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Financial Accounting

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Financial Accounting (Mgt-101)
VU
Lesson-7
Areas Covered in this lecture
Cash book and bank book.
Accounting Period.
Trial Balance and its limitations.
Flow of Transaction
In Financial Accounting, any business transaction flows as follows:
The business transaction is recorded in a voucher. The voucher is the first document prepared in the
financial accounting.
All credit transactions are then posted in the journal.
In these days, voucher is directly fed in the books of accounts by means of computers.
From the books of accounts, trial balance is prepared, which shows the arithmetic accuracy of the
accounting system.
Finally, financial statements. i.e., Profit & Loss Account and Balance Sheet is prepared from trial
balance.
Cash Book & Bank Book
Cash book and bank book are part of general ledger.
All entries including payables and receivables are recorded in the general ledger. Expenses, income,
assets and liabilities are recorded in different head of accounts to analyze the expenses incurred in
different head of accounts.
Due to large volume of transactions, entries related to cash and bank are recorded in the separate
books.
Cash Book
All cash transactions (receipts and payments) are recorded in the cash book.
Cash book balance shows the amount of cash in hand at a particular time.
Format of cash book is here under:
Cash Book
Account Code 01
Receipt Side
Payment Side
Date No. Narration / Ledger
Receipt  Date No. Narration / Ledger Payment
Particulars  Code
Amount
Particulars  Code  Amount
OR
Cash Book
Account Code 01
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Financial Accounting (Mgt-101)
VU
Date
Voucher
Narration /
Ledger
Receipt  Payment
Balance
Number
Particulars
Code
Amount  Amount
Dr/(Cr)
Two formats of cash book are shown above. In the first format, receipt side and payment side are
shown separately. In the second format, two columns are shown for receipt and payment with an
extra column of balance. The balance column shows the net balance of cash available for use.
The ledger code shows the code of that head of account which contains the second effect of the
cash transactions because debits and credits are always equal in financial accounting.
Both of these formats are correct. A business can use any format considering its policies and
requirements.
Bank Book
All bank transactions are recorded in the bank book.
The balance of bank book reflects the cash available at bank at a particular time.
Format of bank book is hereunder:
Bank Book (Bank Account Number)
Account Code 02
Date
Voucher
Chq.
Narration /
Ledger
Receipt
Payment
Balance
Number
No.
Particulars
Code
Amount
Amount
Dr/(Cr)
The format of bank book is same as that of cash book except the column of cheque no.
This column is added in the format because all payments made by cheque and the number of
cheque is written in that column to keep the accounting record updated.
Accounting Period
Accounting period is any period for which a profit and loss account is prepared.
The length of the accounting period can be anything between one day to one year
The legal or statutory definition is a maximum of one year.
The only exception in this case is the formation of a new company which is formed before the
start of accounting period.
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Financial Accounting (Mgt-101)
VU
Financial year ("a period of 12 month duration")
In Pakistan, financial year starts from 1st of July and ends on 30th of June.
Exceptions are:
o  Specialized business. e.g., Textile, banks, Sugar mills etc.
Financial reports can be made for a week or a month, depending upon the requirements of the
company.
Debit & Credit Balances
It has already been mentioned that both sides i.e. Debit and credit side of a ledger must be equal.
If debit side of a ledger is greater that credit side. The balance will be written on the credit side and
it will be called Debit Balance. The reason being, the balance is written on the credit side because of
excessive debit balance. Therefore, it is called Debit Balance. For example:
Title of Account
Account Code 01
Debit Side
Credit Side
Narration /
Receipt
Narration /
Payment
Date
No.
Date
No.
Particulars
Amount
Particulars
Amount
1
100,000
3
80,000
2
20,000
4
30,000
120,000
110,000
Balance
10,000
A Debit Balance
Similarly, if credit side is greater than debit side, the balance will be written on the debit side. This
balance is called. Credit Balance. For Example:
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Financial Accounting (Mgt-101)
VU
Title of Account
Account Code 01
Debit Side
Credit Side
Narration /
Receipt
Narration /
No.
Date
Date
No.
Payment
Particulars
Amount
Particulars
Amount
1
80,000
3
100,000
2
30,000
4
20,000
110,000
120,000
Balance
10,000
A Credit Balance
Trial Balance
At the end of accounting period, a list of all ledger balances is prepared. This list is called trial
Balance.
Both sides of trial balance i.e. Debit side and credit side must be equal. If both sides are not equal,
there are errors in the books of accounts.
Trial balance shows the mathematical accuracy of the books of accounts.
Limitations of Trial Balance
Trial balance only shows the mathematical accuracy of the accounts.
If both sides of trial balance are equal, books of accounts are considered to be correct. But this
might not be true in all the cases.
If any transaction is not recorded at all, trial balance can not detect the omitted transaction.
If any transaction is recorded in the wrong head e.g. if an expense is debited to an assets account.
Trial balance will not be able to detect that mistake too.
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Financial Accounting (Mgt-101)
VU
A Sample Trial Balance
Name Of The Organization
Trial Balance As On (Date on Which Trial Balance is Drawn)
Title of Account
Account
Debit
Credit
Code
Amount
Amount
Cash in Hand
01
xy
Cash at bank
02
xy
Capital
03
xy
Assets
04
xy
xy
Liabilities
05
Income
06
xy
Expenses
07
xy
Total
xyz
xyz
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Table of Contents:
  1. Introduction to Financial Accounting
  2. Basic Concepts of Business: capital, profit, budget
  3. Cash Accounting and Accrual Accounting
  4. Business entity, Single and double entry book-keeping, Debit and Credit
  5. Rules of Debit and Credit for Assets, Liabilities, Income and Expenses
  6. flow of transactions, books of accounts, General Ledger balance
  7. Cash book and bank book, Accounting Period, Trial Balance and its limitations
  8. Profit & Loss account from trial balance, Receipt & Payment, Income & Expenditure and Profit & Loss account
  9. Assets and Liabilities, Balance Sheet from trial balance
  10. Sample Transactions of a Company
  11. Sample Accounts of a Company
  12. THE ACCOUNTING EQUATION
  13. types of vouchers, Carrying forward the balance of an account
  14. ILLUSTRATIONS: Ccarrying Forward of Balances
  15. Opening Stock, Closing Stock
  16. COST OF GOODS SOLD STATEMENT
  17. DEPRECIATION
  18. GROUPINGS OF FIXED ASSETS
  19. CAPITAL WORK IN PROGRESS 1
  20. CAPITAL WORK IN PROGRESS 2
  21. REVALUATION OF FIXED ASSETS
  22. Banking transactions, Bank reconciliation statements
  23. RECAP
  24. Accounting Examples with Solutions
  25. RECORDING OF PROVISION FOR BAD DEBTS
  26. SUBSIDIARY BOOKS
  27. A PERSON IS BOTH DEBTOR AND CREDITOR
  28. RECTIFICATION OF ERROR
  29. STANDARD FORMAT OF PROFIT & LOSS ACCOUNT
  30. STANDARD FORMAT OF BALANCE SHEET
  31. DIFFERENT BUSINESS ENTITIES: Commercial, Non-commercial organizations
  32. SOLE PROPRIETORSHIP
  33. Financial Statements Of Manufacturing Concern
  34. Financial Statements of Partnership firms
  35. INTEREST ON CAPITAL AND DRAWINGS
  36. DISADVANTAGES OF A PARTNERSHIP FIRM
  37. SHARE CAPITAL
  38. STATEMENT OF CHANGES IN EQUITY
  39. Financial Statements of Limited Companies
  40. Financial Statements of Limited Companies
  41. CASH FLOW STATEMENT 1
  42. CASH FLOW STATEMENT 2
  43. FINANCIAL STATEMENTS OF LISTED, QUOTED COMPANIES
  44. FINANCIAL STATEMENTS OF LISTED COMPANIES
  45. FINANCIAL STATEMENTS OF LISTED COMPANIES