L 3 Course 01

QUEENS COLLEGE KALITY CUMPAS Learning and Teaching Material
TVET PROGRAM TITLE: Accounts and Budget Support Level –III

MODULE TITLE: Process Financial Transactions and Extract Interim Reports
LEARNING OUTCOMES:
At the end of this module the trainer will be able to
LO1: Check and verify supporting documentation
LO2: Prepare and process banking and petty cash documents
LO3: Prepare and process invoices for payment to creditors and for debtors
LO4: Prepare journals and batch monetary items
LO5: Post journals to ledger
LO6: Enter data into system
LO7: Prepare deposit facility and lodge flows
LO8: Extract a trial balance and interim reports
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LO1. Check and verify supporting documentation

The Source Document in an Accounting Transaction
Source Documents
The source document is the original record of a transaction. During an audit, source documents
are used as evidence that a particular business transaction occurred.
A source document describes all the basic facts of the transaction such as the amount of the
transaction, to which the transaction was made, the purpose of the transaction, and the date of the
transaction.
A source document is the original record containing the details to substantiate a transaction
entered in an accounting system.
The source document should be recorded in the appropriate accounting journal as soon as
possible after the transaction. After recording, all source documents should be filed away in
some sort of system where they can be retrieved if and when they are needed.
Once a transaction has been journalized, the source document should be filed and made
retrievable so that transactions can be verified should the need arise at a later date.
All the daybooks are constructed on the basis of transfers from original source documents. These
are items of business use that contain financial data related to business transactions. The main
source documents a firm is likely to use are as follows:
 Purchase invoice: Received by the firm from suppliers when buying goods on credit
 Sales invoice: Sent by the firm when selling goods on credit
 Debit notes: Received by the firm from suppliers when goods purchased are returned to
the original supplier
 Credit notes: Sent by the firm to customers who have returned the goods
 Cheque counterfoils: From the cheque book to show cheques paid out
 Paying slip; Evidence of money paid into bank accounts
 Till rolls: Evidence of cash being received
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 Petty cash vouchers: Slips to indicate small amounts of cash being paid
 Bank statements: A summary of the bank account from the banks point of view.
The following daybooks are constructed by the use of each of the following source documents:
Daybook Source documents
Sales daybook Sales invoice
Purchases daybook Purchases invoice
Returns inwards daybook Credit notes
Returns outwards daybook Debit notes
Cashbook Cheque counterfoils, paying in slips, till rolls, etc.
The journal Everything else not covered by above
At a minimum, each source document should include the date, the amount, and a description of
the transaction. When practical, beyond these minimum requirements source documents should
contain the name and address of the other party of the transaction.
When a source document does not exist, for example, when a cash receipt is not provided by a
vendor or is misplaced, a document should be generated as soon as possible after the transaction,
using other documents such as bank statements to support the information on the generated
source document.
Each time a company makes a financial transaction, some sort of paper trail is generated. That
paper trail is called a source document. If a small business writes a check out of its checking
account for office supplies, for example, the source document is the check along with the receipt
for office supplies.
The source document is essential to the bookkeeping and accounting process. It is the evidence
that a financial transaction occurred. If a company is audited, source documents back up the
accounting journals and general ledger as an indisputable audit trail.
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Keeping a source document for a business is just like keeping your receipts for tax-deductible
items for your personal taxes. You have to have those receipts in case your taxes are audited. The
same is true for your business, but you don't just keep receipts for tax deductible expenses. You
keep receipts (source documents) for every financial transaction.
When a business transaction occurs, a document known as the source document captures the key
data of the transaction. The source document describes the basic facts of the transaction such as
its date, purpose, and amount.
To facilitate referencing, each source document should have a unique identifier, usually a
number or alphanumeric code. Pre-numbering of commonly-used forms helps to enforce
numbering, to classify transactions, and to identify and locate missing source documents. A well-
designed source document form can minimize errors and improve the efficiency of transaction
recording.
The source document may be created in either paper or electronic format. For example,
automated accounting systems may generate the source document electronically or allow paper
source documents to be scanned and converted into electronic images. Accounting software
often provides on-screen entry forms for different types of transactions to capture the data and
generate the source document.
The source document is an early document in the accounting cycle. It provides the information
required to analyze and classify the transaction and to create the journal entries.
In the past, source documents were printed on paper. Today many of the paper documents are
being converted to an electronic format.
Source documents should be retained for future reference. For instance, auditors will review a
portion of a company‟s transactions and will need to examine the pertinent source documents.
A business enterprise generally prepares the following two basic financial statements:
Profit and Loss Account to ascertain the profit earned or loss incurred during an accounting
period.
Balance Sheet to ascertain the financial position of the business as on a particular date
Generally, a business enterprise has numerous transactions every day during an accounting
period. Unless the transactions are recorded and analyzed, it is not possible to determine the
impact of each transaction in the above two basic statements. Traditionally, accounting is a
method of collecting, recording, classifying, summarizing, presenting and interpreting financial
data aspect of an economic activity. The series of business transactions occurring during the
accounting period and its recording is referred to an accounting process/mechanism. An
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Accounting process is a complete sequence of accounting procedures which are repeated in

the same order during each accounting period.
Therefore, accounting process involves the following steps or stages:
1. Identification of transaction
In accounting, only business transactions are recorded. A transaction is an event which can be
expressed in terms of money and which brings change in the financial position of a business
enterprise. An event is an incident or a happening which may or may not being any change in the
financial position of a business enterprise. Therefore, all transactions are events but all events are
not transactions. A transaction is a complete action, to an expected or possible future action. In
every transaction, there is movement of value from one source to another. For example, when
goods are purchased for cash, there is a movement of goods from the seller to the buyer and a
movement of cash from buyer to the seller. Transactions may be external (between a business
entity and a second party, e.g., goods sold on credit to Hari or internal (do not involve second
party, e.g., depreciation charged on the machinery).
2. Recording the transaction
Journal is the first book of original entry in which all transactions are recorded event wise and
date-wise and presents a historical record of all monetary transactions. It may further be divided
into sub-journals as well which are also known subsidiary books.
3. Classifying
Accounting is the art of classifying business transactions.
Classification means statement setting out for a period where all the similar transactions relating
to a person, a thing, expense, or any other subject are grouped together under appropriate heads
of accounts.
4. Summarizing
Summarizing is the art of making the activities of the business enterprise as classified in the
ledger for the use of management or other user groups i.e. Sundry debtors, Sundry creditors
etc. Summarization helps in the preparation of Profit and Loss Account and Balance sheet for a
particular fiscal year.
5. Analysis and Interpretation
The financial information or data as recorded in the books of a account must further be analyzed
and interpreted so to draw useful conclusions. Thus, analysis of accounting information will help
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the management to assess in the performance of business operation and forming future plans
also.
6. Presentation or reporting of financial information
The end users of accounting statements must be benefited from analysis and interpretation of
data as some of them are the „stock holders‟ and other one the „stake holders‟. Comparison
of past and present statement and reports, use of ratio and trend analysis are the different tools
of analysis and interpretation.
From the above discussion one can conclude that accounting is a art which starts and includes
steps right from recording of business transactions of monetary character to the communicating
or reporting the results thereof to the various interested parties.
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LO2. Prepare and process banking and petty cash documents

Petty Cash
Petty Cash, also known as impress cash, is a fund established for making small payments that
are impractical to pay by check. Examples include postage due, reimbursement to employees for
small purchases of office supplies, and numerous similar items. The establishment of a petty cash
system begins by making out a check to cash, cashing it, and placing the cash in a petty cash
box:
A petty cash custodian should be designated to have responsibility for safeguarding and making
payments from this fund. At the time the fund is established, the following journal entry is
needed. This journal entry, in essence, subdivides the petty cash portion of available funds into a
separate account.
Petty cash 1, 000
Cash 1, 000
(To record establishment of petty cash fund)
Policies should be established regarding appropriate expenditures (type and amount) that can be
paid from petty cash. When a disbursement is made from the fund by the custodian, a receipt
should always be placed in the petty cash box. The receipt should clearly set forth the amount
and nature of expenditure. The receipts are sometimes known as petty cash vouchers. Therefore,
at any point in time, the receipts plus the remaining cash should equal the balance of the petty
cash fund (i.e., the amount of cash originally placed in the fund and recorded by the entry
above).
Replenishment of Petty Cash

As expenditures occur, cash in the box will be depleted. Eventually the fund will require
replenishment back to its original level. To replenish the fund, a check for cash is prepared in an
amount to bring the fund back up to the desired balance. The check is cashed and the proceeds
are placed in the petty cash box. At the same time, receipts are removed from the petty cash box
and formally recorded as expenses.
The journal entry for this action involves debits to appropriate expense accounts as represented
by the receipts, and a credit to Cash for the amount of the replenishment. Notice that the Petty
Cash account is not impacted -- it was originally established as a base amount and its balance has
not been changed by virtue of this activity.
Supplies Expense 390
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Fuel Expense 155
Miscellaneous Expense-----------------------------70
Cash 615
(To record replenishment of petty cash)
Cash Short and Over

Occasionally, errors will occur, and the petty cash fund will be out of balance. In other words,
the sum of the cash and receipts differs from the correct Petty Cash balance. This might be the
result of simple mistakes, such as math errors in making change, or perhaps someone failed to
provide a receipt for an appropriate expenditure. Whatever the cause, the available cash must be
brought back to the appropriate level. The journal entry to record full replenishment may require
an additional debit (for shortages) or credit (for overages) to Cash Short (Over). In the following
entry, $635 is placed back into the fund, even though receipts amount to only $615. The
difference is debited to Cash Short (Over):
Supplies Expense 390
Fuel Expense 155
Miscellaneous Expense-----------------------------70
Cash Short (Over) 20
Cash 635
(To record replenishment of petty cash)
The Cash Short (Over) account is an income statement type account. It is also applicable to
situations other than petty cash. For example, a retailer will compare daily cash sales to the
actual cash found in the cash register drawers. If a surplus or shortage is discovered, the
difference will be recorded in Cash Short (Over); a debit balance indicates a shortage (expense),
while a credit represents an overage (revenue). As a means of enforcing accountability, some
companies may pressure employees to reimburse cash shortages.
Bank Reconciliation
A company's general ledger account Cash contains a record of the transactions (checks written,
receipts from customers, etc.) that involve its checking account. The bank also creates a record of
the company's checking account when it processes the company's checks, deposits, service
charges, and other items. Soon after each month ends the bank usually mails a bank statement to
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the company. The bank statement lists the activity in the bank account during the recent month
as well as the balance in the bank account.
When the company receives its bank statement, the company should verify that the amounts on
the bank statement are consistent or compatible with the amounts in the company's Cash account
in its general ledger and vice versa. This process of confirming the amounts is referred to as
reconciling the bank statement, bank statement reconciliation, bank reconciliation, or doing a
"bank rec." The benefit of reconciling the bank statement is knowing that the amount of Cash
reported by the company (company's books) is consistent with the amount of cash shown in the
bank's records.
Because most companies write hundreds of checks each month and make many deposits,
reconciling the amounts on the company's books with the amounts on the bank statement can be
time consuming. The process is complicated because some items appear in the company's Cash
account in one month, but appear on the bank statement in a different month. For example,
checks written near the end of August are deducted immediately on the company's books, but
those checks will likely clear the bank account in early September. Sometimes the bank
decreases the company's bank account without informing the company of the amount. For
example, a bank service charge might be deducted on the bank statement on August 31, but the
company will not learn of the amount until the company receives the bank statement in early
September. From these two examples, you can understand why there will likely be a difference
in the balance on the bank statement vs. the balance in the Cash account on the company's
books. It is also possible (perhaps likely) that neither balance is the true balance. Both balances
may need adjustment in order to report the true amount of cash.
After you adjust the balance per bank to be the true balance and after you adjust the balance per
books to also be the same true balance, you have reconciled the bank statement. Most
accountants would simply say that you have done the bank reconciliation or the bank rec.
Features or characteristics of bank reconciliation statement

a) It is merely a statement not an account.
b) This is a periodical statement.
c) It is prepared on a particular day or this statement is valid for the day it is prepared.
d) The preparation of bank reconciliation statement is not a part of the double entry book-
keeping.
e) The causes which are responsible for the disagreement of the two balances can easily be
found out.
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Bank Reconciliation Process
Step 1. Adjusting the Balance per Bank
We will demonstrate the bank reconciliation process in several steps. The first step is to adjust
the balance on the bank statement to the true, adjusted, or corrected balance. The items necessary
for this step are listed in the following schedule:
Step 1. Balance per Bank Statement on Aug. 31, 2010
Adjustments:
Add: Deposits in transit
Deduct: Outstanding checks
Add or Deduct: Bank errors
Adjusted/Corrected Balance per Bank
Deposits in transit are amounts already received and recorded by the company, but are not yet
recorded by the bank. For example, a retail store deposits its cash receipts of August 31 into
the bank's night depository at 10:00 p.m. on August 31. The bank will process this deposit on
the morning of September 1. As of August 31 (the bank statement date) this is a deposit in
transit.
Because deposits in transit are already included in the company's Cash account, there is no need
to adjust the company's records. However, deposits in transit are not yet on the bank statement.
Therefore, they need to be listed on the bank reconciliation as an increase to the balance per
bank in order to report the true amount of cash.
 A helpful rule of thumb is "put it where it isn't." A deposit in transit is on the company's
books, but it isn't on the bank statement. Put it where it isn't: as an adjustment to the
balance on the bank statement.
Outstanding checks are checks that have been written and recorded in the company's Cash
account, but have not yet cleared the bank account. Checks written during the last few days of
the month plus a few older checks are likely to be among the outstanding checks.
Because all checks that have been written are immediately recorded in the company's Cash
account, there is no need to adjust the company's records for the outstanding checks. However,
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the outstanding checks have not yet reached the bank and the bank statement. Therefore,
outstanding checks are listed on the bank reconciliation as a decrease in the balance per bank.
 Recall the helpful tip "put it where it isn't." An outstanding check is on the
company's books, but it isn't on the bank statement. Put it where it isn't: as an
adjustment to the balance on the bank statement.
Bank errors are mistakes made by the bank. Bank errors could include the bank recording an
incorrect amount, entering an amount that does not belong on a company's bank statement, or
omitting an amount from a company's bank statement. The company should notify the bank of its
errors. Depending on the error, the correction could increase or decrease the balance shown on
the bank statement. (Since the company did not make the error, the company's records are not
changed.)
Step 2. Adjusting the Balance per Books
The second step of the bank reconciliation is to adjust the balance in the company's Cash
account so that it is the true, adjusted, or corrected balance. Examples of the items involved are
shown in the following schedule:
Step 2. Balance per Books on Aug. 31, 2010
Adjustments:
Deduct: Bank service charges
Deduct: NSF checks & fees
Deduct: Check printing charges
Add: Interest earned
Add: Notes Receivable collected by bank
Add or Deduct: Errors in company's Cash account
Adjusted/Corrected Balance per Books
Bank service charges are fees deducted from the bank statement for the bank's processing of the
checking account activity (accepting deposits, posting checks, mailing the bank statement, etc.)
Other types of bank service charges include the fee charged when a company overdraws its
checking account and the bank fee for processing a stop payment order on a company's check.
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The bank might deduct these charges or fees on the bank statement without notifying the
company. When that occurs the company usually learns of the amounts only after receiving its
bank statement.
Because the bank service charges have already been deducted on the bank statement, there is no
adjustment to the balance per bank. However, the service charges will have to be entered as an
adjustment to the company's books. The company's Cash account will need to be decreased by
the amount of the service charges.
 Recall the helpful tip "put it where it isn't." A bank service charge is already listed on
the bank statement, but it isn't on the company's books. Put it where it isn't: as an
adjustment to the Cash account on the company's books.
An NSF check is a check that was not honored by the bank of the person or company writing the
check because that account did not have a sufficient balance. As a result, the check is returned
without being honored or paid. (NSF is the acronym for not sufficient funds. Often the bank
describes the returned check as a return item. Others refer to the NSF check as a "rubber check"
because the check "bounced" back from the bank on which it was written.) When the NSF check
comes back to the bank in which it was deposited, the bank will decrease the checking account of
the company that had deposited the check. The amount charged will be the amount of the check
plus a bank fee.
Because the NSF check and the related bank fee have already been deducted on the bank
statement, there is no need to adjust the balance per the bank. However, if the company has not
yet decreased its Cash account balance for the returned check and the bank fee, the company
must decrease the balance per books in order to reconcile.
Check printing charges occur when a company arranges for its bank to handle the reordering of
its checks. The cost of the printed checks will automatically be deducted from the company's
checking account.
Because the check printing charges have already been deducted on the bank statement, there is
no adjustment to the balance per bank. However, the check printing charges need to be an
adjustment on the company's books. They will be a deduction to the company's Cash account.
 Recall the general rule, "put it where it isn't." A check printing charge is on the bank
statement, but it isn't on the company's books. Put it where it isn't: as an adjustment to the
Cash account on the company's books.
Interest earned will appear on the bank statement when a bank gives a company interest on its
account balances. The amount is added to the checking account balance and is automatically on
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the bank statement. Hence there is no need to adjust the balance per the bank statement.
However, the amount of interest earned will increase the balance in the company's Cash account
on its books.
 Recall "put it where it isn't." Interest received from the bank is on the bank statement, but
it isn't on the company's books. Put it where it isn't: as an adjustment to the Cash account
on the company's books.
Notes Receivable are assets of a company. When notes come due, the company might ask its
bank to collect the notes receivable. For this service the bank will charge a fee. The bank will
increase the company's checking account for the amount it collected (principal and interest) and
will decrease the account by the collection fee it charges. Since these amounts are already on the
bank statement, the company must be certain that the amounts appear on the company's books in
its Cash account.
 Recall the tip "put it where it isn't." The amounts collected by the bank and the bank's
fees are on the bank statement, but they are not on the company's books. Put them
where they aren't: as adjustments to the Cash account on the company's books.
Errors in the company's Cash account result from the company entering an incorrect amount,
entering a transaction that does not belong in the account, or omitting a transaction that should be
in the account. Since the company made these errors, the correction of the error will be either an
increase or a decrease to the balance in the Cash account on the company's books.
Step 3. Comparing the Adjusted Balances
After adjusting the balance per bank (Step 1) and after adjusting the balance per books (Step 2),
the two adjusted amounts should be equal. If they are not equal, you must repeat the process
until the balances are identical. The balances should be the true, correct amount of cash as of the
date of the bank reconciliation.
Step 4. Preparing Journal Entries
Journal entries must be prepared for the adjustments to the balance per books (Step 2).
Adjustments to increase the cash balance will require a journal entry that debits Cash and credits
another account. Adjustments to decrease the cash balance will require a credit to Cash and a
debit to another account.
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LO3. Prepare and process invoices for payment to creditors and

for debtors
Invoice
While making a sale, the seller prepares a statement giving the particulars such as the quantity,
price per unit, the total amount payable, any deductions made and shows the net amount payable
by the buyer. Such a statement is called an invoice
VOUCHER
A voucher is a written document in support of a transaction. It is a proof that a particular
transaction has taken place for the value stated in the voucher. Voucher is necessary to audit the
accounts.
Each transaction is recorded in books of accounts providing all the required information of the
transaction. Since each transaction has an effect on the financial position of the business, there
should be a documentary evidence to establish the monetary accounts at which transactions are
recorded and also the transactions are properly authorized. The common documents that are
generally used are as under:
(i) Payment voucher;
(ii) Receipt voucher; and
(iii) Transfer voucher.
(i) A Payment voucher usually on a printed standard form, is a record of payment. When
payment is made for an expense, generally a bills is prepared to record full particulars of the
claim by the person or organization receiving payment. From the bill, the accounting department
prepares a voucher for each payment to be made, no matter whether the amount that is paid for
the goods purchased, or to pay employee‟s salaries, or to pay for services or to pay for any other
asset acquisition.
(ii) A Receipt voucher is a document which is issued against cash receipts. It may also be a
printed standard form. This document shows that a certain sum of money was received from a
person or organization and also, contains information of the purpose for which the money is
received. It is signed by a responsible employee, authorized by the management to receive the
money.
(iii) A Transfer voucher is used to record the residuary transactions. An internal transaction or
a transaction not involving any cash payment or cash receipt is recorded in the transfer voucher.
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Examples are: Goods purchased on credit; depreciation of assets, outstanding expenses, accrued
income, etc.
LO4: Prepare journals and batch monetary items

JOURNAL
Journal is a historical record of business transaction or events. The word journal comes from the
French word “Jour” meaning “day”. It is a book of original or prime entry. Journal is a primary
book for recording the day to day transactions in a chronological order i.e. the order in which
they occur. The journal is a form of diary for business transactions. This is called the book of
first entry since every transaction is recorded firstly in the journal.
Journal Entry
Journal entry means recording the business transactions in the journal. For each transaction a
separate entry is recorded. Before recording, the transaction is analyzed to determine which
account is to be debited and which account is to be credited.
The Performa of journal is shown as follows:
JOURNAL
Name of the Journal Page No
Date Particulars L.F Debit Credit
(Items) (Post. Ref) (Amount) (Amount)
(1) (2) (3) (4) (5)
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(1) Date: In each page of the journal at the top of the date column, the year is written and in the
next line, month and date of the first entry are written. The year and month need not be
repeated until a new page is begun or the month or the year changes. Thus, in this column, the
date on which the transaction takes place is alone written.
(2) Particulars: In this column, the details regarding account titles and description are
recorded. The name of the account to be debited is entered first at the extreme left of the
particulars column next to the date and the abbreviation „Dr.‟ is written at the right extreme of
the same column in the same line. The name of the account to be credited is entered in the next
line preceded by the word “To” leaving a few spaces away from the extreme left of the
particulars column. In the next line immediately to the account credited, a short about the
transaction is given which is known as “Narration”. “Narration” may include particulars
required to identify and understand the transaction and should be adequate enough to explain
the transaction.
It usually starts with the word “Being” which means what it is and is written within parentheses.
The use of the word “Being” is completely dispensed with, in modern parlance. To indicate the
completion of the entry for a transaction, a line is usually drawn all through the particulars
column.
(3) Ledger Folio: This column is meant to record the reference of the main book, i.e., ledger
and is not filled in when the transactions are recorded in the journal.
The page number of the ledger in which the accounts are appearing is indicated in this column,
while the debits and credits are posted o the ledger accounts.
(4) Amount (Debit): The amount to be debited along with its unit of measurement at the top
of this column on each page is written against the account debited.
(5) Amount (Credit): The amount to be credited along with its unit of measurement at the top of
this column on each page is written against the account credited.
SUB-DIVISION OF JOURNAL
When innumerable number of transactions takes place, the journal, as the sole book of the
original entry becomes inadequate. Thus, the number and the number and type of journals
required are determined by the nature of operations and the volume of transactions in a
particular business. There are many types of journals and the following are the important ones:
1. Sales Day Book- to record all credit sales.
2. Purchases Day Book- to record all credit purchases.
3. Cash Book- to record all cash transactions of receipts as well as payments.

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4. Sales Returns Day Book- to record the return of goods sold to customers on credit.
5. Purchases Returns Day Book- to record the return of goods purchased from suppliers on
credit.
6. Bills Receivable Book- to record the details of all the bills received.
7. Bills Payable Book- to record the details of all the bills accepted.
8. Journal Proper-to record all residual transactions which do not find place in any of
the aforementioned books of original entry.
Advantages of Using Journal

Journal is used because of the following advantages:
· A journal contains a permanent record of all the business transactions.
· The journal provides a complete chronological (in order of the time of occurrence) history of
all business transactions and the task of later tracing of some transactions is facilitated.
· Complete information relating to one single business transaction is available in one

place with all its aspects.
· The transaction is provided with an explanation technically called a narration.
· Use of the journal reduces the possibility of an error when transactions are first recorded
in this book.
· The journal establishes the quality of debits and credits for a transaction and reconciles any
problems. If a business purchases a bicycle, it is necessary to decide whether the bicycle
represents ordinary goods or machinery. Further any amount paid is debited to bicycle
account and credited to cash account.
· The use of journals avoids omission or duplication of transactions or parts of transaction.

Without the journal the accountant would be forced to got to the individual account to enter
debits and credits. Therefore it is possible for accountant to miss part of a transaction,
duplicate all or part of a transaction or incorrectly record debits and credits. Even with the
Journal, it is still possible to omit transactions and make other errors. However, the Journal
reduces these problems.
· Once a transaction is recorded in the journal, it is not necessary to post it immediately in

the ledger accounts. In this, way, the journal allows the delayed posting.
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In connection with the journal, the following points are to be remembered:
· For each transaction, the exact accounts should be debited and credited. For that, the two
accounts involved must be identified to pass a proper journal entry.
· Sometimes, a journal entry may have more than one debit or more than one credit. This
type of journal entry is called compound journal entry. Regardless of how many debits
or credits are contained in a compound journal entry, all the debits are entered before any
credits are entered. The aggregate amount of debits should be equal to the aggregate
amount of credits.
· For a business, journal entries generally extend to several pages. Therefore, the totals are
cast at the end of each page, against the debit and credit columns, the following words and
written in the particular column, which indicates, carried forward (of the amount on the
next page) “Total c/f”.
The debits and credits totals of the page are then written on the next page in the amount columns;
and opposite to that on the left, the following words are written in the particulars column to
indicate brought forward (of the amount of the previous page) “Total b/f”. This process is
repeated on every page and on the last page, “Grand Total” is cast.
Journalizing
Journalizing is the process of recording journal entries in the Journal. It is a systematic act of
entering the transaction in a day book in order of their occurrence i.e., date-wise or event-wise.
After analyzing the business transactions, the following steps in journalizing are followed:
(i) Find out what accounts are involved in business transaction.
(ii) Ascertain what is the nature of accounts involved?
(iii) Ascertain the golden rule of debit and credit is applicable for each of the
accounts involved.
(iv) Find out what account is to be debited which is to be credited.
(v) Record the date of transaction in the “Date Column”.
(vi) Write the name of the account to be debited very near to the left hand side in the
„Particulars Column‟ along with the word „Dr‟ on the same line against the name of
the account in the „Particulars Column‟ and the amount to be debited in the „Debit
Amount column‟ against the name of the account.
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(vii) Record the name of the account to be credited in the next line preceded by the word „To‟
at a few space towards right in the „Particulars Column‟ and the amount to be credited
in the „Credit Amount Column‟ in front of the name of the account.
(viii) Record narration (i.e. a brief explanation of the transaction) within brackets in
the following line in „Particulars Column‟.
(ix) A thin line is drawn all through the particulars column to separate one Journal entry
from the other and it shows that the entry of a transaction has been completed.
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LO5. Post journals to ledger

Ledger
It has already been discussed in earlier lesson that accounting involves recording, classifying and
summarizing the financial transactions. Recording is made in Journal, which has been explained
in the preceding lesson. Classification of the recorded transactions is made in the ledger. This is
being discussed in the present lesson.
Ledger is a main book of account in which various accounts of personal, real and nominal nature,
are opened and maintained. In journal, as all the business transactions are recorded
chronologically, it is very difficult to obtain all the transactions pertaining to one head of account
together at one place. But, the preparation of different ledger accounts helps to get a consolidated
picture of the transactions pertaining to one ledger account at a time. Thus, a ledger account may
be defined as a summary statement of all the transactions relating to a person, asset, expense, or
income or gain or loss which have taken place during a specified period and shows their net
effect ultimately. From the above definition, it is clear that when transactions take place, they are
first entered in the journal and subsequently posted to the concerned accounts in the ledger.
Posting refers to the process of entering in the ledger the information given in the journal. In the
past, the ledgers were kept in bound books. But with the passage of time, they became loose-leaf
ones and the advantages of the same lie in the removal of completed accounts, insertion of new
accounts and arrangement of accounts in any required manner.
Ledger is a book which contains various accounts. In simple words, ledger is a set of accounts. It
includes all accounts of the business enterprise whether Real, Nominal or Personal. Ledger may
be kept in any of the following two forms:
· Bound Ledger; and
· Loose Leaf Ledger.
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It is common to keep the ledger in the form of loose-leaf cards these days instead of keeping
them in bounded form. This helps in posting transactions particularly when mechanized system
of accounting is used.
Interestingly, nowadays, mechanized system of accounting is preferred over the manual

system of accounting.
Sub-division of ledger
In a big business, the number of accounts is numerous and it is found necessary to maintain a
separate ledger for customers, suppliers and for others.
Usually, the following three types of ledgers are maintained in such big business concerns.
(i) Debtors’ Ledger: It contains accounts of all customers to whom goods have been sold
on credit. From the Sales Day Book, Sales Returns Book and Cash
Book, the entries are made in this ledger. This ledger is also known as sales ledger.
(ii) Creditors’ Ledger: It contains accounts of all suppliers from whom goods have been bought
on credit. From the Purchases Day Book, Purchases Returns Book and Cash Book, the entries are
made in this ledger. This ledger is also known as
Purchase Ledger.
(iii) General Ledger: It contains all the residual accounts of real and nominal nature. It is
also known as Nominal Ledger.
Distinction between journal and ledger

(i) Journal is a book of prime entry, whereas ledger is a book of final entry.
(ii) Transactions are recorded daily in the journal, whereas posting in the ledger is
made periodically.
(iii) In the journal, information about a particular account is not found at one place,
whereas in the ledger information about a particular account is found at one place only.
(iv)Recording of transactions in the journal is called journalizing and recording of

transactions in the ledger is called posting.
(v) A journal entry shows both the aspects debit as well as credit but each entry in the ledger
shows only one aspect.
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(vi) Narration is written after each entry in the journal but no narration is given in the ledger.
(vii) Vouchers, receipts, debit notes, credit notes etc., from the basic documents form
journal entry, whereas journal constitutes basic record for ledger entries.
Posting
The term „Posting‟ means transferring the debit and credit items from the Journal to their
respective accounts in the ledger. It is important to note that the exact names of accounts used in
the Journal should be carried to the ledger. For example:
If in the Journal, Salary Account has been debited, it would not be correct to debit the
Outstanding Salary Account in the Ledger. Therefore, the correct course would be to use the
same account in both the Journal and Ledger.
Ledger posting may be done at any time. However, it must be completed before the annual
financial statements are prepared. It is advisable to keep the more active accounts posted upto
date. The examples of such accounts are the cash account, personal accounts of various parties,
etc.
The Ledger posting may be made by the book-keeper from the
Journal to the Ledger by any of the following methods:
· He may take a particular side first. For example, he may take the debits first and make
the complete postings of all debits from Journal to the Ledger.
· He may take a particular account first and post all debits and credits relating to that account
appearing on one particular page of Journal. He may then take some other account and follow
the same procedure.
· He may complete posting of each journal entry before proceeding to the next entry.
It is advisable to follow the last method. Further, one should post each debit and credit item as it
appears in the Journal.
The Ledger Folio (L.F.) column in the Journal is used at the time when debits and credits are
posted to the Ledger. The page number of the
Ledger on which the posting has been done is mentioned in the L.F. Column of the Journal.
Similarly a folio column in the Ledger can also be kept where the page from which posting has
been made from the Journal. Thus, these are cross references in both the Journal and the
Ledger. A proper index must be maintained in the Ledger giving the names of the accounts and
the page number.
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Rules Regarding Posting

The following rules must be observed while posting transactions in the Ledger from the Journal:
i) Separate accounts should be opened in the Ledger for posting transactions relating to
different accounts recorded in the Journal. For example, separate accounts may be opened
for sales, purchases, sales returns, purchases returns, salaries, rent, cash, etc.
ii) The concerned account which has been debited in the Journal should also be debited in the
Ledger. However, a reference should be made of the other account which has been credited
in the Journal. For example, for salaries paid, the salaries account should be debited in the
Ledger, but reference should be given of the Cash Account which has been credited in the
Journal.
iii) The concerned account, which has been credited in the Journal; should also be credited in
the Ledger, but reference should be given of the account, which has been debited in the
Journal. For example, for salaries paid, Cash Account has been credited in the Journal. It
will be credited in the Ledger also, but reference will be given of the Salaries Account in
the Ledger.
Thus, it may be concluded that while making posting in the Ledger, the concerned account which
has been debited or credited in the Journal should also be debited or credited in the Ledger, but
reference has to be given of the other account which has been credited or debited in the Journal,
as the case may be.
This will be clear with the following example:
Suppose salaries of Rs. 10,000 have been paid in cash, the following entry will be passed in the
Journal:
Salaries Account Dr. 10,000
To Cash Account 10,000
In the Ledger two accounts will be opened (i) Salaries Account, and
(ii) Cash Account. Since Salaries Account has been debited in the Journal, it will also be debited
in the Ledger. Similarly Cash Account has been credited in the Journal and, therefore, it will
also be credited in the
Ledger, but reference will be given of the other account involved. Thus, the accounts will appear
as follows in the Ledger:
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Salaries Account Account No
Balance
Date Particulars Post. Ref Debit Credit Debit Credit
Salary 10000
Cash Account Account No
Balance
Date Particulars Post. Ref Debit Credit Debit Credit
Cash A/c 10000
Use of the words “To” and “By”: It is customary to use words „To‟ and „By‟ while making
posting in the Ledger. The word „To‟ is used with the accounts which appear on the debit side of
a Ledger Account. For example in the Salaries Account, instead of writing only “Cash” as shown
above, the words “To Cash” will appear on the debit side of the account.
Similarly, the word “By” is used with accounts which appear on the credit side of a Ledger
Account. For example in the above case, the words “By
Salaries A/c” will appear on the credit side of the Cash Account instead of only “Salaries A/c”.
The words „To‟ and „By‟ do not have any specific meanings. Modern accountants are,
therefore, ignoring the use of these words.
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LO6. Enter data into system

Introduction to Data and Data Collection
Data collection is the first operational stage in the information system. The objective is to ensure that
event data entering the system are valid, complete and free from material errors. In many respects, this
is the most important stage in the system.
Two rules govern the design of data collection procedure:
 Relevance and
 Efficiency.
The information system should capture only relevant data. A fundamental task of the system designer is
to determine what is and what is not relevant. He or she does so by analyzing the user‟s needs. Only
data that ultimately contribute to information are relevant. The data collection stage should be designed
to filter irrelevant facts from the system.
Data versus Information

Data are facts which may or may not be processed (edited, summarized or refined) and have no direct
effect on the user. By contrast, information causes the user to take an action that he or she otherwise
could not have taken. Information is simply defined as processed data.
The distinction between data and information has pervasive implications for the study of information
systems. If output from the information system fails to cause users to act, the system serves no purpose
and has failed in its primary objectives.
Importance of data
The data serve as the bases or raw materials for analysis. Without an analysis of factual data, no
specific inferences can be drawn on the questions under study. Inferences based on imagination or
guesswork cannot provide correct answers to research questions. The relevance, adequacy and
reliability of data determine the quality of the findings of a study.
Data form the basis for testing the hypotheses formulated in a Study. Data also provide the facts and
figures required for constructing measurement scales and tables, which are analysed with statistical
techniques. Inferences on the results of statistical, analysis and tests of significance provide the answers
to research questions. Thus the scientific process of measurement, analysis, testing and inferences
depends on the availability of relevant data and their accuracy. Hence the importance of data for any
research studies.
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What is data collection?

Data Collection helps your team to assess the health of your process. To do so, you must identify the
key quality characteristics you will measure, how you will measure them, and what you will do with
the data you collect. What exactly is a key quality characteristic? It is a characteristic of the product or
service produced by a process that customers have determined is important to them. Key quality
characteristics are such things as the speed of delivery of a service, the finish on a set of stainless steel
shelves, the precision with which an electronic component is calibrated, or the effectiveness of an
administrative response to a tasking by higher authority. Every product or service has multiple key
quality characteristics. When you are selecting processes to improve, you need to find out the
processes, or process steps, that produce the characteristics your customers perceive as important to
product quality. Data Collection is nothing more than planning for and obtaining useful information on
key
quality characteristics produced by your process. However, simply collecting data does not ensure that
you will obtain relevant or specific enough data to tell you what is occurring in your process. The key
issue is not: How do we collect data? Rather, it is: How do we obtain useful data?
What Is Data Collection?
Data Collection is obtaining useful information. The issue is not: How do we collect data?
It is: How do we obtain useful data?
Data Collection General Rules
The following are general rules to help you with data collection.
• Use available data if you can.
• If using available data be sure to find out how earlier evaluators:
 collected the data

 defined the variables
 Ensured accuracy of the data.
• If you must collect original data:
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 establish procedures and follow them (protocol)

 maintain accurate records of definitions and coding
 Pre-test, pre-test, pre-test
 verify accuracy of coding, data input
Key Issues about Measures of Data Collection
When you collect data, you will need to keep these key issues in mind:
 Are your measures credible?

 Are your measures valid?
 Are your measures measuring what counts?
 Are your measures reliable?
 Are your measures precise?
Credibility refers to how reliable or believable your data collection is. In other words, are the
data that you are collecting giving you information about the actual situation? As well, it is
important to make sure that the data you are collecting are relevant and they measure the most
important information. Be sure to avoid the trap of measuring what is easy instead of measuring
what you need. For example, teacher opinions may not be the most credible measure for learning
the reasons for high dropout rates. The opinions of the dropouts are a more relevant measure.
Validity is a term used to describe if a measurement actually measures what it is supposed to

measure. Are the questions you are asking giving you information about the issues you want to
measure? For example, using waiting lists as a measure of the demand for early childhood
education may not be valid. Waiting lists are frequently out of date and parents place children on
multiple waiting lists. Two kinds of validity are face validity and content validity:
 Face validity addresses the extent to which the contents of the test or procedure look like
they are measuring what they are supposed to measure. For example, if you were
measuring health status or physical fitness, the measure of how fast one runs 100 meters,
may indeed look like it could be a measure of health status or at least physical fitness.
 Content validity addresses the extent to which the content of the test or procedure
adequately represents all that is required for validity. Again using the example of health
status, if a researcher was trying to develop such a measure, then he or she should allow
other competent people to examine the content of the proposed test to ensure that all
relevant measures are included and that all are weighted appropriately for the proposed
test.
Reliability is a term used to describe the stability of your measurement: that it measures the
same thing, in the same way, in repeated tests. For example, the measurement tools for some
sporting events need to be reliable. The clock, stopwatch, or tape that measures the distance of a
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jump, must be measure the time or distance in the same way, each time it is used. If it does, it is
considered a reliable measure. If it does not, the results of the study (the competition) would be
flawed and results of the event could be questioned. Birth weights of newborn infants are an
example of a reliable measure, assuming the scales are calibrated. Attendance rates are an
example of a measure with low reliability unless it is precisely defined. Attendance rates on the
first day of school and three quarters of the way through the school year are known to vary
substantially.
Precision is a term used to describe how the language used in the data collection matches the
measure. For example, if the question is about countries, then the measures must be at the
national level. If the question is about people, then the measures must be on the individual level.
Sources of Data
 Primary Sources
Data is said to be primary if they are obtained first hand for the particular purpose on which one
is correctly working. So, primary data are collected either by or under the direct supervision and
instruction of the researcher. Such Data are original in character and are generated in large
number of surveys conducted mostly by government and also by some individuals, institutions,
and research bodies. For example data obtained by the demographic and health survey (DHS) by
the central statistical authority of Ethiopia, are primary for (CSA). Primary data are collected
from primary sources for the first time such as through the use of formal and informal surveys,
focused group discussion, participant observation, meeting and panel group discussion etc. The
source of primary data is primary sources such as people (individual, groups).
Advantages of primary sources
 Secondary source may contain mistakes due to errors in transcription made when the
figures were copied from the primary source.
 The primary source frequently includes definition of terms and units used.
 The primary source often includes a copy of the schedule and description of the procedure
used in selecting the sample and in collecting the data.
 Primary source usually shows data in greater detail.
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 Secondary source
These are sources containing data that have been collected and compiled for similar or another
purpose. The secondary sources consist of readily available compendia and already compiled
statistical statements and reports whose data may be used by researches for their studies, e.g.,
census reports, Reports of Government Departments, Statistical Statements relating to
Cooperatives, Federal Cooperative Commission, Commercial Banks and Micro Finance Credit
Institutions published by the National Bank for Ethiopia, Reports of trade associations,
publications of international organizations such as UNO, IMF, World Bank, ILO, WHO, etc.,
Trade and Financial Journals, newspapers, etc. Secondary sources consist of not only published
records and reports, but also unpublished records.
Features of Secondary Sources: Though secondary sources are diverse and consist of all sorts
of materials, they have certain common characteristics.
First, they are ready made and readily available, and do not require the trouble of constructing
tools and administering them.
Second, they consist of data over which a researcher has no original control over collection and
classification. Others shape both the form and the content of secondary sources. Clearly, this is a
feature, which can limit the research value of secondary sources.
Finally, secondary sources are not limited in time and space. That is, the researcher using them
need not have been present when and where they were gathered.
Use of secondary data
The secondary data may be used in three ways by a researcher.
 First, some specific information from secondary sources may be used for reference
purposes.
 Second, secondary data may be used as bench marks against which the findings of a
research may be tested.
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 Finally, secondary data may be used as the sole source of information for a research
project
Advantages
1. Secondary data, if available, can be secured quickly and cheaply

2. Wider geographical area and longer reference period may be covered without much cost.
Thus the use of secondary data extends the researcher's space and time reach.
3. The use of secondary data broadens the database from which scientific generalizations
can be made.
4. The use of secondary data enables a researcher to verify the findings based on primary
data.
Disadvantages/limitations
1. The most important limitation is the available data may not meet, our specific research
needs.
2. The available data may not be as accurate as desired.
3. The secondary data are not up-to-date and become obsolete when they appear in print,
because of time lag in producing them.
4. Finally, information about the whereabouts of sources may not be available to all social
scientists.
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LO7. Prepare deposit facility and lodge flows

DEPOSITS & ITS TYPES
DEPOSIT:
A sum of money placed or kept in a bank account, usually to gain interest. The terms Deposit
refers to an amount of money in cash or check form or sent via a wire transfer that is placed
into a bank account. The target bank account for the Bank Deposit can be any kind of account
that accepts deposits.
TYPES OF DEPOSITS:
There are two types of deposits. These are
1. Demand Deposit
Here money is not deposited for a specific time period. Investor can withdraw money at any
time. Bank is responsible to return the money on customer‟s demand. This account allows you
to demand your money at any time.Its further classified into types:
a) Saving deposits :These deposits accounts are one of the most popular deposits for individual
accounts. These accounts not only provide cheque facility but also have lot of flexibility for
deposits and withdrawal of funds from the account. Most of the banks have rules for the
maximum number of withdrawals in a period and the maximum amount of withdrawal, but
hardly any bank enforces these. However, banks have every right to enforce such restrictions if
it is felt that the account is being misused as a current account. Usually there are 100
withdrawals per year i.e 2 withdrawal per week. Till 24/10/2011, the interest on Saving Bank
Accounts was regulared by RBI and it was fixed at 4.00% on daily balance basis. However,
wef 25th October, 2011, RBI has deregulated Saving Fund account interest rates and now banks
are free to decide the same within certain conditions imposed by RBI. Under directions of
RBI, now banks are also required to open no frill accounts (this term is used for accounts which
do not have any minimum balance requirements). Although Public Sector Banks still pay only
4% rate of interest, some private banks like Kotak Bank and Yes Bank pay between 6% and 7%
on such deposits. From the FY 2012-13, interest earned up to Rs 10,000 in a financial year on
Saving Bank accounts is exempted from tax.
b) Current deposits: Current Accounts are basically meant for businessmen and are never
used for the purpose of investment or savings. These deposits are the most liquid deposits and
there are no limits for number of transactions or the amount of transactions in a day. Most of
the current account is opened in the names of firm / company accounts. Cheque book facility is
provided and the account holder can deposit all types of the cheques and drafts in their name or
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endorsed in their favor by third parties. No interest is paid by banks on these accounts. On the
other hand, banks charge certain service charges, on such accounts.
2. FIXED/TERM/TIME DEPOSITS:
Under this scheme money is deposited for a fixed period of time so it is also called Fixed
Deposit. Investor can withdraw the money only after the time period. Premature withdrawals are
also allowed by paying a penalty. Interest is calculated on monthly, quarterly or yearly depends
on the bank and scheme. These are further classified into following types:
a) Recurring Deposit
This is another type of fixed deposit in with investor pay a small amount every month for a
specific time period. For example pay Rs.1000/- every month for a period of 5 years. After 5
years he will get the principle with interest accumulated. A Recurring Bank Deposit is a good
option for regular savings. It is also called RD Account & is usually operated by salary
earners.
b) Cumulative deposit:
In a Cumulative Deposits, interest is payable at the time of maturity along with the principal.
This Scheme is suitable for the people who do not require periodic interest payment. This is also
called Money Multiplier Scheme.
c) Non-Cumulative Deposit:
In a non-Cumulative Deposits principal amount is paid at the time of maturity & interest amount
is paid is paid on periodical basis.
Lo8. Extracting a trial balance and interim reports
Trial balance
Aims and Objectives
i) To study the meaning and definition of Trial balance.
ii) To know the objectives, features and limitations of Trail balance.
iii) To understand the methods of preparing Trial balance.
INTRODUCTION
According to the dual aspect concept, the total of debit balance must be equal to the credit
balance. It is a must that the correctness of posting to the ledger accounts and their balances
be verified. This is done by preparing a trail balance.
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Meaning and Definition
Meaning
Trial balance is a statement prepared with the balances or total of debits and credits of all the
accounts in the ledger to test the arithmetical accuracy of the ledger accounts. As the name
indicates it is prepared to check the ledger balances. If the total of the debit and credit amount
columns of the trail balance are equal, it is assumed that the posting to the ledger in terms of
debit and credit amounts is accurate. The agreement of a trail balance ensure arithmetical
accuracy only, A concern can prepare trail balance at any time, but its preparation as on the
closing date of an accounting year is compulsory.
Definition
According to M.S. Gosav “Trail balance is a statement containing the balances of all ledger
accounts, as at any given date, arranged in the form of debit and credit columns placed side by
side and prepared with the object of checking the arithmetical accuracy of ledger postings”.
Objectives of Preparing a Trail Balance
(i) It gives the balances of all the accounts of the ledger. The balance of any account can be
found from a glance from the trail balance without going through the pages of the ledger.
(ii) It is a check on the accuracy of posting. If the trail balance agrees, it proves:
(a) That both the aspects of each transaction are recorded and
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(b) That the books are arithmetically accurate.
(iii) It facilitates the preparation of profit and loss account and the balance sheet.
(iv) Important conclusions can be derived by comparing the balances of two or more than
two years with the help of trail balances of those years.
Features of Trail Balances

The following are the important features of a trail balances:
(i) A trail balance is prepared as on a specified date.
(ii) It contains a list of all ledger account including cash account.
(iii) It may be prepared with the balances or totals of Ledger accounts.
(iv) Total of the debit and credit amount columns of the trail balance must tally.
(v) It the debit and credit amounts are equal, we assume that ledger accounts are
arithmetically accurate.
(vi) Difference in the debit and credit columns points out that some mistakes have
been committed.
(vii) Tallying of trail balance is not a conclusive profit of accuracy of accounts.
Limitations of Trail Balance

The following are the important limitations of trail balances:
(i) The trail balance can be prepared only in those concerns where double entry system of book-
keeping is adopted. This system is too costly.
(ii) A trail balance is not a conclusive proof of the arithmetical accuracy of the books of
account. It the trail balance agrees, it does not mean that now there are absolutely no errors in
books. On the other hand, some errors are not disclosed by the trail balance.
(iii) It the trail balance is wrong, the subsequent preparation of Trading,
P&L Account and Balance Sheet will not reflect the true picture of the
concern.
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Methods of Preparing Trail Balance

A trail balance refers to a list of the ledger balances as on a particular date. It can be prepared
in the following manner:
 Total Method
According to this method, debit total and credit total of each account of ledger are recorded
in the trail balance.
 Balance Method
According to this method, only balance of each account of ledger is recorded in trail balance.
Some accounts may have debit balance and the other may have credit balance. All these debit
and credit balances are recorded in it. This method is widely used.
BALANCE SHEET
A Balance Sheet is a statement of financial position of a business concern at a given date. It is
called a Balance Sheet because it is a sheet of balances of those ledger accounts which have not
been closed till the preparation of Trading and Profit and Loss Account. After the preparation
of Trading and Profit and Loss Account the balances left in the trial balance represent either
personal or real accounts. In other words, they either represent assets or liabilities existing on a
particular date. Excess of assets over liabilities represent the capital and is indicative of the
financial soundness of a company.
A Balance Sheet is also described as a “Statement showing the Sources and Application of
Capital”. It is a statement and not an account and prepared from real and personal accounts. The
left hand side of the Balance Sheet may be viewed as description of the sources from which the
business has obtained the capital with which it currently operates and the right hand side as a
description of the form in which that capital is invested on a specified date.
Characteristics
The characteristics of a Balance Sheet are summarised as under:
(a) A Balance Sheet is only a statement and not an account. It has no debit side or credit
side. The headings of the two sides are „Assets‟ and „Liabilities‟.
(b) A Balance Sheet is prepared at a particular point of time and not for a particular period. The
information contained in the
Balance Sheet is true only at that particular point of time at which it is prepared.
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(c) A Balance Sheet is a summary of balances of those ledger accounts which have not
been closed by transfer to Trading and Profit and Loss Account.
(d) A Balance Sheet shows the nature and value of assets and the nature and the amount
of liabilities at a given date.
Classification of assets and liabilities
Assets
Assets are the properties possessed by a business and the amount due to it from others. The
various types of assets are:
(a) Fixed Assets
All assets that are acquired for the purpose of using them in the conduct of business operations
and not for reselling to earn profit are called fixed assets. These assets are not readily convertible
into cash in the normal course of business operations. Examples are land and building, furniture,
machinery, etc.
(b) Current Assets
All assets which are acquired for reselling during the course of business are to be treated as
current assets. Examples are cash and bank balances, inventory, accounts receivables, etc.
(c) Tangible Assets
There are definite assets which can be seen, touched and have volume such as machinery, cash,
stock, etc.
(d) Intangible Assets
Those assets which cannot be seen, touched and have no volume but have value are called
intangible assets. Goodwill, patents and trademarks are examples of such assets.
(e) Fictitious Assets
Fictitious assets are not assets at all since they are not represented by any tangible possession.
They appear on the asset side simply because of a debit balance in a particular account not
yet written off e.g. provision for discount on creditors, discount on issue of shares etc.
(f) Wasting Assets
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Such assets as mines, quarries etc. that become exhausted or reduce in value by their working are
called wasting assets.
(g) Contingent Assets
Contingent assets come into existence upon the happening of a certain event or the expiry of a
certain time. If that event happens, the asset becomes available otherwise not, for example, sale
agreement to acquire some property, hire purchase contracts etc.
In practical no reference is made to contingent assets in the Balance Sheet. At the most, they
may form part of notes to the Balance Sheet.
Liabilities
A liability is an amount which a business is legally bound to pay. It is a claim by an outsider
on the assets of a business. The liabilities of a business concern may be classified as:
(a) Long Term Liabilities
The liabilities or obligations of a business which are not payable within the next accounting
period but will be payable within next five to ten years are known as long term liabilities. Public
deposits, debentures, bank loan are the examples of long term liabilities.
(b) Current Liabilities
All short term obligations generally due and payable within one year are current liabilities. This
includes trade creditors, bills payable etc.
(c) Contingent Liabilities
A contingent liability is one which is not an actual liability. They become actual on the
happenings of some event which is uncertain. In other words, they would become liabilities in
the future provided the contemplated event occurs. Since such a liability is not actual liability it
is not shown in the Balance Sheet. Usually it is mentioned in the form of a footnote below the
Balance Sheet.
Marshalling of assets and liabilities
The arrangement of assets and liabilities in a particular order is called marshalling of the Balance
Sheet. Assets and liabilities can be arranged in the Balance Sheet into two ways:
(a) In order of liquidity.
(b) In order of permanence.
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When assets and liabilities are arranged according to their reliability and payment
preferences, such an order is called liquidity order. Such arrangement is given below in
Balance Sheet (a). When the order is reversed from that what is followed in liquidity, it is
called order of permanence. In other words, assets and liabilities are listed in order of
permanence.
PROFIT AND LOSS ACCOUNT (Unadjusted income statement)

Trading Account results in the gross profit/loss made by a businessman on purchasing and
selling of goods. It does not take into consideration the other operating expenses incurred by him
during the course of running the business. Besides this, a businessman may have other sources
of income. In order to ascertain the true profit or loss which the business has made during a
particular period, it is necessary that all such expenses and incomes should be considered. Profit
and
Loss Account considers all such expenses and incomes and gives the net profit made or net loss
suffered by a business during a particular period.
All the indirect revenue expenses and losses are shown on the debit side of the Profit and Loss
Account, where as all indirect revenue incomes are shown on the credit side of the Profit and
Loss Account.
Profit and Loss Account measures net income by matching revenues and expenses according to
the accounting principles. Net income is the difference between total revenues and total
expenses. In this connection, we must remember that all the expenses, for the period are to be
debited to this account - whether paid or not. If it is paid in advance or outstanding, proper
adjustments are to be made (Discussed later). Likewise all revenues, whether received or not are
to be credited.
Revenue if received in advance or accrued but not received, proper adjustment is required.
Important points in Profit and Loss account

1. Selling and Distribution Expenses
These expenses are incurred for promoting sales and distribution of sold goods. Example of such
expenses are good own rent, carriage outwards, advertisement, cost of after sales service, selling
agents commission, etc.
2. Management Expenses
These are the expenses incurred for carrying out the day-to-day administration of a business.
Expenses, under this head, include office salaries, office rent and lighting, printing and stationery
and telegrams, telephone charges, etc.
38
3. Maintenance Expenses
These expenses are incurred for maintaining the fixed assets of the administrative office in a
good condition. They include repairs and renewals, etc.
4. Financial Expenses
These expenses are incurred for arranging finance necessary for running the business. These
include interest on loans, discount on bills, etc.
5. Abnormal Losses
There are some abnormal losses that may occur during the accounting period. All types of
abnormal losses are treated as extra ordinary expenses and debited to Profit and Loss
Account. Examples are stock lost by fire and not covered by insurance, loss on sale of fixed
assets, etc.
Following are the expenses not to appear in the Profit and Loss
Account:
(i) Domestic and household expenses of proprietor or partners.
(ii) Drawings in the form of cash, goods by the proprietor or partners.
(iii) Personal income tax and life insurance premium paid by the firm on behalf of proprietor
or partners.
6. Gross Profit
This is the balance of the Trading Account transferred to the Profit and Loss Account. If
the Trading Account shows a gross loss, it will appear on the debit side.
7. Other Income
During the course of the business, other than income from the sale of goods, the business may
have some other income of financial nature.
The examples are discount or commission received.
8. Non-trading Income
Such incomes include interest on bank deposits, loans to employees and investment in
debentures of companies. Similarly, dividend on investment in shares of companies and units of
mutual funds are also known as non-trading incomes and shown in Profit and Loss Account.
39
9. Abnormal Gains
There may be capital gains arising during the course of the year,
e.g., profit arising out of sale of a fixed asset. Such profit is shown as a separate income on the
credit side of the Profit and Loss Account.
RECTIFICATION OF ERRORS
INTRODUCTION
Every concern is interested in ascertaining its true profit/loss and financial position at the close
of the trading year. The effort of the accountant is to prepare the final accounts in such a fashion
which exhibits true picture of the business. The basic information for the preparation of final
accounts is supplied by the trial balance. Thus, the accuracy of the trial balance determines to a
great extent the accuracy or otherwise of the information provided by final accounts. However,
the trial balance is prepared to ensure the arithmetical accuracy of the records of a business and
also to ensure that for every debit entry a credit of an equal amount has been recorded. Thus, a
trial balance in which the total of the debits does not equal the total of credits can be taken as an
evidence for the existence of some errors in the records. On the other hand, a trial balance in
which the total of the debits equal the total of credits is not a conclusive proof of accuracy of the
records.
Certain errors may not affect the agreement of a trial balance as the erroneous entries may not
violate the dual aspect concept. It means that even if the trial balance agrees, steps should be
taken to ensure that the records are free from errors. It, therefore, becomes utmost important to
locate such errors and rectify them so that the correct financial position of the concern may be
ascertained. So whenever errors in accounting records come to notice, they should be rectified
without waiting till the end of the accounting year when trial balance is to be prepared. The
objectives of rectification of errors are as follows:
a) Presenting correct accounting records;
b) Ascertaining correct profit or loss for the accounting period; and
c) Exhibiting a true financial position of the concern on a particular date.
CLASSIFICATION OF ERRORS
The errors can be classified as follows:
 Clerical Errors
 Errors of Principle
40
1. Clerical errors
Clerical errors are those errors which are committed by the clerical staff during the course of
recording the business transactions in the books of accounts. These errors are:
a) Errors of omission
b) Errors of commission
c) Compensating errors
a) Errors of Omission
When a transaction is either wholly or partially not recorded in the books of accounts, it is an
error of omission. When a transaction is omitted completely, it is called “complete error of
omission” and when a transaction is partly omitted, it is called a “partial error of omission”. A
complete error of omission does not affect the agreement of trial balance whereas partial error of
omission may or may not affect the agreement of trial balance. For example, Rs. 100 paid to
Ram is neither recorded in the cash book nor in the account of Ram, this error will not affect the
agreement of trial balance. Only the total of the trial balance would be short by Rs. 100. But if
posting is not done in one of the accounts, this will affect the agreement of trial balance.
b) Errors of Commission
Errors of commission take place when some transactions are incorrectly recorded in the books of
accounts. Such errors include errors on account of wrong balancing of an account, wrong
posting, wrong
totalling, wrong carry forwards, etc. For example, if a sum of Rs. 255 received from Hari is
credited to his account as Rs. 525, this is an error of commission. Similarly, if a sum of Rs. 500
paid to Suresh is credited to Sohan‟s account such an error is an error of commission. Some of
the errors of commission affect the agreement of trial balance whereas others do not. Errors
affecting the agreement of trial balance can be easily revealed by preparing a trial balance.
c) Compensating Errors
These errors, also called self-balancing or equalising errors, are a group of errors, the total
effect of which is not reflected in the trial balance. These errors are of a neutralizing nature. One
error is compensated by the other error or by errors of an opposite nature. For example,
Amitabh‟s account is credited with Rs. 500 instead of Rs. 600;
41
Abhijit‟s account credited with Rs. 160 instead of Rs. 100 and Jaya‟s account credited with
Rs. 150 instead of Rs. 110. Here the first error of under-credit of Rs. 100 is covered by second
and third errors of overcredit of Rs. 60 and Rs. 40 respectively.
2. Errors of Principle
When a transaction is recorded against the fundamental principles of accounting, it is an error of

principle. These errors arise because of the failure to differentiate capital and revenue items i.e. a
capital expenditure is taken as a revenue expenditure or vice-versa. Similarly, a capital receipt
may have been taken as a revenue receipt or vice-versa. For example, a sum of Rs. 50 paid on the
repairs of furniture should be debited to repairs account, but if it is debited to the furniture
account, it will be termed as an error of principle. Repair of furniture is revenue expenditure. If it
is debited to furniture account, it has been taken as a capital expenditure. Such errors do not
affect the agreement of the trial balance because they are correctly recorded so far as the debit or
credit side of the wrong class of account is concerned. It would be appreciated that such an error
arises through lack of knowledge of principles of accountancy.
42

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QUEENS COLLEGE KALITY CUMPAS Learning and Teaching Material

TVET PROGRAM TITLE: Accounts and Budget Support Level –III

At the end of this module the trainer will be able to

LO1: Check and verify supporting documentation

LO2: Prepare and process banking and petty cash documents

LO4: Prepare journals and batch monetary items

LO5: Post journals to ledger

LO6: Enter data into system

LO7: Prepare deposit facility and lodge flows

LO8: Extract a trial balance and interim reports

LO1. Check and verify supporting documentation

Daybook Source documents

Sales daybook Sales invoice

Purchases daybook Purchases invoice

Returns inwards daybook Credit notes

Returns outwards daybook Debit notes

Cashbook Cheque counterfoils, paying in slips, till rolls, etc.

The journal Everything else not covered by above

Accounting process is a complete sequence of accounting procedures which are repeated in

Therefore, accounting process involves the following steps or stages:

2. Recording the transaction

Accounting is the art of classifying business transactions.

5. Analysis and Interpretation

6. Presentation or reporting of financial information

LO2. Prepare and process banking and petty cash documents

Petty cash 1, 000

(To record establishment of petty cash fund)

Replenishment of Petty Cash

Supplies Expense 390

Fuel Expense 155

(To record replenishment of petty cash)

Cash Short and Over

Supplies Expense 390

Fuel Expense 155

Cash Short (Over) 20

(To record replenishment of petty cash)

Features or characteristics of bank reconciliation statement

b) This is a periodical statement.

Bank Reconciliation Process

Step 1. Adjusting the Balance per Bank

Step 1. Balance per Bank Statement on Aug. 31, 2010

Add: Deposits in transit

Deduct: Outstanding checks

Add or Deduct: Bank errors

Adjusted/Corrected Balance per Bank

Step 2. Adjusting the Balance per Books

Step 2. Balance per Books on Aug. 31, 2010

Deduct: Bank service charges

Deduct: NSF checks & fees

Deduct: Check printing charges

Add: Interest earned

Add: Notes Receivable collected by bank

Add or Deduct: Errors in company's Cash account

Adjusted/Corrected Balance per Books

Step 3. Comparing the Adjusted Balances

Step 4. Preparing Journal Entries

LO3. Prepare and process invoices for payment to creditors and

(i) Payment voucher;

(ii) Receipt voucher; and

(iii) Transfer voucher.

LO4: Prepare journals and batch monetary items

The Performa of journal is shown as follows:

Name of the Journal Page No

Date Particulars L.F Debit Credit