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Managing business accounts

Course : CIII in office management and administration Lecturer : Prasada M.K

Introduction: Managing business accounts is that business activity which is concerned with the acquisition and conservation of capital funds in meeting financial needs and overall objectives of the business concerns. Meaning: It is "The art of recording , classifying and summarizing , in a significant manner and in terms of money , transaction and events which are, in part at least, of financial character, and interpreting the result thereof." The three important aspects of accounts have been highlighted by the above meaning. 1. Account as an Art & science. 2. Accounting is done for Business transaction. 3. Accounting is a system.


Record business activities in a systematic manner.

Evaluate the performance of the business in terms of profit. Know the financial position of the business. Control business activities effectively. Provide information to various stake holders in the business.

BASIC TERMS IN ACCOUNTING Entity: Entity has a definite individual existence. Business Entity is an identifiable business enterprise such as Super Bazaar, etc. Transaction: Transaction is an event involving some value between two or more entities

Assets: Assets are economic resources of an enterprise that can be expressed in monetary terms.
"Fixed Assets" are assets held on a long term basis such as land, buildings, etc. "Current Assets" are assets held on a short term basis such as debtors, bills receivables, etc.

Profit: Profit is the excess of the revenues of a period over its related expenses during an accounting year. Profit increases the investment of the owners. Gain: Gain is a profit that arises from events or transactions which are incidental to business such as sale of fixed assets, winning a court case, appreciation in the value of an asset. Loss: The excess of expenses of a period over its related revenues is termed as Loss. Discount: Discount is the deduction in the price of goods on sale. Voucher: The documentary evidence in support of a transaction is known as Voucher. Goods: Goods refer to the products which a business unit produces and sells, or by and sells.

Drawings: Withdrawal of money and/ or goods by the owner from the business for personal use is known as drawings. Drawings reduce the investment of owners. Purchases: Purchases are a total amount of goods procured by business on credit and cash, for use or sale. Stock: Stock (inventory) is a measure of something on hand - goods, spares and other items in a business. It is called 'Stock in hand.' Debtors: Debtor's persons and / or other entities who owe enterprise money, having bought goods and services on credit. Creditors: Creditors are persons and / or other entities who have to be paid by an enterprise for providing goods and services on credit.

Accounting process or cycle

There is a cycle of action in accounting for any business. This cycle is depicted diagrammatically below:
Journal entries Ledger

Accounting cycle

Final accounts

Trial balance

Chapter 2 Accounting concepts and conventions In order to maintain uniformity and consistency in preparing and maintaining books of accounts, certain rules or principles have been evolved. These rules/principles are classified as concepts and conventions. Accounting concept refers to the basic assumptions and rules and principles which work as the basis of recording of business transactions and preparing accounts.

Accounting concepts and conventions as follows : Business entity concept Money measurement concept Going concern concept Accounting period concept Accounting cost concept Dual aspect concept Realization concept Accrual concept Matching concept

Business entity concept: This concept assumes that, for accounting purposes, the business enterprise and its owners are two separate independent entities. Thus, the business and personal transactions of its owner are separate. Money measurement concept: This concept assumes that all business transactions must be in terms of Money, transactions which can be expressed in terms of money are recorded in the books of accounts. Going concern concept: This concept states that a business firm will continue to carry on its activities for an indefinite period of time. Simply stated, it means that every business entity has continuity of life. Accounting period concept: All the transactions are recorded in the books of accounts on the assumption that profits on these transactions are to be ascertained for a specified period. This is known as accounting period concept.

Cost concept: Accounting cost concept states that all assets are recorded in the books of accounts at their purchase price, which includes cost of acquisition, transportation and installation and not at its market price. Dual aspect concept: Dual aspect concept assumes that every transaction has a dual effect, i.e. it affects two accounts in their respective opposite sides. (Dr and Cr) Realization concept: This concept states that revenue from any business transaction should be included in the accounting records only when it is realized. The concept of realization states that revenue is realized at the time when goods or services are actually delivered. Accrual concept: The meaning of accrual is something that becomes due especially an amount of money that is yet to be paid or received at the end of the accounting period.

Matching concept: Matching concept undertakes the expenses of a particular accounting period are the costs of the assets used to earn the revenue that is recognized in that period. In the matching concept the expenses in a period are matched with the revenues generated for the same period; the result is the net income or loss for that period. Accounting conventions: An accounting convention refers to common practices which are universally followed in recording and presenting accounting information of the business entity. They are followed like customs, tradition, etc. in a society. The most important conventions which have been used for a long period are: Convention of consistency. Convention of full disclosure. Convention of materiality. Convention of conservatism.

Convention of consistency The convention of consistency means that same accounting principles should be used for preparing financial statements year after year.
Convention of full disclosure Convention of full disclosure requires that all material and relevant facts concerning financial statements should be fully disclosed. Full disclosure means that there should be full, fair and adequate disclosure of accounting information. Convention of materiality The convention of materiality states that, to make financial statements meaningful, only material fact i.e. important and relevant information should be supplied to the users of accounting information. The materiality of a fact depends on its nature and the amount involved. Material fact means the information of which will influence the decision of its user.

Convention of conservatism This convention is based on the principle that Anticipate no profit, but provide for all possible losses. It provides guidance for recording transactions in the books of accounts. It is based on the policy of playing safe in regard to showing profit. The main objective of this convention is to show minimum profit. Profit should not be overstated.

Chapter: 3 Journal Accounting process starts with the identification of financial transactions of a business. Such financial transactions are recorded permanently in the books of accounts systematically in different specialized books. These books of accounts are called journal. The word "journal" has been derived from the French word "jour". Jour means day. So journal means daily. Transactions are recorded daily in journal and hence it has been named so. It is a book of original entry to record chronologically (i.e. in order of date) and in detail the various transactions of a trader. It is also known Day Book because it contains the account of every day's transactions.

Compound (combined) journal entries: In most of the cases journal entry has one account to be debited and one account to be credited it should be termed as simple journal entry. In some cases entry may contain more than one debit or more than one credit or both. In such cases the entry is known as compound

Objectives Of The Journal The following are the main objectives of the journal * Journal is prepared to keep a systematic record of financial transactions. * Journal is prepared to show financial transactions in chronological order. * Journal is prepared to present necessary information about the financial transactions. * Journal is prepared to use as a legal evidence of financial transactions.

* Journal is prepared to facilitate the preparation of ledger book.

Ledger The ledger is a permanent book of record which contains a number of accounts of different subjects. Its purpose is, therefore to provide classified financial information about the subjects such as a person, asset and an expense or income. The ledger is a book of accounts relating to all the financial transaction of the business. It contains the accounts of all expenses, losses, incomes and gains. The ledger also contains the accounts of the financial transactions relating to capital, all liabilities and assets of the business. Objectives Of Ledger Accounts The following are main objectives of ledger accounts To Provide Classified Financial Information To Provide Check On Arithmetical Accuracy To Help Ascertain Profit Or Loss To Help Reveal The Financial Position

Chapter: Trial balance

Trial balance is an important statement prepared under the double-entry system. The fundamental principle of the double-entry system is that for every amount of debit there is an equal amount of credit and vice verse. This principle provides a check on arithmetical accuracy of the recording of financial transactions in different books such as journal and the ledger. Such a check can be performed by preparing a statement called trial balance. Trial balance is a statement which is prepared by using the debit and credit totals or balances of all ledger accounts with a view to ascertain the arithmetical accuracy of the recordings of the financial transactions of the business.

Features of trial balance : Trial balance can be prepared anytime during the accounting period. It is prepared to check the arithmetical accuracy of posting of entries from journal to ledger, in other words it is an instrument for carrying out the job of checking and testing. It is not a part of the double entry system of book keeping but only for checking the accuracy of posting. However it does not reveal all errors. Objectives of preparing trial balance: It ensures that all transactions have been recorded with the same debit and credit amounts It makes the preparation of trading, profit and loss account and balance sheet easy by making available the balances of all account at single place. By identifying errors in the books of accounts it helps in rectifying those errors before the preparation of the final accounts.

Cash book Cash book is a book of original entry in which transactions relating only to cash receipts and payments are recorded in detail. When cash is received it is entered on the debit or left hand side. Similarly, when cash is paid out the same is recorded on the credit or right hand side of the cash book. Types of cashbook: Single column cash book Double column cash book Triple column cash book Petty cash book

Subsidiary book Subsidiary book may be defined as a book of prime entry in which transactions of a particular category are recorded. In other words, in order to save time and energy, the transactions which are of similar character are recorded in separate books, these are called subsidiary books or subdivision of journal. A number of subsidiary books are opened to record all business transactions. In practical system of bookkeeping, subsidiary books are: Cash book Purchase book Sales book Purchase return book Sales return book

Purchase Book: All credit purchase of goods are written in this book. Cash purchase of goods and credit purchase of assets are not recorded in this book. Other names of purchase book are purchase day book, purchase journal, bought journal, inward invoice book etc. Sales Book: All sales of goods are written in this book. Cash sale of goods and credit sale of assets are not recorded in this book. Other names of Sales Book are Sales Day Book, Sales Journal, Sold book, Outward Invoice Book etc. Purchase Return Book: It may be necessary to return some goods that the firm has bought on credit for a variety of reasons. All returns of such goods are recorded primarily in Return Outward Book. This book is also known as Purchase Return Book. Sales Return Book: Goods may be returned by the customers for a variety of reasons. All goods returned from customers are recorded in Sales Return Book. This book is also known as Return Inward Book.