for kaushik
she...@gmail.com
When a transaction occurs, a document is produced. This document is
referred to as a source document. Some examples of source documents
are:
· The sales slip, receipt, or invoice that documents a purchase.
· The deposit slips and checks that effect credits (additions) to and
debits (subtractions) from a checking account.
These source documents are then recorded in a journal. This is also
known as a book of first entry. The journal records both sides of the
transaction recorded by the source document. These write-ups are known
as journal entries.
These Journal entries are then transferred to a ledger. A ledger is
also known as a book of accounts. The purpose of a ledger is to bring
all of the amounts recorded for that account from the journal together.
This process of transferring the values is known as posting.
Once the entries have all been posted, the ledger accounts are added up
in a process called balancing. A particular working document called an
unadjusted trial balance is created. This lists all the balances from
all the accounts in the ledger. Notice that the values are not posted
to the trial balance, they are merely copied.
At this point accounting happens. The accountant produces a number of
adjustments which make sure that the values comply with accounting
principles. These values are then passed through the accounting system
resulting in an adjusted trial balance. This process continues until
the accountant is satisfied that the resulting figures are correct and
can be used to produce financial statements
Selling merchandise on credit:
1. The amount of trade receivables (an asset) for the business
increases.
2. The sales revenue for the business increases (eventually this will
become part of equity).
Upon payment, the trade receivables account decreases while the cash
account increases.
Should the receivable be "written off" as uncollectible debt, the
receivable account decreases and the bad debt is added to expenses
(which also becomes part of equity when netted against income and cost
of goods sold). In larger firms, a portion of the receivable account is
written off beforehand as expected to be uncollectible.
Paying a trade creditor:
1. The amount of trade payables (a liability) for the business
decreases.
2. The amount of cash in the business is reduced.
assets = liabilities + equity
For a particular time period, the equation becomes:
assets = liabilities + equity + (revenue - expenses)
assets + expenses = liabilities + equity + revenue
This equation must be true, for any time period. If it is, then the
accounts are said to be in balance. If the accounts are not in balance,
an error has occurred.
Debits and credits are then defined as follows:
· debit: an increase in one of the accounts with a normal balance of
debit or a decrease in one of the accounts with a normal balance of
credit. A debit is recorded on the left hand side of a 'T' account
· credit: an increase in one of the accounts with a normal balance of
credit or a decrease in one of the accounts with a normal balance of
debit. A credit balance is recorded on the right hand side of a 'T'
account
· Debit accounts = Asset and Expenses and money received to bank
accounts
· Credit accounts = Gains and Liabilities and money paid out of bank
accounts
Examples:
Purchase of a Computer
The following accounts have a normal balance of debit:
· Assets
· Expenses
· Losses (that is, when expenses exceed revenue)
The following accounts have a normal balance of credit:
· Liabilities
The following table summarizes the basic accounts. A "+" indicates an
increase; a "-" indicates a decrease.
Debit/credit
Account Debit Credit
Assets + -
Liabilities - +
Shareholder Equity - +
Revenue (-) +
Expenses + (-)
Ledger example 1
In this example the following will be used: Books of first entry
(a.k.a. Books of prime entry)
· Sales Invoice Daybook (records customer Invoice Daybook)
· Bank Receipts Daybook (records customer & non customer receipts)
· Purchase Invoice Daybook (records supplier Invoice Daybook)
· Bank Payments Daybook (records supplier & non supplier payments)
Ledger Cards
· Customer Ledger Cards
· Supplier Ledger Cards
General Ledger (Nominal Ledger)
Bank Account Ledger
Trade Creditors Ledger
Trade Debtors Ledger
>From the above we will create:
· Trial Balance
· Profit and Loss Statement (Dr & Cr Formating, classic format)
· Profit and Loss Statement (List Format, Modern version used today)
· Balance Sheet (Dr & Cr Formatting, classic format)
· Balance Sheet (List Format, Modern version used today)
Purchase Invoice Daybook
Purchase Invoice Daybook
Date Supplier Name Reference Amount Electricity Widgets
10 Jul 2006 Electricity Company PI1 1000 1000
12 Jul 2006 Widget Company PI2 1600 1600
------- ------- -------
Total 2600 1000 1600
==== ==== ====
Credit Debit Debit
Trade Profit Profit
Creditors & loss & loss
control a/c control a/c control a/c
Each indivdual line is posted as follows:
The amount value is posted as a credit to the individual supplier's
ledger a/c
The analysis amount is posted a debit to the relevant general ledger
a/c
>From example above:
Line 1 - Amount value 1000 is posted as a credit to the Supplier's
ledger a/c ELE01-Electricy Company
Line 1 - Electricty value 1000 is posted as a debit to the
Electricity general ledger a/c code
Double-entry has been observed Dr = 1000 Cr = 1000
Line 2 - Amount value 1600 is posted as a credit to the Supplier's
ledger a/c WID01-Widget Company
Line 2 - Electricty value 1600 is posted as a debit to the Widget
general ledger a/c code
Double-entry has been observed Dr = 1600 Cr = 1600
The totals' of each column are posted as follows:
Amount total value 2600 posted as a credit to the Trade creditors
control a/c
Electricity total value 1000 posted as a debit to the Profit & loss
control a/c
Widget total value 1600 posted as a debit to the Profit & loss
control a/c
Double-entry has been observed Dr = 2600 Cr = 2600
Bank Payments Daybook
Bank Payments Daybook
Date Supplier Name Reference Amount Trade Creditors Other
17 Jul 2006 Electricity Company BP701 1000 1000
19 Jul 2006 Widget Company BP702 900 900
28 Jul 2006 Owner's Wages BP703 400 400
------- ------- -------
Total 2300 1900 400
==== ==== ====
Credit Debit Debit
Profit & Trade Wages
loss Creditors control a/c
control a/c control a/c
Keys: PI = Purchase Invoice, BP = Bank Payment
Each indivdual line is posted as follows: The amount value is posted as
a debit to the individual supplier's ledger a/c
The analysis amount is posted as a credit to the relevantgeneral ledger
a/c
>From example above:
Line 1 - Amount value 1000 is posted as a debit to the Supplier's
ledger a/c ELE01-Electricity Company
Line 1 - Trade creditors value 1000 is posted as a credit to the
Bank general ledger a/c code
Double-entry has been observed Dr = 1000 Cr = 1000
Line 2 - Amount value 900 is posted as a debit to the Supplier's
ledger a/c WID01-Widget Company
Line 2 - Trade creditors value 900 is posted as a credit to the Bank
general ledger a/c code
Double-entry has been observed Dr = 900 Cr = 900
Line 3 - Amount value 400 is posted as a debit to the Wages general
ledger a/c code
Line 3 - Trade creditors value 400 is posted as a credit to the Bank
general ledger a/c code
Double-entry has been observed Dr = 400 Cr = 400
The totals' of each column are posted as follows:
Amount total value 2300 posted as a debit to the Trade creditors
control a/c
Electricity total value 1900 posted as a credit to the Profit & loss
control a/c
Widget total value 400 posted as a credit to the Profit & loss
control a/c
Double-entry has been observed Dr = 2300 Cr = 2300
The daybooks are the key documents (books) to the double entry system.
>From these daybooks we create the ledger accounts. Each transaction
will be recorded in at least two ledger accounts.
Supplier Ledger Cards
SUPPLIER LEDGER CARDS
A/c Code: ELE01 - Electricity Company
Date Details Reference Amount Date Details Reference Amount
17 Jul 2006 Bank Payments Daybook BP701 1000 10 Jul
2006 Invoice PI1 1000
31 Jul 2006 Balance c/f 0
------- -------
1000 1000
==== ====
01 Aug 2006 Balance b/f 0
A/c Code: WID01 - Widget Company
Date Details Reference Amount Date Details Reference Amount
19 Jul 2006 Bank Payments Daybook BP702 900 12 Jul
2006 Invoice PI2 1600
31 Jul 2006 Balance c/f 700
------- -------
1600 1600
==== ====
01 Aug 2006 Balance b/f 700
Sales daybook
Sales Invoice Daybook
Date Customer Name Reference Amount Parts Service
02 Jul 2006 JJ Manufacuring SI1 2500 2500
29 Jul 2006 JJ Manufacturing SI2 3200 3200
------- ------- -------
Total 5700 2500 3200
==== ==== ====
Debit Credit Credit
Trade Profit Profit
debtors & loss & loss
control a/c control a/c control a/c
Each indivdual line is posted as follows:
The amount value is posted as a debit to the individual customer's
ledger a/c
The analysis amount is posted a credit to the relevant general ledger
a/c
>From example above:
Line 1 - Amount value 2500 is posted as a debit to the Customer's
ledger a/c JJM01-JJ Manufacturing
Line 1 - Electricty value 2500 is posted as a credit to the
Sales-parts general ledger a/c code
Double-entry has been observed Dr = 2500 Cr = 2500
Line 2 - Amount value 3200 is posted as a credit to the Customer's
ledger a/c JJM01-JJ Manufacturing
Line 2 - Electricty value 3200 is posted as a debit to the
Sales-service general ledger a/c code
Double-entry has been observed Dr = 3200 Cr = 3200
The totals' of each column are posted as follows:
Amount total value 5700 posted as a debit to the Trade debtors
control a/c
Sales-parts total value 2500 posted as a credit to the Profit & loss
control a/c
Sales-service total value 3200 posted as a credit to the Profit &
loss control a/c
Double-entry has been observed Dr = 5700 Cr = 5700
General Ledger
GENERAL LEDGER
Sales parts
Date Details Reference Amount Date Details Reference Amount
31 Jul 2006 Balance c/f 2500 02 Jul 2006 Sales invoice
daybook SI1 2500
------- -------
2500 2500
==== ====
01 Aug 2006 Balance b/f 2500
Sales service
Date Details Reference Amount Date Details Reference Amount
31 Jul 2006 Balance c/f 3200 29 Jul 2006 Sales invoice
daybook SI2 3200
------- -------
3200 3200
==== ====
01 Aug 2006 Balance b/f 3200
Electricity
Date Details Reference Amount Date Details Reference Amount
10 Jul 2006 Electricity Co. PI1 1000 31 Jul 2006 Balance c/f 1000
------- -------
1000 1000
==== ====
01 Aug 2006 Balance b/f 1000
Widgets
Date Details Reference Amount Date Details Reference Amount
12 Jul 2006 Widget Co. PI2 1600 31 Jul 2006 Balance c/f 1600
------- -------
1600 1600
==== ====
01 Aug 2006 Balance b/f 1600
Other a/c
Date Details Reference Amount Date Details Reference Amount
28 Jul 2006 Owner's Wages BP703 400 31 Jul 2006 Balance c/f 400
------- -------
400 400
==== ====
01 Aug 2006 Balance b/f 400
Bank Control A/c
Date Details Reference Amount Date Details Reference Amount
31 Jul 2006 Bank receipts daybook BR-Jul 2500 31 Jul 2006 Bank payments
daybook BP-Jul 2300
31 Jul 2006 Balance c/f 200
------- -------
2500 2500
==== ====
01 Aug 2006 Balance b/f 200
Trade Debtors Control A/c
Date Details Reference Amount Date Details Reference Amount
01 Jul 2006 Balance b/f 0 31 Jul 2006 Bank receipts
daybook BR-Jul 2500
31 Jul 2006 Sales Invoice Daybook SI-Jul 5700 31 Jul 2006 Balance
c/f 3200
------- -------
5700 5700
==== ====
01 Aug 2006 Balance b/f 3200
Trade Creditors Control A/c
Date Details Reference Amount Date Details Reference Amount
31 Jul 2006 Bank Payments Daybook BP-Jul 1900 01 Jul 2006 Balance
b/f 0
31 Jul 2006 Balance c/f 700 31 Jul 2006 Purchase Daybook PI-Jul 2600
------- -------
2600 2600
==== ====
01 Aug 2006 Balance b/f 700
Profit & loss control A/c
Date Details Reference Amount Date Details Reference Amount
31 Jul 2006 Purchase invoice daybook PI-Jul 2600 31 Jul 2006 Sales
invoice daybook SI-Jul 5700
31 Jul 2006 Bank payments daybook BP-Jul 400
31 Jul 2006 Balance c/f 2700
------- -------
5700 5700
==== ====
01 Aug 2006 Balance b/f 2700
The cutomers ledger cards shows the breakdown of how the trade debtors
control a/c is made up. The trade debtors control a/c is the total of
outstanding debtors and the customer ledger cards shows the amount due
for each individual customer. The total of each individual customer
account added together should equal the total in the trade debtors
control a/c.
The supplier ledger cards shows the breakdown of how the trade
creditors control a/c is made up. The trade creditors control a/c is
the total of outstanding creditors and the suppliers ledger cards shows
the amount due for each individual supplier. The total of each
individual supplier account added together should equal the total in
the trade creditors control a/c.
Each Bank a/c shows all the money in and out through a bank. If you
have more than one bank account for your company you will have to
maintain separate bank account ledger in order to complete bank
reconcilliation statements and be able to see how much is left in each
account.
The Bank control a/c keeps the total for all bank accounts. The balance
of each individual bank acount, when added together, must equal the
balance in the bank control a/c.