UNIT 5

SUPARNA MUKHERJEE
ACCOUNTANCY
ACCOUNTANCY FOR
FOR LAWYERS
LAWYERS
It is the legal duty of every profession to
keep a systematic record of its daily
transaction.
It helps to know where it stands and
adjudge its performance. This systematic
recording of transactions is known as
accounting.
Since legal profession is a trade, lawyers
are under duty to maintain systematic
accounts relating to the profession.
▪ The basic purpose of accounting is to present a complete
financial picture of the Advocates profession.
▪ This can be done with the help of two financial statements
like
(i) Profit and loss account and
(ii) Balance sheet showing the assests and liabilities.
It is necessary to maintain proper accounts to calculate the
following
(i) Annual Income
(ii) Income Tax
(iii)Professional Tax
(iv)Amount due to the client or amount due by the client.
1. To calculate the annual income : To calculate the
annual income of the Advocate from the legal profession, it
is necessary to maintain proper accounts of his income
from the profession. Maintaining this account is useful for
Advocates also. By knowing his Annual Income , he can take
steps to improve his profession.
2. To Calculate income Tax : Advocates are liable to Pay
Income tax for the income derived from the profession. In
order to calculate the amount payable as income tax, he has
to maintain proper accounts relating to his income and
expenditure. To calculate the taxable income, he is entitled
to deduct certain expenditure like rent, salary, telephone
bill and other administrative expenditure. For this purpose,
also he has to maintain proper accounts.
3. To calculate professional tax: Every six months
the advocates are liable to pay professional tax to the
Government. The amount of professional tax varies
depending on the income. In order to calculate the
amount of professional tax he has to maintain the
proper accounts.
4. To Ascertain the amount due from the client or
due to the client: The account relating to the amount
received from the client and the amount received on
behalf of the client from others or from the court
should be properly maintained. Then only the
amount due from the client can be calculated. This
will help not only the client but also the Advocate.
▪ Functions Of Accounting:
1.Systematic record of transactions.
2.Communicating results to the interested parties.
3.Compliance with legal requirements.
4.Ascertain the financial position of individual.
▪ Advantages Of Accounting:
1.Replacement of memory.
2.Evidence in court.
3.Settlement of taxation liability.
4.Comparative study.
5.Assistance to various parties.
▪Limitations Of Accounting:
1.Records only monetary transactions.
2.No realistic information.
3.Personal bias of accountant affects
the accounting statements.
4.No real test of managerial
performance.
5.It lacks a uniform procedure.
▪LEGISLATIONS REQUIRING KNOWLEDGE
OF ACCOUNTANCY
1. As a member of the Bar Council, he should know its
accounting.
2. He should know Legal services Authorities and
Supreme Court Legal Services Committee.
3. He should know the accounting of Advocates as per
Supreme Court rules.
4. He should know the welfare fund accounting.
5. He should know how to prepare his own accounts.
Case Laws:
1.Pawan Kumar Sharma v. Gurdial Singh (1998 (7) SCC 24).
The court held that mere ownership of the taxi cannot lead to any
irresistible conclusion that he was engaged in “taxi business” to
constitute misconduct.
2. Harish Chander Singh v. Suman Dondey (1999 (2) SCC 215).
The court held that the disciplinary committee of bar council could not
have held the advocate guilty of charge of misappropriation especially
without going the whole of accounts.
3. Hamiraj L. Chulani v. Bar Council of Maharashtra & Goa (AIR
1996 SC 1708).
The Supreme Court held that the rule made by the bar council
restricting the entry of a person already carrying on other profession
is not arbitrary and at the same time it does not impose reasonable
restrictions.
PLACE OF KEEPING THE ACCOUNTS BOOKS.
The accounts books and documents relating to the accounts
should be kept and maintained by the advocate,
(i) At his office.
(ii) Where he is carrying on the profession more than one
office, then at his head office. But accounts can also be
maintained separately for each branch at the respective
branch office.
Penalty for not keeping Account Books: A Lawyer who is
legally liable to maintain account books, fails to maintain it or
fails to retain it for the prescribed period (cash book and
ledger-16 years, other books-8 years) is liable to pay penalty
ranging from Rs.2000/- to 1,00,000/- (S.271 A ).
▪ Bar council Rules relating to accounting
An Advocate is under a duty to maintain proper accounts of money received
from his client and the amount received on behalf of client from others or
from the court. The rules relating to such accounting is dealt in rules 25 to
32 of the Bar Council Of India Rules 1975.
▪ Rule 25: An advocate should keep the accounts of the client’s money
entrusted to him. The accounts should show the amounts received from the
client, the expenses incurred for him and the debits made on the account
of Advocate fees with the respective dates and all other necessary
particulars.
▪ Rule 26 : Where moneys are received from the client, it should be entered
whether the amount have been received for the advocates fees or
expenses. Amount received for the expenses shall not be diverted towards
Advocates fees without the consent of the client in writing.
▪ Rule 27: Where any amount is received on behalf of his client the fact of
such receipt must be intimated to the client as early as possible.
▪ Rule 28 : After the completion of the proceeding, the advocate shall be at
the liberty to take the settled fee due to him from the unspent money in his
hand.
▪Rule 29: Where the fee has been left unsettled, the
advocate shall take the fees which he is legally
entitled from the moneys of the client remaining in his
hands, after the completion of the proceeding. The
balance shall be returned to the client.
▪Rule 30: A copy of the client account shall be
furnished to him after getting the necessary copying
charges from him.
▪Rule 31: An advocate shall not make any agreements
whereby client’s funds in his hands are converted into
loans to the advocate.
▪Rule 32: An Advocate shall not lend money to his
client for the purpose of conducting the case
▪ Rules Relating to Accounting Under Income Tax Act: Under
the Income Tax Act, every lawyer is required to maintain the
following books of accounts and other documents to enable the
Assessing Officer to calculate his total income :
(i) cash book
(ii) Receipt Voucher
(iii) payment voucher
(iv) journal
(v) ledger.
▪ The accounting year is 1st April to 31 st March next year.
1. Cash book : It is the book in which the amount received by the
Advocates from the clients and others and the amount spent for
the clients are written. This book is useful for the Advocate to
know the amount in his hand on each day.
2. Receipt Voucher : It is the document prepared for recording the receipt of money by
cash or cheque. When an Advocate received money from the client, the Advocate has to
issue a receipt to the client. Advocate shall maintain receipt books with serially
numbered receipt forms in duplicate. The original receipt should be given to the client
and the duplicate shall be retained by the Advocate.
3. Payment Voucher : Payment vouchers are used to record such payments for which
receipts are not obtainable from the person to whom such payments are made. For
example, bus fare, auto fare, court fees, stamps, refreshment expenses etc. In such cases
the Advocate signature in the payment voucher and the signature of the person to whom
payment is made may be obtained.
4. Journal : Journal is the book of first entry or original entry. In the journal the
transactions are recorded in the order of their occurrence. It should contain the following
details
(i) Date of Transactions
(ii) Account to which the transaction relates
(iii) Amount to be debited,
(iv) Amount to be credited
(v) Explanation of the transaction.
▪ 5. Ledger : The transactions recorded in the journal are to be posted to the separate heads of account
in another book called as Ledger. In the ledger different pages are allotted to the different heads of
accounts. When the journal entries are posted to the concerned heads of account in the ledger, the
page number of the ledger should be noted in the journal for easy reference.
▪ The ledger account of an advocate shall contain the following heads:
(i)Clients Account : For each and every client separate pages shall be allotted in this ledger and
separate account shall be maintained for them.
(ii) Fees Account : In this account the fees received from each and every client shall be entered
separately. From this account the total amount of fees received from all the clients in a financial year can
be ascertained.
(iii) Rent Account.
(iv) Salary Account.
(v) Library Account.
(vi) Printing and Stationary Account.
(vii) Postage and Telegram Account.
(viii) Electricity Charges.
(ix) Conveyance Charges.
(x) Repair and Maintenance.
(xi) Office Miscellaneous Expenses Account.
▪ At the beginning of the ledger book the index may be given with the name of the different heads of
account and their respective pages for easy reference.
Case Laws:
1.Manilal Kher Ambalal And Co. vs A.G. Lulla, Seventh Income-Tax ..1989 176 ITR
253 Bom
Facts of the case: The Petition is filed by advocates who are solicitor and advocates
enrolled for more than 50 years age and have been filing accounts every year within the
rules framed by High court, Bombay with related to their professional work. Petitioners
were maintaining separate accounts in the banks as per rule 10 of the Bombay High court.
When an IT Officer sent the advocates notice to furnish the details as per new rules against
the method followed by advocates from several years, the Advocates preferred this appeal
against the change of accounting system.
Issues of the case:
1.When an advocate is accountable for money received from client towards case and is that
a quasi trust and does he hold such money in a fiduciary capacity?
2.Whether the change in the accounting system for an advocate can be called for by an IT
officer with out proper amendment?
Judgment: The Bombay High Court ruled that the High Court Rules are unquestionably
created in conformity with professional standards and cannot be held accountable. As a
result, the petition was approved, and the respondent was required to cover the petitioners’
costs.
2. Associated Law Advisers Antriksh Bhawan v/s ITO Ward I.T.A. No.
5336 & 5846/DEL of 2014
▪ Facts of the Case:
The aforesaid cross appeal have been filed by the Assessor as well as the
Revenue Officers against the impugned order dated 22/8/ 2014 under
section 143 ( 3) for the assessment year 2010-11.
▪ Issues
1.Whether a law firm can treat advance payment received for the payment to
senior advocate and for the payment to its own partners in similar manner?
2.Can an advocate receive money as an address advanced in his judiciary
capacity?
▪ Judgment:
Once the case has been determined, the advocate may accept the funds in
his official capacity as a judge and may treat them solely as advances rather
than as profits. The Revenue officer’s Appeal is dismissed, and the Assessor’s
Appeal is upheld.
ELEMENTARY ASPECTS OF
BOOKKEEPING
Bookkeeping is a task concerned with the
recording of financial data relating to business
operations in a significant and orderly manner. It
envelopes all the procedural aspects of
accounting work and embraces record-keeping
function.
Bookkeeping procedures are governed by the
end product, the financial statements. And
‘financial statements’ includes Profit and Loss
Account and Balance Sheet including Schedules
and Notes forming part of Accounts.
Elements of Bookkeeping
▪Journals
In the system of Bookkeeping, the journals are the
first place you can look to find complete information
about a transaction. The general journal, used by
many businesses that employ a double-entry
accounting system, records the debit and credit
amounts for each account as transactions occur. It
may also list a short description of the transaction. For
example, some businesses may have specialized
journals, each for recording a specific kind of
transaction depending on their needs.
▪Ledgers
Ledgers group transactions according to
account and the effect it has on the business.
Such grouping or categories in the ledger
may include assets, liabilities, expenses and
revenue. Transactions from business journals
get posted or recorded to the ledgers
periodically. And with the help of ledgers,
the financial position of the business can be
easily ascertained as well.
▪ Financial statements : They communicate the essential
information about the financial situation of a company to outside
parties. Most bookkeeping software uses four major financial
statements:
❑Balance sheet: - It gives a description of a company's financial
position for a particular date, by listing details of its assets,
liabilities and shareholder's equity.
❑Income Statement: - It displays the businesses net earnings for a
specific period.
❑Cash flow statement: - It picturizes the increases and decreases
in cash for a period as it relates to business operations,
investment and financing activities of a business.
❑Statement of shareholders: - It displays the changes in the
company's retained earnings, by listing items like net income for
the year and dividends paid to shareholders.
What kind of entries do find its place in Bookkeeping?
▪ Essentially, bookkeeping means recording and tracking the numbers
involved in the financial side of the business in an organized way. It is
essential for businesses but is also useful for individuals and non -
profit organizations.
▪ Any transaction, whether it is a question of purchase or sale, must be
recorded. And the person(s) responsible for bookkeeping for
business would record all transactions that are related. The following
are some examples of entries which forms part of bookkeeping:
▪ Expense payments to suppliers
▪ Loan payments
▪ Customer payments for invoices
▪ Monitoring asset depreciation and booking adjustments
What is Double-entry Bookkeeping?
▪ A transaction implies two sides. Double-entry bookkeeping
is where both sides of each transaction are captured and
recorded, as against single entry bookkeeping where only
the cash side of a transaction is recorded.
▪ The transaction is recorded as soon as it occurs in a book
called the Journal. A Journal is also known as daybook,
because in it a day’s transactions are entered
chronologically as soon as one arises, so no financial
information is lost.
▪ Conventionally, the two affected entries in a double-entry
system are known as Debit (Dr) and Credit (Cr). The system
uses the ‘duality principle’ that for every debit entry there is
always an equal and corresponding credit entry.
The 2 Sides of a Transaction, The 3 Types of Account
and the Rules of Accounting
The two sides of a transaction i.e., the Debit and Credit
are respectively posted in the two affected accounts
which would be one or other of the following three
types of accounts:
▪Real Account – where tangible aspects like cash,
goods etc. are the things/ transacted
▪Personal Account – where a person, group of persons
or a legal entity is the affected party of transaction.
▪Nominal Account – represents income/ expense
related to intangible things like rent, goodwill, etc.; or
gains/ loss.
The credit and debit sides of a given transaction are
posted in the affected account according to the rule
specific to the type of account ( listed above). These
are known as the ‘three golden rules of accounting’.

▪Golden Rule 1 – for Real Accounts: Debit what

comes in and Credit what goes out.
▪Golden Rule 2 – for Personal Accounts: Debit the
Receiver and Credit the giver.
▪Golden Rule 3 – for Nominal Accounts: Debit all
expenses and losses and Credit all incomes and
gains.
Head of Account: A ledger is an account where bookkeeping
entries belonging to different affected accounts are segregated
and posted. Ledgers are periodically processed for a company’s
financial and managerial accounting as well as for statutory
compliances. The data posted to ledgers is first validated by a
Trial balance before it is further used.
▪ Head of Account or simply Account Head is a name under which
transactions of a particular nature are grouped or recorded. For
example, repair and maintenance expenses incurred on so many
things so many times are all grouped under the head ‘Repairs &
Maintenance’. Another example is conveyance expenses, which
are grouped under the head ‘Conveyance Expenses’. All ledgers
that come under a particular account-head are grouped
together, for preparation of Balance Sheet and are therefore also
at times referred to as ‘Ledger groups’.
The above concepts are illustrated using the following three
transactions:
Representative transactions of an office:
▪ Furniture (tangible, so real account) is purchased with Rs. 20,000/-
Cash (real account). Here furniture is coming in (Dr) cash is going out
(Cr). Affected ledgers: Furniture (under head Capital Purchases) and
Cash ledgers.
▪ Rent (intangible, so nominal account) of Rs. 12,000/- is paid for the
premises in cash (real account). Here rent is an expense (Dr) and
cash is going out (Cr). Affected ledgers: Cash and Rent ledgers.
▪ Stationery items (real account) are purchased for Rs. 1,800/- on credit
from Books & Pens store (personal account). Here stationery is
coming in (Dr) and the Books & Pens store is the giver (Cr). Affected
ledgers: General stores ledger and Books & Pens Store ledger
(ultimately balances of all such short-term creditors are compiled
under the account head ‘Sundry Creditors’).
FORMAT SHOWING THE RECORDING OF THE ABOVE TRANSACTIONS IN DOUBLE-
ENTRY BOOKKEEPING JOURNAL

DATE (Year Sl. Ledger

PARTICULARS Dr Cr
2020) No. Folio

to Capital purchases
1-103
1, July 01 (Furniture) 20,000:00 20,000:00
1-100
by cash

To Rent 2- 109
1, July 02 12,000:00 12, 000:00
By Cash 1-100

To General Stores
1- 108
1, July 03 (stationary) 1,800:00 1,800:00
3- 104
By Books & Pens Store
Systems of Bookkeeping: There are two systems of bookkeeping: the Mercantile
system and the Cash system. Over a period, a third system, referred to as Hybrid
system evolved.
▪ Mercantile System of Bookkeeping
➢This system is also known as the “book profits system of accountancy” or the
“Complete double-entry bookkeeping” or more popularly “Accrual” method of
accounting.
➢Under this system the net profit or loss is calculated after taking into account all the
income and all the expenditure relating to the period, whether such income has
been actually received or not and, whether such expenditure is actually paid or not.
➢The profit computed under this system is the profit truly earned, though not
necessarily realized in cash, or the loss computed under this system is the loss truly
sustained, though not necessarily paid in cash.
➢This method of bookkeeping brings into credit what is due immediately as it
becomes legally due and before it is actually received; and it brings into debit
expenditure as soon as the amount for which a legal liability has been incurred,
even before it is actually disbursed.
▪ Cash System of Bookkeeping: This system is opposite of
the ‘mercantile system of bookkeeping’. Under this system
only actual cash receipts and actual cash payments are
recorded. Entries being made only when money is really
collected or disbursed.
Which System to adopt Mercantile or Cash?
▪ A pertinent question that may arise here is what system to
use?
▪ The Hon’ble Supreme Court in Commissioner of Income
Tax Vs A Krishna Swamy Mudaliar (1964) 53 ITR 122
observed that in some cases, neither of the two systems
mercantile system or cash system give a clear picture of the
true profits earned and certainly not taxable profits.
What Is the Actual Business Practice, Mercantile or
Cash?
▪ In actual business practice, the system of bookkeeping
followed in many cases are such that they can neither be
called “mercantile accountancy system” nor the “cash
system of bookkeeping”. They are simply mixtures of the
two systems and are styled as ‘hybrid systems of
bookkeeping’
▪ Naturally, the dilemma or question that pops up in mind at
this juncture is whether one can adopt different methods of
accounting for different sources?
▪ The Hon’ble Allahabad Hight court in JK Bankers Vs
Commissioner of Income Tax (1974) 94 ITR, has held that
there could be different methods of accounting for different
sources of income.
▪ How Does Law Impact Bookkeeping?
▪ To live, money is needed, money transactions are
intertwined with tax, and the ramifications of tax are many.
In case an entry is misconstrued and booked, impact of
law on bookkeeping arises.
▪ While determining the impact of law, it is found that some
terms used in the Act are defined exhaustively, which
cause minimum issues and are relatively easy to resolve.
▪ Some are defined inclusively; these terms are patently
clear to understand but are latent minefields.
▪ And then there are terms that are not defined at all but are
profusely used in the Act, these are the quagmires. One
has to depend on their natural meaning and decided
cases by courts to interpret them.
▪ The natural meaning comes from the nature of things.
▪ Nature of assets: Any expenditure incurred to acquire a fixed
asset or in connection with the installation of a fixed asset is
capital expenditure; whereas any expenditure incurred to
purchase goods for resale along with other necessary expenses
incurred in connection with such purchase are revenue
expenses.
▪ Nature of liability: A payment made by a person to discharge a
capital liability is a capital expenditure. Whereas an expenditure
incurred to discharge a revenue liability is revenue expenditure.
▪ For example, the amount paid to a contractor for cancellation of
a contract to construct a factory building is capital expenditure.
While the amount paid by a person as compensation for failing
to supply goods as per the contract is a revenue expenditure as
it is to discharge the revenue liability.
▪ Nature of transaction: An expense incurred to acquire a source of
income like purchase of a patent for medicine to produce it and
sell is a capital expenditure. whereas, expenditure incurred to earn
income, say like salaries paid to the employees or advertisements
or customer entertainment are revenue expenditure.
▪ Nature of purpose of transaction: If the amount is spent on
increasing the earning capacity of an asset, it is capital
expenditure. For example, redoing the décor of the reception
lounge of a hotel to create an ambiance is capital expenditure, or
fixing additional doors and windows in an industry is capital
expenditure. While any expenditure incurred on keeping an asset
in running condition is revenue expenditure. In the example just
given periodic cleaning and changing the upholstery of the seating
arrangement, painting of doors and windows periodically to
protect from corrosion, wear and tear is revenue expenditure.
CAPITAL EXPENDITURE REVENUE EXPENDITURE

Acquisition of Fixed Assets Routine expenditure

Produces benefits for several
Gets consumed in one year
years
Improves or increases earning Maintains the profit-making
capacity capacity of business

Non-recurring outlay Recurring item

Normally it is a lump sum Normally it is a periodic pay
payment out.
▪ Commissioner of Income Tax Vs. Shrimati Shingari Bai on 23 February 1945 (AIR 1945 All 102),
the facts that led to the appeal in the Allahabad High Court were,
▪ Shrimati Shingari Bai, the assessee was a professional money lender. She regularly kept her books
according to “complete double-entry bookkeeping” or “mercantile system of accounting.” For the
accounting year 1933-34 she, the assessee has shown her income from money lending to be Rs. 1499/-
▪ Only for the purpose of this return of 1933-34 she chose a cash method of accounting. When her
accounts were scrutinized, according to which all her accounts were regularly kept, the interest
account showed a credit of Rs.31,081/-.
▪ The question raised by the Commissioner of Income Tax (CIT) before the Court was, whether
according to the law in force in respect of the assessment year 1934-35, the Income-Tax Officer was
entitled to base his assessment of the profits on the ‘mercantile system” which was her own regular
system, for the accounting year 1933-34 too; or whether she – the assessee – was entitled to insist on an
assessment based only on actual receipts and actual expenditure, the “cash system” of accounting, as
per her tax-return?
▪ In his judgment Hon’ble Iqbal Ahmad, CJ held that the answer to the question referred is, “The
Income-Tax Officer, on the facts set out in the case stated, … , entitled and bound, to compute the
profits and gains of the assessee in accordance with the method of accounting regularly adopted by
the assessee, that is to say, the mercantile method of accounting. …”
▪ It can be inferred reading this judgement together with the subsequent judgement in case of JK
Bankers of the same Allahabad High Court that, you may use different methods of accounting for
different sources, but you cannot use different methods in different years for the same source of
income.
▪ One cannot duck taking the plea that it was only a
daybook entry; when it comes to scrutiny all books of
account will be scrutinized. According to Section 2(12A) of
the Income Tax Act, 1961 books or books of account,
include ledgers, daybooks, cash books, account books and
other books, whether kept in the written form or a
printouts of data. The Hon’ble Income Tax Appellate
Tribunal Delhi Bench, in Brij Lal Goyal V. Asst. CIT (2004)
88 ITD 413 held that the Books of Account mean those
books of account whose main objects is to provide
credible data and information to file the tax returns.
▪ Bookkeeping is not a mere recording of numbers but also
determining the purpose of the financial transaction in real
life situation and booking it in consonance with law under
the appropriate account head.
CLOSING OF ACCOUNTS
▪ The Closing Process is a step in the accounting cycle that occurs
at the end of the accounting period, after the financial
statements are completed. This serves to get everything ready
for the next year.
▪ The financial close process is a recurring system in which an
accounting team verifies and adjusts account balances at the
end of a designated period and before the accounting cycle
closes. It starts with documenting the journal entry for each
transaction and ends with preparing data for the next period.
▪ The entire process produces financial reporting that is
representative of a company’s true financial position. The CFO
can then use this information to inform stakeholders such as
lenders, investors, management, and regulatory agencies.
▪ What is a Permanent Account?
Permanent accounts, also known as balance sheet accounts, are the
accounts that report on activities related to one or more future accounting
periods - such as cash. At the end of the accounting period it doesn't
involuntarily go down to zero (by itself). The ending balance carries over to
the next year. They are accounts that pertain to either assets, liabilities, or
owner's equity. Another example would be a payables account.
▪ What is a Temporary Account?
Temporary accounts, also known as income statement accounts, are the
accounts related to one accounting period. These are accounts that close
out at the end of the accounting period. They do not carry over to the next
year. These accounts tend to have a specific or special purpose. Once the
purpose for the account is served, they are erased. For example, an account
to accrue commission payments to salespeople may be closed once the
commission are paid. Erasing the account means that we won't claim them
for more than one period. They are assets that pertain to revenues,
expenses, and dividends ("r-e-d accounts").
Temporary accounts are opened at the beginning of the period and used to
record transactions and events for that period. Then they're closed at the
end of the period.
The Month-end Financial Close Process
Financial close management streamlines your accounting data and ensures all transactions for the
month have been accounted for. This paints a clearer picture for more informed decision-making
and forecasted sales.
Aggregating Data
Prior to closing your books, it’s important to have all the information needed in front of you. Some
documents and data to collect include:
• Bank account information
• All revenue totals
• Petty cash fund amount
• Inventory and stock levels
• Balance sheets
• Financial statement information
• Total fixed assets
• General ledger data
• Income and expense account information
The Month-end Closing Process
When an accounting period comes to a close, there are
specific steps to take that will ensure you cover all the
bases.
1. Record all incoming cash.
2. Update the accounts payable.
3. Reconcile accounts.
4. Review all petty cash.
5. Look over fixed assets.
6. Count stock and inventory.
7. Organize and review financial statements.
8. Check expense and revenue accounts.
9. Review data before closing.
10. Prepare for the next month.
The 4 Steps in the Closing Process
▪The financial closing process involves reviewing
account balances and reducing or zeroing out,
temporary accounts before the accounting cycle
closes. Here are the four steps to make that happen:
1.Close revenue accounts to income summary (income
summary is a temporary account)
2.Close expense accounts to income summary
3.Close income summary to retained earnings
4.Close dividends (or withdrawals) to retained
earnings
Cash Transaction
A cash transaction refers to a transaction which involves an immediate
outflow of cash towards the purchase of any goods, services, or assets. Cash
transaction can be consumer-oriented or business-oriented.
A cash transaction stands in contrast to other modes of payment, such as
credit transactions in a business involving bills receivable. Similarly, a cash
transaction is also different from credit card transactions.
▪ Cash transactions are different from transactions which involve a delay in
delivery of the goods or delay in payment. Such transactions include
credit sale, forward contract, futures contract, and other margin
transactions.
▪ An example of a cash transaction is you walking into a store, buying
clothes, and paying using a debit card. A debit card payment is the same
as an immediate payment of cash as the amount gets instantly debited
from your bank account. However, credit card payments are not the same
in effect for the purchaser.
▪ Cash transactions are usually initiated by a buyer who hands over the cash to the seller
in exchange for goods or services. In some cases, a receipt may be issued to the buyer
as proof of payment.
▪ One of the advantages of cash transactions is the simplicity and convenience they offer.
Both parties can complete the transaction without the need for complicated payment
systems or third-party intermediaries.
▪ Cash transactions are also instant, meaning that once the payment is made, the seller has
immediate access to the funds.
▪ However, cash transactions also come with some disadvantages. For one, carrying large
sums of cash can be risky, making both the buyer and seller vulnerable to theft or
robbery.
▪ Cash transactions also do not offer the same level of protection as other forms of
payment, such as credit cards or online payment systems.
▪ Another drawback of cash transactions is that they do not leave a clear trail of the
transaction, making it challenging to keep track of the payments made. This can create
difficulties for businesses when it comes to accounting and record-keeping.
▪ In some cases, governments may also impose limits or restrictions on cash transactions
to combat money laundering, tax evasion, or other illegal activities. For example, in some
countries, cash transactions above a certain amount may require the parties to report the
transaction to the government.
▪ Despite the risks associated with carrying cash, some people still
prefer this form of payment because it allows them to stay within their
budget and avoid the temptation of overspending with credit cards.
▪ Others may also prefer cash transactions because they value the
anonymity it provides, as it does not leave a paper trail.
▪ In recent years, there has been a shift towards contactless payments,
which use near-field communication (NFC) technology to make
payments without physical contact. These payments can be made
using smartphones, smartwatches, or even debit and credit cards
with NFC technology.
▪ While contactless payments offer many benefits, such as speed and
convenience, they have also raised concerns about security and
privacy. Hackers can intercept the data transmitted during
contactless transactions, making them vulnerable to fraud and
identity theft.
Bulk transactions
A bulk payment is a system that allows a company/individual to make
debit payments to multiple beneficiaries. For instance, payouts. Here,
the bulk list is the list of beneficiaries that the creditor intends to pay
from a single account.
The creditor’s bank statement reflects this bulk transfer as a single
payment.
Thus, it is also known as batch payment or mass payment.
The bulk payment system streamlines the payment process, reduces
processing time, and minimises errors, making it an indispensable tool
for businesses.
In India, bulk transfers can be done directly through corporate bank
accounts. However, these solutions are plagued with issues like
working hour limitations. Moreover, they are tedious to use and have
difficult reconciliation procedures.
The bulk payment system helps businesses in several ways. They include the
following:
▪ Efficient Payment Processing: In businesses, making individual payments can be
time-consuming and tedious. A bulk payment system enables organizations to
process several transactions simultaneously, saving time and improving overall
efficiency.
▪ Cost-Effectiveness: Bulk payment systems are usually more cost-effective than
multiple individual transactions. Most banks and payment gateways offer reduced
transaction fees for bulk payments, resulting in significant business cost savings.
▪ Improved Cash Flow Management: By consolidating multiple payments into a
single transaction, organisations can better manage their cash flow and maintain
accurate financial records.
▪ Enhanced Security: Bulk payment systems offer secure transaction processing,
protecting sensitive information. It reduces the risk of fraud and unauthorised
transactions.
▪ Compliance and Regulatory Requirements: In specific industries, businesses are
legally mandated to pay multiple beneficiaries simultaneously. Bulk payment
systems help organisations comply with these regulatory requirements.
Features of Bulk Payment Systems
▪ The exclusive features of bulk payment systems include the following:
▪ Flexibility: Bulk payment systems can handle different payment types, such as
NEFT (National Electronic Funds Transfer), IMPS (Immediate Payment Service),
and RTGS (Real Time Gross Settlement), allowing businesses to choose the most
suitable option for their needs.
▪ Scheduling and Automation: These systems enable organisations to schedule
payments in advance and automate recurring transactions, ensuring timely and
accurate payment processing.
▪ Multiple File Formats: Bulk payment systems support various formats for
uploading payment information, such as CSV, XML, or Excel files. This feature
allows businesses to use their existing data formats without needing conversion.
▪ Real-time Tracking and Reporting: Organisations can monitor the progress of
their bulk payments and receive detailed transaction reports, enabling them to
maintain accurate financial records and identify discrepancies.
▪ Integration with Accounting Software: Many bulk payment systems can be
integrated with popular accounting software, allowing businesses to streamline
payment processing and maintain up-to-date financial records.
Challenges in Bulk Payment Systems
▪ One of the primary challenges in implementing a bulk payment
system is ensuring compatibility with the existing financial
infrastructure. Organisations may need to upgrade their software or
invest in new technology to facilitate bulk payments.
▪ Besides, bulk payment systems deal with sensitive financial
information. Given this, data security is a significant concern.
Organisations must implement suitable security measures to protect
their data and comply with the Reserve Bank of India's (RBI)
guidelines on data security.
▪ Moreover, bulk payment systems minimise the risk of errors, but
payment discrepancies can still occur. Businesses must establish a
system to identify and rectify payment errors promptly. In addition,
adhering to the regulatory requirements related to bulk payment
systems can be challenging for businesses. Organisations must
ensure compliance with RBI guidelines, tax laws, and other relevant
regulations.
Different Types of Bulk Payments: The different types of bulk
payments are listed as follows:
▪ Standard Domestic Bulk Payment: The Standard Domestic
Bulk Payment allows you to make payments to multiple
beneficiaries from a single account. Within this, there are certain
classifications:
• Future Dated Bulk Payments (FBULK)
• Next-Day Bulk Payments (NBULK)
• Immediate Bulk Payments (IBULK)
▪ Bulk Inter Account Transfer (IAT)
▪ Bulk Inter Account Transfer (IAT) allows you to credit funds to
funds to multiple accounts from a single debit account. Often,
Bulk IAT is used to make international payment transfers. This is
because the Bulk IAT process is more reliable and secure.
▪ Bulk Payment Systems in India
▪ The Reserve Bank of India (RBI) regulates bulk payment systems in India, making several
options available to businesses. Some popular bulk payment systems include:
▪ National Electronic Funds Transfer (NEFT): NEFT facilitates electronic fund transfers
between banks and is commonly used for bulk payments. NEFT transactions get
processed in batches at specific intervals throughout the day, and the minimum transfer
amount is ₹1.
▪ Real-Time Gross Settlement (RTGS): RTGS is a real-time payment system used for
high-value transactions, with a minimum transfer amount of ₹2 lakhs. It is often used for
bulk payments involving large sums of money.
▪ Immediate Payment Service (IMPS): IMPS is an instant payment service that operates
24/7, enabling businesses to make bulk payments round the clock. The maximum
transaction limit for IMPS is ₹2 lakh per transaction.
▪ Unified Payments Interface (UPI): UPI is a real-time payment system that enables
multiple bank accounts into a single mobile application, facilitating instant fund transfers.
UPI supports bulk payments for businesses through its UPI AutoPay feature.
▪ Bharat Bill Payment System (BBPS): BBPS is an integrated bill payment system
allowing businesses to make bulk payments for various utility services such as
electricity, gas, and water.
Trial Balance: The Basis of Final Accounts
▪ The basis of final accounts is the trial balance.
▪ The trial balance includes all the balances of the ledger
accounts, including the account balances of
expenses, revenue, assets, liabilities, capital, and
drawings.
▪ A trial balance has two columns: debit and credit. Debit
balances usually represent expenses and assets
drawings that appear in the debit column of the trial
balance.
▪ Credit balances represent revenue, capital, and
liabilities: these appear in the credit column of the trial
balance.
▪The trial balance is a connecting link between
the accounting records and the preparation of
financial statements. The availability of a tallied
trial balance is the first step in the preparation
of financial statements, as it contains the
balances of all the accounts.
▪From the trial balance, expenses and revenues
are transferred to the trading and profit and
loss account. Assets, liabilities, and drawings
are transferred to the balance sheet.
Commercial Mathematics
Commercial mathematics is an essential branch of mathematics that involves
fundamental life concepts used in businesses like taxation, banking, shares,
dividends, compound interest, profit and loss, etc. Commercial
mathematics includes necessary topics related to businesses, so it is also known
as business mathematics. Following are the few topics of commercial
mathematics:
• Money
• Compound Interest
• Banking
• Shares and Dividends
• Ratios
• Profit and Loss
• Proportions
• Percentages
• Taxation