Chapter 4-Recording of Transaction-2

(c) Practical System of Accounting

Explanation- The system by which transactions of a class are first recorded in the book, specially meant for it, and on the basis of which ledger accounts are then prepared, is known as the ‘Practical System of Accounting.’

(a) Subsidiary books.

Explanation- The books of original or prime entry are also called Subsidiary books since ledger accounts are prepared on their basis and without this further process of ledger posting, a Trial balance cannot be taken out.

(b) Compound voucher

Explanation- Voucher which records a transaction that entails multiple debits/credits and one credit/debit is called compound voucher. Compound voucher may be: (a) Debit Voucher or (b) Credit Voucher.

(d) English System

Explanation- The other name of ‘Practical System of Accounting’ is ‘English System.’

(a) Journal voucher

Explanation- The accounting voucher prepared for complex transaction is known as Complex Voucher/ Journal Voucher.

(d) Balance sheet

Explanation- The balance sheet is a statement of assets, liabilities and capital.

(a) Subsidiary book.

Explanation- Posting is done from the journal to the ledger that is why it is a subsidiary book.

(a) Cash book

Explanation- Cash book is prepared to record receipts and payments of cash and bank transactions.

(c) Purchases book

Explanation- Purchases book is prepared to record credit purchases of goods dealt in or of the materials and stores required in the factory.

(d) Sales Return book

Explanation- To record the returns made by customers, sales return book is prepared by firm.

(a) Journal

Explanation- Cash Book is a special Journal. It is so because transactions are directly recorded in it.

(c) Cheque

Explanation- A cheque is a document which is in writing drawn upon a specified banker and payable on demand. It is an easy medium to transfer money.

(b) Bills Payable book

Explanation- Bills Payable Book is prepared to record the issue of promissory notes or hundis to other parties.

(a) Sales book

Explanation- Sales book is prepared to record the credit sale of goods dealt in by the firm.

(d) Three types

Explanation- The main cash book may be of three types:

(1) Simple cash book

(2) Two-column cash book, and

(3) Three-column cash book

(b) Ledger

Explanation- Cash book is a part of the ledger also. Hence, it has also to be treated as the principal book. The cash book is, thus, both a subsidiary book and a principal book.

(c) Simple cash book

Explanation- Such a cash book appears like an ordinary account with one account column on each side. Thus, it is called simple cash book. It has cash column only.

(a) Single-column cash book

Explanation- Simple cash book is also known as Single-column cash book.

(c) Receipts

Explanation- The left-hand side of simple cash book records receipts of cash. Simple cash book contains cash column only.

(d) Payments

Explanation- The left-hand side records receipts of cash and the right-hand side the payments. Hence, it is also called a ‘single column cash book’.

(b) Journal

Explanation- Journal is that primary book of accounts in which transactions are originally recorded in a chronological (day-to-day) order. It is called the book of original entry.

(a) L.F.

Explanation- L.F.- the page number in the ledger where the relevant account will be found is written.

(a) Double-column cash book

Explanation- If alongwith the columns for amounts to record cash receipts and cash payments, another column is added on each side to record the cash discount allowed or the cash discount received, it will be a double-column cash book.

(d) Two types

Explanation- Entries in the Journal may be divided into two groups:

1. Simple Entry

2. Compound Entry

(b) Simple entry

Explanation- A Simple Entry is one in which only two accounts are affected, viz., one account to be debited and another to be credited with an equal amount.

(a) Bad debts

Explanation- When a debtor becomes bankrupt, i.e. unable to pay one’s debts, the entire amount due from him is not realised. The unrealised amount is a loss to business, the same is called Bad Debts.

(c) Compound entry

Explanation- In a compound entry, there may be two or more accounts to be debited and only one to be credited or vice versa.

(b) Dr.

Explanation- In Journal, the account to be debited is written with the word ‘‘Dr.’’ written towards the end of the column.

(a) To

Explanation- The name of the account to be credited is written preceded by word ‘‘To.’’ For example-

Ajay Dr.

To Cash A/c

(d) Bad Debts recovered

Explanation- Sometime insolvent debtor whose account had been earlier written off as ‘Bad Debts’ pays some amount.The amount so received is a gain to the business and is known as Bad Debts Recovered.The entry of bad debts recovered is:

Cash/Bank A/c Dr.

To Bad Debts Recovered A/c

(d) Gain

Explanation- Recovery of bad debts written off last year is gain to the business, therefore, it is credited to Bad Debts Recovered Account.

(c) Discount

Explanation- A reduction in amount whether to encourage more purchases or prompt payment is called discount.

(b) Two types

Explanation- Discount may be classified into:

(i) Trade discount

(ii) Cash discount

(a) Purchases A/c

Explanation- Amount of purchases is reduced with the value of goods given away as charity. The following entry is passed:

Charity A/c Dr.

To Purchases A/c

(b) Trade discount

Explanation- Trade discount is an allowance made to a customer if he purchases goods above a certain quantity or an amount. The discount so allowed is reduced from the sale value and the sale or purchase is recorded in the books at the net value.

(d) Cash discount

Explanation- Cash discount is an allowance to encourage prompt payment of amount due. Cash discount, received or allowed is recorded separately in the books.

(c) Advertisement expense

Explanation- To increase sales sometimes goods are distributed as free samples. It is a part of advertisement expense, hence, it is debited to advertisement account and deducted from purchases.

(d) Drawings

Explanation- It is treated as decrease in purchase and not increase in sales as no profit is earned on such goods.

(b) Trade discount

Explanation- Trading account is not recorded in the ledger accounts.

(c) Purchases A/c

Explanation- When the goods are withdrawn by proprietor for personal use. Following journal entry is passed-

Drawings A/c ......Dr.

To Purchases A/c

(d) Cash discount

Explanation- Cash discount is not deducted from the invoice.

(b) Current assets

Explanation- Prepaid expenses is the part of current assets which can be converted into cash within a period of one year.

(b) Loss by fire accident A/c

Explanation- Goods destroyed by fire or accident etc. is recorded by debiting the loss to the account titled ‘Loss by Fire Accident Account.’ It is an Expense Account. A loss by Fire Account is debited because loss represents an increase in expense and Purchase Account is credited because it will decrease the purchase.

(d) Trade discount

Explanation- The amount of the trade discount is deducted from the invoice. It is given on a purchase of higher quantity.

(c) Sales tax

Explanation- At the time of sale, sales tax is also collected from the customers. Sales tax so collected must be deposited in government account on the due date. Sales tax collected is a liability and therefore, should be credited in a separate account.

(c) Sundry Expenses A/c

Explanation- Businessman often has to pay petty expenses, such as for refreshment, postage, conveyance etc. It is not desirable to record such expenses in a separate account of each expenses. These expenses are generally debited in one account, i.e., Sundry Expenses Account.

(d) Assets - Capital

Explanation- Liabilities are debts, they are amounts owed to creditors. Thus, the claims who are not owners are called ‘‘Liabilities.’’

(d) Outstanding expenses

Explanation- For example, Wages for the year ending 31^st March, 2002 are Rs. 8,000. Out of this wages Rs.1000 for the month of March, 2002 have been paid in April 2002. Since, Rs.1000 as on 31^st March, 2002 is yet to be paid it should be recorded in the books by passing the following journal entry:

Wages A/c ......Dr. 1,000

To Outstanding Wages A/c 1,000

(b) Assets - Liabilities

Explanation- Capital is also known as Owner’s Equity, proprietorship and net worth. Owner’s Equity means owner’s claim against the assets of the business. It will always be equal to assets less liabilities.

(c) Prepaid expenses

Explanation- Normally payment of certain expenses like Insurance, Rent of Shop etc, are paid in advance. Such expenses are termed as advance or prepaid expenses.

(d) Depreciation

Explanation- Due to continuous use of fixed assets, value of these assets keeps on decreasing every year. This diminition is called the depreciation.

(a) Loss

Explanation- Interest on capital is loss for business. Therefore, interest account is debited and capital account is credited by the amount of business.

(c) Depreciation

Explanation- Depreciation is a fall in the value of assets and this is a trading loss.

(b) Gain to the business

Explanation- In case, interest is charged on drawings, it is a gain for the business. For this, drawings account will be debited interest on drawings account will be credited.

(d) Journal

Explanation- The possibility of errors is reduced in Journal as the amounts to be debited and credited are written side by side and the two can be compared to see that they are equal.

(a) Journal

Explanation- Transactions are entered in the journal in the chronological order, hence, the order in which they occur enters the record permanently.

(b) Ledger

Explanation- Ledger is the most important book of account. It is the principal book of account which contains all the information regarding business.

(c) Real Account

Explanation- The real accounts show the values of properties and also the value of stock.

(d) Stock and prepaid expenses

Explanation- Current assets are those assets which can be converted into cash within a period of one year.

(d) Nominal account

Explanation- Nominal accounts reflect the sources of income and also the amount spent on various items.

(b) Long-term loans and public deposits

Explanation- Long-term loans and public deposits are the examples of fixed liabilities which cannot be paid off within a period of one year.

(a) Debit side

Explanation- The left-hand side of ledger is known as the debit side.

(b) Balancing of account

Explanation- For example, if total of credit side is more than the debit side of any account the difference of amount will be recorded as Balance c/d on debit side and vice versa on the credit side.

(d) Trial Balance

Explanation- It is prepared by listing each and every account and entering in separate columns the totals of the debit and credit sides.

(c) Trial balance

Explanation- The Trial Balance enables one to establish whether the posting and other accounting processes have been carried out without committing arithmetical errors.

(a) The balance method

Explanation- In this method, only the debit or credit balances are entered separately in two columns.

(b) Gross Trial Balance

Explanation- In this, the total of each side is entered respectively.

(d) Trial Balance

Explanation- Financial statements are normally prepared on the basis of the Trial balance.

(c) Assets

Explanation- The equation says that the assets of a business are always equal to the claims of owners and the outsiders.

(c) Balance Method

Explanation- The other name of Net Trial Balance is Balance Method. This is commonly used method of preparing Trial Balance.

(a) Two types

Explanation- The systems of recording transactions in the books of accounts are generally classified into two types, viz. Double Entry system and Single Entry system.

(c) Posting

Explanation- The process of transferring journal entry to individual accounts is called posting.

(b) Journal Folio

Explanation- It records the page number of the original book of entry on which relevant transaction is recorded. This column is filled up at the time of posting.

(d) Balance brought down

Explanation- Assets will show a debit balance. Such accounts will be opened and the relevant amounts written on the debit side as ‘‘To Balance brought down.’’

(b) Contra entry

Explanation- Some transactions are recorded in three-column cash book which relates to both cash and bank i.e. balance of one will decrease and other will increase due to such transactions. Such transactions are entered on both the sides of cash book. Such entries are known as Contra entries.