Definition of Accounting

Accounting can be defined as a process of reporting, recording, interpreting and summarising

economic data. The introduction of accounting helps the decision-makers of a company to make
effective choices, by providing information on the financial status of the business.
The American Institute of Certified Public Accountants (AICPA) had defined accounting as the
“art of recording, classifying, and summarising in a significant manner and in terms of money,
transactions and events which are, in part at least, of financial character, and interpreting the
results thereof”.
Today, accounting is used by everyone and a good understanding of it is beneficial to all.
Accountancy act as a language of finance. To understand accounting efficiently, it is important to
understand the aspects of accounting.

 Economic Events- It is a consequence of a company has to undergo when the number

of monetary transactions is involved. Such as purchasing new machinery, transportation,
machine installation on-site, etc.
 Identification, Measurement, Recording, and Communication- The accounting
system should be outlined in such a way that the right data is identified, measured,
recorded and communicated to the right individual and at the right time.
 Organization-In refers to the size of activities and level of a business operation.
 Interested Users of Information- It is about communicating important financial
information to the customers, according to which they will make the correct decision.

Fundamentals of Accounting
 Assets- The economic value of an item which is possessed by the enterprise is referred
to as Assets. To put it in other words, assets are those items that can be transformed into
cash or that generates income for the enterprise shortly. It is useful in paying any
expenses of the business entity or debt.
 Liabilities- The economic value of an obligation or debt that is payable by the enterprise
to other establishment or individual is referred to as liability. To put it in other words,
liabilities are the obligations that are rising out of previous transactions, which is payable
by the enterprise, through the assets possessed by the enterprise.
 Owner’s Equity- Owner’s equity is one of the 3 vital segments of a sole proprietorship’s
balance sheet and one of the main aspects of the accounting equation: Assets =
Liabilities + Owner’s Equity. It depicts the owner’s investment in the trade minus the
owner’s withdrawal from the trade + the net income since the business concern
commenced.

Objectives of Accounting
The main objectives of accounting are:
To maintain a systematic record of business transactions

 Accounting is used to maintain a systematic record of all the financial transactions in a

book of accounts.
 For this, all the transactions are recorded in chronological order in Journal and then
posted to principle book i.e. Ledger.
To ascertain profit and loss
  Every businessman is keen to know the net results of business operations periodically.
 To check whether the business has earned profits or incurred losses, we prepare a
“Profit & Loss Account”.
To determine the financial position

 Another important objective is to determine the financial position of the business to check
the value of assets and liabilities.
 For this purpose, we prepare a “Balance Sheet”.
To provide information to various users

 Providing information to the various interested parties or stakeholders is one of the most
important objectives of accounting.
 It helps them in making good financial decisions.
To assist the management

 By analysing financial data and providing interpretations in the form of reports,

accounting assists management in handling business operations effectively.

Characteristics of Accounting:
The following attributes or characteristics can be drawn from the definition of Accounting:
(1) Identifying financial transactions and events

 Accounting records only those transactions and events which are of financial nature.
 So, first of all, such transactions and events are identified.
(2) Measuring the transactions

 Accounting measures the transactions and events in terms of money which are
considered as a common unit.
(3) Recording of transactions

 Accounting involves recording the financial transactions inappropriate book of accounts

such as Journal or Subsidiary Books.
(4) Classifying the transactions

 Transactions recorded in the books of original entry – Journal or Subsidiary books are
classified and grouped according to nature and posted in separate accounts known as
‘Ledger Accounts’.
(5) Summarising the transactions

 It involves presenting the classified data in a manner and in the form of statements,
which are understandable by the users.
 It includes Trial balance, Trading Account, Profit and Loss Account and Balance Sheet.
(6) Analysing and interpreting financial data

 Results of the business are analyzed and interpreted so that users of financial
statements can make a meaningful and sound judgment.
(7) Communicating the financial data or reports to the users
  Communicating the financial data to the users on time is the final step of Accounting so
that they can make appropriate decisions.

What are the Different Branches of Accounting?

The following are the main branches of accounting:
(a) Financial accounting:
Financial Accounting is that branch of accounting which involves identifying, measuring,
recording, classifying, summarising the business transactions, i.e. it involves the steps from
Identifying, Recording of transactions to Summarisation, and communicating the financial data.
(b) Cost accounting:
Cost Accounting is that branch of accounting which is concerned with the process of ascertaining
and controlling the cost of products or services.
(c) Management accounting
Management accounting refers to that branch of accounting which is concerned with presenting
the accounting information in such a way that helps the management in planning and controlling
the operations of a business and in decision making.

Steps of the Accounting Process:

Accounting process is the process of collecting, recording, classifying, summarising and
communicating financial information to the users for judgement and decision-making. The
following steps are involved in accounting process:
(1) Identification: It is the process of identifying and analysing business transactions.
(2)Recording: For recording, we use ‘Journal’ or Subsidiary Books.
(3) Classification of transactions: Classification means segregation of transactions on the basis of
nature and posting them in a format known as Ledger Account.
(4) Summarisation: It includes preparation of Trial Balance and Financial Statements.
(5) Analysis & Interpretation: It includes an assessment of the financial reports and making some
meaningful conclusions.
(6) Communicating information to the users: It includes sharing the financial reports and
interprets results to the users of financial statements.

Define the term Bookkeeping, Accounting and Accountancy.

Bookkeeping Book Keeping is a part of Accounting and it is the process of identifying,

measuring, recording and classifying the financial transactions.

Accounting Accounting is a wider concept and actually, it begins where Book Keeping ends. It
includes summarizing, interpreting and communicating the financial data to the
users of financial statements.

Accountancy Accountancy refers to systematic knowledge of the principles and the techniques
which are applied in Accounting.
What is the Difference Between Bookkeeping and Accounting?
Parameters Bookkeeping Accounting

Scope Bookkeeping involves identifying, In addition to bookkeeping, Accounting also

measuring, recording & classifying includes summarizing, interpreting and
financial transactions in the ledger communicating the financial data to the users
accounts. of financial statements.

Objective The main aim is to maintain The main aim is to ascertain the profitability
systematic records of financial and financial position of the business.
transactions.

Stage It is a primary stage of accounting It is a second stage and begins where book-
keeping ends.

Nature of job This job is in routine and repetitive This job is analytical in nature.
in nature.

Level of Bookkeeping does not require It requires specialized skill to analyze, so it is

skills special skills. It is performed by performed by senior staff.
Junior Staff.

What are the Advantages of Accounting?

The following are the main advantages of accounting:
1. Provide information about financial performance

 Accounting provides factual information about financial performance during a given

period of time
 Like, profit earned or loss incurred over a period and financial position at a particular
point of time.
2. Provide assistance to management

 Accounting helps management in business planning, decision making and in exercising

control.
 For this, it provides financial information in the form of reports.
3. Facilitates comparative study

 By keeping systematic records and preparation of reports at regular intervals, accounting

helps in making a comparison.
4. Helps in settlement of tax liability

 Systematic accounting records help in settlement of various tax liabilities. Such as –

Income Tax, GST, etc.
5. Helpful in raising loan

 Banks and Financial Institutions grant a loan to the firm on the basis of appraisal of the
financial statement of the firm.
6. Helpful in decision making
  Accounting provides useful information to the management for taking decisions.

What Are the Limitations of Accounting?

Following are the limitations of accounting:

 Accounting is not precise: Accounting is not completely free from personal bias or
judgment.
 Accounting is done on historic values of assets: Accounting records assets at their
historical cost less depreciation. It does not reflect their current market value.
 Ignore the effect of price level changes: Accounting statements are prepared at
historical cost. So changes in the value of money are ignored.
 Ignore the qualitative information: Accounting records only monetary transactions. It
ignores the qualitative aspects.
 Affected by window dressing: Window dressing means manipulation in accounting to
present a more favourable position of the business than the actual position.

Explain the Users of Accounting Information:

Users may be categorised into internal users and external users.

(A) Internal Users

 Owners: Owners contribute capital in the business and thus they are exposed to
maximum risk. So, they are always interested in the safety of their capital.
 Management: Accounting information is used by management for taking various
decisions.
 Employees: Employees are interested in the financial statements to assess the ability of
the business to pay higher wages and bonuses.

(B) External Users

 Banks and financial institutions: Banks and Financial Institutions provide loans to
business. So, they are interested in financial information to ensure the safety and
recovery of the loan.
 Investors: Investors are interested to know the earning capacity of business and safety
of the investment.
 Creditors: Creditors provide the goods on credit. So they need accounting information to
ascertain the financial soundness of the firm.
 Government: The government needs accounting information to assess the tax liability of
the business entity.
 Researchers: Researchers use accounting information in their research work.
 Consumers: They require accounting information for establishing good accounting
control, which will reduce the cost of production.

Qualitative Characteristics of Accounting Information

Qualitative characteristics are the attributes of accounting information, which enhance its
understandability and usefulness:

 Reliability: Reliability implies that the information must be free from material error and
personal bias.
  Relevance: Accounting information must be relevant to the decision-making
requirements of the users.
 Understandability: Information should be disclosed in financial statements in such a
manner that these are easily understandable.
 Comparability: Both intra-firm and inter-firm comparison must be possible over different
time periods.

Explain the System of Accounting

System of accounting

 There are following two systems of recording transactions in the books of accounts:
 Double Entry System
 Single Entry System
Double-entry system

 The double entry system is based on the Dual Aspect Principle.

 Every transaction has two aspects, ‘a Debit’ and ‘a credit’ of an equal amount.
 This system of accounting recognises and records both aspects of the transaction.
Single entry system

 Under this system, both aspects are not recorded for all the transactions.
 Either only one aspect is recorded or both the aspects are not recorded for all the
transactions.

What Are the Advantages of the Double-entry System of Accounting?

Following are the main advantages of the double-entry system of accounting:
Scientific system

 As compared to the other systems, this system of recording transactions is more

scientific and useful to achieve the objective of accounting.
A complete record of the transaction

 Since both the aspects of transactions are considered there is a complete recording of
each and every transaction.
 Using these records we are able to compute profit or loss easily.
Checks arithmetical accuracy of accounts

 Under this system, by preparing a Trial Balance we are able to check the arithmetical
accuracy of the records.
Determination of profit/loss and depiction of financial position

 Under this system by preparing ‘Profit & Loss A/c’ we get to know about the profit earned
or loss incurred.
 By preparing the ‘Balance Sheet’ the financial position of the business can be
ascertained, i.e. position of assets and liabilities is depicted.
Helpful in decision making
  Administration and management are able to take decisions on the basis of factual
information under the double-entry system of accounting.

Multiple Choice Questions

Q.1- Which of the following is the first step in accounting?

a. Communicating to the interested parties.

b. Analysing
c. Measurement of transactions
d. Identification & recording of Financial transactions and events

Q.2- Which of the following is not a business transaction?

a. Purchases of goods from Amit of `5,000

b. Paid salaries `250.
c. Purchase a Car of `5,25,000 from his personal account.
d. Purchase a Laptop of `50,500 for Business.

Answer key

1-d, 2-c

What are the Objectives of the Accounting Concept?

 The primary aim of accounting is to maintain uniformity and regularity in the
preparation of accounting statements.
 Accounting concepts act as an underlying principle that helps accountants in the
preparation and maintenance of business records.
 It aims to understand the business rules and regulations that are required to be
followed by all types of business entities, and hence simplifying the detailed and
comparable financial information.

What are the Different Accounting Concepts?

Following are the different accounting concepts that are widely used all around the world and
hence are termed as universally accepted accounting rules. The different accounting
concepts are:

Business Entity Concept

This concept assumes that the organization and business owners are two independent
entities. Hence, the business translation and personal transaction of its owner are different.
For example, when the business owner invests his money in the business, it is recorded as a
liability of the business to the owner. Similarly, when the owner takes away from the
business cash/goods for his/her personal use, it is not treated as a business expense. Thus,
the accounting transactions are recorded in the books of accounts from the organization's
point of view and not the person owning the business.

Example:
Suppose Mr. Birla started a business. He invested Rs 1, 00, 000. He purchased goods for
Rs 50,000, furniture for Rs. 40,000, and plant and machinery for Rs. 10,000 and Rs 2000
remained in hand. These are the assets of the business and not of the business owner.
According to the business entity concept, Rs.1,00,000 will be assumed by a business as
capital i.e. a liability of the business towards the owner of the business.

Now suppose, he takes away Rs. 5000 cash or goods for the same worth for his domestic
purposes. This withdrawal of cash/goods by the owner from the business is his private
expense and not the business expense. It is termed as Drawings.

Therefore, the business entity concept states that the business and the business owner are
two separate/distinct persons. Accordingly, any expenses incurred by the owner for himself
or his family from business will be considered as expenses and it will be represented as
drawings.

Accrual Concept

The term accrual means something is due, especially an amount of money that is yet to be
paid or received at the end of the accounting period. It implies that revenue is realized at the
time of sale through cash or not whereas expenses are recognized when they become
payable whether cash is paid or not. Therefore, both the transactions are recorded in the
accounting period in which they relate.

In the accounting system, the accrual concept tells that the business revenue is realized at
the time goods and services are sold irrespective of the fact when cash is received for the
same. For example, On March 5, 2021, the firm sold goods for Rs 55000, and the payment
was not received until April 5, 2021, the amount was due and payable to the firm on the date
goods and services were sold i.e. March 5, 2021. It must be included in the revenue for the
year ending March 31, 2021.

Similarly, expenses are recognized at the time services are provided, irrespective of the fact
that cash paid for these services are made. For example, if the firm received goods costing
Rs.20000 on March 9, 2021, but the payment is made on April 7, 2021, the accrual concept
requires that expenses must be recorded for the year ending March 31, 2021, although no
payment has been made until this date though the service has been received and the
person to whom the payment should have been made is represented as a creditor of
business firm.

In brief, the accrual concept states that revenue is recognized when realized and expenses
are recognized when they become due and payable irrespective of the cash receipt or cash
payment.

Accounting Cost Concept

The accounting cost concept states all the business assets should be written down in the
book of accounts at the price assets are purchased, including the cost of acquisition, and
installation. The assets are not recorded at their market price. It implies that the fixed assets
like plant and machinery, building, furniture, etc are recorded at their purchase price. For
example, a machine was purchased by ABC Limited for Rs.10,00,000, for manufacturing
bottles. An amount of Rs.2,000 was spent on transporting the machine to the factory site.
Also, Rs.2000 was additionally spent on its installation. Hence, the total amount at which the
machine will be recorded in the books of accounts would be the total of all these items i.e.
Rs.10, 040, 00. This cost is also termed as historical cost.

Dual Aspect
The dual aspect is the basic principle of accounting. It provides the basis for recording
business transactions in the books of accounts. This concept assumes that every transaction
recorded in the books of accountants is based on dual concepts. This implies that the
transaction that is recorded affects two accounts on their respective opposite sides. Hence,
the transaction should be recorded at dual places. It implies that both aspects of the
transaction should be recorded in the books of account. For example, goods purchased in
exchange for cash have two aspects such as paying cash and receiving goods. Therefore,
both the aspects should be registered in the books of accounts. The duality of the
transaction is commonly expressed in the terms of the following equation given below:

Assets = Liabilities + Capital

The dual concept implies that every transaction has a similar effect on assets and liabilities
in such a way that the value of total assets is always equal to the value of total liabilities.

Going Concepts

The Going concept in accounting states that a business activities will be carried by any firm
for an unlimited duration This simply means that every business has continuity of life. Hence,
it will not be dissolved shortly. This is an important assumption of accounting as it provides a
base for representing the asset value in the balance sheet.

For example, the plant and machinery was purchased by a company of Rs. 10 lakhs and its
life span is 10 years. According to the Going concept, every year some amount of assets
purchased by the business will be represented as an expense and the balance amount will
be shown as an asset in the books of accounts. Thus, if an amount is incurred on an item
that will be used in business for several years ahead, it will not be proper to charge the
amount from the revenues of that particular year in which the item was purchased Only a
part of the purchase value is shown as an expense in the year of purchase and the
remaining balance is shown as an asset in the balance sheet.

Money Measurement Concept

The money measurement concept assumes that the business transactions are made in
terms of money i.e. in the currency of a country. In India, such transactions are made in
terms of the rupee. Hence, as per the money measurement concept, transactions that can
be expressed in terms of money should be recorded in books of accounts. For example, the
sale of goods worth Rs. 10000, purchase of raw material Rs. 5000, rent paid Rs.2000 are
expressed in terms of money, hence these transactions can be recorded in the books of
accounts.

Accounting Period Concepts

Accounting period concepts state that all the transactions recorded in the books of account
should be based on the assumption that profit on these transactions is to be ascertained for
a specific period. Hence this concept says that the balance sheet and profit and loss account
of a business should be prepared at regular intervals. This is important for different purposes
like calculation of profit and loss, tax calculation, ascertaining financial position, etc. Also,
this concept assumes that business indefinite life is divided into two parts. These parts are
termed accounting periods. It can be one month, three months, six months, etc. Usually,
one year is considered as one accounting period which may be a calendar year or financial
year.

The year that begins on January 1 and ends on January 31 is termed as calendar year
whereas the year that begins on April 1 and ends on March 31 is termed as financial year.
Realization Concept

The term realization concept states that revenue earned from any business transaction
should be included in the accounting records only when it is realized. The term realization
implies the creation of a legal right to receive money. Hence, it should be noted that selling
goods is considered as realization whereas receiving order is not considered as realization.

In other words, the revenue concept states that revenue is realized when cash is received or
the right to receive cash on the sale of goods or services or both have been created.

Matching Concepts

The Matching concept states that revenue and expenses incurred to earn the revenue must
belong to the same accounting period. Hence, once revenue is realized, the next step is to
assign the relevant accounting period. For example, if you pay a commission to a
salesperson for the sale that you record in March. The commission should also be recorded
in the same month.
The matching concept implies that all the revenue earned during an accounting year whether
received or not during that year or all the expenses incurred whether paid or not during that
year should be considered while determining the profit and loss of the business for that year.
This enables the investors or shareholders to know the exact profit and loss of the business.
What are Accounting Conventions?

Accounting conventions are certain restrictions for the business transactions that are
complicated and are unclear. Although accounting conventions are not generally or legally
binding, these generally accepted principles maintain consistency in financial statements.
While standardized financial reporting processes, the accounting conventions consider
comparison, full disclosure of transaction, relevance, and application in financial statements.

Four important types of accounting conventions are:

 Conservatism: It tells the accountants to err on the side of caution when providing
the estimates for the assets and liabilities, which means that when there are two
values of a transaction available, then the always lower one should be referred to.
 Consistency: A company is forced to apply the similar accounting principles across
the different accounting cycles. Once this chooses a method it is urged to stick with it
in the future also, unless it finds a good reason to perform it in another way. In the
absence of these accounting conventions, the ability of investors to compare and
assess how the company performs becomes more challenging.
 Full Disclosure: Information that is considered potentially significant and relevant is
to be completely disclosed, regardless of whether it is detrimental to the company.
 Materiality: Similar to full disclosure, this convention also bound organizations to put
down their cards on the table, meaning they need to totally disclose all the material
facts about the company. The aim behind this materiality convention is that any
information that could influence the person’s decision by considering the financial
statement must be included.
Role of Accounting:
Accounting Equation:
o The resources owned by a business are its assets.

o The rights of creditors are the debts of the business and are called liabilities.

o The rights of the owners are called owner’s equity.

o The equation Assets = Liabilities + Owner’s Equity is called the accounting

equation.

Example:
Transaction A
Transaction B

Transaction C

o The liability created by a purchase on account is called an account payable.

o Items such as supplies that will be used in the business in the future are called prepaid
expenses, which are assets.

Transaction D

o Revenue from providing services is recorded as fees earned.

o Revenue from the sale of merchandise is recorded as sales.

 o Other examples of revenue include rent, which is recorded as rent revenue, and
interest, which is recorded as interest revenue.
o An account receivable is a claim against a customer, which is an asset.

Transaction E

Transaction F

Transaction G

Transaction H
Summary

Accounts are classified using two approaches:

 Traditional approach (also known as the British approach)

 Modern approach (also known as the American approach)

This article briefly discusses how accounts are classified under both
approaches.

Classification of Accounts Under the Traditional (or

British) Approach
According to the traditional approach, accounts are classified into three
types: real accounts, nominal accounts, and personal accounts. Given
that it is an old system for classifying accounts, it is used rarely in practice.

Personal Accounts

Personal accounts are the accounts that are used to record transactions
relating to individual persons, firms, companies, or other organizations.

Examples of such accounts include an individual’s accounts (e.g., Mr. X’s

account), the accounts held by modern enterprises, and city bank
accounts.

Impersonal Accounts

Impersonal accounts are those that do not relate to persons. There are two
types:

1. Real accounts (or permanent accounts)

2. Nominal accounts (or temporary accounts)

Real Accounts

Real accounts exist even after the end of accounting period. For the
next accounting period, these accounts start with a non-zero balance,
which is carried forward from the previous accounting period.
Examples of such accounts include machinery accounts, land accounts,
furniture accounts, cash accounts, and accounts payable accounts.

Usually, real accounts are listed in the balance sheet of the business. For
this reason, they are sometimes referred to as balance sheet accounts.

Nominal Accounts

Nominal accounts are closed at the end of the accounting period. For the
next account period, these accounts start with a zero balance. Nominal
accounts typically cover issues such as income, gains, expenses,
and losses.

Normally, nominal accounts are used to accumulate income and expense

data. In turn, these data can be used to prepare income statements or
trading and profit and loss accounts. For this reason, nominal accounts are
sometimes referred to as income statement accounts.

Examples of nominal accounts include sales, purchases, gains on asset

sales, wages paid, and rent paid.

Classification of Accounts Under the Modern (or

American) Approach
The modern approach has become a standard for classifying accounts in
many developed countries.The main types of accounts used under this
approach are mostly self-explanatory.

Specifically, under the modern approach, accounts are classified into the
following five groups:

1. Asset accounts: Examples include land accounts, machinery

accounts, accounts receivable accounts, prepaid rent accounts, and
cash accounts.
2. Liability accounts: Examples include loan accounts, accounts
payable accounts, wages payable accounts, salaries payable
accounts, and rent payable accounts.
 3. Revenue accounts: Examples include sales accounts, service
revenue accounts, rent revenue accounts, and interest revenue
accounts.
4. Expense accounts: Examples include wage expense accounts,
commission expense accounts, salary expense accounts, and rent
expense accounts.
5. Capital/owner’s equity accounts: An example is an individual
owner’s account (e.g., Mr. X’s account).

Example
Consider the list of accounts shown below. Our task is to classify these
accounts using both the traditional and modern approaches.

1. Plant and machinery

2. Purchases
3. Sales
4. Rent
5. Land and building
6. Cash
7. Sam’s capital
8. Loan from city bank

Traditional classification:

1. Plant and machinery > Real account

2. Purchases > Nominal account
3. Sales > Nominal account
4. Rent expense > Nominal account
5. Land and building > Real account
6. Cash > Real account
7. Sam’s capital > Personal account
8. Loan from city bank > Personal account

Modern classification:

1. Plant and machinery > Asset account

2. Purchases > Expense account
3. Sales > Revenue account
4. Rent expense > Expense account
5. Land and building > Asset account
6. Cash > Asset account
 7. Sam’s capital > Capital/owner’s equity account
8. Loan from city bank > Liability account

JOURNALING

APPROACH:
Increased value Decreased value
Drawings/dividends Debit Credit
Expense Debit Credit
Assets Debit Credit
Liability Credit Debit
Equity Credit Debit
Revenue Credit Debit
Example:
XYZ international issues 20 invoices to its customers and records each transaction in
the sales account and the respective debtor’s account. Also, the company purchased
from 10 suppliers the records in
purchases accounts and respective
creditors’ accounts. In addition, some
of the payable liability is recorded in
the general journal account. The
details are as stated:
Prepare General ledger.
More questions and solutions here: https://www.ncert-solutions.com/ts-grewal-accountancy-
class-11-solutions-chapter-6/

Steps in Preparation of Trial Balance

Let’s understand how to prepare a trial balance keeping into consideration the above
example. Following are the steps:

1. Calculate the Balances of Each of the Ledger Accounts

Business transactions are first recorded in the form of journal entries following
the basic accounting principles. These journal entries then go into the ledger
accounts involved in the various business transactions.

For instance, consider the cash account of Kapoor Pvt Ltd in the above example.
The cash transactions are recorded and the cash account is closed with the
remaining debit balance of Rs 6,50,000 as on May 1, 2018. Likewise, balances of
other ledger accounts are ascertained and accordingly the accounts are closed with
the remaining debit or credit balances.

2. Record Debit or Credit Balances in Trial Balance

The remaining debit or credit balances in various accounts of ledger as ascertained
above are then recorded in the Trial Balance. The balances of each of the accounts
of ledger are recorded in the debit or the credit columns as the case may be.

For example, the remaining debit cash balance as on May 1, 2018 is recorded in the
debit column of the trial balance. Further, the remaining credit balance of capital
account of Rs 8,00,000 is recorded in the credit column of the trial balance. Similarly,
the remaining debit or credit balances of all the accounts of ledger are recorded in
the debit or credit columns of trial balance respectively.

3. Calculate Total of The Debit Column

Ascertain the total of the debit column. This is done after recording all the debit
balances of the various accounts of ledger put into debit column of Trial Balance.

For instance, consider the total of the debit column of the Trial Balance of Rs
10,20,000. This is calculated after recording all the closing debit balances of various
accounts of ledger. These accounts include cash, stock, furniture, drawings etc.

4. Calculate Total of The Credit Column

Ascertain the total of the credit column. This is done after recording all the credit
balances of the various accounts of ledger put into credit column of Trial Balance.

For instance, consider the total of the credit column of the Trial Balance of Rs
10,20,000. This is calculated after recording all the closing credit balances of various
accounts of ledger. These accounts include capital, interest etc.

5. Check if Debit is Equal To Credit

Finally, you need to check if the total of the debit column matches the total of the
credit column. As specified earlier, trial balance is prepared to check the accuracy of
the debit and credit balances of various accounts of ledger. Both the debit and credit
columns of the Trial Balance must tally since every debit has every credit. However,
it is an indication that there were some errors made while recording transactions in
ledger or trial in cases where they are not equal.

You must note that as per the accounting principle:

 All assets, expenses and receivables must have debit balances and all
 Liabilities, incomes and payables must have credit balances

Trial balance questions practice here: https://www.accountancyknowledge.com/trial-balance-

problems-and-solutions/

What is a Bank Reconciliation?

A bank reconciliation statement is a document that compares the cash balance
on a company’s balance sheet to the corresponding amount on its bank
statement. Reconciling the two accounts helps identify whether accounting
changes are needed. Bank reconciliations are completed at regular intervals to
ensure that the company’s cash records are correct. They also help
detect fraud and any cash manipulations.

Reasons for Difference Between Bank Statement and Company’s

Accounting Record

When banks send companies a bank statement that contains the

company’s beginning cash balance, transactions during the period, and ending
cash balance, the bank’s ending cash balance and the company’s ending cash
balance are almost always different. Some reasons for the difference are:

 Deposits in transit: Cash and checks that have been received and
recorded by the company but have not yet been recorded on the bank
statement.
 Outstanding checks: Checks that have been issued by the company to
creditors, but the payments have not yet been processed.
 Bank service fees: Banks deduct charges for services they provide to
customers but these amounts are usually relatively small.
 Interest income: Banks pay interest on some bank accounts.
 Not sufficient funds (NSF) checks: When a customer deposits a check into
an account but the account of the issuer of the check has an insufficient
 amount to pay the check, the bank deducts from the customer’s account
the check that was previously credited. The check is then returned to the
depositor as an NSF check.

Nowadays, many companies use specialized accounting software in bank

reconciliation to reduce the amount of work and adjustments required and to
enable real-time updates.

Bank Reconciliation Procedure

1. On the bank statement, compare the company’s list of issued checks and
deposits to the checks shown on the statement to identify uncleared
checks and deposits in transit.
2. Using the cash balance shown on the bank statement, add back any
deposits in transit.
3. Deduct any outstanding checks.
4. This will provide the adjusted bank cash balance.
5. Next, use the company’s ending cash balance, add any interest earned
and notes receivable amount.
6. Deduct any bank service fees, penalties, and NSF checks. This will arrive at
the adjusted company cash balance.
7. After reconciliation, the adjusted bank balance should match with the
company’s ending adjusted cash balance.

Practice questions here: https://www.accountancyknowledge.com/bank-

reconciliation-statement-problems-and-solutions/

Rectification of errors:

It is the process of revising mistakes and making amendments to the accounting records.
Rectification of Errors is basically of two kinds:
1. Errors not affecting Trial Balance
2. Errors affecting Trial Balance
Errors not affecting Trial balance are the errors that are not affecting Trial balance and can
be rectified by passing a rectification journal entry. While other errors are errors that affect
one account of trial balance, which cannot be rectified by passing journal entries. However, a
journal entry can be passed only by opening a Suspense account.

ERRORS NOT AFFECTING TRIAL BALANCE:

These are the errors that affect two or more accounts of the trial balance and are therefore
called two-sided errors. These errors can occur on any side of the account, either Debit or
credit, which will be rectified by passing a journal entry.
Reversing the impact of the wrong entry on the debit and credit side and then passing the
correct debit and credit entry, can easily rectify the errors.

For example:

Credit sales to A of Rs. 20,000 were not recorded in the sales book. In order to rectify such
an error, a journal entry would be passed debiting A’s account with Rs. 20,000 and crediting
Sales Account with Rs. 20,000.

The Journal Entry to be passed for the above rectification shall be:
A a/c Dr. 20,000
To Sales Account Cr. 20,000

ERRORS AFFECTING TRIAL BALANCE:

Errors that affect the trial balance occurs on any one side of the trial balance, and such
errors can only be rectified by passing a journal entry along with the opening of a suspense
account. These errors are also known as one-sided errors, as only one side of the account
(either debit or credit) is affected by these errors.

The process of rectification is as follows:

1. Classify the account having an error.
2. Check the shortage or excess in the account.
3. If there is an excess credit and shortage in debit, then the difference should be debited
from the account with the difference amount.
4. If the difference is found due to excess debit and shortage of credit, then credit the
account with the difference.
5. At last, the suspense account is debited or credited.
For example:
Depreciation is written off on machinery, Rs.10,000 was not recorded in the Machinery
account. In order to rectify the said entry, a journal entry would be passed by debiting the
Suspense account with Rs. 10,000 and crediting Machinery account with Rs. 10,000.

Journal Entry to be passed for the above rectification shall be:

Suspense a/c Dr. 10,000
To Machinery Account Cr. 10,000

TYPES OF ERRORS:
1. Errors of omission: This is an error where a transaction is completely
omitted from the accounting records. As the debits and credits for the
transaction would always balance, omission of any transaction will never
be detected. This kind of error mostly happens when the transaction is
not recorded in the books of the original entry.
2. Errors of commission: This is an error when the entries are made for
the correct amount and at the appropriate side (debit or credit), but one
or more entries are made to the wrong account. For example, if printing
costs are incorrectly debited to the courier account (both expense
accounts). This will not affect the totals.
3. Errors of principle: This is an error where the entries are made for the
correct amount and at the appropriate side (i.e., debit or credit), but with
the wrong type of account is used. For example, if printing costs (an
expense account), are debited to stock (an asset account). This will not
affect the totals.
4. Compensating errors: As indicated by the name, compensating errors
are those errors which naturally compensate each other.