A COMPLEATE GUIDE TO TALLY

By Abhijit Behera.

LESSON 1 INTRODUCTION TO TRADING ORGANISATIONS Lesion objectives On completion of this lesson, you will be able to Understand a trading organization and its activities Understand the accounting terms associated with trading organization Understand the role of inventory.

recap of tally undergraduate Tally undergraduate was the first step towards understanding the wide spectrum of business organizations, from the simple service organization to the complex manufacturing organization. The course took you through working of a service organization, which illustrated the basis of accounting procedures. You learned to process of simple transactions, set up related accounts and prepare financial statements.

Systematic instruction were provide on the treatment of receipts and payments; advance and credit payments for services provide; purchase of officequipments and other supplies; adjusting entries for depreciation, prepayment, accrued revenue and expenses. The hands-on practical approach gave you an understanding of tally and the fundamentals of accounting. Tally postgraduate will deal with the mechanics of trading organization and accounting procedures related to them.

trading organizations an organization involved in the process of buying and selling can be called a rading organization. Trading is an exchange of goods for fixed market price or perceived value. Traders act as channels who provide goods produced by the manufacturers at a convenient place, price, quantity and time to the consumers. Traders can be broadly classified as Wholesellers: wholesellers purchase merchandise in bulk directly from manufacturers and sell to retailers. Retailers: retailers purchase merchandise from wholesalers and cater t the end consumers. nature of trading organizations actual market price of a product is based on the existing demand and supply and is valid for a short period. The value of the product is determined by the Quality Conveience. In relation to the actual amount paid it. The tader deals with goods and repacks the if necessary but does not process them. A trading organization has to keep a continuous track of market demand and ensure that inventory planning is done to takeavantage of demand whenever it arises. A different price may be charged to different customer segments by varying the percentage of discount on the list price. Accounting in trading organizations collections

The product profit margin. Overall profitability from repeated orders by the buyer. The factors that help in deciding the credit period are The credibility of the buyer is based on his own financial stability and the relationship with the seller. Trade discount: Trade discount is a discount allowed on the list price of a commodity. Trade Discount and Cash Discount There are two major kinds of discounts offered by traders making a sale. Credit period is the time frame for which the supplier agrees to provide the customer with credit. primarily with the intention of selling them to customers.Customer demand trading organisation sale Inventory based on customer demand Arrival of stock Figure 1.1 accountiong in a trading organisation Trading organisation Sells goods Maintains inventory Cost for trading organisation is the cost of goods sold Goods are tangible Activities of trading organisation Service organisation Sells services Does not have inventory Cost for service organisation is the cost of providing services Services are not tangile Purchases: purchases for a business are to buy goods in exchange for a monetary value. . Sales: a sale involves transfer of goods or services for money. It is reported in financial statements net of trade discount. It is offered to allow for customer segmentations and represents the position of the buy vis-à-vis the rest of the market. The credit period offered by the competitors. Accounting and commercial terms associated with trading organizations Credit period Credit is an arrangement for deferred payment for goods and services.

Cost of goods sold=opening stock+purchases-purchases returns and allowances-closing stock It contains of all the costs associated with the goods that were sold during a specified accounting period. Cash discount is not deducted from sales revenue. including materials. It represents the sum of opening stock and purchases in a period.Cash discount: cash discount is a discount allowed as an inducement or incentives to the coustomers for prompt payments. a debit/credit note must be raised to account for returns/allowances. If purchases/sales are already recorded. but is recognized separately. a delivery/receipt note is issued and rejection out/rejection in is recorded to account for returns/allowances. Cost of goods available for sale= opening stock + purchases-purchases returns and allowances Cost of goods sold Cost of goods sold represents direct cost incurred by a business in the process of selling goods. labour and overhead. Allowance is a concession granted to customers for unsatisfactory goods or services. Returns are the total value of merchandise returned by customers for refund or credit. Cost of goods available for sale Cost of goods available for sale is the cost of goods that a business could have sold in a period. it is important to know whether purchases / sales have been recorded in the books of account. If purchases/sales are not recorded. Both reduce the total value of sales because that portion of the sales considered not earned Type of issue Quantity related Solution Reach a conclusion on quantity of stock delivered Deliver the balance to the customer Reduce the customer obligation Quality related Take back the stock Offer a discounted rate When dealing with quantity/quality related issues with regards to stock. . Returns / allowances. Goods may be returned due to one of the reasons Quantity related issues Quality related issues Payment terms and delivery related issues.

Gross profit is arrived at by reducing direct expenses from direct incomes. Gross profit in terms of percentage =[(gross operating revenue-cost of goods sold)*100] / (gross operation cost} .Gross profit Gross profit is the profit earned out of the core activity of buying and selling.

This is a popular measure for comparing the earning power of companies. Operating profit (PBIT) Operating profit is the net income before income tax expenses and interest expense.This percentage provides a relative measure of profitability. Operating profit=gross profit-operation expenses . marketing and administrative expenses. Operating expenses Operating expenses are periodic expenses incurred in the course of running a business. including sales. It covers all expenses related to the ongoing operations of a company.

The funds invested in the inventory cannot be used for other purposes until cash is received on the sale of goods. money and time that contribute towards the final product. strikes. Determining inventory levels A minimum stock of inventory has to be maintained for the following reasons    Accurate prediction of requirement of raw materials or trading goods. In the process of production for such sale. and the availability of the same at a desired location and price is difficult. Costs of purchase The costs of purchase consists of the purchase price including duties and taxes (other than those subsequently recoverable by the enterprise form the taxing authorities). may be affected by breakdowns. In the form of materials or supplies to be consumed in the production process or in the rendering of services. Trade discounts. Factors such as machines. In other words.Net profit Net profit is also known as profit or net earnings. inventory is the money invested by an organisation in raw materials. Net profit=operating profit-interest expense-income tax expenses Introduction to inventory Inventory consists of raw materials. Cost of inventory The cost of inventory usually comprises all costs of purchase. apart from raw materials. items available for sale or in the process of being made ready for sale (work-in progress). Definition of inventory Inventories are assets    Held for sale in the course of business. freight inwards and other expenditure directly attributable to the acquisition. There is a lead time for procurement of goods after placing orders with suppliers. Measurement of inventory Inventory should be valued at the lower of cost net realizable value. Inventory is a current asset because it can be converted into cash. duty drawbacks and other similar items are deducted in determining the cost of purchase. men. other expenses and there may be an unforeseen extension of time involved in the conversion. work-in-progress and finished goods for expected future sales. costs of conversion and other costs incurred in bringing the inventories to their present location and condition. rebates. Kind of inventory .

where one has to quote the selling price of the material based on the cost of purchase. Supplies are the items consumed in the normal functioning of a firm that are not part of the final products. y y When the process of input material are fluctuation. It is the value of partly finished goods. For example. the calculation of the inventory value is besed on the principle that inventory in hand is the one most recently purchased. while valueing inventory are:   Is input stock identifiable with output stock? Is the cost of input stock identifiable with output stock used for sales? The valuation of stock has to thus serve the following objectives    The profit on sales needs to be arrived at. In a price sensitive market. . The closing stock has to be valued fairly close to market value. As the oldest stock in the inventory is sold first. Introduction to inventory valuation A material is valued by determining its cost of purchase. rubber is the raw material for tyres. Weighted Average Cost Weight average is an average calculated by assigning each quantity to be averaged a weight. When prices have to be quoted to the customers based on latest purchase cost. to be modified or transformed into the final product. valuation of input stock (raw materials/traded goods) is required when output stock (finished goods/traded goods) is sold. To determine the profit of transactions. This method is justified by the fact that closing stock represents the latest purchases price (which is considered closer to the market price) and is useful when prices are stable. Valuation of material cost has to facilitate comparison of jobs. Finished goods inventory is that portion of goods which are manufactured and available for sale. This method is developed to overcome the FIFO s shortfall in handling following scenarios. WIP is an acronym for work. the questions to be answered. The cost of goods sold thus represents the cost of items acquired in the earlier purchases. Inventory costing methods FIFO: first in first out FIFO is an inventory cost method whereby the goods purchased first are assumed to be the goods sold first. This method is based on the logic that cost of goods sold should reflect latest costs and profits booked accordingly. so that the closing stock consists of the most recently purchased goods.    Raw materials are the items purchased for use in the production process. Lifo : last in first out LIFO is an inventory cost method whereby the last goods purchased are assumed to be the first goods sold so that the closing stock consists of the first goods purchased. These weights determine the relative importance of each quantity on the average. A new average price has to be worked out on each purchase of material. This method averages prices after multiplying them by their quantities on each new purchase. after considering cost of materials used.in progress.

At the end of the period.14 Standard cost Under this method. Inventory System Quantity vs. variances between actual and standard are booked to reflect the real position. NO. the cost of recording stock movement may outweigh the benefit of recording stock and the organization opts for periodic inventory valuation. When physical verification of stock is easier.Example : national stores bought cups from KR glassware company. a standard price is set for each material and issues for a period are made at this price. The inventory on hand and the cost of goods sold are determined by means of a physical count at periodic intervals or at the end of the period. a physical inventory is usually taken only at the end or at regular intervals. The inventory is usually maintained in a factory or godowns which are strategically located to achieve timely delivery. The details of the purchase are given in the table below. Note: totally enables maintaining of stock quantity records as well as value based records with ease. periodic inventory system is applicable when integrate accounts with inventory in F11 : Features is set to No. . value records Quantity and value records are used to record the movement of stock. Perpetual and periodic inventory systems Periodic inventory system In this method. When price movement of materials is insignificant When movement at stores level cannot be recorded or there are no stores In such situations. When there is a strong physical control over the movement of goods. 1 2 3 DATE 4-6-2005 15-6-2005 20-6-2005 TOTAL QUANTITY 5 10 20 35 RATE 10 12 11 33 TOTAL VALUE 50 120 220 390 Calculation of average prices is done as given below Simple Average Price= Total rate/Total number of transactions=33/3=11 Weight Average Price = Total value/Total quantity = 390/35=11. In the other valuation methods. SL. comparison of two jobs is not possible due to market fluctuations. Organisations may not feel the need for systematic recording of every movement of goods. Note: in tally. reduce cost of holding and so on. Standard pricing method overcomes this defiency.

Returns are the tota value of merchandise returned by customers for unsatisfactory goods and services. Note: in tally. Cost of goods available for sale is the closing stock on a given date. Credit period is the time frame for which the supplier agrees to provide the customer with credit. Gross profit is the profit earned out of core actities like buying and selling. Perpectual system of inventory is preferable in cases where There is a strong system control over movement of goods. Operating expenses are periodic expenses incurred in the course of running the business. Price movement of material is significant. Physical verification of stock is difficult. Cost of goods sold represents direct costs incurred by business in the process of selling goods. Stock is converted to finished goods in stages. Movement at stores level can be recorded. A purchase for a business means buying goods. This method is applicable to businesses where there are a number of sales transactions every day and the sales are of high value. primarily with the intention of selling them to customers. Points to remember Trading organization is an organization that is involved in the process of buying and selling. It involves the recording of receipts to delivery of materials on a daily basis. periodic inventory system is applicable when integrate accounts with inventory in F11 : Features is set to yes. items available for sale or in the process of being made ready for sale (w-i-p) . Inventory is a repository of raw materials. Sales are transactions that involves transfer of goods or services for money. Operating profit is the net income before income befor income tax income tax expense and interest expense.Perpetual inventory system Perpetual inventory method where the inventory accounting is kept up-to-date. Cash discount is a discount allowed as an inducement/incentive to the customers for prompt payments. Trade discount is a discount allowed from the list price of a commodity to assist increase of sales.

Understand the application of bills of exchange. Understand the process of purchase and sales returns. . you will be able to Define cash and credit purchases and differentiate between them. Define cash and credit sales and differentiate between them.Lesson 2 PURCHASES AND SALES Lesson Objectives On compleation of this lesson. Understand the principles of revenue recognition and the concept of price levels.

Debit note is a note that indicates and accounts for an amount owed by a person or a company. The supplier informs the buyer that an interest is due delayed payments. It informs the supplier that his account has been debited with the value of the goods returned. it is better to route the order through customer account. The scope of the debit note is not limited to accounting for purchase returns only. This usually happens when the product is standredised and when the seller has to deal with lots of one-time buyer. it is known as credit sales. However. The buyer acknowledges to the supplier that interest . a document called the credit note is prepared at the time of return of goods (from supplier s perspective) to record the quantity and value of goods returned by buyers. This helps to keep track of the business done with the customers. it is better to route the order through a vendor account. The supplier accounts for and intimates the buyer that expenditure incurred on his behalf is recoverable . required for vendor management. If the goods are purchased in smaller units. it is known as a cash purchase. when both parties involved in the transaction agree upon a later date as the date of payment for goods purchased it is known as a credit purchase. Purchase returns Goods purchased can be returned to a supplier of the goods do not measure up to the terms and conditions agreed upon by the buyer and the supplier. The scope of the debit note is not limited to accounting for an amount owed by a person or a company. either by cash or cheque. either by cash or cheque. then the seller need not bother about the buyer details. name of the supplier to whom the goods have been returned. this should be taken into consideration while calculating the value of the goods returned. However. If the buyer orders on a regular basis. Of the supplier receives regular orders. Credit note is a note that acknowledges and accounts for an amount owned by a person or a company. If the quantity if goods sold is in smaller units.Cash and credit purchases When payment is mede on a purchase instantly. This usually happens when the product is standardized and when the buyer has to deal with lots of onetime suppliers. it is known as cash sales. when both parties involved in the transaction agree upon a later date as the date of payment for the goods sold. Sales return Goods can be returned to a supplier by buyer if the goods supplied are not according to terms and conditions agreed by both the buyer and supplier. This helps the buyer to Record payments that will be affected in future Negotiate trade and cash discounts Bargain for credit period Cash and credit sales When payment is received on goods sold instantly. It can be issued when The buyer does not agree with the sales invoice sent by the supplier after booking of purchases. the buyer need not bother about supplier details. at the time of return of goods (from buyer s perspective) a document called the debit note is prepared showing the date of return.details of goods returned and reasons for returning the goods. Of discount is allowed by the supplier. It is a simple and efficient system to inform the supplier of all receipts due.

No significant uncertainty exists regarding the amount of consideration to be received. Endorse the bill to his creditor. Discount the bill with the banker.is due for delayed payments and acknowledges reimbursement of expenditures incurred by the supplier on his behalf. Price Levels Products are sold in different markers for different prices and to different customer segements based on the demand and supply for the product and competation from other organizations dealing in similar products. signed by the maker (drawer). directing a certain person (drawee) to pay a certain sum of money only to. The drawer can make use of the bill in any of the following ways Retain the bill till the date of maturity and collect the money from the drawee. The price level feature in tally allows setting up of different price lists for the same items. On the other hand. in which case it is a liability for him. Seller retains no effective control over the goods usually associated with ownership. the order of. When the drawee accepts the bill and sends it back to the drawer it becomes a bills receivable to the drawer as the money is receivable by him on the bill. a certain person or to the bearer (payee) of the instrument. Revenue recognition principles As per the principles of revenue recognition. Bill of exchange Bill of exchange is an instrument in writing. either by cash or cheque. The diversity followed in assigning different values for the same product is known as setting up of proce levels. revenue can be recognized when Significant risks and rewards of ownership of goods are transferred to the buyer. One can prepare invoices with different prices for different customers for the same product. it must be accepted by the drawee as will as dated and properly stamped. Therefore. containing an unconditional order. When both parties involved in the transaction agree upon a later date as the date of payment for the goods purchased it is known as credit purchase. it becomes a bills payable to the drawee if money is payable by him on the bill. it is known as cash purchase. Note : Trade discounts and volume rebates received are not eccompassed in the definition of revenue. it becomes an asset to him. Points to remember When payment is make for a purchase instantly. Send the bill to the banker for collection. Specimen of bill of exchange Bills receivable and bills payable A bill of exchange can be bills of receivable as well as bills payable. . with ease.

Power of Simplicity . signed by the maker i. Credit note is a note that acknowledges and accounts for an amount owed to a person or a company by you.e drawer directing a certain person i. it is known as a cash sales. containing an unconditional order. When both parties involved in the transaction agree upon a later date as the date of payment for the goods sold.When payment is received on goods sold instantly.e. drawee to pay a certain sum of money only to or to the order of a certain person or to the bearer(payee) of the instrument. Debit note is a note that indicates and accounts for an amount owed by a person or a company to you. it is known as credit sales. either by cash or cheque. Bills receivable is a bill of exchange due for payment at a future date. Bill of exchange is an instrument in writing.

LESSON 3 LESSON OBJECTIVES On completion of this lesson. you will be able to Recognize tally s capability to improve effeiciency in trading organization. Understand appropriate features and configuration settings Record transactions through accounting vouchers .

if necessary. You can also use the mouse. Maintain an account of pending invoices of orders delivered. Go to gateway of tally>company info>create company Use the following table to enter the information in the fields available in company creation screen. Accommodate free samples and replacement stocks. Physical stock can be reconciled with stock records. Identify stocks batch wise. Create a company To start working with tally. Prepare profit and loss account for any required period. Use enter or tab to navigate between the fields. View stock valuation under multiple methods and estimate their effect on profit. Track the pending orders that need to ve delivered. Set volume based discount and trade discount for different customer segments. Maintain stock details location-wise. Set different price lists for different customer segments. Identify slow-moving and fast-moving items and take necessary remedial action. Keep track of expiry dates for inventory items. create a company. Avail information of alternate products using stock groups and category. Record credit periods availed from suppliers. . Follow up pending payments against invoices. Set credit and credit limits for customers.Tally s capability for a trading organization Prepare invoice View balance sheet at any given point of time. Calculate interest on payments pending beyond due dates. View periodic movement of cash and funds in business.

If VAT is not applicable.angul orisssa State Orissa Pin code 759001 Email address contactssys@microshop. The Taxpayer s 117dd2547887 Identification number consists of 11 digits. the field applicable from appears on the screen. the field is set to no Application form:enter the data from which VAT Is applicable 1-4-2010 Note : only if VAT is activated.nua bazaar.Company creation-microshop systems FIELD DATA TO BE ENTERED Directory Accept what is displayed on the screen Name Microshp systems Mailing name Microshp systems Address 45. Number Skip field don t enter any details Currency symbol Rs. Vat TIN:Enter the VAT TIN number.com Use Indian VAT? Set to Yes for the companies which are Yes located in the state where VAT is applicable.1-Company creation screen-maintain field sub-window Financialyear from Books beginning form Use security control Tally vault password Use security control Base currency information Field Base currency sympol 1-4-2005 1-4-2005 No Skip field donot enter any details here No Description Preset as default currency . The first 2 digits represents state code as used by the Union Ministry of Home Affairs Local sale tax number Skips field automatically Inter-state sales tax Skip field-don t enter any details Income tax number Abcde12345f VAT regn. Maintain Accounts with inventory maintain Option Description Accounts only Financial accounts of the company only Accounts with inventory Both financial accounts and inventory recorded of the company Figure 3.

Figure 3. . Allow invoicing? Invoicing is generally used for sale of stock where the details of the items sold are listed option for price lists becomes available only if the invoicing is allowed.Formal name Type in the name for the currency symbol by default this is set to Indian repees Numver of decimal places By default thi is set to 2 Show amounts suffixed to amounts Tally caters to currencies where the different parts of large amounts are called by special names by default this is set to no Is symbol suffixed to amounts By default this is set to no in india the rs symbol is placed in front of amounts Put a space between amounts By default this is set to yes The completed company creation screen appears as shown below Figure 3. The company features are specific to the current company only and theus each company may have different features activated. In other words the perpetual inventory system is activated. Ensure that the company details are as shown below. How ever. Transactions canbe recorded in foreign currency required. This button is available in most applications of tally. if the accounts and inventory are intergrated by setting this field to YES.features company operations alteration Intergrate accounts and inventory? If accounts are not integrated with nventory. microshop systems F11:features is used to modify the various features of a company.F11. bank accounts or ledgers can be maintained in foreing exchange. the inventory entries automatically updated the balance sheet stock figures.2-company creation screen completed Accept the screen to save the company. Invoices. Allow multi-currency? Tally has multi-currency option. inventory vouchers will not have any impact on the valance sheet stock figures will be maintained separately.

either of them can be used. Maintain billwise details? This field has to ve activated to make it available for ledger accounts. The other features will be explained as and when required. This is available in the accounts and inventory master screens through the F12 :configure button and can be modified as per requirement.master configuration Ensure that the master configuration settings are as shown in figure Allow aliases aling with names? An alias is another name for an account head. . fields requiring advanced settings are displayed in the group creation and ledger creation screen.4 F12:configure. Each ledger account can be set individually for the feature as required. both name and alias are available while entering a voucher. Go to gateway of tally . The following fields are dislayed in group creation screen. Master configuration Master configuration is used to set the details that shoukd appear in the accounts and inventory master. Configuration settings affect all companies maintained in the same data directory andsettings configuration for one company will affect other companies in that data directory. purchases are allocated to cost purchases allows manual allocation of purchases to cost centre s. Allow advanced entries in masters? If this field is set to yes.F12:configure>accts/inv info Figure 3. if required. This field can be used to enter codes. In invoice mode. Alteration of a company This allows to modify or change information of the company created.Enter purchases in invoice format? Set this field to Yes to create purchase vouchers in invoice mode. If an alias is given. F12: configuration USE F12:to configure settings for various applications available in tally before you start working with the company created. The suppliers invoices can be entered in the same way as theyphysically appear.

the group behaves like a control account for its ledgers. when the user enters purchase transaction using the invoice mode. user can fill in the mailing and other related details along with essential notes for a ledger account head. taxes. the values given for the selected group s legers in the entry can be apportioned or appropriated or allocates base on the purchases value or purchases. not the individual ledger balances. discounts)? (for sales invoice entry) this field is set to yes if the ledger under this group have percentages for discounts/ taxes to be used for invoice entry.. Voucher configuration This is used to configure features while making voucher entry. Go to gateway of tally>F12 configure>voucher entry . Used for calculation(e. In other words. The other features will ve explained as and when required. Method to allocate when used in purchase invoice? In this field allocation method needs to have assigned if applicable. If thes are set to Yes. Only voucher entry in invoice mode used the automatic calculation capability.Group behaves like a sub-ledger? If this is set to yes. only the group balance will be displayed. Net debit/credit balances for reporting? If this field is set to yes amounts are displayed as a net figure instead of separate debit credit balances in reports. Add notes for ledger accounts? Use addresses for ledger accounts? Use contacy details for ledger accounts? These three fields are self explanatory.g.