Rules for Double entry system of Accounting with examples.

Double Entry System of Accounting

Double entry system of accounting is based on the dual aspect concept. It includes two aspects, they are Debit aspects and Credit aspects.

Debit Aspects- This includes either Receiving aspects, incoming aspects or Expenditure aspects, these are known as Debit aspects.

Credit Aspects- The another aspects may be Giving aspects, outgoing aspects or income aspects. These are known as Credit aspects.

Stages of Double Entry System

There are three distinct stages are includes a complete system of double entry.

i)        Recording of transactions in the journal.

ii)      Posting of journal entry in to the respective ledger accounts and then preparing a trial balance.

iii)    Closing of books of accounts and preparing final accounts.

Rules for Double Entry System

An account is statement and it is a record of transactions relating to a person, or a firm, or a property, or a liability, or an income or expenditure. There are three kinds of rules for double entry system. They are as follows:-

1.       Personal Accounts

Under this statement, a separate account will be prepared for each person. It includes Natural peron’s account, Artificial person’s account and representative personal accounts. Some of the examples of personal account are Ramu’s account, Bank account, Any firms account, any companies account, prepaid expense account, outstanding wages account etc.

Rule for personal Account:-

   “Debit the receiver

             Credit the giver”

2.       Real Accounts

Under the real account, a separate account will create for each class of property or asset. There will have an account relating to a property, an asset or a possession of property. Some of the examples for real account are Cash account, Furniture account, Goodwill account etc.

Rule for Real Account:-

   “Debit what comes in

             Credit what goes out”

3.       Nominal Account

These includes the expenses and losses or incomes and gains of business. Some of the examples of Nominal account are wages account, discount received account, interest account etc.

Rule for Real Account:-

   “Debit all expenses and losses

             Credit all incomes and gains”

Advantages of Double entry system

The important merits of Double entry system are as follows:-

1.       Under Double entry system, keeps a complete record of business transactions.

2.       This provides complete information regarding the business.

3.       This has the facility of checking mathematical accuracy of books of accounts.

4.       It reveals the profit or loss of the business for a given period.

5.       This enables the business man to plan, control and take necessary actions in his operations.

6.       It avoids chances of fraud or misappropriation of accounts.

7.       This system is flexible according to the nature of business.

8.       This system is accepted by the tax authorities.

9.       Actual net profit can be calculated directly.

Disadvantages of Double entry system

The important limitations of Double entry system are as follows:-

1.       It is not suitable to disclose all the information of a transaction which is not properly recorded in the journal.

2.       If there is any errors in the transactions recorded in the books, it is difficult to detecting the errors.

3.       This system required more clerical labour.

4.       If there is any compensatory errors, it is not suitable to find out by this system.

These all are the Advantages and Disadvantages of Double entry system of accounting.

Meaning and Types of accounting Errors and procedure for rectifying accounting errors.

Accounting Errors

Accounting errors are those mistakes which occurs in the book keeping or accounting, relating to a routine activity or relating to the principle of accounting. The Accounting errors happens in entering the transactions in journal or subsidiary books or at the time of posting of entries in to the ledger. The accounting errors may happen because of the omission, commission, principle or as a compensating of errors.

Classification of Accounting errors

Accounting errors are classified in to four types on the basis of nature of Errors. They are (1) Errors of Omission, (2) Errors of Commission, (3) Errors of Principles and (4) Compensating Errors.

(1)     Errors of Omission

The Errors of Omission will occur when a transaction is not recorded in the books of accounts or omitted by mistake. The Errors of Omission may happen as partial or complete.

         The partial errors may happen in relation to any subsidiary books. This is the result of when a transaction is entered in the subsidiary book but not posted to the ledger. For example, cash paid to the suppliers has been entered in the payment side of the cash book but it will not be entered in the debit side of the suppliers account.

        The complete omission may happen the transaction is completely omitted from  the books of accounts. For example, an accountant fails to enter a specific invoice from the sales day book.

(2)     Errors of Commission

When a transaction is entered in the books of accounts in wrongly, this may be entered as partially or incorrectly. This kind of errors are known as Errors of Commission. The Errors of Commission may happens because of ignorance or negligence of the accountant. This may be of different types, the main reasons are Errors relating to subsidiary books and Errors relating to ledger.

(3)    Errors of Principles

This  kind of errors are occurs when the entries are made against the principle of accounting. These Errors are made because of the following reasons:-

1.       Errors happens due to the inability to make a distinction between the revenue and capital items.

2.        Errors happens due to the inability to make a difference between the business expenses and personal expenses.

3.       Errors happens because of the inability to make a distinction between the productive expense and nonproductive expenses.

(4)     Compensating Errors

 Compensating Errors are those errors which compensates themselves in the net results of the business. This means, if there are over debit in one account which will be compensated by the over credit in some account in the same extent of the business. Like that, if there is a wrong debit in one account which will be neutralized by some wrong credit in the same extent of the business.

The accounting errors will hardly affect the accuracy of trial balance of the business because the trial balance is the final proof of the books of accounts. There are some of the methods to rectify the accounting errors happened in the books of accounts. The important two methods for rectifying the accounting errors are as follow.

à Striking of the wrong Entry.

à Making appropriate entries to correct the errors.

Procedure for rectifying Accounting errors.

There are mainly three steps to rectify the accounting errors in the books of accounts.

a.       Ascertain the error occurred

b.       Identify the correct record of transaction which has to be done.

c.       Decide the rectification entry.

These all are the different kinds of accounting errors and the methods to rectify those errors.

Financial Accounting.Principles- Concepts and conventions of Accounting, Meaning, Definition and objectives of Accounting

Accounting- Meaning and Definition

Accounting is a process of communicating the results of business operations to various parties who are interested or connected with the business, which includes the owners, investors, creditors, government, bank and other financial institutions etc. Accounting is associated with everybody who is interested to keep the accounts of finance or monetary transactions.

The American Institute of Certified Public Accountants has defined accounting as ''the art of recording, classifying and summarizing 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".  The above mentioned definition shows the following aspects of accounting.

• Accounting involves both art and science.
• This includes recording, classifying and summarizing of business transactions.
• This records the transactions in terms of money.
• It records the financial things and events only.
• Accounting is the process of interpreting the results of financial operations.
• This communicates the results of analysis and interpretation to the management or to the concerned party.

Main Objectives of Accounting

The main objectives of accounting is as follows:-

• To evaluate the operating results of the enterprise.
• To disclose the financial position of the business
• To ensure necessary control over the operation as well as the resources of the business.

Accounting Principles

Accounting principles are the norms or rule of actions adopted while recording business transactions which will ensure the uniformity, clarity and understanding of business. The accounting principles are mainly classified in to two categories. They are Accounting Concepts and Accounting Conventions.

1. Accounting Concepts

        Accounting concepts are basic assumptions or conditions which the accounting system is based. The important accounting concepts are Business Entity Concept, Going Concern concept, Dual Aspect Concept, Cost Concept, Money measurement Concept, Realization Concept, Accrual Concept and matching Concept.

• Business Entity Concept-  Business entity concept states that the business and business man are two separate entity. Under this, business is treated as a separate unit distinct from its owner. The transactions between the proprietor and the business will be recorded separately in the books of business and shown separately under the heading 'Capital account'.
• Going Concern concept- As per this concept business unit has a perpetual succession or a continued existence and the transactions are are recorded from the point of view. The concept says  that the business will continue in operation long enough to charge the cost of fixed assets over the useful life time against the income from business.
•  Dual Aspect Concept- Under this concept each business transaction has two aspects they are receiving aspects and giving aspects. The receiving aspect is known as Debit aspect and the giving aspect is known as the Credit aspect of the business.
• Cost Concept- Cost Concept is based on the Going concern concept. According to this concept, assets purchased will be entered in the business book as per the cost price in which they are purchased and this will be the base for further accounting of assets.
• Money measurement Concept- This concepts states that, the transactions which will treat only in the terms of money.
• Realization concept- According to this Revenue is recognized only when the sale is made.
• Matching Concept- This matches the cost along with the revenue.

2. Accounting Conventions

        This is method or custom in which the accountants are following for the preparation of accounting statements. This includes mainly three types of conventions. They are as follows:-

• Convention of conservatism
• Convention of consistency
• Convention of material Disclosure.

These all are the accounting concepts and conventions.

Functions of financial management as well as financial manager.

Financial Management

       

Financial management is a process which involves planning, organizing, controlling and directing of financial activities such as the procurement, development and maximum utilization of the funds in an organization. Finance is the lifeblood of every business and it is the study of how the investors allocate the assets in the competitive business environment. In simply we can say that, financial management is the process of applying general management principles to the resources available in the business enterprises.

Functions of Financial management

Financial Management is the base for the success of every business organizations and which includes all the managerial activities related to the finance and other resources of the business. The main objective of the financial management is concerned with the procurement, allocation and control of financial resources in an organization. Some of the important functions of financial management are as follows:-

1. Estimation of Capital requirements.

The estimation of capital requirements for the business is the main responsibility of a financial manager. Capital is the indication of the structure and future plans of the business. The capital requirements should be depends on the nature and characteristics of the business. If the business is a short term plan then it will have a small capital requirements or the type of the business also will depend the capital requirements of the company.

2.      Determine the capital composition

Determination of the capital composition involves the process of deciding the short term and long term capital structure of the business along with the debt equity analysis.  This process will depends on the proportion of the companies equity capital as well as the additional funds in which the company have to be raised from the outsiders. The estimation is the base for fixing of capital structure for the business.

3.      Sources of Funds     
Another important function of a financial manager is to analyze the external environment and find out the favorable choices for procuring funds for the future process of business activities. Some of the main choices of source of funds are as follows:-

a)      Issue of shares and Debentures.

b)     Loans from banks and other financial institutions.

c)     Fund from Bonds.

4.      Investment of Funds

Investment of funds is the very important function in any business organization. This is the main responsibility of the finance manager to analyze and study various profitable ventures to invest the funds and it will help to get maximum return from the investment.

5.      Disposal of surplus

The finance manager is the responsible person to take adequate decisions regarding net profit of the company. It will be done in two ways, that is Dividend Declaration and Retained profits.

6.      Management of Cash.

The key function of a finance manager is cash management and this depends on the future functions in an organization. Cash is required for many purposes in every business organization which includes payment of wages and salaries, purchases, Payment of bills, Meeting current liabilities etc.

7.      Financial Controls

The financial control is one of the major function of the finance manager along with the procurement and utilization of finance. The financial control is done through the clear forecasting of future conditions, Ratio analysis techniques, forecasting of cost and profit of the business etc.

These all are the major functions of financial management as well as the financial manager.

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Meaning and Types of Subsidiary books detailed study report.

Subsidiary Books

Most of the big companies are recording the business transactions in one journal and the posting of the same to the concerned ledger accounts are very difficult tasks and which require more clerical labour also. For avoiding such kind of difficulties most of the business organizations are subdividing the journal in to subsidiary journals or subsidiary books.  Subsidiary books are those books of original entry in which similar nature of transactions are recording in a chronological order.

Kinds of Subsidiary Books

There are different kinds of subsidiary books which includes purchase day book, Sales day book, purchase returns book, Sales returns book, Bills receivable books, Bills payable books, Cash book.

1.       Purchase day book

purchase day book is used for recording credit purchase of goods only. This will not record any cash purchase or credit purchase of any assets. The term goods means all the commodities and services in which the company deals in day to day activities. The preparation of purchase day book involves the Date column, Particulars column, Invoice number column, Ledger folio column, inner amount column and Amount column.

2.       Sales day book

Sales day book is mainly used for recording credit sales of goods and services in an organization. This will not record any cash sales or assets sales. The ruling for the preparation of this book is same as like Purchase day book. This involves the Date column, Particulars column, Invoice number column, Ledger folio column, inner amount column and Amount column.

3.       Purchase returns book

This is maintained to record the transactions of goods returned to the supplier when purchase on credit. The ruling of the preparation of purchase return book or returns outward book involves Date, Particulars, Debit note number, Ledger folio and amount column.

4.       Sales returns book

This book is used to record the goods returned by the customer the goods sold on credit. The ruling of the preparation of Sales return book or returns inward book involves Date, Particulars, credit note number, Ledger folio and amount column.

5.       Bills receivable books

It is used to record the transactions when the bills received from the customer for credit sales. This provides a medium for posting bills receivable transaction. The preparation of this book involves Date when received, Drawer, Acceptor, Where payable, date of bill, term, due date ledger folio, Amount, remarks columns.

6.       Bills payable books

This is used to record the acceptances given to the suppliers for credit purchase. The preparation of bills payable book involves Date of acceptance, giver, payee, Where payable, date of bill, term, due date, ledger folio, Amount, remarks columns.

7.       Cash book

The cash book is used to record all the receipts and payments of cash. For the preparation of cash book there are different rules are available according to the nature of business. The different forms of cash book are as follows:-

a.       Simple Cash book – This is the simple form of cash book.

b.      Two column cash book – This type of cash book have two columns like cash column and discount column.

c.       Three column cash book – This involves three columns such as Bank column, cash column and discount column.

d.      Petty cash book -  This is used to record petty expenses like postage, cartage, printing and stationery etc in the day to day business activities.