Accounting

Fundamentals

Anuj Agarwal
ISC
 Acknowledgement
I would like to show my gratitude to
my accountancy teacher Mr Samik
Das who gave us this enriching
project and in turn helped us to
things. We were encouraged to step
out of our books and explore the
information available.
 INDEX
Sn no.
Contents

Acknowledgeme
1.
nt

2. Introduction

3. The journal

The Trial Balance

: Accounting’s
4.
Equilibrium
check

Subdivisions of a
5.
journal

6. Conclusion
Introduction:
In the interconnected world of global commerce, business decisions
hinge upon the clarity, accuracy, and interpretability of financial data. At
the heart of this intricate web of monetary activities lies the disciplined
practice of accounting. Accounting is often likened to the language of
business; it provides a structured way to capture, organize, and interpret
financial transactions, ensuring that businesses operate efficiently,
regulators maintain oversight, and stakeholders can make informed
decisions.

Furthermore, cash management is intrinsic to business operations. While

major transactions might go through intricate banking channels, many day-
to-day operations require immediate petty cash. Managing this cash,
recording its inflow and outflow, is just as crucial as handling large sums.
Moreover, as businesses invest in assets to drive growth and productivity,
they must also account for the inevitable decline in the value of these
assets over time, known as depreciation.

Objective:
This project aims to delve into the foundational elements of accounting,
providing a detailed understanding of its primary tools and their
significance in the broader context of business operations. Specifically, we
will:

1. Examine the Journal and its Subdivisions: By unpacking the

chronological recording of financial events, we'll understand how
businesses keep track of every transaction, ensuring full transparency and
accountability. Diving into the subdivisions, we will distinguish between
different types of journals like sales, purchases, and cash receipts.

2. Explore the Ledger and its Classifications: Post-journalization, the

ledger acts as a comprehensive repository for financial data, categorized
into specific accounts. We'll delve into the types of ledgers, from assets
and liabilities to revenues and expenses, understanding their role in the
bigger picture.
3. Understand the Trial Balance: As a checkpoint in the accounting cycle,
the trial balance ensures the mathematical accuracy of the double-entry
system. We'll investigate its importance and how it prepares the data for
subsequent financial statements.

4. Study Cash Books: In the day-to-day operations of a business, cash is

king. We'll explore how businesses manage and record their cash
transactions, differentiating between the main cash book and the petty
cash book.

5. Delve into Depreciation: Assets are pivotal for businesses, but they
don't last forever. Through an exploration of depreciation, we'll
understand how businesses account for the reduction in asset value
over time.

The Journal: An Accounting

Foundation

Introduction
In the realm of accounting, documenting each financial transaction is
paramount to maintain clarity, accuracy, and consistency. This intricate
process begins with the recording of every monetary event in a 'Journal'.
Renowned as the 'book of original entry', the journal chronicles business
transactions in the order they occur, laying the groundwork for subsequent
accounting activities.

The Essence of Journalizing

To journalize, one
needs to:

1. Identify the Accounts Involved: Before making an entry, discern which

accounts will be affected by the transaction.
2. Determine the Amount: Ascertain the monetary value of the
transaction.
3. Decide Debit and Credit: According to accounting rules, decide which
account will be debited and which will be credited.
4. Document with Date and Description: Each entry is dated, and a brief
description accompanies it to provide context.
Subdivisions of Journal

While some businesses might use a general journal to record all

transactions, larger enterprises often employ specialised journals to
streamline the process and group similar transactions. These
subdivisions cater to specific transaction types:

1. Sales Journal: This journal is dedicated to documenting credit sales of

merchandise. Businesses that offer their products or services on credit
find the sales journal invaluable. Each entry denotes a sale where
payment is expected in the future. Cash sales, however, are not recorded
here.

2. Purchase Journal: Like its sales counterpart but for the buying side, the
purchase journal captures credit purchases of merchandise. If a company
buys goods on credit to be paid later, it's entered here. Immediate cash
purchases are excluded.

3. Sales Returns and Allowances Journal: Business isn't always

seamless. Occasionally, customers return products or seek allowances for
damages. Such transactions, which represent reductions in sales, are
chronicled here.

4. Purchases Returns and Allowances Journal: This is the buying side's

mirror to the sales returns journal. If a business returns goods to
suppliers or gets allowances for some discrepancies, those transactions
find their way into this journal.

Conclusion

The journal, with its chronological order and detailed descriptions, serves
as the foundational bedrock of the accounting process. It ensures that
every financial event is captured, providing a transparent trail of a
business's financial history. Whether using just a general journal or a
combination with specialised journals, the act of journalizing remains a
critical step in shaping the financial narratives of businesses.
 The Trial Balance: Accounting’s Equilibrium Check

Introduction

After meticulously recording financial transactions in journals and

systematically posting them to ledgers, an essential intermediary step
before drafting the final financial statements emerges: preparing the Trial
Balance. As the name suggests, the Trial Balance is an attempt to balance
the books. It’s a worksheet, not a formal part of the financial statements,
where total debits and credits from all ledger accounts are juxtaposed to
ensure they are equal.

Purpose of the Trial Balance

1. Foundation for Financial Statements: It serves as a draft and the

groundwork for creating detailed financial statements. By listing account
balances, the Trial Balance aids in the systematic preparation of Income
Statements, Balance Sheets, and the Cash Flow Statement.

2. Error Identification: If there's a discrepancy between total debits and

credits, the Trial Balance can pinpoint potential areas of error,
prompting further review and rectification.

Sub-Divisions of a journals
1. Sales Journal (SJ): Used to record credit sales of goods. Only sales of
merchandise on credit are recorded here. Cash sales are recorded in the
cash receipts journal.
2. Purchases Journal (PJ): This is for credit purchases of merchandise.
Cash purchases, instead, are recorded in the cash payments journal.

3. Cash Receipts Journal (CRJ): As the name suggests, this journal records
all cash inflows or cash received by the business, such as cash sales or
collections from customers.

4. Cash Payments Journal (CPJ): This journal records all cash payments
or outflows, like paying expenses or suppliers.

5. Sales Returns and Allowances Journal: Records the returns and

allowances related to goods sold on credit. It captures instances when
customers return items or get a rebate for damaged goods.

6. Purchases Returns and Allowances Journal: Chronicles returns and

allowances from goods purchased on credit. It’s used when a business
returns goods to a supplier or receives a concession for some defect.

7. General Journal (GJ): Also known as the journal proper, the general
journal is a catch-all for entries that don't belong in the specialized
journals. This includes unique or infrequent transactions such as adjusting
entries, closing entries, and corrections.
Conclusion: Understanding the Pillars of Accounting

From journals to ledgers, trial balances to cash books, and the critical
concept of depreciation, the vast expanse of accounting is marked by
its structured processes and practices. The core objective of all these
elements is to capture, record, and present financial transactions with
accuracy and clarity.

The journal is often the starting point, capturing the raw data of every
financial transaction. It's the initial record, chronological in nature,
detailing the economic activity of an organisation. This raw data then gets
organised in the ledger, the cornerstone of financial information, where
transactions are systematically grouped by accounts.

Next, the trial balance comes into play as a litmus test, ensuring the
arithmetic correctness of the double-entry system. Its equilibrium is a
checkpoint, ensuring that for every debit, there is an equal and opposing
credit, affirming the foundational principle of accounting.

Lastly, the concept of depreciation epitomises the forward-looking nature

of accounting. By accounting for the wear and tear or obsolescence of
assets, businesses not only adhere to the principle of prudence but also
ensure that financial statements reflect a realistic view of the asset's
value.