationery 45 45
To Postage 10 10
3 To Stationery 5 5
To Wages 60 60
6 To 25 25
Conveyance 15 15
8 To 20 20
Conveyance 25 25
10 To 35 35
Entertainmen 550 550
11 t
To 210
14 Entertainmen
t
20 To Postage
To
25 Entertainmen
t
28
To Balance
23
28
28
1,000 1,00 45 50 60 40 595
0
PURCHASE JOURNAL:
Purchase transactions can take either the form of cash transaction or credit transaction.
Cash Purchases are recorded usually in the cashbook while credit Purchases in the
book called purchases journal. Purchases journal is a book of original entry to record
day-to-day credit purchases in chronological order. Purchases Journal is usually kept by
large organizations where most of the transactions are of credit type.
FORM OF PURCHASE JOURNAL
The usual form of purchase journal is presented below.
L.
Date Particular Inv. No Amount
F
POSTING TO LEDGER:
Entries from the Purchase Journal are posted to Ledger. Credit entries are posted
individually to the respective Creditor Account. While the total of Debit entries for a
particular period is posted to Purchase Account as a single Figure.
PURCHASES RETURN JOURNAL:
Purchase Return Book is also a book of original entry. Goods return note is the
document prepared when goods are returned. All goods returned to supplier, are
recorded in Purchase Return Book. Posting to ledger accounts is the same as that of
purchases journal but to the reverse side. The total of the purchases returns is posted to
the credit side of the purchase account whereas the individual entries are debited to the
respective suppliers account. When the goods are returned, documents are prepared
which are called the debit advice or Goods return note and contains Particulars and
reasons for return of goods.
ILLUSTRATION:
The following transactions were incurred by the purchases deptt. of Hamid Traders
during the month of November 2004.
Nov 06, Purchases made from Ameer & Co. $ 15,000

Nov 10, Purchases made from ABC Ltd $ 18,000
Nov 11 Purchases returns to Ameer & Co $ 2,000
Nov 16 Purchases made from ABC Ltd $ 12,000
Nov 17 Purchases from Peshawar Traders $ 10,000
Nov 25 Purchases returns to ABC Ltd $ 1,000
24
Nov 28 Purchases from Ameer & Co. $ 5,000

Nov 30 Purchases return to Peshawar Traders $ 2, 000
Enter transaction in the purchases journal and purchases returns journal and post to
ledger.
25
SOLUTION:
Purchases journal of Hamid Traders
Date Particulars Inv.No L.F Amount

$
2004
Nov 6 Ameer & Co 15,000
Nov 10 ABC Ltd 18,000
Nov 17 Peshawar Traders 10,000
60,000
Purchases returns Journal of Hamid traders

Date Particulars Debit L.F Amount
$
2004
Nov 30 Peshawar Traders 2,000
5,000
Ledger of Hamid Traders

Ameer & Co. Account No. 30
Date Particulars F Debit Date Particular F Credit
$ $
2004 2004
Nov 11 Purchases Returns 1 2,000 Nov 6 Purchases 1 15,000
ABC Ltd Account No. 31

$ $
2004 2004
Nov 25 Purchases Returns 1 1,000 Nov 10 Purchases 1 18,000
Peshawar Traders Account No. 32

$ $
2004 2004
Nov 30 Purchase Returns 1 2,000 Nov 11 Purchases 1 10,000
Purchases Account No. 15

$ $
2004
Nov Sundry Creditors 1 60,000
26
Purchases Returns Account No. 16

$ $
Nov Sundry 1 5,000
Creditors
SALES JOURNAL:
Like purchases, sales transactions are also of two types, cash sales and credit sales. All
credit sales are recorded in sales journal in chronological order from sale invoices.
POSTING TO LEDGER:
Posting from sales book is normally done at the end of some specified period such as a
month. Total of the sales during the month is posted in the credit of the sales account
each individual entry is however posted to the debit of customers account.
SALES RETURNS JOURNAL:
Sales Return Journal is maintained to record all goods returned by the customers. All
entries are made from the credit advice after issuing the same to the customer.
ILLUSTRATION
M/S Jan Traders incurred the following transactions during the month of December
2004
Dec 6 Sales made to M/S Karim & Co. $17,000
Dec 9 Sales made to XYZ Ltd. $10,000
Dec 13 Sales returns by Karim & Co $ 3,000
Dec 15 Sales returns by XYZ Ltd $ 2,000
Dec 20 Sales to M/S Ali Enterprises $ 8,000
Dec 23 Sales to XYZ Ltd $11,000
Dec 27 Sales returns by Ali Enterprises $ 1,000
Dec 30 Sales to Karim & Co. $ 2,000
Make entries in the sales journal, sales returns journal and post to ledger accounts.
SALES JOURNAL OF HAMID TRADERS
Page-1
L.
Date Particular Inv.No Amount
F
$
Dec 6 Karim & Co 17,000
Dec 9 XYZ Ltd 10,000
Dec 20 Ali Enterprises 8,000
Dec 30 Karim & Co 2,000
48,000
27
SALES RETURN JOURNAL OF HAMID TRADERS
Page-1
L.
Date Particular C.A Amount
F
$
Dec 13 Karim& Co 3,000
Dec 27 Ali Enterprises 1,000
6,000
LEDGER OF M/S HAMID TRADERS
Karim & Co
Credit
Date Particulars F Debit Date Particular F
$
Dec 6 Sales 17,000 Dec 13 Sales Return 3,000
Dec 30 Sales 2,000
XYZ Ltd
Credit
Date Particulars F Debit Date Particular F
$
Dec 23 Sales 11,000
Ali Enterprises
$
Sales
Date Particular F Credit
$
Dec 27 Sundry Debtors 48,000
Sales Return
Date Particulars F Debit
Dec 30 Sundry Debtors 6,000
28
CHAPTER 05
BANKING TRANSACTIONS:
There are two aspects of banking transactions. Bank Deposits and withdrawal.
Following types of Account are maintained to handle these transactions.
a. CURRENT ACCOUNT:
Current Account is maintained for immediate cash deposits and withdrawal with no limit
on amount and frequency of withdrawal. No interest is normally charged on current
account. Businesses prefer this type of account to have immediate access to cash.
b. SAVING BANK ACCOUNT:
Saving Bank Account normally places a limit on the amount and frequency of
withdrawal. Interest is paid to account holders. Individuals normally maintain this type of
account.
c. FIXED DEPOSITS:
Fixed Deposit Account, as its name implies, require account holder to place the money
for a fixed period usually, six month or a year or more than one year. Interest is paid by
the bank, keeping in view the period of deposit. A penalty is normally imposed for
premature withdrawal.
Besides taking deposits Banks also issue loans to individuals and business
organizations.
LOANS:
Funds issued to individuals and business organizations are called loans.

Normally a high interest rate is charged on the loan than on deposits.
OVERDRAFTS:
Overdraft is the facility provided by the bank to business organizations, This

facility is provided to current account holders to withdraw extra money than the
deposited amount.
CHEQUE:
An instrument supplied by the bank to account holders. It is an instruction to the bank to

pay a stated amount to a person or business named in the cheque. Cheque can either
be (i) Open (can be cashed) or (ii) crossed (i.e. paid only into the account.)
29
BANK DRAFTS:
Bank draft is instruments of transfer i.e. an instruction issued by the bank to one of its
branch to pay a certain amount to the person concerned.
BANK STATEMENT or BANK PASS BOOK:
Bank Statement is a chronological record maintained by the bank for each individual
account holder. The statement contains information about deposits, withdrawal, opening
and closing balances for a particular period.
DISHONOUR OF CHEQUE:
Some cheques presented to the bank are not accepted, this is called dishonor of
Cheque. Cheque may be dishonored due to the following reasons:
1. Unavailability of fund in the concerned account

2. Over writing
3. Faults in the signature
BANK RECONCILIATION STATEMENT:
Bank Record maintained in the entity Books is matched with the Bank statement issued
by the bank on regular interval to spot out any differences. These differences are
reflected in Bank reconciliation statement. The differences exist, each time, statement is
prepared. The causes of these differences are:
1. Un presented Cheques: Cheque issued by the entity at period end may be

entered in the bankbook but may not be presented to bank for payment till the
date of statement.
2. Direct Collection: Bank might have taken credit of Cash, Cheque received
directly into the entity account but intimation of the same might have been
conveyed to the client after the period end.
3. Direct Credits: Interest on savings account is credited by the bank, soon as
entitlement arises, but may not be recorded in the entity books.
4. Direct Debits: Interest charged on overdraft, or commission may be debited to
the entity’ account, while the same remain unrecorded in the entity Books.
5. The entity may have deposited cheques/drafts but bank might not have collected
the same till the date of the statement.
6. Some of the cheques/drafts deposited in the bank may have been dishonored
and the effect of dishonor remained unknown and unrecorded in the entity
record.
In order to examine whether the disagreement is due to certain genuine reasons as

described above or there is some misappropriation of funds, a reconciliation statement
is prepared and the causes of disagreement discovered.
30
PREPARATION OF BANK RECONCILIATION STATEMENT:
The following steps are involved in the preparation of a bank reconciliation statement.
1. Check all entries on receipts and payments side with the bank statement and tick
them.
2. Prepare a list of unticked entries of the bank statement and record the same in
the bank book so as to work out the correct balance of the bank book
3. Prepare a list of unticked entries in the bank book and prepare the reconciliation
statement by using one of the following methods.
a) Starting from the cash book balance:
i. If there is a debit balance, deduct all cheques/drafts deposited in the bank but
not credited by the bank, and add all the cheques issued but not given in the
bank statement/bank statement (or not presented to bank for payment. The
balance now would agree with the bank statement.
ii. If there is a credit balance, add all cheques/drafts deposited in the bank, but
not credited in the bank and less all cheques issued but not presented to the
bank for payment. The balance now would agree with the bank statement.
b) Starting from the bank statement:
If there is a credit balance in the bank statement, add to it all cheques/drafts

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

deposited but not collected and credited by the bank and add to it all cheques
issued but not presented to the bank for payment.
ILLUSTRATION:
On 31st Dec 2004, the balance of cash at bank as shown by the cash book of
International Relief Agency was $4,500/- and in the bank statement the balance was
shown at $19,500.
On checking the cash book with the bank statement it was found that.
a. Cheque of $1,000 deposited in bank on 27th Dec was not credited by the
bank.
b. Two cheques issued to XYZ Limited amounting to $16,000 on 24th Dec 2004
were not presented to the bank for payment.
Prepare bank reconciliation statement
SOLUTION:
Method 1 (starting from the cash book balance) $
31
Balance as per cash book (debit) 4,500
Less cheques deposited but not collected 1,000

3,500
Add: cheques issued but not presented to the bank 16,000

Balance as per bank statements (credit) 19,500
Method II (Starting from the bank statement/bank statement)
Balance as per bank statement (credit) 19,500
Less cheques issued but not presented 16,000

3,500
Add cheque deposited but not collected 1,000
Balance as per cash book (debit) 4,500
32
ILLUSTRATION:
From the following information of International Relief Agency prepare bank reconciliation
statement on 30th June 2004. Balance as per bank statement was 8,000.
i. Balance as per bank book $ 9,200

ii. Bank charges & commission debited by
bank but not taken in bank book $ 100
iii. cheque received form Rahim & Co
Deposited in bank on 20th June but not
Credited by bank. $ 6,000
iv. Cheque issued to XYZ Ltd on 27th

June but not presented to bank for
Payment $ 2,900
v. Cheque issued for rent on 29th June

2004 but not presented to bank for
Payment $ 2,000
SOLUTION:
International Relief Agency Bank Reconciliation Statement as on 30-6-2004
Amount
$
Balance as per bank book (debit) 9,200
ii)Less: Bank charges debited by bank 100

iii)Less cheques deposited but not collected by bank 6,000
3,100
Add: cheques issued but not presented to bank

iv) 27-6-04 2,900
v) 27-6-04 2,000
4,900
Balance as per bank statement (credit) 8,000
33
CHAPTER 06
ACCOUNTING STATEMENTS FOR NON-TRADING CONCERNS:
Non-trading concerns usually maintain their accounts in double entry accounting system
and periodically prepare their final accounts for submission to their members and
donors. The method of preparing final accounts by non-trading concerns is different
than trading concerns. As these accounts do not deals in any goods like trading
concerns, so they can’t prepare trading and profit and loss account. At the end of the
year they prepare an account called an income and expenditure account and balance
sheet. The income and expenditure account serve the same purpose as of the profit
and loss account in case of trading concerns and is made out exactly in the same
manner.
Usually the non profit making institution do not maintain a full set of books but
merely a cash book in which all the receipts and payments are entered. At the end
of the year cashbook is summarized under suitable heading and the summary
thus prepared is called a receipt and payment account.
RECEIPT AND PAYMENT ACCOUNT
It is a mere summary of cashbook for a year. It begins with cash in hand at the
commencement and ends with that at the close of the year. Similarly to cash account,
receipts are shown on the debit side while payments on the credit side, with out any
distinction between capital and revenue. Moreover, it does not include unpaid
expenditure or any unrealized income relating to the period under review and so fails to
reveal the financial position of the concern.
INCOME AND EXPENDITURE ACCOUNT
It is another name for profit and loss account. This account is credited with all earnings
(both realized and unrealized) and debited with all the expenses (both paid and Un-
paid). The difference represents either surplus or deficit for a given period which is
carried to the balance sheet.
DIFFERENCE BETWEEN INCOME AND EXPENDITURE ACCOUNT & RECEIPT

AND PAYMENT ACCOUNT
RECEIPT AND PAYMENT ACCOUNT INCOME AND EXPENDITURE

ACCOUNT
1. It begins with opening 1. It does not commence with any

and ends with closing balance of balance.
cash/bank. 2. It includes revenue items only.
2. It records all sum
34
received and paid
whether they relate to revenue or 3. It includes the items relating only to
capital item. the year for which it is prepared.
3. It includes all sums Provisions are made for all
actually received and paid during the outstanding expenses and accrued
year whether they relate to the past, income.
the current or the next year. 4. Income is shown on the credit side
4. The receipts are shown and expenses on the debit side
on the debit side and the payments 5. It definitely shows whether there
on the credit side. has been an excess of income over
5. It simply ends with a expenditure or vice versa.
closing balance of cash and does not 6. It is always accompanied by a
show the result of the business. balance sheet.
6. It is not accompanied by
a balance sheet.
BALANCE SHEET
It has three components
Equity/Grants/Donations
Liabilities
Assets
While using the tabular form of presentation, Liabilities are shown on the left side
whereas assets are shown on the right side. Both sides must be equal to give accurate
information.
35
Illustration
International Relief Agency started work on 1-2-2004 with an endowment fund of US $

300,000. During the month following transactions took place:
Date US $
Particulars
February
01 Subscription received from Members 100,000
02 Subscription still receivable 50,000
05 Profit/Interest received 1,000
10 Rent paid 5,000
12 Utilities 6,000
13 Salaries 95,000
15 Training courses 15,000
17 Fixed assets acquired 25,000
18 Advances to staff 15,000
19 Advances to suppliers 10,000
28 Salaries Payable 10,000
28 Utilities Payable 2,500
Required: Prepare Journal, Ledger Account, Trial Balance, Receipt and payment
account, Income and Expenditure Account and Balance Sheet
JOURNAL
Date Particulars L.F Debit Credit
$ $
Feb 01 Bank 300,000
Endowment Fund 300,000
Endowment Fund at Bank
Feb 01 Bank 100,000
Subscription 100,000
Subscription Received
Feb 02 Account Receivable 50,000
Subscription 50,000
Subscription Receivable from
members
Feb 05 Bank 1,000
Interest on bank deposit 1,000
Profit Received on fund
deposits
Feb 10 Rent 5,000
Bank 5,000
Rent paid
Feb 12 Utilities 6,000
Bank 6,000
Utilities paid
36
Feb 13 Salaries 95,000

Bank 95,000
Salaries paid
Feb 15 Training 15,000
Bank 15,000
Training Exp paid
Feb 17 Fixed Assets 25,000
Bank 25,000
Fixed Asset Purchased
Feb 18 Advances to staff 15,000
Bank 15,000
Advances issued to staff
Feb 19 Advances to suppliers 10,000
Bank 10,000
Advances issued to Supplier
Feb 28 Utilities 2,500
Account Payable 2,500
utilities bills payable
Feb 28 Salaries 10,000
Salary payable
LEDGER ACCOUNT
Bank Book Account No.

Date Particulars Foli Debit Date Particulars Foli Credit
o $ o $
2004 Feb Rent 5,000
Feb 01 Endowment 300,000 10 Utilities 6,000
Feb 01 Fund 100,000 Feb12 Salaries 95,000
Feb 05 Subscription 1,000 Feb Training Exp 15,000
Bank profit 13 Fixed assets 25,000
Feb Advances to staff 15,000
15 Advances to 10,000
Feb suppliers 230,000
17 Cash at bank
Feb
18
Feb
19
Feb
28
TOTAL 401,00 401,000
0
Subscription Account No.

Feb Bank 100,000
01
Feb A/C Receivable 50,000
02
Feb 28 Income & 150,0
Expenditure 00
TOTAL 150, 150,000
000
37
INTEREST ON BANK DEPOSIT Account

No
Feb 28 Feb 5 Bank 1,000
Income & 1,000
Expenditure
TOTAL 1,00 1,000
0
UTILITIES Account
No
Date Particulars Folio Deb Date Particulars Foli Credit
it o
Feb 12 Bank 6,00
0 Feb Income & 8,500
Account Payable 28 Expenditure
2,50
0
TOTAL 8,5 8,500
00
RENT Account
No
Date Particulars Foli Debi Date Particulars Foli Credit
o t o
Feb 10 Bank 5,000
Feb Income & 5,000
28 Expenditure
TOTAL 5,00 5,000
0
SALARIES Account
No
Date Particulars Fol Debi Date Particulars Foli Credit
io t o
Feb 13 Bank 95,00 Feb Income & 105,000
Feb 28 Account Payable 0 28 Expenditure
10,00
0
TOTAL 105, 105,000
000
TRAINING EXP Account

No
o t o
Feb 15 Bank 15,00 Feb Income & 15,000
0 28 Expenditure
TOTAL 15,0 15,000

00
ADVANCES TO STAFF Account

No
o t o
Feb 18 Bank 15,00
38
0 Feb Balance C/F 15,000

28
TOTAL 15,0 15,000
00
ADVANCES TO SUPPLIERS Account

No
o t o
Feb 18 Bank 10,00
28
TOTAL 10,0 10,000
00
FIXED ASSETS Account

No
o t o
Feb 17 Bank 25,0
28
TOTAL 25,0 25,000
00
ENDOWMENT FUND Account

No
Date Particulars Fol Debi Date Particulars Foli Credit
io t o
Feb 28 Balance C/F 300,0 Feb Bank 300,000
00 01
TOTAL 100, 100,000
000
INTERNATIONAL RELIEF AGENCY

TRIAL BALANCE
AS ON FEBRUARY 28, 2004
ACCOUNT HEAD DEBIT CREDIT
Rent paid 5,000
Utilities 8,500
Salaries 105,000
Training courses 15,000
Fixed assets acquired 25,000
Advances to staff 15,000
Advances to suppliers 10,000
Cash at bank 230,000
Endowment Fund 300,000
Account Receivable 50,000
Subscription 150,000
Bank profit 1,000
TOTAL 463,500 463,500

RECEIPTS AND PAYMENT ACCOUNT
FOR THE MONTH OF FEBRUARY 2004
39
AMOUN
AMOUNT
RECEIPTS T PAYMENTS
US $
US $
Opening Balance Rent paid 5,000
Add: Receipts during period Utilities 6,000
Salaries 95,000
Endowment Fund 300,000 Training courses 15,000
Fixed assets acquired 25,000
Subscription Received 100,000 Advances to staff 15,000
Bank profit 1,000 Cash at bank 230,000
Total 401,00 Total 401,000

0

INCOME AND EXPENDITURE ACCOUNT
FOR THE MONTH ENDED FEBRUARY 28, 2004
EXPENDITURE AMOUN INCOME AMOUN

T$ T$
Rent paid 5,000
Utilities 8,500 Subscription Received
Salaries 105,000 100000 150,000
Training courses 15,000 Add: Receivable
50000 1,000
Excess of income over expenditures 17,500
(Carried to balance sheet) Bank profit
Total 151,00 Total 151,00

0 0

BALANCE SHEET
AS AT FEBRUARY 28, 2004
Capital & Liabilities US $ Property & Assets US $
Endowment Fund 300,000 Fixed Assets less 25,000

Surplus 17,500 Depreciation
Accrued Expenses 12,500
Current Assets
50,000
Subscriptions receivables 15,000
Advances to staff 10,000
Cash at Bank
Grand Total 330,00 Grand Total 330,0
40
0 00
CHAPTER 07
CAPITAL AND REVENUE EXPENDITURE
CAPITAL EXPENDITURE
Expenditure means the amount spent. Any expenditure incurred for the following
purposes is capital expenditure:
a) For acquiring fixed assets such as land, buildings, plant and machinery, furniture
and fittings and motor vehicles. These assets should not be acquired with a view
to resell them at a profit during the year but to be retained in the business for
more than a year. The cost of fixed asset would include all expenditure up to the
time the asset becomes ready for use.
b) For making improvements and extensions to the fixed asset e.g., additions to
buildings.
c) For increasing the earning capacity of a business or for reducing the cost of
manufacture, administration or distribution in a business e.g., expenditure
incurred in removing the business to a central locality or compensation paid to a
retrenched employee.
d) For raising capital money for the business such as brokerage paid for arranging
loans, discount on issue of shares and debentures, underwriting commission etc.
All capital expenditure represents either an assets or liability and is shown in the
balance sheet.
LIST OF CAPITAL EXPENDITURE
The following is a list of the usual items of capital expenditure.

1. Cost of good will
2. Freehold land and buildings and the legal charges incurred in this connection.
3. Cost of lease
4. Cost of machineries, plants, tools, fixtures. etc
5. Cost of trade marks, patents, copy rights, designs etc
6. Cost of car, lorry etc
7. Cost of installation of lights and fans
8. Cost of any other assets acquired by way of equipment
9. Erection cost of plant and machinery
10. Cost of addition to existing assets
11. Structural improvements and alterations in the existing assets
12. Expenses for developments in case of mines and plantations
13. Expenses for administration incurred for construction and equipment of any
industrial enterprise
14. Expenses incurred in experimenting which finally result in the acquisition of a
patent or other rights
41
REVENUE EXPENDITURE
Expenditure will be treated as revenue if it is incurred for the following purpose:
a) Expenditure for purchasing floating assets. e.g. cost of goods, raw material and
stores.
b) Expenditure incurred by maintaining fixed assets in proper working order e.g.,
repairs to plant and machinery, buildings, furniture and fittings etc
c) Expenditure incurred for meeting day to day expenses of operating a business
e.g., salaries, wages, rent, rates, taxes, stationery, postage etc.
All the revenue expenditure has to be deducted from the income earned by the
organization. That is to say, all revenue items will be taken to the profit & loss account.
LIST OF REVENUE EXPENDITURE
The following is a list of usual items of revenue expenditure:

a) Expenses incurred for the ordinary administration and carrying on the operations
of a business
b) Expenses for repairs
c) Cost of goods for resale
d) Cost of raw materials and stores acquired for consumption in course of
manufacturing
e) Wages paid for manufacture of products for sale
f) Expenses for the manufacture and distribution of the finished product
g) Loss from wear and tear and obsolescence of assets
h) Depreciation of lease assets
i) Interest on loans borrowed for business
j) Loss from sale of fixed assets
k) Fees for renewal of patent rights etc
l) Up keep and maintenance of motor car and van
m) Maintenance of fan and lights
n) Book value of assets discarded or totally damaged or destroyed by fire or other
reasons
DIFFERENCE BETWEEN
CAPITAL EXPENDITURE AND REVENUE EXPENDITURE.
Capital expenditure Revenue expenditure

1. Its effect is long term i.e. it 1. Its effect is temporary i.e. it is
is not exhausted within the current exhausted within the current
accounting year- its benefit is accounting year.
enjoyed in future years also.
2. An asset is acquired or the

value of an asset is increased as a 2. Neither an asset is acquired nor is
result of this expenditure. the value of an asset increased.
3. Generally, it has physical 3. It has no physical existence i.e. it
42
existence i.e. it can be seen with cannot be seen with eyes.

eyes.
4. It occurs repeatedly it is recurring
4. It does not occur again and and regular.
again it is non-recurring and 5. This expenditure helps to maintain
irregular. the concern.
5. This expenditure improves 6. The whole amount of this
the position of the concern. expenditure is shown in trading and
6. A portion of this profit & loss account or income &
expenditure is shown in trading and expenditure account. But deferred
profit & loss account or income & revenue expenditure and prepaid
expenditure account as expenses are not shown.
depreciation. 7. It does not appear in balance
sheet. Deferred revenue expenditure,
outstanding expenditure, outstanding
7. It appears in balance sheet expenses and prepaid expenses are,
until its benefit is fully exhausted. however, temporarily shown in
balance sheet.
8. It reduces revenue e.g. payment of
salaries to employee’s decreases
revenue.
8. It does not reduce the
revenue of the concern. Purchase
of fixed asset does not affect
revenue.
43
CHAPTER 09
DEPRECIATION
“Depreciation may be defined as the permanent and continuous diminution in the

quality, quantity or value of an asset”
CAUSES OF DEPRECIATION
The main causes of depreciation may be divided into two categories namely:
1. Internal Causes: depreciation which occurs for certain inherent normal causes
is known as internal depreciation. The causes of internal depreciation are:
a. Wear and Tear: Some assets physically deteriorate due to wear and tear
in use. More use of an asset, the greater would be the wear and tear.
Physical deterioration of an asset is caused from movement, strain,
friction, etc. an obvious example of this is motor car which rapidly wears
out. Other assets like this are building, plant, machinery, furniture etc. The
wear and tear is general but primary cause of depreciation.
b. Depletion: Some assets declines in value proportionate to the quantum
of production, e.g. mine, quarry etc. with the raising of coal from coal mine
the total deposit reduces gradually and after sometime it will be fully
exhausted. Then it will be reduced to nil.
2. External Causes: Depreciation caused by some external reasons is called
external depreciation. The causes of external depreciation are:
c. Obsolescence: Some assets, although in proper working order, may
become obsolete. For example, old machine becomes obsolete with the
invention of more economical and sophisticated machine whose
productive capacity is generally larger and cost of production is less. In
order to survive in the competitive market the manufacturers must install
new machine replacing the old one. Again, it may happen that the articles
produced by old machine are no longer saleable in the market on account
of change of habit and taste of the people. In such a case the old
machine, although in good working condition, must be discarded and new
one should be purchased.
d. Efflux of Time: Some assets diminish in value on account of sheer
passage of time, even though they are not used e.g. leasehold property,
patent right, copyright etc. suppose, we take a house on lease for 10 year
for US$ 10,000, its annual depreciation will be US$ 1,000 (10000/10),
irrespective of whether the house has been used or not. Because with the
end of lease after 10 years, the house will go out of our possession.
e. Accident: Assets may be destroyed by abnormal reasons such as fire,
earthquake, flood etc. in such a case the destroyed asset must be written
off as loss and new one purchased.
44
FORMS AND FORMATS

Name of the Organization
Trial Balance
As on ___________________
A/C Codes Particular DR CR
45
Name of the Organisation

Income and Expenditure Account
For the Year Ended
2004 2003
Note (EURO) (EURO)
Income
Donations 8
Other Receipts 9
Expenditure
Salaries and othe benefits (Admin)
Salaries and othe benefits (Field)
Repair and Maintenance
Depreciation
Financial Expenses
Office Contingencies
Travelling and Conveyance
Corporate Expenses
Development Expenditure
Excess of Expenditure over income for

the peroid
Accumulated excess of income over

expenditure brought forward
Accumulated excess of income over

Expenditure carried to Balance Sheet
The above Income and Expenditure should be read with the Annexed Notes
Finance Manager Project Manager / Director
46

Balance Sheet
As At
2004 2003
Note (EURO) (EURO)
Fixed Assets
at cost less accumulated depreciation 8
Net Current Assets

Current Assets
Stores and spares
Advances, Deposits and prepayments
Cash and Bank balances
Less:
Current Liabilities
Creditors and accrued expenses
Net Assets Employed
Represented by
Accumulated excess on income

over expenditure
The above Income and Expenditure should be read with the Annexed Notes
Finance Manager Project Manager / Director
47

Notes to the Accounts
For the year ended___________________
1. Legal Status and Operations

The ________________________________”The Society” has been registered
under the Societies Registration Act, 1880 (or any other relevant legislation)
Under this heading the organization will show summary of its overall activities
e.g. (Health and sanitation, education, improvement of water supplies, women
welfare etc.)
2. Accounting Polices
The Following polices have been adopted in preparation of these accounts.
2.1. Accounting convention
Under this heading the organization will show the basis on which they record all
their transactions in the books of accounts (e.g. Historical Cost Convention)
2.2. Fixed Assets
Under this heading the organization will show the basis on which they value
their fixed assets. In addition the rate and method used for depreciation of Fixed
Assets should also be mentioned here.
2.3. Revenue Recognition
Under this heading the organization will show the timing of recognition of their
income / donations / grants etc.
2.4. Consumable Stores
Under this heading the organization will show the basis on which they value
their
2.5. Foreign Exchange Currency Translation
Under this heading the organization will show the basis on which they convert
their foreign exchange into reporting currency for reporting purpose.
Fixed Assets
Written
down value
Cost Depreciation
as at 30-06-
Ra
04
Particular te
As at Additio As at As at For As at
%
01-07- ns / 30- 01- the 30-
04 deletio 06-04 07-04 year 06-04
ns
Land
Building
Machinery
Vehicles
Office
Equipment
Furniture &
Fixture
Electric
Appliances
Other Assets
48
2004 (EURO)
2005 (EURO)
49
2004 2003
Note (EURO) (EURO)
Advance, Deposits
and Prepayments
Advances
To Staff
To Contractor
To Other
Deposits
Securities
Prepayments
Rent
Insurance
Cash and Bank Balances
Cash in hand
Cash in Bank - current account
Cash in Bank - saving account
Crediors and Accrued Expenses
Crediors
Accrued Expenses
50
2004 2003
Note (EURO) (EURO)
Income from Donaitons
Funds from Foreign Donors

Funds from Local Donors
Funds from Provincial Government
Funds from Federal Government
Income from Other Sources
Interest on bank deposits

Gain on foreign currency
Interest on staff loan
Consultancy fee
Service charges
Training fee
Registration fee
Income from investment
Miscellaneous
General
Figures have been rounded off to the nearest Euro.
Figures of the previous year have been rearranged and regruoped.
wherever necessary for the purpose of comparison.
Finance Manager Director
51

Accounting For Accountants

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Accounting For Accountants

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Basic Accounting Course

Accountants always play an important role in the progress of an economy of any

FIELDS OF ACCOUNTING ACTIVITIES:

Accountants are employed in a number of organizations involving manufacturers,

Accounting is a broader term than bookkeeping. It calls for a greater understanding of

while preparing timely accounting statements, estimates and professional judgments

Accounting is defined as “the art of recording, classifying and summarizing in a

Bookkeeping is an activity concerned with the recording of financial data relating to

Any activity done for the sake of earning profit.

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

Account is defined as a summarized and classified record of transactions. The

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

BUSINESS DOCUMENT / VOUCHER:

Each transaction is recorded in documents providing all the information of the

Following are the important accounting concepts:

1. Business Entity Concept

BUSINESS ENTITY CONCEPT:

GOING CONCERN CONCEPT:

MONEY MEASUREMENT CONCEPT:

HISTORICAL COST CONCEPT:

It is a fundamental concept of accounting, which is based on the historical record of the

DUAL ASPECT CONCEPT:

ASSETS = LIABILITIES + CAPITAL

Revenue should be taken into account when realized.

Financial statements are prepared following certain traditions/customs. These

Following are the important accounting conventions.

Financial statements should disclose all material information to facilitate the

Cycles shows complete sequence of accounting procedures which are repeated in

DOUBLE ENTRY BOOK KEEPING:

A Financial Statement includes:

1. The balance sheet, which describes the overall financial position of an

ELEMENTS OF FINANCIAL STATEMENTS:

Balance Sheet comprises

Income Statement comprises:

Assets are the resources controlled by the organization as a result of past

Assets are further classified as:

A liability is a present obligation, arising from past transaction, the settlement of

Debit: Decrease in Liabilities:

Liabilities are further classified as:

Debit: Decrease in Equity.

It means any type of income of the business.

Debit: Decrease in Revenue.

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

Expense means the expenditure whose benefit is finished or enjoyed.

Debit: Increase in Expenses.

SUMMARY OF RULES OF DEBIT AND CREDIT

Account Increase Decrease

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

Step.5 Adjustment if required is made in the books of accounts or in a separate work

BOOKS OF ORIGINAL ENTRY:

ENTRIES IN THE JOURNAL:

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

1. Date of the transaction.

2. Names of Accounts to be debited and credited.

Date Particulars L.F Debit Credit

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

Required: Record these transactions in the journal

JOURNAL OF WELFARE RELIEF COMMITTEE

2004 Cash 75,000

COMPOUND JOURNAL ENTRIES:

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

Debit Title of Account (A/C No…) Credit