ACCOUNTING - SYSTEMS

There are two systems of accounting followed -

 Single Entry System

 Double Entry System

Single Entry System

Single entry system is an incomplete system of accounting, followed by small businessmen,

where the number of transactions is very less. In this system of accounting, only personal
accounts are opened and maintained by a business owner. Sometimes subsidiary books are
maintained and sometimes not. Since real and nominal accounts are not opened by the business
owner, preparation of profit & loss account and balance sheet is not possible to ascertain the
correct position of profit or loss or financial position of business entity.

Double Entry System

Double entry system of accounts is a scientific system of accounts followed all over the world
without any dispute. It is an old system of accounting. It was developed by ‘Luco Pacioli‟ of
Italy in 1494. Under the double entry system of account, every entry has its dual aspects of debit
and credit. It means assets of the business always equal to liabilities of the business.
Assets = Liabilities
If we give something, we also get something in return and vice versa.

There are 3 types of accounts

Real account − It relates assets and liabilities; it does not include people accounts. They carry
forward every year.
Personal account − Connects individuals, firms and associations accounts.
Nominal account − Relates all income, expenses, losses and gains accounts.
Golden rules of accounting
 Debit the receiver, credit the giver
If a person gives something to a firm, it must be recorded as credit in the books of accounts. It is
used as in personal accounts.
 If anything coming then Debit, if anything goes out then credit.
Real accounts consist of machinery, land and building etc. debit what comes in means it will add
to the existing balance similarly, credit what goes means it will be deducted from the existence
balance.
 All expenses and losses are to be debited; all incomes and gains are to be credited.
When a firm gets a profit, it will credit all incomes and gains means it will increase firm‟s
capital. Similarly, by debiting expenses and losses means it will decrease its capital. These are
used in nominal accounts.
Type of account Golden rules
Real account  Debit what comes in
 Credit what goes out
Personal account  Debit the receiver
 Credit the giver
Nominal account  Debit the expenses or losses
 Credit the income or gain

Rules of Debit and Credit under Double Entry System of Accounts

The following rules of debit and credit are called the golden rules of accounts:

Classification of accounts Rules Effect

Personal Accounts Debit=Credit
Receiver is Debit
Giver is Credit

Real Accounts Debit=Credit

What Comes In Debit
What Goes Out Credit

Nominal Accounts Expenses are Debit Debit=Credit

 Incomes are Credit

Example

Mr. A starts a business regarding which we have the following data:

Introduces Capital in cash Ksh 50,000

Purchases (Cash) Ksh 20,000

Purchases (Credit) from Mr. B Ksh 25,000

Freight charges paid in cash Ksh 1,000

Goods sold to Mr. C on credit Ksh 15,000

Cash Sale Ksh 30,000

Purchased computer Ksh 10,000

Commission Income Ksh 8,000

Journal entries for above items would be done as -

S.No. Journal Entries Classification Rule

1 Real A/c Debit what comes in;
Cash A/c Dr. 50,000
Personal A/c Credit the giver(Owner)
To Capital A/c 50,000
2 Real A/c Debit what comes in;
Goods Purchase A/c Dr. 20,000
Real A/c Credit what goes out
To cash A/c 20,000
3 Real A/c Debit what comes in;
Goods Purchase A/c Dr. 25,000
Personal A/c Credit the giver
To B A/c 25,000
4 Nominal A/c Debit all expenses
Freight A/c Dr. 1,000
Real A/c Credit what goes out
To cash A/c 1,000
5 Personal A/c Debit the receiver
C A/c Dr. 15,000
Real Account Credit what goes out
To Sale A/c 15,000
6 Real A/c Debit what comes in;
Cash A/c Dr. 30,000
Real A/c Credit what goes out
To Sale A/c 30,000
7 Real A/c Debit what comes in;
Computer A/c Dr. 10,000
Real A/c Credit what goes out
To cash A/c 10,000
8 Real A/c Debit what comes in;
Cash A/c Dr. 8,000
Nominal A/c Credit all incomes
To commission A/c 8,000

It is very clear from the above example how the rules of debit and credit work. It is also clear
that every entry has its dual aspect. In any case, debit will always be equal to credit in double
entry accounting system.
 Financial Accounting - Journal
“The process of recording a transaction in a journal is called journalizing the transactions.”

---Meigs and Meigs and Johnson

Journal is a book that is maintained on a daily basis for recording all the financial entries of the
day. Passing the entries is called journal entry. Journal entries are passed according to rules of
debit and credit of double entry system.

1 2 3 4 5
Date Particular L.F. Amount
Debit Credit
xx-xx-xx xx xxxx
... ... ... ... A/c Dr.
xx
To ... ... ... ... A/c
xxxx
(... ... Narration... ...)

Column 1: It represents the date of transaction.

Column 2: Line 1 (... ... ... ...) represents the name of account to be debited.
Line 2 (... ... ... ...) represents the name of account to be credited.
Line 3 for narration of transaction.
Column 3: Ledger Folio (L.F.) represents the page number of ledger account on which we post
these entries.
Column 4: Amount(s) to be debited.
Column 5: Amount(s) to be credited.

Note
 If there are multiple transactions in a day, the total amount of all the transaction through a
single journal entry may pass with total amount.
 If debit or credit entry is same and the corresponding entry is different, we may post a
combined entry for the same. It is called ‘compound entry’ regardless of how many debit
or credit entries are contained in compound journal entry. For example,
 1 2 3 4 5
Date Particular L.F. Amount
Debit Credit
Xxxx xx xx
... ... ... ... A/c Dr.
xx xx
... ... ... ... A/c Dr.
xx
To ... ... ... ... A/c xxxx
(Narration... ... ... ...)

Analysis and Treatment of Transactions

The following accounting entries are commonly used in every business and they come under the
category of routine journal entries.

S.No. Transaction Nature Analysis and Treatment

1 Capital Capital account is personal account. Whenever the owner
introduces capital in the form of cash, goods or assets, the
entry will be as here under:

Cash/Goods/Asset A/c Dr. xx

To Capital A/c xx

(Being cash/goods/assets introduced as capital)

2 Drawing Account Drawing account is also a capital account. Whenever the

owner of the business withdraws money for his personal use,
it is called drawing. The balance of Drawing account is
transferred to the capital account at the end of the accounting
year.

Drawing A/c Dr. xx

To Cash A/c xx

(Being withdrawal of cash for personal use)

Note:
1. Introduction of capital as well as withdrawal of capital may occur any time during the
accounting year.
2. In addition to cash, there may be other expenses of the owner/proprietor which may pay
directly on his behalf debating his account. For example, payment of his insurance, taxes, rent,
electricity or personal phone bills.
3. Business account and personal account of proprietor are different as owner of the business and
business, both are separate entities.

3 Trade Discount Trade discount is allowed by seller to buyer directly on their

sales invoice. Buyer in this case is usually whole-sellers,
traders or manufacturers, who further sell this material to their
customers or use the material in their manufacturing process.
Rate of discount may vary from customer to customer.
Treatment - No need to pass any journal entry in this case.
The sale is booked on the net of trade discount. Similarly, if
we get trade discount from our supplier, we book our purchase
at the net of trade discount.

4 Cash Discount Cash discount is also allowed by seller to his buyer; still it
does not come in the category of trade discount. Cash discount
is a sort of scheme to inspire their debtors to release their due
payment in time. For example, a seller may allow 5% cash
discount, if he gets payment within a week against the time
limit of 45 days.
Treatment - If A allowed a discount of 5% to B, then

In the books of A:
Cash A/c Dr. xx
Discount A/c Dr. xx
To B A/c xxxx
 (Being 5% discount allowed to B on payment of Ksh........)

In the books of B:
A A/c Dr. xxxx
To Discount A/c xx
To B A/c xx

(Being payment of Ksh xx made to A and getting a discount

of 5%)
Note - In the above case, discount is a loss to A and income to
B.

5 Bad Debts Part of credit sale which is unrecovered from debtors due to
some reason like insolvency, dishonesty, etc. are called bad
debts of the company. Bad debts are loss to the company.
Treatment:
(1) To book bad debts

Bad Debts A/c Dr. xx

To Debtor A/c xx

(Being loss on account of bad debts)

(2) To recover bad debts

Cash A/c Dr. xx

To bad debts recovery A/c xx

(Being recovery of bad debts)

6 Expenses on purchase of There are a few types of expenses incurred on the purchases
Goods of goods like inward freight, cartage, unloading charges, etc.
Treatment:

Inward freight/Cartage/ A/c Dr. xx

To Cash A/c xx
 (Being freight charges paid on purchase of goods)

7 Expenses on Sale of Expenses are also incurred while selling products to

Goods customers such as freight outward, insurance charges, etc.
Treatment:

Freight outward/Insurance Expenses A/c Dr. xx

To Cash A/c xx

(Being freight charges paid on sale of goods)

8 Expenses on Purchase Sometimes we need to pay expenses on the purchase of fixed

of Assets assets like transportation charges, installation charges, etc.
Treatment:
Expenses incurred on purchases of fixed asset are added in the
value of fixed assets and could not be treated like expenses on
purchases of goods:

Fixed Asset A/c Dr. xx

To Cash A/c Dr. xx

(Expenses incurred on purchase of asset)

9 Payment of Expenses
Treatment:

Expenses A/c Dr. xx

To Cash A/c xx

(Being expenses incurred)

10 Outstanding Expenses Sometimes expenses remain outstanding at the end of the

financial year, but due to the accrual basis of accounting, we
need to book those expenses which are due for payment and to
be paid in the next accounting year. For example, the salary
due on the last day of the accounting year to be paid in the
 next year.
Treatment:

Salary A/c Dr. xx

To salary outstanding A/c xx

(Being salary for the month of .........due)

11 Prepaid Expenses Sometimes we pay expenses in advance such as insurance

paid three months before the closing of the accounting year.
Since insurance is usually paid for the whole year, in this case,
the insurance for nine months is treated as prepaid insurance.
Similarly, rent for the first month of next accounting year may
be paid in advance.
Treatment:

Prepaid Expenses A/c Dr. xx

To Expenses/Cash A/c xx

(Being prepaid expenses for month paid)

Note: Expenses account is replaced with the respective head
of expense account.

12 Income Received
Treatment:

Cash/Debtor A/c Dr. xx

To Income A/c xx

(Being Income received in cash)

Note: Income account will be replaced with the respective
head of Income account.

13 Banking Transactions
(1) Cheque deposited in bank
Cheque received from party is deposited in bank, Cheque
direct deposit by party in our bank account, payment made by
party through RTGS, or cash directly deposited by party in
our bank account. The entry remains same in all the above
cases.

Bank A/c Dr. xx

To Debtor A/c xx

(2) Payment made to party through cheque

Cheque issued to party or directly deposited in his bank
account, or payment made through either by RTGS, or cash
directly deposited in his bank account. Entry remains same in
all the above cases except in the case of cash deposited in his
bank account.

Debtor A/c Dr. xx

To Bank A/c xx

(Being payment made through ..... )

If we deposit cash in his bank account, entry will be as
follows:

Debtor A/c Dr. xx

To Cash A/c xx

(Being payment made through ..... )

(3) Cash withdrawn for office Expenses

Cash A/c Dr. xx

To Bank A/c xx

(Being cash withdrawn from bank for office use)

(4) Cash deposited with Bank

Cash A/c Dr. xx

To Cash A/c xx

(Being cash withdrawn from bank for office use)

 Note: The above entries No. 3 & 4 are called ‘contra’ entries.
(Any transactions involving a transfer of cash between one cash a/c
to another or one cash a/c to another bank a/c or one bank account
to another is called as a contra entry)
(5) Bank charge debited by bank
Sometimes banks debit from our account against some
charges for service provided by them. For example, cheque
book issuing charges, demand draft issuing charges, Bank
interest, etc.

Bank Commission/Charges A/c Dr. xx

To bank A/c xx

(Bank charges/commission/interest debited by bank)

14 Interest on Capital Interest on capital, introduced by sole proprietor or partners of

the firm: This entry is passed on the last date of the
accounting year as follows:

Interest on capital A/c Dr. xx

To Capital A/c xx

(Being interest @..... on capital provide)

15 Payment on behalf of Some expenses may be on behalf of our debtors or creditors.

others
Debtors/Creditors A/c Dr. xx
To Cash/Expenses A/c xx

(Being expenses debited to party, paid on his behalf)

16 Advance received Sometimes the customers pay an advance amount for the
against supply of supply of goods/services, which need to be adjusted later:
goods/services
Bank/Cash A/c Dr. xx
To Advance from Customers A/c xx
 (Being advance received from xxxxxxxx)

17 Advance paid against As above, we may also pay an advance amount to our supplier
supply of goods/services against supply of goods/services:

Advance against supply of goods A/c Dr. xx

To Cash/Bank A/c xx

(Being advance paid against supply of goods/services)

Ledger in Accounting

Ledger is a summary of all transactions in a journal. A ledger is a record of all business

transactions made by a firm. This is often called as chart of accounts.

The ledger helps us in summarizing journal entries of same nature at single place. For example,
if we pass 100 times a journal entry for sale, we can create a sales account only once and post all
the sales transaction in that ledger account date-wise. Hence, an unlimited number of journal
entries can be summarized in a few ledger accounts. Transferring journal entries into a ledger
account is called ‘posting’.

General ledger has three account types namely assets, liabilities and equity accounts. Most of
the firms have almost same accounts like cash, account payable and retained earnings, but some
may have specialized accounts for specific projects.

Types of ledgers are −

 Sales ledger −Maintains sales transactions (service or goods sold) of a firm
 Purchase ledger −Maintain purchase transactions (services, goods purchased) of a firm
 General ledger −Records expenses, income, depreciation etc. in nominal ledger and
records salaries, wages, capitals etc., in private ledger

Ledger account examples

Assets Liabilities Stock Operation Operating
revenues expenses
Cash Debt Stockholder sales Salaries and
equity wages
Land Account Common stock Services fees Office expenses
payables
Account Loans Retained Depreciation
receivables earnings expense
Equipment accrued
 expenses

General ledger account format

Name of the business
Name of the document – General ledger
Date Particulars Dr (OR) Cr Account Post Debit Credit
no. ref
Xx/xx/xxxx Owners fund (KSh.
100000)
Bank Dr Xxxxxxx
Capital Cr Xxxxxxx
Xx/xx/xxxx Purchases
Bank Decrease in
Cr
Property Increase in
Dr
Ruling of Account in Ledger Account
Format-1

In the books of M/s. ABC Company

Ledger account of M/s XYZ LTD.

Dr. Cr.

Date Particulars F Amount Date Particulars F Amount

xxxx To Balance b/d xxx Xxxx By Balance b/d xxx

xxxx To Name of the debit xxx Xxxx By Name of Credit xxx

account account

xxxx To Balance c/d xx xxxx By Balance c/d xx

Total xxxx Total xxxx

Format-2

Nowadays, the handwritten books are being replaced by computerized accounts. The companies
majorly use a six-column format to maintain ledger accounts of their customers. It looks as
follows:

In the books of M/s. ABC Bank Ltd.

Ledger account of M/s XYZ Ltd.

Amount Balance
Date Particulars LF
Debit Credit Dr. / Cr. Amount
Format-1 is used for academic purpose. Hence, this format is useful to learn the basics and
principles of accounting.
Format-2 is used by banking and financial organization as well as well as by most of the business
organizations.

Important Points Regarding Ledger

 Each side of a journal entry is posted in the same side of the ledger. It means the debit
entry of a journal is posted in the debit side and vice-a-versa.
 Balance c/d refers to the balance carried down and balance b/d refers to the balance
brought down.
 After posting in ledger, balancing of ledger is done. In the column named Total, the figure
comes on the basis of ‘whichever is higher’. Means, if the total of debit side is 10,000
and the total of credit is 5,000, we write 10,000 in the column named Total of both, the
debit and the credit side.
 The difference of both sides (in this case, it is 5,000) is written in the last row of the credit
side as ‘balance c/d‟. This balance is called the debit balance of account or vice-a-versa.
 All expenses and assets represent debit balance.
 All the income and liabilities represent credit balance including capital account.
 Debit balance of personal account represents „Amount Receivable‟. This comes under the
category of assets. For example debtors.
 Credit balance of personal accounts signifies ‘Amount Payable‟. This comes under
liabilities side and represents that we need to pay this amount which is credited due to
goods, service, loan, or advance received.
 Debit side of real account means stock in hand or any kind of assets. Credit balance of
Real account is not possible.
 Debit balance of nominal account means expenses of organization.
 Credit balance of nominal accounts means income earned.
 Debit balance of cash book means cash in hand.
 Debit side of Bank book means balance at bank.
 Credit balance of Bank book indicates ‘Bank Overdraft‟.
  Debit and credit balances of nominal account (Expenses and income will be nil, because
these balances get transferred to trading, and profit & loss account to arrive at profit and
loss of the company.
 Balances of real and personal account appear in balance sheet of the company and to be
carried forward to next accounting years.

Illustration

Journalize the following transactions and post them in to ledger account:

S.No. Transactions Amount

1 Commenced business and introduced cash 400,000.00
2 Goods purchased for cash 50,000.00
3 Goods purchased from Mr. Abdul 135,000.00
4 Freight charges paid on purchases 1,500.00
5 Computer purchased-cash 35,000.00
6 Freight charges paid on purchases of computer 500.00
7 Sale made to Mr. Ram 200,000.00
8 Rent paid 12,000.00
9 Salary paid 15,000.00
10 Cash received from Mr. Ram 150,000.00
11 Cash deposited in bank 75,000.00
12 Office Expenses paid 25,000.00
Journal Entries
S.No. Particulars L.F. Amount
Debit Credit
1 ** 400,000 400,000
Cash A/c Dr.
To Capital A/c
(Being capital introduced)

2 ** 500,000 500,000
Purchase A/c Dr.
To Cash A/c
(Being cash purchase made)

3 ** 135,000 135,000
Purchase A/c Dr.
To Abdul A/c
(Being goods purchase from Abdul)

4 ** 1,500 1,500
Inward Freight Charges A/c Dr.
To Cash A/c
(Being freight charges Paid)

5 ** 35,000 35,000
Computer A/c Dr.
To Cash A/c
(Being computer purchased on cash)

6 ** 500 500
Computer A/c Dr.
To Cash A/c
(Being freight charges on computer paid)

7 ** 200,000 200,000
Ram A/c Dr.
To Sale A/c
(Being sold to Mr. Ram)

8 ** 12,000 12,000
Rent A/c Dr.
To Cash A/c
 (Being rent paid )

9 ** 15,000 15,000
Salary A/c Dr.
To Cash A/c
(Being salary paid)

10 ** 150,000 150,000
Cash A/c Dr.
To Ram A/c
(Being cash Received from Mr. Ram)

11 ** 75,000 75,000
Bank A/c Dr.
To Cash A/c
(Being cash deposited in Bank)

12 ** 25,000 25,000
Office Expenses A/c Dr.
To Cash A/c
(Being office expenses paid)
 Subsidiary Books

Subsidiary Books are books of Original Entry. They are also known as Day Book or special journals.
We record transactions of similar nature are in Subsidiary Books. They are helpful in overcoming the
limitations of journal book or journal entries.

Different Types of Subsidiary Books

We can divide the subsidiary books into the following types:

1. Cash book
2. Purchases book
3. Sales book
4. Purchases return or return outwards book
5. Sales return or return inwards book
6. Bills receivable book
7. Bills payable book
8. Journal proper

1. Cash Book

Cash book is a record of all the transactions related to cash. Examples include: expenses paid in
cash, revenue collected in cash, payments made to creditors, payments received from debtors,
cash deposited in bank, withdrawn of cash for office use, etc.
In double column cash book, a discount column is included on both debit and credit sides to
record the discount allowed to customers and the discount received from creditors respectively.
In triple column cash book, one more column of bank is included to record all the transactions
relating to bank.

Note: In modern accounting, simple cash book is the most popular way to record cash
transactions. The double column cash book or three column cash book is practically for
academic purpose. A separate bank book is used to record all the banking transactions as they are
more than cash transactions. These days, cash is used just to meet petty and routine expenditures
of an organization. In most of the organizations, the salaries of employees are paid by bank
transfer.
Note: Cash book always shows debit balance; cash in hand, and a part of current assets.

Single Column Cash Book

Cash book is just like a ledger account. There is no need to open a separate cash account in the
ledger. The balance of cash book is directly posted to the trial balance. Since cash account is a
real account, ruling is followed, i.e. what comes in – debit, and what goes out – credit. All the
received cash is posted in the debit side and all payments and expenses are posted in the credit
side of the cash book.

Format
CASH BOOK (Single Column)
Dr. Cr.
Date Particulars L.F. Amount Date Particulars L.F. Amount

Double Column Cash Book

Here, we have an additional Discount column on each side of the cash book. The debit side
column of discount represents the discount to debtors of the company and the credit side of
discount column means the discount received from our suppliers or creditors while making
payments.
The total of discount column of debit side of cash book is posted in the ledger account
of ‘Discount Allowed to Customers’ account as ‘To Total as per Cash Book’.
Similarly, credit column of cash book is posted in ledger account of ‘Discount Received’ as ‘By
total of cash book’.

Format
CASH BOOK (Single Column)
Dr. Cr.
Date Particulars L.F. Discount Amount Date Particulars L.F. Discount Amount
Triple Column Cash Book

When one more column of Bank is added in both sides of the double column cash book to post
all banking transactions, it is called triple column cash book. All banking transactions are routed
through this cash book and there is no need to open a separate bank account in ledger.

2. Petty Cash Book

In any organization, there may be many petty transactions incurring for which payments have to
be done. Therefore, cash is kept with an employee, who deals with it and makes regular
payments out of it. To make it simple and secure, mostly a constant balance is kept with that
employee.
Suppose cashier pays Ksh 5,000 to Mr. A, who will pay day-to-day organization expenses out of
it.
Suppose Mr. A spends Ksh 4,200 out of it in a day, the main cashier pays Ksh 4,200, so his
balance of petty cash book will be again Ksh 5,000.
It is very useful system of accounting, as it saves the time of the main cashier and provides better
control.

Format
PETTY CASH BOOK
Amount C.B.F Date Particulars Amount Stationery Cartage Loading Postage L.F.
Received Paid &
Printing
 3. Purchase Book

Purchase book is prepared to record all the credit purchases of an organization. Purchase book is
not a purchase ledger.

Format
PURCHASE BOOK
Date Particulars Inward Invoice No. L.F. Amount

4. Sale Book

The features of a sale book are same as a purchase book, except for the fact that it records all the
credit sales.

Format
SALE BOOK
Date Particulars Outward Invoice No. L.F. Amount

5. Purchase Return Book

Sometimes goods are to be retuned back to the supplier, for various reasons. The most common
reason being defective goods or poor quality goods. In this case, a debit note is issued.

Format
PURCHASE RETURN BOOK
Date Particulars Credit Note No. L.F. Amount

6. Sale Return Book

The reason of Sale return is same as for purchase return. Sometimes the customer can return the
goods if they don‟t meet the quality standards promised. In such cases, a credit note is issued to
the customer.
Format
SALE RETURN BOOK
Date Particulars Debit Note No. L.F. Amount

7. Bills Receivables Book

Bills are raised by creditor to debtor. The debtors accept them and subsequently return them to
the creditors. Bills accepted by debtors are called as ‘Bills Receivables’ in the books of creditors,
and ‘Bills Payable’ in the books of debtors.
We keep them in our record called ‘Bills Receivable Books’ and ‘Bills Payable Book’.

Format
BILLS RECEIVABLE BOOK
Date Received From Term Due Date L.F. Amount

8. Bills Payable Book

Bills payable issues to the supplier of goods or services for payment, and the record is
maintained in this book.

Format
BILLS PAYABLE BOOK
Date To Whom Given Term Due Date L.F. Amount

Key Features of Subsidiary Books

There is a difference between a purchase book and a purchase ledger.

A purchase book records only credit purchases and a purchase ledger records all the cash
purchases in chronicle order.
The daily balance of purchase book is transferred to purchase ledger. Therefore, purchase ledger
is a comprehensive account of all purchases.
The same rule applies to sale book and sale ledger.
 It is quite clear that maintaining a subsidiary book is facilitation to journal entries,
practically it is not possible to post each and every transaction through journal entries,
especially in big organizations because it makes the records bulky and unpractical.
 Maintenance of subsidiary books gives us more scientific, practical, specialized,
controlled, and easy approach to work.
 It provides us facility to divide the work among different departments like sale
department, purchase department, cash department, bank department, etc. It makes each
department more accountable and provides an easy way to audit and detect errors.
 In modern days, the latest computer technology has set its base all over the world. More
and more competent accounts professionals are offering their services. Accuracy, quick
results, and compliance of law are the key factors of any organization. No one can ignore
these factors in a competitive market.
Bank Reconciliation

On a particular date, reconciliation of our bank balance with the balance of bank passbook is
called bank reconciliation.
The bank reconciliation is a statement that consists of:

 Balance as per our cash book/bank book

 Balance as per pass book
 Reason for difference in both of above

This statement may be prepared at any time as per suitability and requirement of the firm, which
depends upon the volume and number of transaction of the bank.
In these days, where most of the banking transactions are done electronically, the customer gets
alerts for every transaction. Time to reconcile the bank is reduced more.

Format
BANK RECONCILIATION STATEMENT
Particulars Debit Bank Credit Bank
Balance as per Balance as per
Bank Book Bank Book
(overdraft)
Balance as per Bank Book 50,000 -50,000
1. Add: Cheque issued to parties but not presented in 325,000 325,000
bank
2. Less: Cheque deposited in bank but not cleared yet -50,000 -50,000
3. Less: Bank Charges debited by bank but not entered in -1,200 -1,200
our books of accounts
4. Less: Bank interest charged by bank but not entered in -10,000 -10,000
our books of accounts
5. Add: Payment direct deposited by party without 175,000 175,000
intimation to us
Balance as per Bank Pass Book/ Statement 488,000 388,000
Trial Balance

Trial balance is a summary of all the debit and credit balances of ledger accounts. The total of
debit side and credit side of trial balance should be matched. Trial balance is prepared on the last
day of the accounting cycle.
Trial balance provides us a comprehensive list of balances. With the help of that, we can draw
financial reports of an organization. For example, the trading account can be analyzed to
ascertain the gross profit, the profit and loss account is analyzed to ascertain the profit or Loss of
that particular accounting year, and finally, the balance sheet of the concern is prepared to
conclude the financial position of the firm.

Format
TRIAL BALANCE
S.No. Ledger Accounts L.F. Debit(Ksh.) Credit(Ksh.)
1 ADVANCE FROM CUSTOMERS XX
2 ADVANCE TO STIFF XX
3 AUDIT FEES XX
4 BALANCE AT BANK XX
5 BANK BORROWINGS XX
6 BANK INTEREST PAID XX
7 CAPITAL XX
8 CASH IN HAND XX
9 COMMISSION ON SALE XX
10 ELECTRICITY EXPENSES XX
11 FIXED ASSETS XX
12 FREIGHT OUTWARD XX
13 INTEREST RECEIVED XX
14 INWARD FREIGHT CHARGES XX
15 OFFICE EXPENSES XX
16 OUTSTANDING RENT XX
17 PREPAID INSURANCE XX
18 PURCHASES XX
19 RENT XX
20 REPAIR AND RENUWALS XX
21 SALARY XX
22 SALARY PAYABLE XX
23 SALE XX
24 STAFF WELFARE EXPENSES XX
25 STOCK XX
26 SUNDRY CREDTIORS XX
27 SUNDRY DEBITORS XX
TOTAL XXXXX XXXXX

Financial Statements

Financial statements are prepared to ascertain the profit or loss of the business, and to know the
financial position of the company.
Trading, profit & Loss accounts ascertain the net profit for an accounting period and balance
sheet reflects the position of the business.
All the above has almost a fixed format, just put all the balances of ledger accounts into the
format given below with the help of the trial balance. With that, we may derive desired results in
the shape of financial equations.

Trading & Profit & Loss Account of M/s ABC Limited

For the period ending 31-03-2014

Particulars Amount Particulars Amount

To Opening Stock XX By Sales XX
To Purchases XX By Closing Stock XX
To Freight charges XX By Gross Loss c/d XXX
To Direct Expenses XX
To Gross Profit c/d XXX
Total XXXX Total XXXX
To Salaries XX By Gross Profit b/d XXX
To Rent XX
To Office Expenses XX By Bank Interest received XX
To Bank charges XX By Discount XX
To Bank Interest XX By Commission Income XX
To Electricity Expenses XX By Net Loss transfer to Balance XX
sheet
To Staff Welfare Expenses XX
To Audit Fees XX
To Repair & Renewal XX
To Commission XX
To Sundry Expenses XX
To Depreciation XX
To Net Profit transfer to Balance XX
sheet
Total XXXX Total XXXX

Balance sheet of M/s ABC Limited

as on 31-03-2014

Liabilities Amount Assets Amount

XX XX
Capital XX Fixed Assets XXXX
Add: Net Profit XX Less: Description XX

Bank Borrowings XX Current Assets -

Long Term Borrowing XX Stock XX
Current Liabilities - Debtors XX
Advance Form Customers XX Cash In hand XX
Sundry creditors XXX Cash at Bank XX
Bills Payable Bills receivables XX
Expenses Payable
Total XXXX Total XXXX

Owner’s Equity

The equation of equity is as follows:

Owner Equity = Assets – liability

The owner or the sole proprietor of a business makes investments, earns some profit on it, and
withdraws some money out of it for his personal use called drawings.
We may write this transaction as follows:

Investment (capital) ± Profit or Loss – drawings = Owner‟s Equity

Current Assets

Assets that are convertible into cash within the next accounting year are called current assets.
Cash in hand, cash in bank, fixed deposit receipts (FDRS), inventory, debtors, receivable bills,
short-term investments, staff loan and advances; all these come under current assets. In addition,
prepaid expenses are also a part of current assets.
Note: Prepaid expenses are not convertible into cash, but they save cash for the next financial or
accounting year.

Current Liabilities

Like current assets, current liabilities are immediate liabilities of the firm that are to be paid
within one year from the date of balance sheet.
Current liabilities primarily include sundry creditors, expenses payable, bills payable, short-term
loans, advance from customers, etc.