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CLEAR Accounting

Capital Liabilities Expenses Assets Revenue

Foreword

There are very few sciences which have not advanced over the ages. The science
of book – keeping is one such.
Many books have been written on accounting systems and new books are still
being published. Every new book is aimed at providing a still simpler view of the
accounting system. New knowledge has never been added to the accounting
system.
The basic structure of book-keeping is the same all over the world, but knowledge
of the accounting terms used in different countries has become essential thanks to
globalization.
Similarly, knowledge of computerized accounting systems became essential thanks
to the ubiquitous presence of computers. Here again the manual and the
computerized accounting systems have no structural difference.

Introduction to Accounting

Definition: "Accounting is the art of recording, classifying, summarizing and


interpreting a business transaction."
All Business Transactions do not form Accounting Transactions. Accounting books
say that only those transactions which are capable of being measured in value or
monetary terms are to be considered in accounting.
All such monetary transactions have to be recorded and they are recorded in a
double entry format. There is a double entry in the accounts of the person who
received the money and another double entry in the accounts of the person who
gave the money.

Financial Accounting
• provides information primarily to people outside the company

• provides information that would be helpful in attracting

o Equity and debt (useful in debt contracts)

o Credit from suppliers


o Customers

o Employees

Managerial Accounting
• provides information to people inside the company

o Internal investment decisions

o Performance evaluation

Tax Accounting
• provides information to the tax authorities

Management Information System (MIS) goes far beyond the Managerial


Accounting. It monitors performance of the Organization in Financial as well as
Non-Financial terms.

Types of Accounts

An Account (Accounting Head) is an element used for recording Accounting


Entries. The minimum accounting heads to be maintained are CLEAR i.e. Capital
a/c, Liabilities a/c, Expenses / Losses a/c, Assets a/c, Revenue / Incomes a/c.
There are 3 Types of Accounts:
1. PERSONAL ACCOUNT - Any account that bears the name of a particular
person (including, of course, names of companies, suppliers, customers and
so forth). For instance, the Walters Account, the Mortimer Account, the
Calvin Motors Ltd. Account, and more.
2. REAL ACCOUNT - Any account for which that recorded on the account can
be really verified. For instance, the Cash Account (if the Cash Account
shows that we received $ 80, then we can check physically to see if we
have $ 80 in cash). Another example is the Goods Account. If the Account
shows that we received goods worth $ 100, then goods to that value should
be physically present in the warehouse.
3. NOMINAL ACCOUNT OR PROFIT AND LOSS ACCOUNT- Any account
that describes an expense or receipts (the name of the account will always
be followed by the words ' ... Expense Account' or '... Receipts Account'}.

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Accounting Rules:

Following are the fundamental accounting rules in respect of the 3 account types:

Personal Account Debit the Receiver (Asset) Credit the Giver (Liability)
Real Account Debit what comes in (Asset) Credit what goes out
(Liability)
Nominal Account Debit Expenses / Loss Credit Income / Gain

Debit Profit and Loss Credit Profit and Loss


Account Account

Accounting is recording the transactions relating to business. Only those


transactions that can be assessed / expressed in value / monetary terms are
capable of being called Accounting Transactions. Transactions which cannot
be assessed / expressed in value / monetary terms are Service Transactions and
are not to be considered in Accounting.

The Double Entry Convention

In bookkeeping, each single" commercial transaction is recorded twice. On the


"Received" side and then again on the "Gave" side. Each Account has two columns
“Received” and “Gave”. These are known as “Debit” and “Credit” respectively. Debit
column is on the left side of the page and the Credit column is on the right side of
the page.
In accounting there are two systems. The hard copy documents of Service
Transaction like receipt, invoice, check and so forth first lead to an entry of both
Debit and Credit in a book called “A Journal” in a chronological manner. The entries
are then copied to various Ledger Accounts. This process of transferring the values
from a Journal to a Ledger is known as Posting.

Business Documents Journal Entry Transfer to Ledger

Once the entries have all been posted, the Ledger accounts are added up in a
process called Balancing. A list of transactions posted in the Ledger is made as
follows:

Account Debit Credit Debit Balance Credit Balance


Name Transaction Transaction

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Total A B
Total C D

This arrangement is called the Trial Balance. The expression 'Trial Balance' comes,
from the fact the debit and credit columns must balance (hence the word balance).
That is sum of Debit Transactions must equal the sum of Credit Transactions (A =
B) and this is equal to the Journal Total. Similarly the Sum of Debit Balances must
equal the sum of Credit Balances (C = D). Thus the above table constitutes a trial
(check) that the records in the journal have been properly transferred to the nominal
ledger.
At the end of each year, the bookkeeping system produces two statements (directly
from the Trial Balance). Let us assume that we are concerned with the year ending
on December 12, xx. The two statements will be:
Statement 1 - The Profit and Loss Statement for the year ending December 31, xx.
Statement 2 - The Balance Sheet as on December 31, xx.
We need to have more understanding of business activities before we return to the
above financial statements.

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Introduction to Service Oriented Transaction Architecture
(SOTA):

Service

Bill Gates states in his book “Business @ Speed of Thought” that there are two sets
of Processes in any Organization. One is the Core Service Process for which the
Organization owes its existence. For example the core process in a car
manufacturing industry is the making of cars and the core process in a hospital is
patient care. All other processes are subservient Business Processes. The SOTA
architecture implies development of IT System based on the Core Service Process.
The Business Process Data is a bye-product of the Core Service Process Data and
hence is not captured separately. Service is thus the core Entity of SOTA.

Service Elements:

All the types of Services have common basic elements:


A customer
A Service which is provided
A Provider

Entities

Provider provides a Service to a Customer. A Service is an entity. Customers and


Providers are Persons either actual people or Legal Persons; they are Person type
of an entity. Besides Person Entity and Service Entity, we need one more Entity for
Service Transaction and that is Concept Entity. Concept is a mental construct of
Real Life Phenomenon. The Concept Entities describe the Service Transactions.
For our purpose we will say that anything which is not a Customer, Provider or a
Service is a Concept.

Service Types:

What services do organizations or individuals provide?


1. CONSULTATIVE: This type of service involves a logical interaction
between a customer and a provider of service. Doctors, lawyers, and
management consultants provide consultative services. These services
have a outcome which gets documented.

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2. PROCEDURAL: This type of service involves a physical interaction
between a customer and a provider. This service may also involve use of
equipment, machine or a hard or soft instrument. These services also
require documentation of outcome.
3. MATERIAL (CONSUMABLE): This type of service transfers the ownership of
a hardware or software from the provider to the customer. There is debit and
credit to material accounts of provider and customers.
4. FACILITY (USE OF HARD OR SOFT ASSET): The provider of the service allows
limited use of his hardware or software to the customer. Examples of hard
assets are airline seats, hotel rooms. Examples of soft assets are Internet
Service Providers. This service will involve blocking and release of the
asset.
5. BOOKING SERVICE: All the facility services and sometimes the other
types of services need booking. A service of any type if it needs booking
always needs a booking before a service request can be made.
6. INFORMATION: These services are rather complex. They involve various
Structures and Concepts which are the building blocks of information.
7. FINANCIAL: When anyone of the above types of services is given by a
provider to a customer, it generates a request for a Reciprocal Financial
Service whereby the
Customer of the earlier
Service is obliged to pay the
consideration to the Provider
of the Original Service. In the
Reciprocal Financial Service
the Recipient of the Original
Service becomes the Provider
of the Reciprocal Financial

Provider Customer Non Financial Service

Customer Provider Reciprocal Financial Service

Service who pays the consideration to the Provider of the Original Service
who now becomes Customer of the Reciprocal Financial Service.
Financial Services whereby a Provider allows a Customer temporary use of
money like a Loan or a Deposit are facility services. They are close ended
that is they have a limited time period and a price in the form of Interest.
Investment of Capital is an Open Ended Facility Service. These Facility
Services should form a separate Group of services under Facility Services.
Interest is thus a consideration payable for Facility Service. Deposit is an

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anticipatory Reciprocal Financial Service to cover Original Services at a
later date. It may cover previously known or booked Original Services or
may cover Services not requested at the time of Deposit when it is called On
Account Deposit. Depreciation is notional and is a Report side calculated
field. Its value is based on the Original Price of Purchase.

Service Levels:

Services are transacted at three levels in an organization.


Level 1: External Services: Services provided by the organizations to external
organizations or persons.
Level 2: Internal Services: Services provided within the organization.
Level 3: Procured Services: Services procured by organizations from external
organizations or persons.

External
External Services
Services
A
AProvider CustomerC
Provider Customer CInternal
Internal ServicesCustomer
ServicesCustomer Provider
Provider

B
BProcured
Procured Services
Services

P
PProvider
Provider CustomerFigure
CustomerFigure 1:
1: AA is
is aa provider
provider to
to the
the customer
customer C.
C. AA
is
is aa customer
customer of of B.
B. BB is
is aa customer
customer of
of P.
P. Blue
Blue lines
lines indicates
indicates
services
services and red lines requests. Services and requests flow
and red lines requests. Services and requests flow in
in
opposite
opposite directions.
directions.

Scope of IT

There are only two IT activities on any System.

1. Registration: Before any transaction can be recorded on any IT


System, we need to Register Customers and Providers of Services
under various Person Entity Groups for example Patients, Employees,
Account holders etc. At the time of such Registration, we give values to
desired Person Attributes like Name, Date of Birth, and Telephone
Number etc. Similarly we need to Register various Concept Entities like
Departments. The Concept Entities bring standardization of values and
also add meaning to the values entered. We also need to register
various Services under various Service Entity Groups for example Bank
Locker Services, Savings Account Services, or Laboratory Services,

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Room Services etc. At the time of Service Registration, we need to give
values to desired Service Attributes like Service Name, List Price etc.
Thus Attributes get their values during Registration. When Registering
Services we also need to Register all the Parameters of the Service that
should get their values on the IT System during a Service Transaction
like the Quantity Requested, Sale Price etc. These Parameters get
values during every Service Transaction.

2. Transaction: A Service Transaction starts with a Request for Service


and ends when all the Parameters get their values.

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Conventional Accounting System and the SOTA

Business
Any business starts with the owner’s equity. The owner or promoter invests his
money to form an organization. The organization in turn owes the promoter his
(owners) equity.
(Owner's Name), Capital is the main owner's equity account. The amounts in all
the other owner's equity accounts
are eventually recorded in the
Capital account. Any monies the
Promoter owner invests in the business are
Capital entered directly into this account.
Withdrawals Organization (Owner's Name), Withdrawals or
Drawing account sums the assets
(cash, inventory, etc.) that the owner takes out of the business for personal use.
The amount in this account is eventually recorded in the Capital account and
decreases the Capital account.
Capital Accounts are involved in all Service Transactions where the Owner of
the Business and the Owner’s Business Organization are Customer / Provider
of each other.
There is a catch here. An individual or a Person has many identities. A Person may
be an owner of a Business. All people who own the Business, should be Registered
as Owner’s of the Business. The Transactions which they would enter into as
Owners of the Business alone would involve Capital Accounts. The Person who
owns the Business can act in any other capacity and deal with the Business as a
Customer or Provider of any service in this independent capacity. For example a
Person who owns a Hospital may undergo a CT scan in the same hospital and may
pay for his CT Scan. For this Purpose he is Registered as a Person in “Patient
Group”. This transaction has no bearing on the Capital accounts.
The Services which will be transacted between the Owners and the Business are
common for all Organizations but they need to be registered. Once created, they
can be used for any organization.
To familiarize with the Journal and Ledger entries, let us presume Ibrahim invests
200,000 rupees by cash in a company. The typical Journal entry of the Transaction
that brings Owner’s Capital of Rs. 200,000 in a company is shown below.

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This Transaction is also recorded in Cash Ledger and Capital Ledger as follows:
Cash Ledger:

2,00,000

Ibrahim Capital Ledger:

SOTA will record this Transaction as


Customer = M/s __________
Provider = Ibrahim
Service = Invest Capital (Facility Service)
Parameter 1 Mode of Payment = Cash
Parameter 2 Amount = 200,000
Parameter 3 Unit = Rupees

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The Date and Time of Transaction are recorded from System at the actual when the
Cash was received and System Entry made for the same.
In the above transaction if the Capital was brought by a Cheque, then the Ledger of
the bank account in which the Cheque was deposited by the company will show a
Debit entry exactly like that shown in the Cash Ledger above.
The Personal and Real Accounts are reflected in the Balance Sheet. The Nominal
Account Balance is consolidated in a single Profit and Loss (P&L) Account. The
Rules of Accounts for SOTA are as follows:

Reciprocal
Type of Original Fin
Service Service Service Service Debit Credit
Procured Open Bank / Cash / Provider Capital
Service Capital Complete ended Equipment A/c
Procured Non Not Profit & Loss Provider Creditor
Service Material complete Complete A/c A/c
Procured Non Profit & Loss Bank / Cash /
Service Material Complete Complete A/c Expense Prepaid
Procured Non Not Expenses
Service Material Complete Complete Prepaid Bank / Cash
Procured Equipment /
Service Material Complete Complete Furniture A/c Cash /Bank
External All Not Customer
Service complete Complete Debtors A/c Profit & Loss A/c
External
Service All Complete Complete Bank / Cash Profit & Loss A/c
External Not Profit & Loss
Service All Complete Complete A/c Customer A/c

There may be more than one person investing in a company and every investor will
have a Capital Ledger with his name. Every time an investor gives “Invest Capital
Service” to the Company, there will be a Credit entry in his Capital Ledger.
There will be thus be a “Withdraw Capital Service” by which the investor withdraws
amounts and these amounts will be entered on the Debit side of his Capital Ledger.
Amounts and other resources borrowed by / for the business from outsiders are
Loan and not Capital. Conventional accounting treats these as Loaned Capital.
Many problems arise out of this in conventional accounting where the interest on
Loaned Capital is deductible for tax purpose but the dividend on Owners Capital is
not. To accommodate this, some countries allow deduction of dividend. The
business is responsible for the loan. The Loans affect Liabilities accounts and not
Capital accounts.
Injecting Capital into the Organization is a Procured open ended Facility Service
where the Owner is the Provider and the Organization is the Customer.

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Owners Withdrawal or Dividend Payment is a Reciprocal Financial Service.
The owner of a business may bring personal assets like car, computer into the
company. The owners of the business may invest in the business by taking loans
personally and investing that in their name as capital contribution. The responsibility
for this amount lies with the person who is borrowing the amount and not the
business. This should not be misunderstood as loaned capital for the business.
Let us see an example: Mrs. Raju Commenced business by bringing in the
following assets and liabilities of hers as her capital contribution.
Cash Rs. 50,000.
Motor Car Rs. 1,00,000
Furniture Rs. 20,000
Bank Loan (payable) Rs. 50,000
Journal entries for these transactions are shown below:

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Sometimes the Journal entries are made in a Complex or Compound manner as
follows:

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Whatever be the Journal entries, there are five Ledger accounts involved. Cash,
Mrs. Raju’s Capital, Motor Car, Furniture and the Bank Accounts.
By SOTA every individual transaction is recorded separately and the Report can be
printed whichever way one wants.

Liabilities:

What the future does not hold for you. LIABILITIES are what the business owes
outsiders. Following are some common liability accounts: When these amounts are
actually paid they constitute Expenses. Liabilities are unfinished Reciprocal
Financial Transactions of Procured Services.
Accounts Payable is what the business owes to people or companies that it has
purchased goods or services from on open account. This type of credit is normally
referred to as trade credit. These are unfinished Reciprocal Financial Services,
where the Procured Original Service of any type has been completed.
Unearned Revenue is used to record advance payments for goods or services that
have not yet been delivered. This is an anticipatory Reciprocal Financial Service
and is a Liability.
Customer Deposits is used to record deposits (such as rent deposits) that are
made to secure payment or cover damages to property, etc. They are Facility
Services if they have to be returned and are anticipatory Reciprocal Financial
Services if they are adjustable against the future Original Services.
It is interesting to note that Incomplete Reciprocal Financial Service for Procured
Services and Anticipatory Reciprocal Financial Service for External Service

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constitute Liability. In the same manner Incomplete Reciprocal Financial Service for
External Services and Anticipatory Reciprocal Financial Service for Procured
Service are Assets.

Reciprocal
Original Fin Account
Service Customer Provider Service Service Name CLEAR
Procured Not Accounts
Service Org Supplier complete Complete Payable Liability
Advance for
purchase /
Procured Not Prepaid
Service Org Supplier Complete Complete Expenses Asset
External Not Accounts
Service Patient Org complete Complete Receivable Asset
External Not Advance for
Service Patient Org Complete Complete Service Liability

Notes Payable are liabilities for which the business has issued (signed) a
promissory note to pay the lender what they borrowed, plus interest. Normally,
just the principal (what the business borrowed) is in the account. The interest is
reported in a separate account (Interest Payable) that will be discussed later.
Here some discussion is required. Any instrument of payment except cash is a
request for Payment Service generated by the Reciprocal Financial Service. This
Payment Service is completed when the payment actually happens by way of cash
or in a bank account. Thus cheque, bank draft, credit card swipe are all requests for
Payment Service. In the same manner, Notes Payable is a request for Payment
Service.
Accrued Expenses Payable is a category of accounts that summarize things the
business has used but has not yet paid for. They are broken down into different
accounts such as: Salaries and Wages Payable (for salaries and wages that have
been earned by the employees but not yet paid); Interest Payable (for interest on
notes payable, etc., that has accumulated on the note but has not been paid). All
these are Accounts Payable for Procured services and hence Liabilities.
Liabilities
200-Accounts Payable
201-Notes Payable
205-Sales Tax-Payable
206-IncomeTax-Payable
209-Unemployment Taxes
220-Long-Term Debt-Mortgages Payable

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221-Long-Term Debt-Bank Loan
225-Miscellaneous Accruals

Expenses

Income and Expenses constitute Nominal Accounts. Expenses are the cost of
generating revenues. In other words, expenses are the cost of doing business.
There are many different kinds of expenses with many different names, but they
normally fall into two or three different categories: cost of goods sold, selling
expenses, general and administrative expenses. Almost all expense account
names, with the exception of Cost of Goods Sold, end with "expense", such as,
Wage Expense, Rent Expense, etc. The amounts in expense accounts are
eventually put in the Capital account and these amounts decrease the Capital
account. All expenses are debited to expense accounts.
Expense Accounts are involved wherever; the Organization is a customer of the
non-Material Service Transaction. Procured Non-material services can be grouped
as different accounting heads as under:
Expenses (Debit) (Procured Non-Material Services)
500-Salaries and Wages
501-Contract Labor
503-Utilities
504-Telephone
505-Rent
508-Maintenance Expense
510-Interest
512-Travel Expense
513-Entertainment
514-Advertising
520-Miscellaneous Expenses
515-Dues and Contributions
What about Taxes?
502-Payroll Taxes
What service is the Organization receiving that makes it liable to pay consideration
of Tax. Logically it is a Facility Service given to the Organization by the Government
authorities. The Facility in this case is the temporary use of License to own a house,

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earn income, sale goods which attract property tax, income tax and the sales tax
respectively as customer of these procured services.
When a person is employed, registration of employee takes place. Employment is a
Procured Facility Service. The Attributes of each Employee define his employment
contract. These Attributes will be:
Date of joining
Designation
Department
Temporary / Permanent
Full time / Part time
Leave entitled per year
Basic salary
Dearness Allowance
Bonus
Provident Fund Account Number
Income Tax PAN Number
When an employee works in an Organization, he is providing the Original Service
(Procured Facility Service) to the Organization. Similarly, when the telephone
service provides telephone facility to the Organization, it is providing the original
service.
The parameters of a employee work service are recorded on a daily basis:
Incoming Time
Outgoing Time
Date
The salary is calculated on the basis of this record.
By the contract of employment some money is payable to the employee, some to
the PF account and some to the Income tax account.
PF account and IT account are services provided by PF and IT to the employee.
You are paying the entire salary to the employee and he is paying the PF and IT by
a separate service.
In the parlance of SOTA, each expense account is a Service Group of Reciprocal
Financial Services. Thus there will be a Salaries and Wages Service Group which
will have all type of salary services like monthly pay, earned leave encashment,
bonus etc. Similarly there will be a Group called Utility Expenses which will have

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Reciprocal Financial Services like Payment of Telephone Expenses, Payment of
Electricity Expenses and Payment of Advertising Expenses etc. Like the
Employees, Telephone Service Vendors, Electricity Vendors and Advertising
Service Vendors will be registered in Respective Person Groups.
There has to be record of original service transaction

The following common expense heads need some reconsideration. Following items
can be considered as Asset accounts rather than Expense accounts.

506-Office Supplies
507-Postage
509-Insurance
The one expense account which is exceptional is
511-Depreciation
What Service is given by whom to account for Depreciation? No Service is the
answer. Depreciation is no Service neither Original nor Reciprocal Financial. It is
just a field for the purpose of Report!

Assets

What the future holds for you. ASSETS are what the business
has or owns. Following are some common asset accounts:
Cash is money the business has on hand and in the bank.
Accounts Receivable is the amounts of money customers owe
the business for goods or services.
Inventory is the cost of goods a business buys to resell.
Prepaid Expenses is a category of accounts that summarize things that the
business pays for in advance, to use in the near future. They are broken down into
individual accounts such as: Supplies Inventory (for office supplies, etc.); Prepaid
Insurance (businesses pay for insurance sometimes two or three years in advance);
Prepaid Rent, Prepaid Interest, etc.
Land (Property), Buildings (Plant) and Equipment (all are sometimes called fixed
assets) are purchased to operate the business. They are expected to last a long
time.
Let us keep the Bank accounts and Cash accounts separate for the time.

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Asset Accounts are involved wherever; the Organization is a Customer of the
Material Service Transaction and such transactions add to the Assets. Procured
Material Services can be grouped as different accounting heads as under:
Assets Accounts Examples (Procured Material Services)
103-Inventory
105-Materials and Supplies
120-Land
121-Buildings
123-Tools and Equipment
125-Automotive Equipment
127-Furniture and Fixtures
Purchase of above items increase the value of these Asset accounts by the value
equal to the purchase price of the Material Service. We can call these Assets as
Material Assets. (Ideally these should be called as Real Assets)
The other Assets are Money Assets (Ideally these should be called as Virtual
Assets) Examples of Money Assets are:
100-Cash in Banks
101-Petty Cash Fund
102-Accounts Receivable
107-Prepaid Expenses
108-Deposits
122-Accumulated Depreciation -- Buildings (Credit)
124-Accumulated Depreciation -- Tools and Equipment (Credit)
126-Accumulated Depreciation -- Automotive Equipment (Credit)
128-Accumulated Depreciation -- Furniture and Fixtures (Credit)
130-Organization Expenses (to be amortized)
Bank a/c is Debited when:
1. Cash paid into the Bank
2. Cheques received by the organisation towards the amounts it has to receive
and deposited in the bank for collection. This is recorded on the date of
deposit in the bank.
3. Interest due and depostied by the bank to the organisation on the bank
account balances.

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4. Direct payments by the customers into the bank account.
5. Amounts collected by the bank on behalf of the customer like Dividends on
shares, Interest on Investments, Rent on property etc. Some of these may
be on a standing instruction.
6. Amount receivable towards a bill receivable honoured on the due date,
when it is collected by the bank.
7. Amount receivable on discounting bills by the bank.
Bank a/c is Credited when:
1. Cash withdrawn from the Bank
2. Cheques issued by the organisation towards the amounts it has to pay. This
will be recorded on the date of issue of the cheque
3. Interest and other charges collected by the bank towards the services it
provides the organisation like collection of outstation cheques etc
4. Amounts paid by the bank on behalf of the customer (organisation) like rent,
insurance premium, etc. Some of these may be on account of a standing
instruction.
5. Amount paid towards clearing a bill payable by a cheque or by the bank
directly on instructions to the bank.
6. Amount payable towards the dishonor of a bill discounted.
7. Cheques dishonored by the issuer
The Value of the above Assets increases in all Transactions where the
Organization is the Provider of the Original Service that is by earning Revenue.
Remember that all the above Asset Accounts increase with a debit entry to the
account.
As the fixed assets are used, their cost is written off systematically - this is called
depreciation. It is assumed that land cannot be used up; therefore, the cost of land
is never written off in this manner. As the cost of the other fixed assets is written off,
the amount is accumulated in an account that serves as an off-set against the cost
of the asset.
Accumulated Depreciation is the account that is used to report the total amount
that a fixed asset has been depreciated from the time it was acquired. The accounts
are specific to each asset account (for example, Accumulated Depreciation -
Buildings or Accumulated Depreciation - Equipment) and the balance in the
accumulated depreciation account is deducted from the balance in the
respective asset account to arrive at a net (undepreciated) cost for the asset.
This amount is called the Book Value of the asset.

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Revenue

Revenue is what a business earns for what it is in business to do. For example,
what a dry cleaning business charges for cleaning a suit is revenue. Revenue
accounts can have many different names, but normally fall into one or two
categories: service revenue or sales revenue. The amounts in revenue accounts
are eventually put in the Capital account and these amounts increase the Capital
account. All revenues are credited to revenue accounts.
Sales (Revenue) Accounts (Credits)
400-Retail Sales
401-Wholesale Sales
402-Sales-Service
405-Miscellaneous Income
Revenue Accounts are involved wherever; the Organization is a provider of the any
Service Transaction and such transactions add to the assets.
For the preparation of MIS, Services provided by the Organization can be grouped
in various ways for Accounting Information. For example, they can be grouped by
the department that provides them like Room Charges, OT Charges, Laboratory
Services, and Radiology Services etc. They can be grouped as Doctors Charges,
Diagnostic Service Charges, Procedure Charges etc. Thus one service can be
grouped under different service groups to enable creation of a good MIS report.
Let us revert back to Accounting. We have seen various types of Accounts.
When the organization makes profit it owes that profit which it is supposed to return
to the promoter. On the other hand if the organization makes loss, it’s obligation to
the promoter decreases!
Profit = Revenue – Expenses
Revenue > Expense = Profit and Revenue < Expense = Loss
The purpose of the accounting system is to keep a record of the changes in Assets,
Liabilities and Owner's Equity (including Revenues and Expenses) and to report the
effects of those changes. The reports are called financial statements and there
are different financial statements to report different things.
Generally speaking, adjusting entries are made at the end of a period to ensure that
Revenues are reported when earned and Expenses are reported when incurred.
Adjusted Trial Balance is a trial balance after all adjustments have been: Analyzed,
Journalized, Posted and the affected accounts “Balanced”.

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Financial Statements are used to report the financial position and results from
operating a business. They are the Balance Sheet, the Owner's Equity
Statement, the Income Statement and the Cash Flow Statement.

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The Balance Sheet

Following are the transactions relating to M/s Trinity Foods, over an accounting
period from 1st June 2005 to 30th June 2006.
1. Started business with Capital Rs. 1,00,000
2. Paid into Bank Rs. 10,000
3. Bought Furniture and paid cash Rs. 25,000
4. Bought goods for cash Rs. 50,000
5. Bought goods from Ram on Credit Rs. 15,000
6. Sold a part of the goods for Rs. 75,000 and paid the proceeds into bank
directly
7. Sold the remaining goods on credit for Rs. 50,000 to Rahim
8. Paid Salaries and Wages Rs. 5,000
9. Paid rent by cheque Rs. 8,000
If you look at the above transactions carefully, you will see that some of these are
Original Service Transactions and some are Reciprocal Financial Transactions
(RFC) as shown in the tablel below:
Trans Level of Type of
ID Service Customer Provider Service Service Amount
1 Invest Capital Org Owner Procured Facility 100,000
RFS for 1
Withdrawal /
Dividend Owner Org RFS RFS
2 Transfer Money Bank Org External Facility 10,000
RFS for 2 Interest Org Bank RFS RFS
3 Purchase Furniture Org Supplier Procured Material
RFS for 3 Supplier Org RFS RFS 25,000
4 Purchase Goods Org Supplier Procured Material
RFS for 4 Supplier Org RFS RFS 50,000
5 Purchase Goods Org Ram Procured Material
RFS for 5 Ram Org RFS RFS 15,000
6 Sale Goods Buyer Org External Material
RFS for 6 Org Buyer RFS RFS 75,000
7 Sale Goods Rahim Org External Material
RFS for 7 Org Rahim RFS RFS 50,000
8 Employment Org Employee Procured Facility
RFS for 8 Pay
Salary Employee Org RFS RFS 5,000
9 Shop on Rent Org Landlord Procured Facility
RFS for 9 Landlord Org RFS RFS 8,000

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The Accounting Cycle will start with the entry of the Transactions in a Journal in a
chronological manner followed by Posting which is the act of transferring the
information in the journal to the appropriate accounts.
The Debits and Credits to various accounts as a result of the above transactions
are shown below:

TransID Service Amount Status Debit Credit Transaction


Invest
1 Capital 100,000 Cash Capital Capital
RFS for 1
Withdrawal /
Dividend Not Due
Transfer
2 Money 10,000 Bank Cash Asset
RFS for 2
Interest Not Due
Purchase
3 Furniture
RFS for 3 25,000 Complete Furniture Cash Asset
Purchase
4 Goods
RFS for 4 50,000 Complete Purchase Cash Expense
Purchase
5 Goods
RFS for 5 15,000 Incomplete Purchase Ram Expense
6 Sale Goods
RFS for 6 75,000 Complete Bank Sales Revenue
7 Sale Goods
RFS for 7 50,000 Incomplete Rahim Sales Revenue
8 Employment
RFS for 8
Pay Salary 5,000 Complete Salary Cash Expense
Shop on
9 Rent
RFS for 9 8,000 Complete Rent Bank Expense

A trial balance is a list of all the above accounts and their balances. What we call
Debit balances are written in one column and Credit balances are written in one
column. Each column is totaled and compared to make sure that Debits = Credits.

24
Closing an account means to "bring the balance to zero". We close what we call
the temporary (or nominal) accounts. They are the temporary Owner's Equity
accounts - Revenues, Expenses and Withdrawals.
There are a total of 4 nominal accounts with either debit or credit balances.
Purchases a/c [Debit Balance]
Sales a/c [Credit Balance]
Salaries and Wages a/c [Debit Balance]
Rent Paid a/c [Debit Balance]
To ascertain the profit or loss made by the organization, the balance in these
accounts should be transferred to the "Profit & Loss a/c". Expenses viz. Purchases,
Salaries and Rent will be Debited to P & L A/c and Revenue viz. Sales will be
Credited to P & L A/c.
The picture that emerges is as follows:

Account TID Debit Credit


Capital 100,000
Cash 1 100,000
2 10,000
3 25,000

4 50,000

8 5,000
Cash Total 100,000 90,000
P&L 4 50,000
5 15,000
6 75,000
7 50,000
8 5,000
9 8,000
P & L Total 78,000 125,000
Bank 2 10,000
6 75,000
9 8,000
Bank Total 85,000 8,000
Ram 5 15,000
Rahim 7 50,000
Furniture 3 25,000

The Conventional Accounting Process followed so far is shown below:

Business Documents Journal Entry Transfer to Ledger

Balance Sheet Closing of 25


Accounts Trial Balance
This process is laborious. We are just moving the same figures from one place to
another.
The Final Balance Sheet will look like this:

This Balance Sheet can easily obtained without resorting to any of the intermediary
reports of Journal, Ledger or closing of accounts. Under SOTA we resort to the
following Rules which are inbuilt and do not have to be created during registration
or transaction. The mode of payment is a parameter of service transaction and will
affect the Cash or bank account accordingly.
Reciprocal
Type of Original Fin
Service Service Service Service Debit Credit
Procured Open Bank / Cash / Provider Capital
Service Capital Complete ended Equipment A/c
Procured Non Not Profit & Loss Provider
Service Material complete Complete A/c Creditor A/c
Bank / Cash /
Procured Non Profit & Loss Expense
Service Material Complete Complete A/c Prepaid
Procured Non Not Expenses
Service Material Complete Complete Prepaid Bank / Cash
Asset Provider
Procured Material Not Equipment / Creditor
Service Asset Complete Complete Furniture A/c Account
Provider
Procured Material Creditor
Service Asset Complete Complete Account Cash /Bank
Procured Material
Service Consumable
External All Not Customer Profit & Loss
Service complete Complete Debtors A/c A/c
External Profit & Loss
Service All Complete Complete Bank / Cash A/c
External Not Profit & Loss
Service All Complete Complete A/c Customer A/c

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