1A03FOA FOR STUDENTS UNIT2.pdf

1A03FOA: FOUNDATION OF ACCOUNTING Unit 2:Journal Entry and Depreciation: Compiled by Bhumika Patel Content ◦ Journal Entry, ◦ Ledger, Posting and Trial Balance, ◦ Cash Book, ◦ Accounting Errors, ◦ Depreciation: Meaning, ◦ Need & imp...

1A03FOA: FOUNDATION OF ACCOUNTING Unit 2:Journal Entry and Depreciation: Compiled by Bhumika Patel Content ◦ Journal Entry, ◦ Ledger, Posting and Trial Balance, ◦ Cash Book, ◦ Accounting Errors, ◦ Depreciation: Meaning, ◦ Need & importance of depreciation, ◦ Methods of charging depreciation (Straight line method and Written down Value Method) 2  Double Entry System ◦ It was in 1494 that Luca Pacioli the Italian mathematician, first published his Compiled by Bhumika Patel comprehensive treatise on the principles of Double Entry System. The use of principles of double entry system made it possible to record not only cash but also all sorts of Business transactions. It had created a profound impact on auditing too, because it enhanced the duties of an auditor to a considerable extent. ◦ Features of Double Entry System ◦ (i) Every transaction has two fold aspects, i.e., one party giving the benefit and the other receiving the benefit. ◦ (ii) Every transaction is divided into two aspects, Debit and Credit. One account is to be debited and the other account is to be credited. ◦ (iii) Every debit must have its corresponding and equal credit. 3 JOURNAL Compiled by Bhumika Patel ◦Books of Prime Entry ◦A journal is often referred to as Book of Prime Entry or the book of original entry. In this book transactions are recorded in their chronological order. ◦ The process of recording transaction in a journal is called as ‘Journalisation’. The entry made in this book is called a ‘journal entry’. 4 Functions of Journal Compiled by Bhumika Patel ◦ (i) Analytical Function: Each transaction is analysed into the debit aspect and the credit aspect. This helps to ◦ find out how each transaction will financially affect the business. ◦ (ii) Recording Function: Accountancy is a business language which helps to record the transactions based on ◦ the principles. Each such recording entry is supported by a narration, which explain, the transaction in simple language. Narration means to narrate – i.e. to explain. It starts with the word – Being … ◦ (iii) Historical Function: It contains a chronological record of the transactions for future references. 5 Advantages of Journal Compiled by Bhumika Patel ◦ (i) Chronological Record: It records transactions as and when it happens. So it is possible to get a detailed day to- day information. ◦ (ii) Minimizing the possibility of errors: The nature of transaction and its effect on the financial position of the business is determined by recording and analyzing into debit and credit aspect. ◦ (iii) Narration: It means explanation of the recorded transactions. ◦ (iv) Helps to finalize the accounts: Journal is the basis of ledger posting and the ultimate Trial Balance. 6  Compiled by Bhumika Patel ◦ Explanation of Journal ◦ (i) Date Column: This column contains the date of the transaction. ◦ (ii) Particulars: This column contains which account is to be debited and which account is to be credited. It is also supported by an explanation called narration. ◦ (iii) Voucher Number: This Column contains the number written on the voucher of the respective transaction. ◦ (iv) Ledger Folio (L.F.): This column contains the folio (i.e. page no.) of the ledger, where the transaction is posted. ◦ (v) Dr. Amount and Cr. Amount: This column shows the financial value of each transaction. The amount is recorded in both the columns, since for every debit there is a corresponding and equal credit. ◦ All the columns are filled in at the time of entering the transaction except for the column of ledger folio. This is filled at the time of posting of the transaction to ‘ledger’ 7 General Journal Compiled by Bhumika Patel ◦ This is a book of chronological record of transactions. ◦ This book records those transactions which occur so infrequently that they do not warrant the setting up of special journals. ◦ Examples of such entries: ◦ (i) opening entries (ii) closing entries (iii) rectification of errors 8 Example: 1 Compiled by Bhumika Patel As per voucher no. 31 of Roy Brothers, on 10.05.2020 goods of ` 50000 were purchased. Cash was paid immediately. Ledger Folios of the Purchase A/c and Cash A/c are 5 and 17 respectively. Journal entry of the above transaction is given bellow: Date Particulars Vouch (LF) Debit Credit er (RS.) (RS.) 10/05/202 Purchase Ac 31 5 50,000 0 Dr. 17 50,000 To Cash Ac (Being goods purchased in 9 cash) LEDGER ACCOUNTS Compiled by Bhumika Patel ◦ The book which contains accounts is known as the ledger. Since finding information pertaining to the financial position of a business emerges only from the accounts, the ledger is also called the Principal Book. ◦ As a result, all the necessary information relating to any account is available from the ledger. This is the most important book of the business and hence is rightly called the “King of All Books”. Also Known as Book of Final Entry. 10  EXAMPLE: 2 ◦ From the following information, state the nature of account and state which account will be debited and which will be credited. ◦ 1. Started business with a capital of ` 50,00,000. ◦ 2. Wages and salaries paid ` 50,000 ◦ 3. Rent received ` 2,00,000 ◦ 4. Purchased goods on credit ` 9,00,000 ◦ 5. Sold goods for ` 8,16,000 and received payment in cheque. Compiled by Bhumika Patel 11 Solution: 1. Bank A/c Dr. To Capital A/c 2. Wages/ Salaries Dr. To Bank A/c 3. Bank A/c Dr. To Rent A/c 4. Purchases A/c Dr. To Creditor A/c 5. Bank A/c Dr. To Sales A/c Compiled by Bhumika Patel 12