BOOK KEEPING & ACCOUNTANCY

Business Any activity in which a person engages with the hope of making a profit is a
business.

Book Keeping It consists of the 1st four steps of accounting cycle:

 Transaction
 Journalizing
 Ledgers
 Trial Balance

Accounting It is the whole system of accountancy. Book keeping is the part of

accountancy. In other words accountancy is the language of the business.

Capital The initial or additional investment by the owner of the business.

Drawing The money withdrawn by the owner is called drawing. There are two types of
drawing:

 Personal Drawings The amount or goods which a partner/owner draw for his
personal use is called personal drawing. Personal drawings should be detected from
capital.

 Business Drawings Money or goods which a partner/ owner draw for business use
is called business drawings.

Transaction Any exchange of value is called transaction. When a building is purchased

for cash, an exchange of building and cash takes place. Both have value.

LIABILITIES There are two types of liabilities:

 Current Liabilities These are the liabilities which is payable in one accounting
period (which is normal one year). These are:

o Notes Payable
o Accounts payable
o Accused Liabilities
o Unearned Revenues
o Dividend Payable

 Long Term Liabilities These are the business debits which are payable
after one accounting period (which is normally more than one year). These are:

o Bonds Payable
o Long Term Debits
o Deferred Income Task
o Mortgage Payable

ASSETS There are two types of assets:

 Current Assets Converted into cash in one accounting period (one year):

o Cash
o Account Receivable
o Notes Receivable
o Prepayments
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  Fixed Assets Converted into cash after one accounting period (after one
year):

o Machinery
o Building
o Vehicle
o Furniture
o Land

Creditors The person who provides loan or goods to the business one credit is called
creditor.

Proprietor The person who is owner of the sole proprietorship business is called
proprietor.

Pay In Slips The details of the amount to be deposited are written on a pay in slip.
Separate types of pay slips are used to deposit cash and cheques.

CHEQUES Withdrawals from bank accounts are made by cheques. There are
two types of cheques:

 Bearer Cheques If some one crosses out the words “Or Order” the
cheque becomes bearer cheque. Bearer cheques are paid on counter.

 Order Cheque If some one crosses out the words “Or Bearer” the cheque
becomes order cheque. Order cheques are paid into the account of the payee.

BUSINESS ORGANIZATIONS To operate business there must be an organization and

the organization has to be owned and operated by men. The organization may be owned by
one person or a group of persons. The group of persons may take two forms as under:

 Sole Proprietorship When a firm is owned by one person, this form of organization
is called a sole proprietorship.

 Partnership When a firm is owned by more than one person, the firm of
organization is registered as a partnership and the owners are called partnership.

 Company When the firm is owned by large members and is registered under the
company act. This form of organization is referred to as a company or a “joint stock
company” and the owners are called share holders or stock holders.

Merchandises The goods bought and sold are called “Merchandise”. In case of a
grocery business, the flour, rice, cooking oil, salt, sugar etc are the merchandise of the firm.

Purchases Merchandise purchased for being sold, are called “Purchases”. If the
purchaser immediately makes cash payment, they are called “Cash Purchasers” if the
payment is to be made at some further date, they are called “Credit Purchasers” or
Purchases on Account.

Purchases Return Sometime, the merchandise purchased is found to be defective, not

according to sample, damaged or in excess of the quantity ordered for, in which case they
are returned to the supplier. These are called “Purchases Return”.

Purchases Allowance When the purchaser informs the seller that some
merchandise is defective or damage. The supplier may agree to reduce the price of those
items. That is, the purchaser retains the defective or damaged merchandize and gets some

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concession in price. This price reduction or concession in price is known as “Purchases
Allowance”.

Sales Merchandise sold or services rendered to customers are called “Sales”. It is also
called “Cash Sales” or “Simply Revenue”. If cash is received immediately, they are “Cash
Sale”. If it is agreed that the amount will be collected at some future date, they are called
“Credit Sales” or Sales on Account.

Sales Return If the customer returns some merchandise due to its defect, damage or some
other reason, it is called “Sales Return”.

Sales Allowance The concession in price granted to customers for defective or

damaged merchandise is called “Sales Allowance”.

Accounts Receivable The total amount due from customers on account of

credit sales is called “Accounts Receivable”. It is also termed as “Debtor” or Sundry
Debtors.

Accounts Payable Total amount owned to suppliers on account of credit purchases is

called Accounts payable. It is also called as creditors.

Bad Debts Business and risk go together. A debt due from a person may not be
collected because he has become insolvent, or has disappeared or for any other reason.
Such irrecoverable amounts are called bad debts.

Revenue Revenue is the grass increase in proprietorship that results when

merchandise is sold or services rendered. It is measured by the cash or the cash value of
other assets received.

Expense Expense is the cost of services and assets that have been used or given up in
the production of revenue during a particular period.

Merchandise Inventory Merchandise on hand, that is goods remaining unsold is called

merchandise inventory, stock in trade, inventory or stock

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Write down the three advantages of double entry system.

Advantages of Double Entry System

 It keeps the record twice in the books which is a more secure system for out record.

 The chances of frauds are minimized.

 Accounts can be detected easily.

 It is a record of debit and credit transaction, which prove accuracy of each and every
time.

 It is easy to understand.

 Checking system is very easier if there is any doubt in any kind of entry.

 Re-conciliation of balances is very easier.

 Preparation of trial balance is also very easier.

Write down the reasons for bounce back of cheque.

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Following are the reasons for bouncing back of cheque:

 Drawer’s signature differs from specimen supplied.

 Cheque is out of date (Stale).
 Cheque is post date.
 Amount is wrong and or a figure differs.
 Cheque mutilated.
 Payment stopped by the drawer.
 Funds insufficient.
 Not arranged for.
 Exceeds arrangement.
 Crossed Cheque should be presented through a bank.
 Clearing house stamp required.
 Cheque not signed in presence or attested by an officer of bank.
 Payee identification required.
 Bank discharge irregular.
 Effects not cleared may be presented again.
 Not draw on us.
 Payee’s endorsement required.
 Payee’s endorsement irregular.
 Payee’s endorsement requires bank confirmation.

Rules A L O.E R E
DR + - - - +
CR - + + + -

1. Paid salaries = Rs.1500/00

2. Purchased merchandise for = Rs.2000/00
3. Withdrawal for personal use = Rs.1000/00
4. Sold goods for = Rs.5000/00 Cash
5. Paid advertising expenses = Rs.1000/0

S.No Transactions Nature of Nature of ↓↑ Debit or Credit

Account Account
1. Paid salaries Cash salaries A Credit
2. Purchased Purchases
merchandise cash

BUSINESS. An activity undertake with the objective of earning profits is called business
for example a grocer’s business, a banking business, a manufacturing business. Business
may be classified as:

 Trading It is a business which is engaged in buying and selling goods like a

grocery shop, a motor care dealer, a petrol pump etc.

 Manufacturing A business is engaged in manufacturing goods and then

selling it like beanery, sugar mills, Adamjee jute mills, Karachi Steel Mills. Etc.

 Service A business which is engaged in selling services like a charted

accountant’s firm, a lawyer’s firm, a dry cleaner’s firm.

TRANSACTION Any exchange of value is called transaction. When a building is

purchased against for cash, an exchanged of building and cash takes place. Both have
value, their exchange is a transaction. When employees are paid salaries, there is an
exchanged of services and cash. Both have value. This exchange again is a transaction.
Different forms of transaction are as follows:

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  Cash Transaction When cash is paid or received as a result of an exchange, this
transaction is called cash transaction.

 Credit Transaction When the payment or receipt of cash is deferred for some
future date, the transaction is called to be credit transaction.

ASSETS AND EQUITIES

a. Some resources are required to operate a business for example cash,

building, furniture, merchandise etc. Resources are technically called assets. Thus,
assets are things of value owned by the business. Assets are known by their
individual names e.g building, furniture etc and their value are measured and
expressed in terms of money i.e rupee e.g furniture Rs.2000/-

b. The assets or resources are obtained from different sources. One source of
getting assets is the owner, for example, the investment made by the owner at the
start of business or at some later stage. By making investment the owner requires a
claim or interest in the total assets of the business. This claim or interest is
measured in terms of money and is equal to the value of assets invested. The
amount of the claim or interest of the owner in the total assets is known as
proprietorship, capital, owners, equity, proprietary equity or insiders equity. First two
terms are very common. The second source is borrowing cash or purchasing assets
on credit. Cash is borrowed and then assets are purchased or the assets are
acquired and payment is postponed till some future date. The parties lending cash or
supplying assets on credit are called creditors. They acquire a claim or interest
against the total assets. Their claim or interest is technically called liabilities,
creditors equity, outsiders equity. Equities are the sources from which those assets
have been acquired.

Balance Balance is the difference between the total of Debit and Credit of an account.

Trial Balance A trial balance is a list of the accounts in a ledger at a given date with the
debit a credit balance of cash account. It is prepared to know or test the accuracy of book
keeping record.

The Ledger All the accounts comprise the ledger. The accounts are maintained in
different forms. A bound register, in loose-leaf from held together in a binder or on cards in a
filing tray. Regardless of physical form of the accounts, however, the ledger is the name of
given to the entire group of accounts.

Promissory Notes A promissory note is an unconditional promise in writing, made by one

person to another, signed by the maker, promising to pay on demand or at a fixed or
determinable future time a certain sum of money to order or bearer.

Notes Payable And Notes Receivable A promissory note from the view point of the
borrower is a note payable and the same note from the view point of the ledger is a note
receivable.

Bills of Exchange A bill of exchange is an unconditional order in writing, addressed by

one person to another and signed by the person giving it, requiring the person to whom it is
addressed to pay on demand or at a fixed or determinable future time, a certain sum of
money to order or to bearer.

Work Sheet Worksheet is a form used for preparation of statement in more efficient
manners.

BANK ACCOUNTS One can have three kind of accounts as under:

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  Saving Account A saving account may be opened by depositing a minimum
amount of rupees five. Cash may be withdrawn by writing a cheque. The bank
allows (gives) interest on the amount left with it.

 Current Account A current account may be opened by depositing a minimum

amount of Rs.500/-. Some of the banks allow interest and so do not. If the balance
in the account is below Rs.500/- a small amount is charged for carrying the account.
Cash may be withdrawn by writing a cheque. Business firms generally have current
account with banks.

 Fixed Deposit Account A Fixed deposit account in which a sum of money is

deposited for a fixed period of time. A higher rate of interest is allowed by banks on
such deposits. Cash may be withdrawn on completion of tenure/ period by cheque.

Pass Book When a saving or current account is opened in a bank, the bank
issued a pass book (some banks do not issue a pass book for current account). A pass
book is a copy of the customer’s account in the bank ledger. It shows the date of the
transaction, amount deposited or withdrawn, balance, and the supporting documents.

Pay In Slips The details of the amount to be deposited are written on a pay in slip.
Separate types of pay in slips are used to deposit cash and cheques. The small portion on
the left hand side is known as counterfoil. On presentation, the bank clerk checks the details
and acknowledges the deposit by affixing the seal of the bank and signing the slip. The
counterfoil is returned to the depositor for his record and the right hand position is kept by
the bank. Forms of pay in slips differ from bank to bank.

Interest & Bank Charges The banks earns profit on the deposited amount and give
some profit to the depositor according to the deposited amount which is called interest.
Banks are deducting some amount for rendering services is called bank charges. The bank
reduces the account balance and informs the depositors later.

Overdraft. The bank may allow a current account holder to draw more than the balance
standing in his account. The excess amount withdrawn is called overdraft.

Bank Statement Periodically a copy of the account of the account holder is sent to his
by the bank. This is called a bank statement.

Drawer The person who draws (sign) the cheque for payment is known as the drawer.

Drawee The bank on which the cheque is drawn (written) is known as the Drawee or
Drawer.

Payee The person or party to whom the payment is to be made is known as the payee.
Drawer and payee are the same when you desire to take the payment from the bank
yourself. The drawer orders the drawee to pay the amount shown on the cheque to the
payee.

Cash Book All cash transactions are recorded in the bash book, appropriate amounts
being written in the appropriate column. Contra entries are identified immediately by writing
the letter ‘c’ in the post column.

The Account The account is a technical device used by accountants to record the
increases and decreases in an item of assets, liabilities and proprietorship. We get
information about each item of assets, liabilities and proprietorship while preparing account
reports. Therefore, there is separate account for each asset, liability and proprietorship.
The account is then known by the item of asset, liability or proprietorship for example cash
account, bailing account, loan account, payable account capital account etc. These are
called account titles.

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The General Journal The general journal is a book of original entry, containing a permanent
date wise (chronological) listing of all transactions and the analysis of each transaction into
debts and credits. Two steps are involved in this process are:

 Analyzing
 Recording

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Business Transactions Or Accounting Transactions

Any exchange of values brings about on immediate change in the amount, nature or
composition of a firm’s asset or equities is called business or accounting transactions.

 Analyzing of Transactions This is a mental process, 1st ascertain the accounts

involved cash sales, accounts receivable, loans etc. Second ascertain the nature of
the accounts involved asset, liability, proprietorship, revenue, or expense. Third
determine the effects in terms of increase and decrease, fourth apply the debit and
credit rules to determine whether each of the account should be debited or credited.

 Recording of Transactions The analyzing is put in a book of original entry in a

systematic manner. Each transaction is analyzed and recorded separately, one
below the other. Each individual record of a transaction in the general journal is
called journal entry.

 External Transactions Transactions in which an outside party is involved are

called “External Transactions”. For example Ahmed & Company purchases
merchandise from Moosa Brothers. In this transaction on outside entry Moosa
Brothers is involved.

 Internal Transactions The transactions in which no outside party is involved

are called “Internal Transaction”. For example Ahmed & Company bought stationery
from Raza & Company. Now when a portion of the stationery is consumed in the
office, a change in the value of stationery on asset has taken place. No outside party
is involved but a transaction has taken place. Such transactions are called “Internal
Transaction.

Debit A debit may be defined as an amount of money recorded on the left hand side of an
account.

Credit A credit may be defined as an amount of money recorded on the right hand side of
an account.

Basic Characteristics of Transactions Transaction is not only an exchange of values

but it also brings about an immediate change in assets or equities of the unit for which we
are accounting.

Basic Accounting/Business Transactions Most accounting transactions fall into one of

the following nine basic groups:

 Investment of assets by owners

 Withdrawal of assets by owners
 The borrowing of funds
 Repayment of borrowed funds
 Purchase of assets, services or facilities
 Payment of liability incurred in the purchase of services or facilities or assets.
 Sale of goods or services to customers, either for cash or on credit.

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  Collection of receivables from customers or others
 Internal transactions that is the use or consumption of assets, services, or facilities
and the like.

Journalizing The process of analyzing and recording transactions in the general journal is
called journalizing. Two steps are involved in this process.

 Analyzing
 Recording

Skeleton Journal Entry A journal entry without columnar rulings and explanations is
called a skeleton journal entry.

Compound Journal Entry In the minimum one account is to be debited and one account
is to be credited. Sometimes the analysis of a transaction will show that more than two
accounts are involved and then more than one account are either to be debited or credited.

Footing The process of taking columnar total is called footing. In the past columnar
total of each page of the journal used to be carried forward on the next page. There is o
added advantage with this practice because the only purpose of totaling the debit or credit
column amounts on each page of the journal is to check that both the columnar totals agree
with each other. This purpose is served by adding each page columns separately. Thus the
practice of carrying forward the totals is discarded.

THE LEDGER AND TRIAL BALANCE

 Increase and decreased takes place in the accounts and an account is a device of
taking care of increases and decreases in an element of an asset, a liability, a
proprietorship, a revenue, and an expense.

 Therefore, in order to show the effects analyzed, accounts are used.

 Furthermore, an item may be affected by many transactions taking place in different

dates and the effects may be different each time. Some times it may increase at
other times it may decrease, so this is another reason for which we need the
account.

Account Number Accounts are assigned numbers according to a set plan. These
numbers are called account numbers.

Chart of Accounts An orderly list of accounts together with the assigned number is
prepared which is called the chart of accounts.

T-ACCOUNT

 Skeleton form of a T-Account Skeleton of the standard form of T-Accounts is

used the broad structure of the standard form. It looks like a bit T with the account
title and account number if found useful. This form is used to economize time, space
and efforts. It is preferably used for classroom demonstrations, practice and rough
works.

 Standard (or Complete) Form of a T-Account The title of account is written in

the center and the account number on the extreme right hand corner. Two horizontal
double lines are drawn across the page immediately below the account title. The
space below is divided into two vertical columns by drawing a thick vertical line in the
center. The structure so far resembles the capital letter ‘T’ which gives the name of
T-Account to this form of an account. The left hand column is used to record relevant
information about debits and credit the right hand column to record credit. The date
column is divided into two. The first to write the year and the month and the second
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 to write day. The item or plantation column is not used frequently. Posting reference
column is after the explanation column.

Self Balancing Account T-Account fails to give a balance (net result) after each
transaction. If this information is frequently, the self-balancing form of account illustrated is
found useful. Date item and credit entries amount columns are separate; an additional
column is added to show the balance after each transaction.

Posting Posting is the process of transferring into ledger accounts the debits and
credits which have been entered in the journal.

Accounts Period Each period is known as accounting period. This period is generally
of one year. A shorter period of time may also be selected as an accounting period. It is a
matter of choice and purpose.

Footing and Balancing the Ledger Accounts Many accounts in the ledger contain
entries of amounts on both the debit and credit sides. Depending upon the transaction, an
account gets debited and or credited several times. These debits or credits mean increase
and or decrease in the amounts of the account. Frequently we want to know the net result of
all increases and decreases in the account. The net result is known as balance. The act of
totaling a money column is known as footing.

The Balance Sheet The asset, liability and proprietary accounts alongwith their
balances are engaged in a systematic manner on a separate sheet. This sheet is known as
balance sheet.

Income Statement Income statement shows the amount of revenue resulting from the
sale of goods or performance of service during a specific period of time and the amount of
expenses that were incurred in getting those revenues. Income statement is also called a
profit loss statement, a trading and profit & loss statement or a statement of operation.

Titles Generally Used on the Income Statement. Generally following titles are used on the
income statement:

 Revenue Titles

o Sales It is the total amount of sales made during the accounting period. This
title is used in retail, wholesale or manufacturing business i.e business which
sells merchandise.

o Revenue From Fee or Income It is the total amount charged to customers for
services performed for them during accounting period. This title is used by
service business.

o Dividends Income It is the total of dividends received on investments in

shares of joint stocks companies. When a company distributes its income
amount its shareholders, the total amount is called dividends declared paid, and
the amount received by each shareholder is dividend income to him.

o Interest Revenue or Interest Earned It is the amount of interest received or to

be received during the accounting period.

o Rental Revenue or Rental Income It is the total rent (of a building) received
or to be received ruing the accounting period.

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 Expenses Titles

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o Cost of Goods Sold or Cost of Sales It is the cost of all products sold during
the accounting period. This title is found on the income statements of business
which sale merchandise.

o Sales Services It is the total amount of salaries paid or to be paid to salesmen

during the accounting period.

o Sales Commission It is the total amount of commission earned by

salesmen during the accounting period.

o Traveling Expenses It is the total cost incurred by the proprietor and

employees of the firm which traveling on business.

o Advertising It is the cost incurred on advertisements of the business, its

products or services.

o Office Salaries The total amount earned by employees engaged in non-selling

activities of the business like accounting and general management.

o Supplies Expenses The cost of office stationery used on the office, sales,
delivery and other departments during the accounting period.

o Insurance Expenses or Expired Insurance It is the portion of the total

premiums paid for insurance which applies the current accounting period.

o Depreciation Expense It is a portion of fixed asset cost that must be

considered as an expense of the accounting period. Separate account titles may
be used for each kind of depreciable fixed asset. Depreciation of machinery,
depreciation of buildings, depreciation of furniture, and like is some common
titles. More about depreciation will be discussed in a later chapter.

o Miscellaneous Expenses The total cost of all business expenses that are
not separately itemized.

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TITLES COMMONLY USED ON THE BALANCE SHEET

 Current Asset Titles

 Cash Currency, coins and cheques that the business has received from
customers and other sources that have not yet been deposited in its bank
account.

 Bank The amount the business has no deposit in its commercial bank
account.

 Accounts Receivable Total amount to be collected from customers.

 Notes Receivable The written promise received from persons or business

organizations to pay cash to the business on the date specified in the not is
called a notes receivable.

 Merchandize Inventory This term is found on the balance sheet of

merchandising business. This represents goods on hand as of the balance sheet
date, i.e goods remaining unsold. It is called stock, stock-in trade, or simply
inventory.

 Supplies The cost of such things as wrapping papers and twin (often times
shown under a separate title of store supplies) and typewriter ribbons, envelopes
stamps and letter heads (often times shown under a separate titles of office
supplies) and other things of a similar nature which the business will use up in
performing its activities. This shows the cost of supplies on hand i.e unused
supplies.

 Prepaid Rents Advance payment of building rent is a very common feature.

With the passage of time a portion of it is used up. The balance of the advance
on the balance sheet date is reported as prepaid rent.

 Prepaid Insurance Insurance premiums too are paid in advance, on the

balance sheet date the balance of such advance is reported as prepaid
insurance.

FIXED OR NON-CURRENT ASSET TITLES

 Land It is the cost of land the business used to carry on its operations for
example, the plot of land on which the office or factory building is constructed
(provided the land is owned by the firm). If it is not owned by the business, it is not
an asset of the business.

 Building This item could be separated into factory building, office building etc.
it is shown at its original cost less depreciation (more about depreciation will be
discussed in later chapter).

 Equipment This item may be shown under different headings. Office equipment
which includes trucks and automobiles the business uses to deliver its merchandise
to customers and many other headings (surgical equipment, dental equipment, stage
equipment etc). It is shown at its original cost less depreciation.

 Plant and MachineryThis item is common to manufacturing business. It includes all

the machines in the factory. It is shown at its original cost less depreciation. Plant is
a blanket term for the looks machinery, fixtures, building, ground etc of a factory or

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 business or business. The work machinery does not go with the term plant in the
above commonly used heading. Care should be taken in the choice of titles.

 Furniture or Fixture The movable things in a room, building etc, which equip it for
living (use) are called furniture. Anything firmly in place is called fixture.

CURRENT LIABILITY TITLES

 Accounts Payable The total amount to be paid by the business to its supplier for
the credit purchase of merchandise and services. This shown only that amount
which is due for payment within one year from the balance sheet date.

 Notes Payable When merchandise is bought on credit or when loan is taken

from a bank, the creditor may require the business to sign a note promising to pay
the amount on the date specified in the note. These notes are called notes payable
(to the creditor these are notes receivable). All such notes which are due for
payment within one year from the date of the balance sheet are reported as such in
this section.

 Interest Payable It is the amount of interest owed by the business on the

balance sheet date for money borrowed or notes issued to lenders.

 Salaries Payable Salaries are commonly paid after the services have been
received by the business. This item reports such salaries which are due for payment
to employees on the date of the balance sheet.

 Taxes Payable These are the amount of taxes owed by the business on the
balances sheet date.

 Advance from Customers Often times, customers give advances. The firm
receiving such advances has either to supply merchandise, lender services, or refund
the amount if it fails to do so. So long as the merchandise is not supplied or service
is not performed, the amount of advance is a liability of the business.

LONG TERM LIABILITY TITLES

 Long Term Notes Payable These are amounts on signed notes due after one year
from the date of the balance sheet.

 Mortgage Loan Payable when some business, property like land or building is
pledged as security for loan it is called mortgaged loan payable. Such loans if
payable after one year from the date of the balance sheet are reported as long term
liabilities

PROPRIETORSHIP OR CAPITAL TITLES

Owner’s (Name) Capital It is the amount of owner’s claim as of the date of the
balance sheet. This name of the owner and the amount of his capital are shown
under his heading.

NEED OF SPECIALIZED JOURNALS

 Some of the reasons for using more than one journal are as follows:

 Recording of a large number of transactions in one journal requires more time and
effort thus will cause delay in recording.

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  Handling of a large number of transactions will require the services of more than one
book-keeper. If three or four book-keepers are engaged in making entries in the
same journal, there are chances that:

o Services will not be utilized efficiently

o Fixation of responsibility will be difficult
o A transaction may get recorded twice

 Some transactions take place very often e.g sales, cash receipt, cash payment and
purchases etc. it is a waste of time, energy and space to make a separate journal
entry for like transactions which take place so frequently.

 In view of above, it can be said that a separate journal can be used for recording each
for those transactions which are of the same nature and are large in number.

SPECIAL JOURNAL Special journals are selected and designed to lift the needs of each
business. Not all business need exactly the same types of journals, but certain special
journals can be used by almost all kinds of business.

 Cash Receipt Journal It is used to record the amounts of cash

received by the business from all sources, from cash sales from customers paying on
their accounts, from loans, from additional capital invested by proprietors and from
other sources.

 Cash Payment or Cash Disbursement Journal It is used to record all major

payments made out of business cash. Payments may be made by cheques drawn
on the business bank account or out of cash kept in hand.

 Cash Journal (Cash Book) It is used by some businesses to record in a

single journal all cash received and paid out.

 Petty Cash Book Small cash payments are recorded in this book.

 Sales JournalIt is used to record credit sale of goods or services.

 Sales Returns & Allowances Journal It is used to record merchandise

returned by customers and allowances granted to customers.

 Purchases Journal It is used to record credit purchase of merchandise meant for

re-sale.

 Purchases Returns & Allowances Journal It is used to record merchandise

returned to suppliers and allowances granted by suppliers.

 General Journal It is used to record all those transactions which can not
be recorded in any of the above journals.

Business Paper A transaction originates a business paper or business

documents. For example, when a firm receives cash from a customer a receipt is issued.
This receipt is objective evidence that the firm collected cash from the customers. And
further, that collection of cash can be verified through this receipt, later on. Business papers
or documents are objective, verifiable evidences of transactions. All transactions must be
supported by such evidences.

Sales Returns Goods supplied to customers may not be according to specifications

or may be in excess in quantity or damaged. If the customer returns them, it is called sales
returns.
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Sales Allowance If the supplier gets some concession in price, that reduces the prices
and the customer keeps such goods with him. These prices reduction are called sales
allowance.

Debit Note or Debit Memorandum When a customer returns goods, he informs the seller
through a business paper called debit memorandum or debit note.

Credit Note Or Credit Memorandum The seller confirms the returns either by a letter
acknowledging the note or by sending his own note called credit note or credit
memorandum. When the customer claims price reduction (allowance) the seller allows the
same by sending a credit note.

Controlling Account A controlling account is a general ledger account containing

information in the form of totals, the details of which are shown in a subsidiary ledger.

Subsidiary Ledger Account of a similar nature which is large in number is

maintained in separate ledger. The separate ledger is known as a subsidiary ledger.

Cash Discount The difference between the gross amounts due and the amount
collected is called cash discount. The seller calls it sales discount and customer or
purchases calls it purchase discount.

Contra Entries When cash from the cash box is deposited into bank account or when
cash withdrawn from the bank account is placed in the cash box, contra entries are made in
the cash book. The work ‘c’ is to be placed in ref columns of both sides which stand for
contra.

Petty Cash Fund Major Payments are made by cheques. Sometimes, the amount to be
paid is so small that the sue of cheque is not deemed necessary. In such situations the
payments are made in cash. In order to control such payments, a petty cash fund is
established. Such a petty cash system is called imprest cash system.

Negotiable instruments The term negotiable means transferable in the ordinary course
of business. A negotiable instrument is an unconditional written promise or order to pay a
certain sum in money to a designated person or to his order or bearer on deemed or at a
fixed or determinable future time. There are four essential elements of negotiability in the
definition. They are:

 The instrument must be in written (or printed) and signed by the maker and drawer.

 It must contain unconditional promise or order to pay a specified sum in money.

 It must be made payable to a designated person or to his order or to bearer.

 It must be payable on deemed or at a fixed or determinable time in the future.

Types of negotiable instruments There are two types of negotiable instruments:

 Instruments which serve as cash or substitute for coins or currency e.g cheques and
bank drafts.

 Instruments which serve as a means of extending credit in a more definite and formal
form e.eg promissory notes and bells of exchange. They are used preliminary for the
purpose of deferring payment in currency.

Reasons for Preparation of Worksheet Income statement and balance sheet is to

benefit owners or manager of business, they must be prepared and available to them
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immediately after the end of the accounting period to see that presently business is in good
financial condition or not. Income statements showing the results of operation for accounting
period. At the end of accounting period, these owners exert great pressure upon accountant
for speedy preparation of accounting statements. Because the journalizing and posting of
adjusting entries is time consuming accountants have found a way of postponing such
journalizing and posting the worksheet.

Work Sheet The worksheet is a basic form on which the accountant arranges information
for the preparation of statements. The form provides columns for the number and names of
accounts as well as several paring of money columns. The worksheet is usually prepared in
pencil. The worksheet is a device sued by accountants. To speed up preparation of financial
statements. This is not an accounting statement. It is simply a work paper or the account
scratch pad.

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