Tally.ERP9 Basic Accounting Part-3

 

Solvent:

       A person who has assets with realizable values which exceeds his liabilities in solvent.

  Insolvent:

                A person whose liabilities are more than realizable values of his assets called an insolvent.

Methods of accounting:

Business transactions are recorded in two different ways:

1.   Single entry

         Double entry

 

Single entry:

it is incomplete system of recording business transactions. The business organization maintains only cash book and personal accounts of debtors and creditors. So the complete recording transaction cannot be made and trail balance cannot be prepared.

 

Double entry: 

it this system every business transaction is having a twofold effect of benefits giving and benefit receiving aspects. The recording is made on basis of both these aspects. Double entry is an accounting system that records the effects of transactions and other events in at least two accounts with equal debits and credits.

Steps involved in double entry system:

a.   Preparation of journal:

                             Journal is called the book of original entry. It records the effect of all transaction for the first time. Here the job of recording takes place.

b.  Preparation of ledger:

                    Ledger is the collection of all accounts is performed. Journal is posted to ledger.

c.    Trial balance preparations:

             Summarizing. It is summary of ledge balances prepared in the form of list.

d.   Preparation of final account:

                                  At the end of the accounting period to know the achievements of the organization and its financial state of affairs, the final accounts are prepared.

 

Meaning of debit and credit:

                   The term ‘debit’ is supposed to have derived from ‘debit’ and the term ‘credit’ from the ‘creditable’.

For convenience ‘Dr’ is  used for debit and ‘Cr’ is used for credit. Recording of transactions require a thorough understanding of the rules of debit and credit relating to accounts.

Both debit and credit may represent either increase or decrease, depending upon the nature of accounts.

 

Journal:

           When the business transaction take place the first step is to record the same in the books of original entry or subsidiary books or books of prime or journal.

Thus journal is a simple book of original entry in which all the business transaction are originally recorded in chronological order and from which they are posted to the ledger accounts at any convenient time.

Journalizing refers to the act of recording each transaction in the journal and the form in which it is recorded, is known as a journal entry.

 

The following are the inherent advantages of using journal, though the transaction can also be directly in the respective ledger accounts:

1.   As all the transactions are entered in the journal chronologically, a date wise record can easily be maintained.

2.   All the necessary information and the required explanations regarding all transactions can be obtained from the journal; and

3.   Errors can be easily located and prevented by the use of journal or books of prime entry.

 

The journal has five columns viz. (1) date (2) particulars  (3) ledger folio; (4) amount (debit)

(5) amount (credit) and a brief explanation of the transaction by way of narration is given after passing the journal entry.

 

(1)           Date: in each page of the journal at the top of the date column, the year is written and in the next line, month and date of the first entry are written. The year and month need not be repeated until a new page is begun or the month or the month or the year changes. Thus, in this column, the date on which the transaction takes place is alone written.

(2)           Particular: in this column, the details regarding account titles and descriptive are recorded. The name of the account to be debited is entered first at the extreme left of the particulars column next to the date and abbreviation ‘Dr.’ is written at the right extreme of the same column in the same line. The name of account to be credited is entered in the next line preceded by the word ‘To’ leaving a few spaces away from the extreme left of the particulars column. In the next line immediately to the account credited, a short about the transaction is given which is known as “Narration”. “Narration” may include particulars required to identify and understand the transaction and should be adequate enough to explain the transaction. It usually starts with the word “Being” which means what it is and written is within parentheses. The use of the word “Being” is completely dispensed with, in modern parlance. To indicate  the completion  of the entry for a transaction, a line is usually drawn all through the particulars column.

(3)           Ledger folio: this column is meant to record the reference of the main book, i.e., ledger and is not filled in when the transaction are recorded in the journal. The page number of the ledger in which the amounts are appearing is indicated in this column, while the debits and credits are posted to the ledger account.

(4)         Amount (debit): the amount to be debited along with its unit of measurement at the top of this column on each page is written against the account debited.

(5)         Amount (credit): the amount to be credited along with its unit of measurement at the top of this column on each page is written against the account credited.