Friday, 30 May 2014

Bookkeeping- A Look at the Double Entry System & Golden Rules of Accounting

As already mentioned in my previous articles, there are two methods of Bookkeeping:-Single Entry System and Double Entry System.

Single Entry system is applicable only for small shop owners and vendors who simply enter either purchases and sales or income entries with no corresponding debit or credit.

Introduction to Double Entry System

Double Entry System is the genuine system of accounting mandatory for all firms and companies. It is based on the method of entering each transaction in two different accounts and on the principle that each transaction affects two persons or two different types of accounts. 

When some person receives something, it is inherent that some other is giving it to you. So whenever you make a transaction, you will be entering the same monetary value of it in two places or two different types of accounts. One entry in the receiving head and the other entry in the giving head. One account gets debited and the other account gets credited with the same amount. Thus two accounts always get affected by each transaction under this double entry system of accounting.

How to make entries or How to differentiate Debit and Credit

There are three accounting principles or rules to be followed while making entries of transactions. But before that, you should have a clear knowledge of What is Debit and What is Credit.

Under double entry system of accounting, all receipts are entered on the Debit side and all payments in the Credit side. Similarly, expenses are debited and incomes are credited. So a debit balance in your book shows that either you have a stock balance or you have incurred so much expenditure on your business. 

As I said, debit side shows your assets and credit side your liabilities. Debit is an asset for the business and credit is the liability. 

Here, be clear that you alienate yourself from the business and look from the viewpoint of your business firm. Business is to be treated as a separate entity. Only that much of amount invested by you in business is its Capital. And its assets and liabilities are different from yours. 

When a business receives funds from you it credits you in its books and shows that you are a Creditor for the business firm. It has borrowed money from you and it ought to return you that money. It received cash or cheques from you. So it debits the Cash account or if deposited in a bank, the Bank account.

In the same manner, you should analyze every transaction and know which account to be debited and which account to be credited.

Three following Golden Rules of Accounting help us in identifying all debits and credits.

Three Golden Rules of Accounting

The three Golden Rules of Accounting and Bookkeeping are as follows:
  1. Debit what comes In and Credit what goes Out
  2. Debit the Receiver and Credit the Giver
  3. Debit Expenses and Credit Incomes
Now, let us examine each of these rules.

Debit what comes in
All that comes into the business should be debited by its value. Suppose you purchase some items for reselling them or Assets for company use. Here you are receiving Stock or Asset like Furniture, Computer, etc. So you Debit either Stock A/c or Furniture A/c or Computer A/c.

Credit what goes out
In the above purchases, you will be paying the cost of items purchased. You may pay by cash or through cheque/draft. So either Cash goes out or a Cheque from your Bank a/c goes out. So you will credit either Cash a/c or the concerned Bank a/c with the amount paid.

Debit the receiver
Suppose you sell something from Stock to say A. In this case A will be receiving some goods and paying its value to you at a later date. So you will have to Debit the a/c of "A" with the value of stock sold (and since the value of that stock is to be reduced, you credit the Stock a/c.) 

Credit the giver 
In above example, you have credited Stock a/c as it is giving the item for sale. 
Next, when you receive money from "A", (you will Debit the Cash a/c or Bank a/c which receives the amount and) Credit will be given to "A" as he is giving the amount.

Debit all expenses
During your course of business, you will be incurring many kinds of expenses like stationery, courier, printing, advertising, traveling, and cartage etc. Now all these expenditure items are to be debited to their respective heads. When you total up all these heads at the month ending or year ending, it will give you the total expenditure incurred for running your business. (When you debit the expenditure heads, the corresponding credits will be given to either cash or bank account as per mode of payment)

Credit all incomes
Whenever you receive any income such as interest from banks on your company's deposits or any other income by way of scrap sales, etc., the relevant heads will be credited with those amounts. (The
corresponding debit entries for these incomes will be given either to the Cash or Bank a/c as the money is received in those accounts.)

So, from the above explanations of Double Entry System and Golden Rules of Accounting, I hope you are able to understand the complete process of Bookkeeping and the Double Entry System of accounting.

Wednesday, 28 May 2014

Book keeping and Basic books of Accounting

What is Bookkeeping?
I have mentioned in my previous article that Double entry system involves maintenance of various books of records. This maintenance of records related to accounts is known as Bookkeeping. They are normally kept Financial Year wise starting on 1st of April and closing on 31st of March, each year.

Bookkeeping involves entering of the transactions of any business activity in its proper related books of records with date, transaction detail and amount. Each transaction made needs to be entered in more than one interrelated books of accounts with correct debit and credit to the parties concerned.

These books need to be maintained perfectly with genuine supporting documents like bills and vouchers, legal documents, etc. All these supporting documents need to be maintained bill wise and date wise in secured files or in bunches properly tagged and bundled in easily accessible record rooms or safes.

Books of Accounts

The Company Act and Rules have made it mandatory to maintain some basic books of accounts according to the size and nature of the business.

The minimum books required are:
1.Cash Book
2.General Ledger
3.Journal Register
4.Assets Register
5 Debtors/ Creditors Ledger

The above-mentioned books are the minimum requirements for any type of business, whether it is Proprietorship, Private Company or Public Company.

Now, let us have a look at the nature of transactions entered in these books.

Cash Book
Cash book contains all cash and bank transactions made daily by the firm. All cash payments and receipts are entered in it. Similarly, all cheque/ draft payments and receipts are also entered in it date wise with supporting documents kept in vouchers.

Bank Book
Since big companies and corporations deal in enormous transactions involving national and multinational levels, they mostly transact their business through banks. So it has become necessary to maintain Cash and Bank Books separately. In such cases, only cash transactions are entered in Cash Books and all bank transactions are entered in Bank books. It facilitates in maintaining better track of bank transactions and reconciliation of Bank Books with banks' records.

General Ledger
A General Ledger is the main book of any company. It displays all transactions of the company "account wise". In this Main Ledger, entries are made from the Cash Book and Bank Book.and from Journal registers.

Journal Register
A Journal Register is a record of transactions other than Cash and Bank. The entries in this book are made direct from vouchers known as Journal Vouchers. These entries, generally, do not directly involve any monetary transaction. Mostly, entries of monthly sales, monthly purchases, depreciation, transfer of balances from one account to another, etc. are made in this Register.

Assets Register
This book deals with details of all assets of the company entered item wise and bill wise. It gives you a clear picture of all the assets of your company as on any date. Depreciation calculation is facilitated with this book.

Debtors/ Creditors Ledger.
Any type of business, whether it is a small company or a big one, deals with Debtors or Creditors. You will have to pay advance beforehand for any purchase. So he becomes your debtor until you receive the supply from him. Similarly, you may sometimes receive goods on credit basis. Then he becomes a creditor to you. You will have to maintain records of all these transactions properly in your books. This book is maintained separately for making such entries in order to locate the actual dues. These are known as Debtors and Creditors Ledgers.

I may deal with all these books and how to make entries in them properly at a later stage.

At present, it is enough that the basic knowledge about what is bookkeeping and types of basic books maintained are known to you.

If any doubts, please feel free to contact me at the email id given on my About page.

Tuesday, 27 May 2014

What is Accounts and two basic methods of accounting

What is Accounting?
All of us know that any business enterprise requires keeping some books of accounting. But, first, let us know what is basically meant by accounting. The accounting basics is basically a process of recording all transactions which involve money value and are maintained in terms of monetary value.

If you buy something, you enter its value. If you pay money you will enter the amount paid. If you sell something, enter its value. If receive payment enter amount received. In the same way, enter all payments made by the amount paid. Enter all receipts by the amount received. So that your account book contains every transaction that you make with date and amount. At the end of a month or year, you can see how much you paid and how much you received. So it facilitates to verify all your transactions and the balance amount left with you as on a date. You can track your spendings with the help of this book.

Two basic Methods of Accounting

There are two basic methods of accounting
1) Single-entry Accounting
2) Double-entry Accounting

Let me explain both of them in detail.

Single entry Accounting

This method of accounting you can see with small retailers and vendors. The small shops which are operated by a single owner with one or two boys purported to be his own relatives do not take the pains to go through all the elaborate procedure of keeping books of accounts. He simply notes down all his purchases made by the total bill amounts and total sales of the day in a single figure. Other expenditure bills are also noted by the amounts paid. Each transaction has only one element of it. If it is a purchase, he enters it under purchases. If bills, he mentions the bill and the amount paid. Total sales are entered by counting the money received during the day. So, in single entry system, every entry is simply a record of the transaction. It does not show the account details.

Double-entry Accounting

Double entry system, on the other hand, contains two sides of every transaction. If you purchase something, you pay the amount. So, you are receiving some goods and paying back its value to the seller. The seller is receiving money and in return, he is selling his stock. So each transaction affects two persons and their accounting books. The seller records the quantity sold item-wise if different types of items are sold and also the money received by him against each item. Similarly, the buyer records quantity and value of purchases made item-wise and the money paid. So for every transaction, there are two entries. Something receiving and something going out. When both these elements are recorded, it becomes a double entry system.

So, you can see that single entry system is simply a record of transactions made date wise with the sole purpose of keeping track of the money involved. But double-entry accounting system is an elaborate process of keeping a detailed record of both sides of each and every transaction giving a clear picture of all the sides of transactions involved in the business.

So, in Single entry system, you keep only one book (generally one bound book with or without rulings) in which you enter all your transactions date wise and will keep all the relevant bills of payments and receipts in original for the income tax assessment.

But, in Double entry system, you need to keep all account books in addition to bills and journal vouchers and all other connected records perfectly as per requirements of the Company Act and Rules.

Saturday, 24 May 2014

What is Economiccounts? How does it evolve?

Welcome to "EconomiCCounts Blog"

Economics and Accounts are two most important aspects of our everyday life. We need to think in terms of both these subjects in exerting any kind of transactions beginning from purchasing vegetables, stores and provisions to payment of bills, dealing with bank accounts, managing shoppings and the monthly budgets, etc. And each business enterprise whether small or big, whether local or national or multinational, let it be retail or wholesale or any kind of trading, manufacturing or marketing or service provider - all need at least some basic knowledge of accounting, economics and financial knowledge.

Every transaction needs both counting and planning.  
Counting is Accounting whereas planning is Economics. 

Both these aspects combined makes "EconomiCCounts".

Primitive man first started with counting the objects. This gave birth to numbers 1 to 9. Then '0' was invented. This gave rise to all the big numbers making tens, hundreds, thousands, millions and so on as man became more and more social, cultured and civilized. Additions, subtractions, multiplications, divisions all evolved. Then other advanced versions of algebra, geometry, trigonometry all developed. Accounting books and softwares developed. Thus everything evolved from the basic need for counting which continuously got developed into the present mostly sophisticated accounting concepts and principles.

As accounting started, man was able to get a clear knowledge and good track of all his transactions. Then he began to feel that he can manage things with proper planning and allocation of resources. This made him to economise everything so as to match the ends with means resulting in the various economics principles and theories.

So you are able to see that accounts and economics go hand in hand along with Finance to make our life better positioned.

In my articles, I try to give some basic knowledge of the many aspects and terminologies useful in accounting economic and financial matters.