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Introduction to Accounts Basic

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What is an account?

It is a system to keep company's data organised, it is a system to sort transactions into records so called account books. When a company set up an accounting system, it is planned in a way the accounts should be to the best needs of the prevailing system means books to be audited, books can be checked by tax departments moreover the company needs a balance sheet of what they have done in the whole year. An accounting system is the same all around India or the world. We are to put our sales, purchases, expanses in record to calculate the profits and generate a balance sheet to show us the owner's capital, assets, liabilities, debtors and creditors.

Accounting system

Today most of the company's use accounting software where you can put entries by just knowing about the voucher to fill entries like a computer operator but knowing the accounts is totally different. We will here, teach you book keeping by hand in few simple steps that will help you do accounting on any operating software because you have the complete understanding of what you are doing. Sitting on software and putting entries can make you an operator but not the accountant.

Learn Accounts

We will start with a story of a person, Mohan who want to start a yarn manufacturing unit in India with three partners, Yogesh , Gurmeet and Paramjit with all the four will have 25% share. They have decided to invest Rs. 10 lac each. They have installed their factory at a rental place at lease rent of Rs.10000/- per month. Machinery cost is Rs. 2000000/-, Electricals and fittings cost is Rs. 200000/- and they have arranged a working capital limits from a commercial bank amounting to Rs.2000000/-. The name of the company is decided as Gobind Woolens. Let the factory started the production on 1.6.2017.

All the partners have decides to use a software for accounting and maintain a day book which is a common for cash and general entries. They have also decided to issue a voucher of each transaction daily and then that voucher will get entered in the day book and then to the accounting software. Now they need to get vouchers printed for daily entries, a purchase file, Electricity Bill file, Telephone / mobile bill file, sale invoices bill file, file to keep daily vouchers, other purchases file than raw material purchase.

Every company maintains the accounts to evaluate their profits/losses, maintain stocks, maintain the list of debtors and creditors, maintain their tax liabilities and they are bound to maintain records also for Govt. Departments. Companies have to show their records any time if asked by Income tax or GST.

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What is accounting?

Accounting is a method of recording transactions.
Keeping financial records.
Internal Audit.
keeping record of stocks
keeping record of income, bank balances, daily cash, total expanses.
It is a systematic process of keeping record of all transactions to reveal profit or loss, firms assets, liabilities, owners equity, debtors and creditors.

Some of the terms/words we must know when starting accounting.

Debtors

A debtor is a person or entity that owes money. In other words, the debtor has a debt or legal obligation to pay an amount to another person or entity.

Creditor

A creditor is a person, bank, or other enterprise that has lent money or extended credit to another party.

Credit

Credit is the goods or services or any amount comes to us as liability and we are bound to pay it. It is recorded on right site of accounting columns in ledgers and the vouchers of accounting software and recorded on the left side page of Day book.

Debit

An entry recording a sum owed by a company to other person or a company, listed on the left-hand side or column of an account and recorded right in the day book. Expenses are also debit entries.

Bad Debt

The amounts that are uncollectible. These are the loss of the company and needs write-off and directly affects the profit of the company.

Balance Sheet

Balance Sheet is a financial statement that summarizes company's assets and liabilities.

Assets:

Assets are the things that company owns, they are the resources of the company. A balance sheet is the financial statement of company's assets and liabilities. In accounts companies vehicles, machinery, cash in hand, securities and deposits, bank balance, debtors are all assets of the company.

Liabilities

Liabilities are the obligation of the company. Partners capital, bank loans, Sundary creditors unsecured loans are the liabilities of a company.

Sundry Creditors

Any person who supplies the goods or services or consumable items to a business firm on credit basis, will be called as sundry creditor.

Sundry Debtors

Sundry debtors might refer to a company's customers who make purchases on credit.

Trading Account

Trading account is the first stage in the process of preparing final accountsTrading account shows the gross profit or loss of the company where on one side opening stock value, total purchases during the period and the manufacturing process expenses are added and on the other side total sales and closing stock are added.

Profit and Loss

The account, through which annual net profit or loss of a business is ascertained, is called profit and loss account. Gross profit or loss of a business is ascertained through trading account and net profit is determined by deducting all indirect expenses (business operating expenses) from the gross profit through profit and loss account. Thus profit and loss account starts with the result provided by trading account.

Gross Profit

Gross profit is calculated by subtracting opening stock value plus purchases plus direct expenses from the sales plus closing stock

Net profit

Net profit is determined by deducting all indirect expenses (business operating expenses) from the gross profit through profit and loss account.

Trial Balance

A trial balance is a bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit columns. Preparing a trial balance for a company serves to detect any mathematical errors that have occurred in the double-entry accounting system.

Cash in Hand (C.I.H.)

The amount of money in the form of cash that a company has after it has paid all its costs. Written at the top of the assets side of a balance sheet to show the amount of money held by a company in the form of currency. Cash in hand is always debit entry in the ledger.

Day Book

A book in which the transactions of each day are recorded as they occur or an account book in which a day's transactions are entered for later transfer to a ledger. A day book can be maintained as cash transactions and the transfer entries.
(Note) Today most of the companies use software for accounting so I prefer a day book common for cash entries and journal entries.

Cash Book

A cash book is a financial journal that contains all cash receipts and payments, including bank deposits and withdrawals. Entries in the cash book are then posted into the general ledger

Ledger

The book in which accounts are maintained is called ledger. Generally, one account is opened on each page of this book. So, the books in which all the transactions of a business concern are finally recorded in the concerned accounts in a summarized form is called ledger.

1. It has two identical sides - left hand side (debit side) and right hand side (credit side).
2. Debit aspect of all the transactions are recorded on the debit side and credit aspects of all the transactions are recorded on credit side according to date.
3. The difference of the totals of the two sides represents balance. The excess of debit side over credit side indicates debit balance, while excess of credit side over debit side indicates the credit balance. If the two sides are equal, there will be no balance.
4. The closing balance of the current year becomes the opening balance of the next year.

Double Entry

The double entry system of accounting or bookkeeping means that every business transaction will involve two accounts (or more). For example, if you draw cash from bank - your bank balance will change and your cash increases. If you purchase goods - party account will change and the purchase also increases. When you issue cheque to make payment of that purchase - party account will change and your bank balance will decrease as payment is to pass from your bank.

Depreciation

Depreciation is the decrease of value of the assets. Buildings, machinery, equipment, furniture, fixtures, computers, outdoor lighting, parking lots, cars, and trucks are examples of assets that will last for more than one year, but will not last indefinitely. During each accounting period, a portion of the cost of these assets is being used up and value decreases. The portion being used up is reported as Depreciation Expense on the income statement. A fixed depreciation is allowed on the items and allowed to subtract from profits in the balance sheets by the income tax laws.

Book Keeping

Bookkeeping is the recording of the financial transactions and information pertaining to a business on day to day basis in a way that daily cash, bank balances, stocks, sales, purchases, debtor and creditor accounts could be checked any time. Book keeping is the most important part of any business.

Bank Reconciliation

Bank reconciliation is the petty adjustments required in the bank account of your books to make the actual bank balance in the bank statement and your bank account in your books same. When you get the bank statement from the bank, you see some bank charges in the statement and you are to put them in your books, this process of confirming the accounts is called as bank reconciliation.
There can be checks that have been written and recorded in the company's day book, but have not yet cleared in the bank account.

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