Accounting Cycle
Transaction -> Documents -> Day Books/Journals -> Ledgers -> Trial Balance -> Final Accounts
Difference between bookkeeping and accounting
Bookkeeping Accounting
Definition Bookkeeping is mainly related to identifying, Accounting is the process of summarizing,
measuring, and recording, financial interpreting, and communicating financial
transactions transactions
Decision Making Management can't take a decision based on the data Depending on the data provided by the accountants,
provided by bookkeeping the management can take critical business decisions
Objective The objective of bookkeeping is to keep the records The objective of accounting is to gauge the financial
of all financial transactions proper and systematic situation and further communicate the information to
the relevant authorities
Preparation of Financial statements are not prepared by Financial statements are prepared by Accountant
Financial Statements bookkeeper
Analysis The process of bookkeeping does not require any Accounting uses bookkeeping information to analyze
analysis and interpret the data and then compiles it into reports
Books of prime/original entry
# Day Books/Journals Purpose Source Document
1 Sales Journal/Day Book Credit sales of goods Sales Invoice
2 Purchases Journal/ Day Book Credit Purchases of goods Purchase Invoice
3 Return Inward Journal Sales Return of goods Credit note issued by seller/supplier to
customer
And in return, customer issues a debit note
4 Return outward Journal Purchases Return of goods Credit note issued by seller/supplier to
customer
And in return, customer issues a debit note
5 Cash Book Cash transactions In case of Cash transactions -> Receipt
Bank transactions In case of bank transactions:
Note Cash discounts Cheque: if payment received by
Cash Book is the only book of cheque
prime entry which is also a Cheque counterfoil: if payment given
ledger by cheque.
Note
For online payments/transfers, bank statement
will be the source documen
6 Petty Cash Book Cash transactions of smaller amounts
7 General Journal Bad & doubtful debts
Depreciation of non-current assets
Correction of errors
Non-cash drawings
Sale or purchase of non-current
assets on credit Invoice
Contra entries
Interest charged on overdue
accounts Statement of Account
Opening entries
Petty Cash Book
Petty Cash book is the book of original entry which is used to record transactions of smaller amounts
For example:
Purchase of Postage stamp
Payment of taxi fare
Purchase of stationary
And other small and urgent payments
Imprest System
It is an accounting system where a certain(fixed) amount ,called float or imprest amount, is maintained by
petty cashier.
Amount spent during the month is reimbursed to the petty cashier by the main cashier either at the end of the
month or on very first day of the next month.
Advantages
It reduces the burden on main cashier
It trains the juniors for promotion in future
Little or no chances of fraud due to smaller amounts involved
Statement of Account
A statement sent by seller/supplier to its customers summarizing the transactions of certain period which is normally one month
Paying-in slip
A document used to deposit money into bank
Ledgers
1) Sales Ledger
It contains T-Accounts of trade receivables/credit customers
2) Purchases Ledger
It contains T-Accounts of trade payables/credit suppliers
3) General/Nominal Ledger
It contains all T-Accounts other than trade receivables and payables
e.g. capital account, expenses account, Sales revenues account, returns account, Purchases account, Van account, Drawings
account.
Note
The total/sum of credit sales from sales journal is posted on credit side of sales account in general ledger
The total/sum of credit purchases from purchases journal is posted on debit side of purchases account in general ledger
The total/sum of sales return from sales return journal is posted on debit side of sales return account in general ledger
The total/sum of purchases return from purchases return journal is posted on credit side of purchases return account in
general ledger
The total/sum of discount allowed column from cash book is posted on debit side of discount allowed account in general
ledger
The total/sum of discount received column from cash book is posted on credit side of discount received account in general
ledger
Trial Balance
It is a list of ledger balance at a particular date
Uses/benefits
it helps to detect errors in ledgers
it facilitates preparation of trial balance
Discounts
Trade Discount Cash Discount
1 It is given to encourage bulk buying It is given to encourage prompt payment
2 It is not recorded anywhere in books of accounts It is properly recorded in cash book
3 It is calculated on list price of the product It is calculated after deduction of trade discount from
list price.
List Price
The list price is the manufacturer recommended price at which the retailer should sell the product.
Example
List price $2500
Trade discount 20%
Cash discount 5%
Required
a) Calculate trade discount
b) Calculate cash discount
c) Net payment if cash discount is availed
Solution
a) Trade discount = 20% X $2500 = $500
b) $2500 - $500 = $2000
Cash discount = 5% X $2000 = $100
c) Net payment = 2000 – 100 = 1900
Journal entries to record payment with cash discount
For Customer/receivables
$ $
Accounts Payables 2000
Discount Received 100
Bank/cash 1900
For seller/payables
$ $
Discount Allowed 100
Bank/cash 1900
Accounts Receivable 2000
Note
Cash discount is available if cash is paid/received within a certain time period
Sales, purchases, sales return and purchases return are recorded after deduction of trade discount but before deduction of
cash discount
