Financial Accounting

We will cover the following topics in this chapter:

1. Posting in Ledger Accounts

2. Subsidiary Ledgers and Control Account

3.  Bank Reconciliation

Posting in a Ledger

Now let us try to understand how a journal works. With the help of journal entries, we book each and every financial transaction of the organization chronically without considering how many times the same type of entry has been repeated in that particular accounting year or period.

Journal entries in any organization may vary from hundreds to millions depending upon the size and structure of the organization. With the help of a journal, each of the transactions might be recorded; however, we can conclude nothing from a journal. Let us consider the following cases. Suppose we want to know:

•  The total sale value or purchase value
• The total of any particular income or expenses
•  The total of amount payable to any particular creditor or receivable from a debtor

In such cases, it might be a tedious job for any bookkeeper or accountant. Hence, the next step is ledger accounts.

The ledger helps us in summarizing journal entries of same nature at single place. For example, if we pass 100 times a journal entry for sale, we can create a sales account only once and post all the sales transaction in that ledger account date-wise. Hence, an unlimited number of journal entries can be summarized in a few ledger accounts. Transferring journal entries into a ledger account is called ‘posting’.

Ruling of Account in Ledger Account

Let us see various formats of ledger accounts:

Format-1

Format-2

Nowadays, the handwritten books are being replaced by computerized accounts. The companies majorly use a six-column format to maintain ledger accounts of their customers. It looks as follows:

Format-1 is used for academic purpose. Hence, this format is useful to learn the basics and principles of accounting.

Format-2 is used by banking and financial organization as well as well as by most of the business organizations

Important Points Regarding Ledger

1.  Each side of a journal entry is posted in the same side of the ledger. It means the debit entry of a journal is posted in the debit side and vice-a-versa.
2. Balance c/d refers to the balance carried down and balance b/d refers to the balance brought down.
3. After posting in ledger, balancing of ledger is done. In the column named Total, the figure comes on the basis of ‘whichever is higher’. Means, if the total of debit side is Rs 10,000 and the total of credit is Rs 5,000, we write Rs 10,000 in the column named Total of both, the debit and the credit side.
4. The difference of both sides (in this case, it is Rs 5,000) is written in the last row of the credit side as ‘balance c/d’. This balance is called the debit balance of account or vice-a-versa.
5. All expenses and assets represent debit balance.
6. All the income and liabilities represent credit balance including capital account.
7. Debit balance of personal account represents ‘Amount Receivable’. This comes under the category of assets. For example debtors.
8. Credit balance of personal accounts signifies ‘Amount Payable’. This comes under liabilities side and represents that we need to pay this amount which is credited due to goods, service, loan, or advance received.
9.  Debit side of real account means stock in hand or any kind of assets. Credit balance of Real account is not possible.
10.  Debit balance of nominal account means expenses of organization.
11. Credit balance of nominal accounts means income earned.
12. Debit balance of cash book means cash in hand.
13. Debit side of Bank book means balance at bank.
14. Credit balance of Bank book indicates ‘Bank Overdraft’. Debit and credit balances of nominal account (Expenses and income will be nil, because these balances get transferred to trading, and profit & loss account to arrive at profit and loss of the company.
15. Balances of real and personal account appear in balance sheet of the company and to be carried forward to next accounting years

SUBSIDIARY BOOKS

Cash Book

Cash book is a record of all the transactions related to cash. Examples include: expenses paid in cash, revenue collected in cash, payments made to creditors, payments received from debtors, cash deposited in bank, withdrawn of cash for office use, etc.

Single Column Cash Book

Double Column Cash Book

Here, we have an additional Discount column on each side of the cash book. The debit side column of discount represents the discount to debtors of the company and the credit side of discount column means the discount received from our suppliers or creditors while making payments.

The total of discount column of debit side of cash book is posted in the ledger account of ‘Discount Allowed to Customers’ account as ‘To Total As Per Cash Book’. Similarly, credit column of cash book is posted in ledger account of ‘Discount Received’ as ‘By total of cash book’.

Triple Column Cash Book

When one more column of Bank is added in both sides of the double column cash book to post all banking transactions, it is called triple column cash book. All banking transactions are routed through this cash book and there is no need to open a separate bank account in ledger.

The triple column cash book has 7 columns on both debit and credit sides. The purpose of each column is briefly explained below:

1. Date: The date column is used to enter the transaction date.
2. Description: The description column is used to write the name of the account to be debited or credited in the ledger as a result of cash or bank transaction.
3. Voucher number (VN): A voucher is a document in support of a transaction. The serial number of the voucher is entered in this column.
4. Posting reference (PR): Each account in the ledger is assigned a unique numbered. The number each ledger account that is written in description column is entered in PR column.
5. Discount: The amount of discount allowed is recorded on debit side and the amount of discount received is recorded on credit side in discount column.The totals of debit column and credit column are posted to discount allowed account and discount received account respectively.
6. Cash: The amount of cash received (net of any discount allowed) is entered on the debit side and the amount of cash paid (net of any discount received) is entered on the credit side in cash column. This column is totaled and balanced like a ledger account.
7. Bank: The amount of all receipts and payments made by the bank account are entered in bank column of the cash book. This column is also totaled and balanced like a ledger account.

Petty Cash Book

In any organization, there may be many petty transactions incurring for which payments have to be done. Therefore, cash is kept with an employee, who deals with it and makes regular payments out of it. To make it simple and secure, mostly a constant balance is kept with that employee.

Suppose cashier pays Rs 5,000 to Mr A, who will pay day-to-day organization expenses out of it. Suppose Mr A spend Rs 4,200 out of it in a day, the main cashier pays Rs 4,200, so his balance of petty cash book will be again Rs 5,000. It is very useful system of accounting, as it saves the time of the main cashier and provides better control.

We will soon discuss about ‘Analytical or Columnar Petty Cash Book’ which is most commonly used in most of the organizations.

Format:

Purchase Book

Purchase book is prepared to record all the credit purchases of an organization. Purchase book is not a purchase ledger.

Format:

Sale Book

The features of a sale book are same as a purchase book, except for the fact that it records all the credit sales.

Format:

Purchase Return Book

Sometimes goods are to be retuned back to the supplier, for various reasons. The most common reason being defective goods or poor quality goods. In this case, a debit note is issued.

Format:

Sale Return Book

The reason of Sale return is same as for purchase return. Sometimes customers return the goods if they don’t meet the quality standards promised. In such cases, a credit note is issued to the customer.

Format:

Bills Receivables Book

Bills are raised by creditors to debtors. The debtors accept them and subsequently return them to the creditors. Bills accepted by debtors are called as ‘Bills Receivables’ in the books of creditors, and ‘Bills Payable’ in the books of debtors. We keep them in our record called ‘Bills Receivable Books’ and ‘Bills Payable Book’.

Format:

Bills Payable Book

Bills payable issues to the supplier of goods or services for payment, and the record is maintained in this book.

Format:

Key Features of Subsidiary Books

1. There is a difference between a purchase book and a purchase ledger. A purchase book records only credit purchases and a purchase ledger records all the cash purchases in chronical order. The daily balance of purchase book is transferred to Financial Accounting purchase ledger. Therefore, purchase ledger is a comprehensive account of all purchases.The same rule applies to sale book and sale ledgers.
 It is quite clear that maintaining a subsidiary book is facilitation to journal entries, practically it is not possible to post each and every transaction through journal entries, especially in big organizations because it makes the records bulky and unpractical.

2. Maintenance of subsidiary books gives us more scientific, practical, specialized, controlled, and easy approach to work.

3. It provides us facility to divide the work among different departments like sale department, purchase department, cash department, bank department, etc. It makes each department more accountable and provides an easy way to audit and detect errors.

4. In modern days, the latest computer technology has set its base all over the world. More and more competent accounts professionals are offering their services. Accuracy, quick results, and compliance of law are the key factors of any organization. No one can ignore these factors in a competitive market.

Bank Reconciliation

On a particular date, reconciliation of our bank balance with the balance of bank passbook is called bank reconciliation. The bank reconciliation is a statement that consists of:

•  Balance as per our cash book/bank book
•  Balance as per pass book
•  Reason for difference in both of above

This statement may be prepared at any time as per suitability and requirement of the firm, which depends upon the volume and number of transaction of the bank. 
In these days, where most of the banking transactions are done electronically, the customer gets alerts for every transaction. Time to reconcile the bank is reduced more.

Format: