ACCOUNTING FIELDS
Like other subjects, Accounting has also its specialized fields. These different fields, as described below, provide different types of accounting information. Also you may have the choice to select any of the specialized field for your career and accordingly to go for the related courses to study.
Financial Accounting
This applies to the overall accounting for the business enterprise. It covers recording of business transactions and preparation of periodic statements from these records. Various general purpose and special purpose reports and statements also prepared from these accounting records to provide information to management, owners, creditors, government agencies and general public.
Cost Accounting
This relates to determination and the control of costs, particularly the costs of manufacturing processes and manufactured products. The cost accountant prepares and interprets cost data, both actual and prospective, for use of management in controlling manufacturing operations and also in planning for the future.
Management Accounting
This involves the development and interpretation of accounting information intended specifically to assist management in running the business, dealing with day-to-day problems and planning for the future. It provides analysis of alternative courses of action and guides in selecting the best one. It also provides guidelines for evaluating performance of departments and individuals. It basically, therefore, provides assistance to the management in making economic decisions.
Auditing
This field of accounting activity reviews general accounting independently. It provides guidelines to examine accounting records and statements and to express opinion regarding their fairness and accuracy. Its activities also determine whether various operating divisions and departments are observing the policies and procedures prescribed by management.
Tax Accounting
This field relates to the preparation of tax returns and tax related accounting statements. It helps in providing guidelines about tax consequences of any business transaction. The tax laws of the country are also relevant in it.
Budgetary Accounting
This field relates to presentation of plans of financial operations for a period. It provides a combination of planning, coordination and control of future operations. It lays down guidelines for analysis of comparison of actual operations with the budgeted operations.
Government Accounting
This specialized field deals with accounting information related to business aspect of public administration. It provides guidelines to control the expenditure of public funds, according to laws and prescribed procedures.
Accounting Instructions (Teaching)
This field relates to teaching and covers different subjects of accounting. This field helps in creating a work force in different fields of accounting who engage themselves at various levels and help in running the economic activity of the country.
Wednesday, March 3, 2010
USERS OF ACCOUNTING INFORMATION
Users of Accounting Information
The purpose of Accounting is to provide information to the users of Financial Statements. A classification of users into various categories and why they need it may be summarized as follows.
MANAGEMENT
Management is the first and most important group of users who receive and use the accounting information to run the business of the Company in most efficient way. They may need the support of Accounting information for an analysis of revenues and expenses, or for budgeting and cash flows, or for a decision on make-or-buy, or for any decision making for future planning.
SHAREHOLDERS AND POTENTIAL SHAREHOLDERS
This group makes the most use of financial information as they have to decide whether to continue their investment in the Company or to make investment in the Company. They evaluate the current performance of their investment from the available information in financial statements.
EMPLOYEES
This group uses accounting information to assess the potential performance of the Company. They form a view about future prospects and promotions in the Company and employee benefits that are going to be offered due to favorable results. This brings confidence and enthusiasm among employees.
LENDERS
This group includes those who have financed the Company over a long period (Long term loans from Banks, Leasing Companies and other Financial Institutions), and those who have provided short term finances like banks, and also those who have supplied raw materials, etc. on credit (Trade Creditors). They are primarily interested in the security of their finances and use the accounting information to work out whether the Company will be able to repay their credits on due dates and also the markup thereon. So they normally use the information to work out the Liquidity position of the Company.
GOVERNMENT AGENCIES
Various government agencies also use the Accounting Statements for their statistical purposes. The tax authorities also use it for annual assessment of income tax etc.
BUSINESS CONTACT GROUP
This group includes the Customers of the Company and also the competitors of the Company as they want to assess the viability and future prospects of the Company and also for comparison of data.
THE PUBLIC
Other groups from the general public may also use the Accounting information for different purposes depending upon their specific interests.
The purpose of Accounting is to provide information to the users of Financial Statements. A classification of users into various categories and why they need it may be summarized as follows.
MANAGEMENT
Management is the first and most important group of users who receive and use the accounting information to run the business of the Company in most efficient way. They may need the support of Accounting information for an analysis of revenues and expenses, or for budgeting and cash flows, or for a decision on make-or-buy, or for any decision making for future planning.
SHAREHOLDERS AND POTENTIAL SHAREHOLDERS
This group makes the most use of financial information as they have to decide whether to continue their investment in the Company or to make investment in the Company. They evaluate the current performance of their investment from the available information in financial statements.
EMPLOYEES
This group uses accounting information to assess the potential performance of the Company. They form a view about future prospects and promotions in the Company and employee benefits that are going to be offered due to favorable results. This brings confidence and enthusiasm among employees.
LENDERS
This group includes those who have financed the Company over a long period (Long term loans from Banks, Leasing Companies and other Financial Institutions), and those who have provided short term finances like banks, and also those who have supplied raw materials, etc. on credit (Trade Creditors). They are primarily interested in the security of their finances and use the accounting information to work out whether the Company will be able to repay their credits on due dates and also the markup thereon. So they normally use the information to work out the Liquidity position of the Company.
GOVERNMENT AGENCIES
Various government agencies also use the Accounting Statements for their statistical purposes. The tax authorities also use it for annual assessment of income tax etc.
BUSINESS CONTACT GROUP
This group includes the Customers of the Company and also the competitors of the Company as they want to assess the viability and future prospects of the Company and also for comparison of data.
THE PUBLIC
Other groups from the general public may also use the Accounting information for different purposes depending upon their specific interests.
QUALITIES OF ACCOUNTING INFORMATION
Qualities of Accounting Information
The following are the desirable qualities of Accounting Information to make it useful for its users. Accordingly these should be kept in mind while preparing Financial Statements.
RELEVANCE
It is primary Qualitative Objective.
It must be relevant for the users to evaluate the financial performance of the business, so that they may draw correct conclusions and make correct decisions.
If it is not relevant, it is useless.
To improve the relevance means to increase the usefulness of the accounting information.
UNDERSTANDABILITY
Financial information will be useful if it is expressed in terminology and in such a form that is understandable to the user.
RELIABILITY / VERIFIABILITY
Financial information should be of a standard that can be relied upon by external users, so that it is free from errors and can be depended upon by users in their decision making.
COMPLETENESS
It is also referred to as “Full Disclosure”.
Accounting Statements should show all aspects of the business.
All the financial accounting data, meeting the above qualitative objectives, should be reported.
LACK OF BIAS / NEUTRALITY
Financial Statements should not be biased in favor of one group of users to the detriment of another.
TIMELINESS
Accounting Statements should be published as soon as possible, after the close of the fiscal year. Other statements, as per law, even during the year should also be provided in the prescribed time.
Information furnished after a decision has been made is of no value.
COMPARABILITY
Accounting information should be comparable with that of other similar enterprises and from one period to the next.
The following are the desirable qualities of Accounting Information to make it useful for its users. Accordingly these should be kept in mind while preparing Financial Statements.
RELEVANCE
It is primary Qualitative Objective.
It must be relevant for the users to evaluate the financial performance of the business, so that they may draw correct conclusions and make correct decisions.
If it is not relevant, it is useless.
To improve the relevance means to increase the usefulness of the accounting information.
UNDERSTANDABILITY
Financial information will be useful if it is expressed in terminology and in such a form that is understandable to the user.
RELIABILITY / VERIFIABILITY
Financial information should be of a standard that can be relied upon by external users, so that it is free from errors and can be depended upon by users in their decision making.
COMPLETENESS
It is also referred to as “Full Disclosure”.
Accounting Statements should show all aspects of the business.
All the financial accounting data, meeting the above qualitative objectives, should be reported.
LACK OF BIAS / NEUTRALITY
Financial Statements should not be biased in favor of one group of users to the detriment of another.
TIMELINESS
Accounting Statements should be published as soon as possible, after the close of the fiscal year. Other statements, as per law, even during the year should also be provided in the prescribed time.
Information furnished after a decision has been made is of no value.
COMPARABILITY
Accounting information should be comparable with that of other similar enterprises and from one period to the next.
Sunday, February 21, 2010
ACCOUNTING CONCEPTS & PRICIPLES
ACCOUNTING CONVENTIONS, CONCEPTS & PRINCIPLES
In order to maintain proper accounting records and to prepare acceptable financial statements, there are several accounting conventions, concepts and principles which developed over the period of time. Some of these are followed by force of custom and practice while a number of them have been enforced through laws and accounting standards. All the accounting rules which developed during the long history of accounting subject may be referred to as conventions, concepts, assumptions, or Generally Accepted Accounting Principles (GAAP), and many to them have become part of International Accounting Standards (IAS) and also enforced by other laws.
All these concepts and principles are stated hereunder with their meanings and brief descriptions. Most of them relate to the preparation and presentation of financial statements, as the basic function of accounting is to provide information to the users of these statements and to enhance the usefulness of accounting data.
The most fundamental accounting concepts that must be followed are:
Fair Presentation
Financial Statements should be “Fairly Presented”, and additional disclosures should be made, beyond those required by IAS, when and where necessary, to achieve the objective of fair presentation. Notes to the Accounts are an example of the same. The financial statements should be presented in accordance with the stated accounting policies of the enterprise, in a manner which provides relevant, reliable, comparable and understandable information, to make it a fair presentation.
Going Concern
This fundamental concept of Going Concern allows for the assumption that the business entity has a reasonable expectation of continuing in business at a profit for an indefinite period of time. Any business enterprise, normally, is not set up for a specific period of time.
In other words, the business enterprise will continue in operational existence for a foreseeable future and this implies that all available information for a foreseeable future should be provided, and not only for the next twelve months.
Accruals and Matching Concept
The Accrual Basis of Accounting means that Assets, Liabilities, Equity, Income and Expenses are recognized when they occur and not when cash or its equivalent is received or paid.
So the related Matching Concept becomes relevant and it signifies that all the costs / expenses should be set off against the sales / revenues they have contributed to. In other words, all incomes and charges relating to the period to which the financial statements relate should be taken into account without regard to the date of receipt or payment.
Consistency
In order that the Concept of Comparability is properly followed the principle of Consistency will have to be adopted.
So it is assumed that the successive Profit and Loss Statements and the Balance Sheets of a business enterprise are based consistently on the same generally accepted accounting principles as previously chosen by the enterprise. A particular accounting method once adopted should not be changed from period to period.
Changes may be made, (presentation, classification, valuation) but the change and its impact on the financial statements must be clearly disclosed.
Some other fundamental accounting concepts are also stated below.
Materiality
The concept of materiality means that the information that is material should not be mixed up or aggregated with other items.
However, the determination of what is material and what is un-important requires the exercise of judgment.
If combining transactions could mislead the user of the financial statements, the amounts should be split out. So any financial information that is material should be mentioned in the financial statements – i.e. if considered of interest to the users of these statements.
An item is “material” if knowledge of the same might reasonably influence the decision of the user of financial statements.
Historical Cost Concept
Under this principle, all the values in respect of business transactions are based on the historical costs incurred.
Thus Financial Statements are prepared based on historical cost values, as their objective evidence exists and this makes them more reliable. This provides the basis for valuation of assets.
Money Measurement Concept
Accounting information has traditionally been related to recording only such events and transactions to which a monetary value can be attributed. Or in other words, all business transactions are recorded in terms of money, because it is the common factor in all business transactions.
Stable Monetary Unit or Stability of Currency
As diverse business transactions are expressed / recorded in terms of a common unit of measurement, namely the monetary unit, so the stability of monetary unit becomes very important. Transactions that happen over a period of time must reflect a single currency and exchange rate. This will allow one year’s set of accounts to be compared with another regardless of the rate of inflation. The effect of inflation or devaluation of currency is presented in a separate statement.
Business Entity / Accounting Entity Concept
This concept implies that a Business Enterprise is separate and distinct from the persons who supply the resources it uses.
In other words, the financial accounting information relates only to the activities of the Business Entity and not to the activities of its owner. The affairs of the business are separate from the non-business activities of its owners. The extent of application of this concept is different for different forms of business organizations.
The Basic Accounting Equation reflects the Accounting Entity Concept. The equation relates to the independent Economic Unit.
Dual Aspect Concept or Duality
This concept means that there are two aspects of accounting (double-side effect of each business transaction), one represented by the assets of the business and the other by rights/claims against them, and that these two aspects are always equal.
Also known as Duality Concept, this is generally expressed as the Dual Effect of each transaction. Double entry system is the name given to the method of recording business transactions for the Dual Aspect Concept.
Realization
The principle of Realization (or Revenue Recognition) implies that a transaction should be recognized when the event from which the transaction stems has taken place, e.g. Sale on credit is recorded or recognized when the sale is made (goods delivered) and invoice raised for the Customer, without waiting until the sale amount is received.
Accounting Period or Time Interval Concept
For accounting purposes, the lifetime of the business is divided into arbitrary periods of fixed length, usually one year.
The Financial Statements are normally prepared at the end of each arbitrary period, (or at specified time intervals) normally referred to as the Accounting Period.
Prudence / Conservatism
Accountants should always err on the side of caution (or should always be on the side of safety) in their estimates and valuations. So accountants are expected to be professionally conservative.
This is called the concept of Prudence, which requires that such method or procedure should be preferred for preparing financial statements which yield lesser amount of net profit or asset value. The concept advocates “anticipate no profits and provide for all losses”.
In order to maintain proper accounting records and to prepare acceptable financial statements, there are several accounting conventions, concepts and principles which developed over the period of time. Some of these are followed by force of custom and practice while a number of them have been enforced through laws and accounting standards. All the accounting rules which developed during the long history of accounting subject may be referred to as conventions, concepts, assumptions, or Generally Accepted Accounting Principles (GAAP), and many to them have become part of International Accounting Standards (IAS) and also enforced by other laws.
All these concepts and principles are stated hereunder with their meanings and brief descriptions. Most of them relate to the preparation and presentation of financial statements, as the basic function of accounting is to provide information to the users of these statements and to enhance the usefulness of accounting data.
The most fundamental accounting concepts that must be followed are:
Fair Presentation
Financial Statements should be “Fairly Presented”, and additional disclosures should be made, beyond those required by IAS, when and where necessary, to achieve the objective of fair presentation. Notes to the Accounts are an example of the same. The financial statements should be presented in accordance with the stated accounting policies of the enterprise, in a manner which provides relevant, reliable, comparable and understandable information, to make it a fair presentation.
Going Concern
This fundamental concept of Going Concern allows for the assumption that the business entity has a reasonable expectation of continuing in business at a profit for an indefinite period of time. Any business enterprise, normally, is not set up for a specific period of time.
In other words, the business enterprise will continue in operational existence for a foreseeable future and this implies that all available information for a foreseeable future should be provided, and not only for the next twelve months.
Accruals and Matching Concept
The Accrual Basis of Accounting means that Assets, Liabilities, Equity, Income and Expenses are recognized when they occur and not when cash or its equivalent is received or paid.
So the related Matching Concept becomes relevant and it signifies that all the costs / expenses should be set off against the sales / revenues they have contributed to. In other words, all incomes and charges relating to the period to which the financial statements relate should be taken into account without regard to the date of receipt or payment.
Consistency
In order that the Concept of Comparability is properly followed the principle of Consistency will have to be adopted.
So it is assumed that the successive Profit and Loss Statements and the Balance Sheets of a business enterprise are based consistently on the same generally accepted accounting principles as previously chosen by the enterprise. A particular accounting method once adopted should not be changed from period to period.
Changes may be made, (presentation, classification, valuation) but the change and its impact on the financial statements must be clearly disclosed.
Some other fundamental accounting concepts are also stated below.
Materiality
The concept of materiality means that the information that is material should not be mixed up or aggregated with other items.
However, the determination of what is material and what is un-important requires the exercise of judgment.
If combining transactions could mislead the user of the financial statements, the amounts should be split out. So any financial information that is material should be mentioned in the financial statements – i.e. if considered of interest to the users of these statements.
An item is “material” if knowledge of the same might reasonably influence the decision of the user of financial statements.
Historical Cost Concept
Under this principle, all the values in respect of business transactions are based on the historical costs incurred.
Thus Financial Statements are prepared based on historical cost values, as their objective evidence exists and this makes them more reliable. This provides the basis for valuation of assets.
Money Measurement Concept
Accounting information has traditionally been related to recording only such events and transactions to which a monetary value can be attributed. Or in other words, all business transactions are recorded in terms of money, because it is the common factor in all business transactions.
Stable Monetary Unit or Stability of Currency
As diverse business transactions are expressed / recorded in terms of a common unit of measurement, namely the monetary unit, so the stability of monetary unit becomes very important. Transactions that happen over a period of time must reflect a single currency and exchange rate. This will allow one year’s set of accounts to be compared with another regardless of the rate of inflation. The effect of inflation or devaluation of currency is presented in a separate statement.
Business Entity / Accounting Entity Concept
This concept implies that a Business Enterprise is separate and distinct from the persons who supply the resources it uses.
In other words, the financial accounting information relates only to the activities of the Business Entity and not to the activities of its owner. The affairs of the business are separate from the non-business activities of its owners. The extent of application of this concept is different for different forms of business organizations.
The Basic Accounting Equation reflects the Accounting Entity Concept. The equation relates to the independent Economic Unit.
Dual Aspect Concept or Duality
This concept means that there are two aspects of accounting (double-side effect of each business transaction), one represented by the assets of the business and the other by rights/claims against them, and that these two aspects are always equal.
Also known as Duality Concept, this is generally expressed as the Dual Effect of each transaction. Double entry system is the name given to the method of recording business transactions for the Dual Aspect Concept.
Realization
The principle of Realization (or Revenue Recognition) implies that a transaction should be recognized when the event from which the transaction stems has taken place, e.g. Sale on credit is recorded or recognized when the sale is made (goods delivered) and invoice raised for the Customer, without waiting until the sale amount is received.
Accounting Period or Time Interval Concept
For accounting purposes, the lifetime of the business is divided into arbitrary periods of fixed length, usually one year.
The Financial Statements are normally prepared at the end of each arbitrary period, (or at specified time intervals) normally referred to as the Accounting Period.
Prudence / Conservatism
Accountants should always err on the side of caution (or should always be on the side of safety) in their estimates and valuations. So accountants are expected to be professionally conservative.
This is called the concept of Prudence, which requires that such method or procedure should be preferred for preparing financial statements which yield lesser amount of net profit or asset value. The concept advocates “anticipate no profits and provide for all losses”.
Thursday, February 18, 2010
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
The principal Financial Statements are:
Balance Sheet
Income Statement (or Profit and Loss Statement)
However, the complete set of Accounting Reports also includes:
Cash Flow Statement
Statement of Owner’s Equity / Statement of Retained Earnings
Financial Statements are the end product of the whole accounting process. The purpose / objective of financial statements is to provide information about the financial position, performance, and changes in financial position of the business enterprise.
BALANCE SHEET is a financial statement which shows at a specific date the financial position of the business enterprise. It shows in an organized manner the financial data in three main sections i.e. Assets, Liabilities and Owner’s Equity at a given date. It reflects the Accounting Equation.
INCOME STATEMENT OR PROFIT AND LOSS STATEMENT shows profitability of the business enterprise over a period of time say preceding year. It provides details of Revenues/Incomes/Gains and Costs/Expenses/Losses of the business enterprise for a time interval or period of time, and the resulting Net Profit or Net Loss. By matching the revenues against expenses, it shows the net result of operations for a period.
CASH FLOW STATEMENT explains changes in cash and cash equivalents (i.e. receipts / generation / inflow and payments / utilization / outflow) of the business enterprise. It reports about the Cash Flow related to its operating, investing and financing activities.
STATEMENT OF OWNER’S EQUITY / RETAINED EARNINGS explains the changes in the amount of owner’s equity / retained earnings over the same period of time.
As the information / figures in the above financial statements are much in summarized form, these are also supported by Notes to the Accounts or Notes to the Financial Statements, giving further details and explanations. That is why these Notes are also considered an integral part of Financial Statements.
The principal Financial Statements are:
Balance Sheet
Income Statement (or Profit and Loss Statement)
However, the complete set of Accounting Reports also includes:
Cash Flow Statement
Statement of Owner’s Equity / Statement of Retained Earnings
Financial Statements are the end product of the whole accounting process. The purpose / objective of financial statements is to provide information about the financial position, performance, and changes in financial position of the business enterprise.
BALANCE SHEET is a financial statement which shows at a specific date the financial position of the business enterprise. It shows in an organized manner the financial data in three main sections i.e. Assets, Liabilities and Owner’s Equity at a given date. It reflects the Accounting Equation.
INCOME STATEMENT OR PROFIT AND LOSS STATEMENT shows profitability of the business enterprise over a period of time say preceding year. It provides details of Revenues/Incomes/Gains and Costs/Expenses/Losses of the business enterprise for a time interval or period of time, and the resulting Net Profit or Net Loss. By matching the revenues against expenses, it shows the net result of operations for a period.
CASH FLOW STATEMENT explains changes in cash and cash equivalents (i.e. receipts / generation / inflow and payments / utilization / outflow) of the business enterprise. It reports about the Cash Flow related to its operating, investing and financing activities.
STATEMENT OF OWNER’S EQUITY / RETAINED EARNINGS explains the changes in the amount of owner’s equity / retained earnings over the same period of time.
As the information / figures in the above financial statements are much in summarized form, these are also supported by Notes to the Accounts or Notes to the Financial Statements, giving further details and explanations. That is why these Notes are also considered an integral part of Financial Statements.
ACCRUAL & CASH-BASIS SYSTEMS
ACCRUAL AND CASH-BASIS SYSTEMS
The business enterprises may keep their account books (i.e. may records their business transactions) in one of the two ways.
ACCRUAL SYSTEM of accounting means that expenses and revenues are recognized in the period they occur, regardless of whether a cash transaction has occurred or not (i.e. payment has been made or not, amount has been received or not). This method matches revenues of the period with the expenses of the same period.
CASH BASIS SYSTEM of accounting means that revenues are recorded only when amounts have been received and expenses are recorded when payments are made. Under this method, revenues and expenses of the same period may not match.
Generally Accepted Accounting Principles (GAAP) requires that all the public companies (business enterprises) have to use Accrual System of Accounting.
The business enterprises may keep their account books (i.e. may records their business transactions) in one of the two ways.
ACCRUAL SYSTEM of accounting means that expenses and revenues are recognized in the period they occur, regardless of whether a cash transaction has occurred or not (i.e. payment has been made or not, amount has been received or not). This method matches revenues of the period with the expenses of the same period.
CASH BASIS SYSTEM of accounting means that revenues are recorded only when amounts have been received and expenses are recorded when payments are made. Under this method, revenues and expenses of the same period may not match.
Generally Accepted Accounting Principles (GAAP) requires that all the public companies (business enterprises) have to use Accrual System of Accounting.
BOOK-KEEPING & BOOKS OF ACCOUNT
BOOK-KEEPING AND BOOKS OF ACCOUNT
Book-keeping and Accounting are not the same, although two are closely related.
Generally, book-keeping means recording of business data (transactions) in a prescribed manner. So in a way, it includes the functions of Recording and Classifying of transactions.
On the other hand, Accounting is primarily concerned with the design of the system of records, the preparation of reports based on the recorded data and the interpretation of the reports. So in a way it includes the functions of Summarizing and Interpreting, in addition to the designing of the system.
This also means that Book-keeping provides a basis for the real Accounting function.
BOOKS OF ACCOUNT
JOURNAL
Once you have analyzed the business transaction, you have to record it in the books of accounts. Writing of transaction in the books is called Recording or Journalizing. The first book where it is recorded is called the journal. That is why it is considered as the Book of Prime Entry, also as the Book of Original Entry.
A journal is a book in which business transactions are written in accounting terms in chronological order (as they occur i.e. date wise). The journal has a specific format and the transaction is written based on the rules of Debit and Credit, along with a brief description of the transaction.
You may have one journal for all types of transactions or you may divide it in different types of journals depending upon the number of transactions, like a Sales Journal, Purchase Journal, Cash Payment Journal, Cash Receipt Journal, and General Journal (for remaining types of transactions).
M/S AMJAD TRADING CORPORATION
JOURNAL for the month of February, 2010
---------------------------------------------------------------------------------
(Date)(V.No.)(Details.............)(Post Ref.)(Debit...)(Credit...)
---------------------------------------------------------------------------------
LEDGER
As against Journal, which is a record of transactions in chronological order related to various elements (Account Heads or Titles), a Ledger is the record of same transactions in a classified manner i.e. all transactions related to one element (Account Head) are recorded (posted) on the page specified for that element, again in chronological order.
So the transactions recorded in Journal are posted to Ledger where each element (Account Head) is allocated a specific space (pages) for this purpose. A Ledger therefore provides information related to one element at a single place.
A Ledger is a book that contains all the elements (account heads) within an organizational accounting system. It is collection of all the ledger accounts. You may call each element as a Ledger Account. You may have all the ledger accounts in one Ledger Book or you may divide it like the Journal and have a sub-ledger for customers (Accounts Receivable), a sub-ledger for vendors (Accounts Payable), a Fixed Assets Ledger and all other ledger accounts in General Ledger. (But then you will have a Control Account in General Ledger for each sub-ledger divided by you.
The standard format of Ledger page is given below.
M/S AMJAD TRADING CORPORATION
LEDGER ACCOUNT OF -----------------------------------------------------
--------------------------------------------------------------------------------
(Date)(V.No.)(Details........)(Post Ref.)(Debit)(Credit)(Dr/Cr)(Balance)
--------------------------------------------------------------------------------
Book-keeping and Accounting are not the same, although two are closely related.
Generally, book-keeping means recording of business data (transactions) in a prescribed manner. So in a way, it includes the functions of Recording and Classifying of transactions.
On the other hand, Accounting is primarily concerned with the design of the system of records, the preparation of reports based on the recorded data and the interpretation of the reports. So in a way it includes the functions of Summarizing and Interpreting, in addition to the designing of the system.
This also means that Book-keeping provides a basis for the real Accounting function.
BOOKS OF ACCOUNT
JOURNAL
Once you have analyzed the business transaction, you have to record it in the books of accounts. Writing of transaction in the books is called Recording or Journalizing. The first book where it is recorded is called the journal. That is why it is considered as the Book of Prime Entry, also as the Book of Original Entry.
A journal is a book in which business transactions are written in accounting terms in chronological order (as they occur i.e. date wise). The journal has a specific format and the transaction is written based on the rules of Debit and Credit, along with a brief description of the transaction.
You may have one journal for all types of transactions or you may divide it in different types of journals depending upon the number of transactions, like a Sales Journal, Purchase Journal, Cash Payment Journal, Cash Receipt Journal, and General Journal (for remaining types of transactions).
M/S AMJAD TRADING CORPORATION
JOURNAL for the month of February, 2010
---------------------------------------------------------------------------------
(Date)(V.No.)(Details.............)(Post Ref.)(Debit...)(Credit...)
---------------------------------------------------------------------------------
LEDGER
As against Journal, which is a record of transactions in chronological order related to various elements (Account Heads or Titles), a Ledger is the record of same transactions in a classified manner i.e. all transactions related to one element (Account Head) are recorded (posted) on the page specified for that element, again in chronological order.
So the transactions recorded in Journal are posted to Ledger where each element (Account Head) is allocated a specific space (pages) for this purpose. A Ledger therefore provides information related to one element at a single place.
A Ledger is a book that contains all the elements (account heads) within an organizational accounting system. It is collection of all the ledger accounts. You may call each element as a Ledger Account. You may have all the ledger accounts in one Ledger Book or you may divide it like the Journal and have a sub-ledger for customers (Accounts Receivable), a sub-ledger for vendors (Accounts Payable), a Fixed Assets Ledger and all other ledger accounts in General Ledger. (But then you will have a Control Account in General Ledger for each sub-ledger divided by you.
The standard format of Ledger page is given below.
M/S AMJAD TRADING CORPORATION
LEDGER ACCOUNT OF -----------------------------------------------------
--------------------------------------------------------------------------------
(Date)(V.No.)(Details........)(Post Ref.)(Debit)(Credit)(Dr/Cr)(Balance)
--------------------------------------------------------------------------------
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