BILL OF EXCHANGE

An instrument in writing containing an unconditional order. Signed by the maker, directing a certain person. To pay a certain sum of money only to or to the order of a certain person or the the bearer of the instrument. It means that if an order is made in writing by one person on another directing him to pay a certain sum of money unconditionally to a certain person or according to his instruction or to the bearer, and if that order is accepted by the person on whom the order was make, the documents is a bill of exchange.

Essentials of a bill of exchange

1. It should be in writing.

2. It should contain an order by the seller to the purchaser to make the payment in future does not amount to a bill of exchange.

3. The order contained in the biol should be unconditional. A bill of exchange with a conditional order can not be made payable.

4. The maker of the bill or the seller is known as drawer and the bill must be signed by him otherwisee. It will be invalided.

5. The purchaser upon whom the bill is drawn is known as drawee and he must be a certain person.

6. Amount ordered to be paid by the drawer in a bill must be certain and it should be in money alone and not in goods.

7. The person to whom payment of bill is to be made is known as payee and he must be a certain person or the bearer of the bill

MEANING, IMPORTANCE AND LIMITATIONS OF FINAL ACCOUNTS

Any business is started with an objective of earning profits. As such the business concerns are interested to know
A. Results of the business I.e. profit earned or loss incurred during the year will be calculated by preparing trading and profit and loss account which is also known as income statement.
B. Financial position of the business I.e. assets and liabilities at the year end will be calculated by preparing balance sheet.
The above two are Aldo called as financial statement since they show the financial results and financial position of the business. They are also called as final accounts as they are prepared at the end of the accounting cycle. I.e., transaction, journal/subsidiary books, ledger, trail balance and final accounts

Importance of final accounts.

1. Reveals financial results of the business i.e., profit or loss

2. Reveals financial position of the business I.e., assets and liabilities .

3. Liquidity and solvency of the business can be understood.

4. Helps in tax calculation.

Limitations of final accounts

1. Profit or loss true picture can not be calculated

2. Assets and liabilities values also not accurate

3. Window dressing is possible in preparing final accounts

4. Personal options of accountants/owners will influence final accounts to some extent.

PREPARATION OF TRIAL BALANCE- PRICEDURE

1. As the trial balance is prepared on particular date that particular date should be shown in the head of trial balance.
2. Trial balance is prepared in the form of statement containing so no, Name of the account, ledger Folio, debit balance and credit balance.
3. The debit balance of the accounts are to be written in debit column, where as credit balanced of the accounts to be written in the credit column of trial balance. The totals of both columns should be equal, it proves arithmetical accuracy.

Aspects to be considered while preparing trial balance

First prepare the format of trial balance showing heading with date on which it is prepared. Whenever the balance of ledger accounts are given based on the nature of the account decide whether the account us debit or credit.

Generally the accounts which show debit balance are the accounts of various assets, expenses and losses, debtors, drawings etc. The accounts which show credit balance are capital accounts, loan a/c, profit and gains a/c etc.

METHODS OF PREPARING TRIAL BALANCE

A trial balance can be prepared in the following two methods.

1. Totals method

Under this method, debit total and credit total of each accounts of ledger are recorded in trial balance. In this method, all accounts of ledger without balancing them will be totalled and recorded in trial balance in their respective rows.

2. Balances method

Under this method, only balance of each account in ledger is found out and recorded in trial balance. All the accounts at end of the year are balanced from the view point of trial balance. All the accounts may be grouped into the following three types.

A. Account showing debit balances.

B. Account showing credit balance

C. Account showing nil/ no balance

While preparing the trial balance all the accounts with debit balance are shown on the debit side of the where as all the accounts with credit balances are shown on the credit side of trial balance.

MERITS AND DEMERITS OF TRIAL BALANCE

Merits of trial balance

1.  It helping in finding out the arithmetical accuracy of the accounts in the ledger.

2. Trading, profit and loss account and balance sheet are prepared on the basis of trial balance.

3.it will help in detecting the errors in the books of accounts and in their rectification.

4. Trial balance enables us to know balance of all accounts in one place.

Demerits of Trial balance

1. Trial balance tallied even though errors are existing in the books of accounts.

2. It is only possible to prepare trial balance of an organization, if the double entry system is followed, which is costly and time consuming.

3. Even if some transactions are omitted the trial balance tallies

4. Trial balance us not prepared in a systematic method the final accounts prepared. On the basis of trial balance do not depict the actual financial position of the concern.

TRIAL BALANCE, FEATURES OF A TRAIL BALANCE

Trial balance is a statement in which debit and credit balances of all ledger accounts are shown to test the arithmetical accuracy of the books of account. Trial balance is ledger is not conclusive proof of accuracy of books of accounts.

Features of a trial balance

1. It is not an account, it is only a statement which is prepared to verify the arithmetical accuracy of ledger accounts.

2. It contains debit and credit balances of ledger account.

3. It is prepared on a particular date generally at the end of business year.

4. Trial balance helps in preparing final accounts.

5. As it is prepared by taking up the ledger account balance, both debit and credit side of a trial balance are always equal.

6. The preparation of trial balance is not compulsory. There is no hard and fast rule in this regard.

BANK RECONCILIATION STATEMENT IMPORTANCE

Bank Reconciliation statement, is a statement prepared at periodical intervals, with a view to indicate the items which cause disagreement between the balances as per the bank columns of the cash book and the passbook, on any given date.

Importance of bank reconciliation statement

A. Similarity of balance between cashbook and passbook canbe confirmed by accountant, with the help of bank reconciliation statement.

B. It also helps, to detect, any mistakes that have taken place in both the cash book and passbook.

C. It also prevents the frauds, by recording disagreement between both balance.

D. Any undue delay in the clearance of cheque will be shown up by the reconciliation statement.

E. This statement is prepared only by business concerns.

F. To reveal exact cash balance lying with the bank.

TYPES OF CASH BOOK

The form of cash book mainly depends on the need, size and network of the business. There are different types of cash books maintained by business organizations. They are.
1. Simple cashbook or single column cashbook or one column cash book.
2.Double column cashbook or two column cashbook.
A. With cash and discount columns.
B. With bank and discount columns
3. Three column cashbook or triple column cashbook.
4. Analytical petty cashbook.

IMPORTANCE OF CASH BOOK

Among the entire subsidiary books cash book is one of the important book. In this book, we record particulars of receipts and payment of money. The main objective of cash book, is to know the balance of cash at any given time. The person who maintains this books is knowns as cashier. It records only one aspects of transaction i.e. cash. The number of cash transaction are more in the business, so the cash book should be prepared and maintained with utmost care.

Business transaction are mainly of two kinds

1. Cash transaction.

2. Credit transaction.

 The credit transactions of the business are recorded in the related subsidiary books. All cash transactions should be recorded in a separate book known as cashbook.

Cash transactions are of two types

1. Cash receipts

2. Cash payment.

 Cash receipts should be recorded on debit side and cash payments the credit side. The difference between total and credit total reveals the balance of cash.

Generally cash book shows debit balance. Business organisations can not pay more than what they receive. In other words cash receipts are more than cash payments or both may be equal.

ADVANTAGES OF CASH BOOK

1. To know the cash and bank balance of the business unit at any time
2. To know how  much received and how much amount of cash paid.
3. Fraud or mistakes can be detected by verifying the closing balance of the cash book with actual amount of cash on hand.
4. It serves as a journal as well as a ledger.

CASH BOOK AND CHARACTERISTICS OF CASH BOOK

The cash book is both a book of prime entry i.e. journal and ledger. It plays double role of journal as well as ledger. Hence it is also called as book of final entry.

Characteristics of cash book

1. Only cash transactions are recorded.

2. It is a susidiary book

3. Cash booK is also called as cash account

4. It's performance and pulling is similar to ledger account i.e debit and credit columns on the both sides of the account.

5. Generally cashbook always shows be

Dedit balance

TYPES OF SUBSIDIARY BOOKS

As we know, the journal is divided into eight subsidiary books. They are.

1. Purchases books

This books records all credit purchase of goods. Cash purchases and purchase of assets are not recorded in this book.

2. Sales books

The goods sold on credit are recorded in this book. Cash sales and assets sold for cash or credit are not recorded in this books

3. Purchase returns books

This book also known as returns  outward book. This book records the goods returned to the suppliers 

4. Sales return book

It is also known as returns inward book. In this book all the goods returned by the customers are recorded. It records the returns of goods sold on credit only.

5. Cash book

The cash book is meant to record all cash transaction. In other words cash receipts and cash payments either in cash or by cheque are recorded in this book.

6. Bills Receivables books

In thus book all the bills received from customers for the amount due for the goods sold on credit are recorded. It contains the details of acceptor of the bills, its due date, date of bill the amount due etc.

7. Bills payable book

If the goods are purchased for credit or loans are taken. The bills are accepted by the trader. All these bills payable are recorded in this book. It contains, amount due date of the bill, place of payment, due date etc.

8. Journal proper

This book is used for recording only those transaction which can not be recorded in any one of the seven subsidiary books mentioned above. Now let us discuss each of these subsidiary books.

SUBSIDIARY BOOKS AND ADAVANTAGES

We studied about journal and ledger. All business transactions are first entered in the journal and later they are posted in the ledger. It is possible and easy to record each and every transaction in the journal, when the size of the business is small. But it becomes difficult to record numerous transactions in the journal for the large scale oraganizations. Which results in wastage of time, labor and stationary. So in big business organization, where the number of transaction are large, the journal is subdivided in such a way that a separate books is used for each category of transactions which are repetitive in nature and sufficiently large in number. These separate books or special books are known as SUBSIDIARY books. SUBSIDIARY journal or day books.

Advantages of subsidiary books

1. No need of writing the journal entries. Transactions are entered directly into their respective journal.

2. Ledger accounts can be prepared on the basis of subsidiary books.

3. Recording of transaction is fast and easy.

4. These books help in the checking of ledger postings. If the trial balance does not agree the errors can be easily detected by verifying the subsidiary books.

5. Division of work can be implemented by entrusting different subsidiary books to different persons which improved efficiency of recording. Accounting work will be done efficiently 

6. Posting of total amount in several ledger accounts instead of writing them separately.

7. Labor involved and time can be saved.

8. Information relating to similar type of transaction will be available at one place. Eg relating to sales or purchase, cash, bank etc.

CLASSIFICATION OF LEDGER ACCOUNTS

The number of transaction depend on size and volume of business. When the firm small the number of transaction limited. When the firm is large the number of transaction are more. The Enterprise having large volume of transactions will divide their ledger into.

A. Debtors ledger or sales ledger

In this ledger the account of all the customers debtors who regularly purchase goods from the business on credit are maintained. All transactions relating to each customer is posted to their respective accounts. It is easy to ascertain the amount due from each customer at any point of time. The debtors' ledger shows debit balance

B. Creditors ledger or purchase ledger

In this ledger the account of all the suppliers trade creditors from whom the business purchase the goods on credit are maintained. All transactions relating to each supplier is posted to their rest accounts. It is easy to ascertain the amount payable to each supplier at any point of time. The creditors' ledger shows credit balance

C. General ledger

In this ledger all accounts related to the assets, incomes, expenses are maintain. 

LEDGER AND ADVANTAGES OF LEDGER

The a book which contains various accounts. It contains of the Enterprise whether real or personal or nominal to which the transaction recorded in the books of original entry are transferred. All debit and credit aspects. Which are recorded in the journal are transferred to the respective Accounts in the ledger.

Advantages of ledger

A. It provides complete information about all accounts in one book 

B. It is easy to ascertain how much money is due to suppliers  ledger and how much money is due from customer

C. It enables to ascertain, what are the main items of revenues/incomes

D. It enables to ascertain what are the main items of expenses.

E. It enables to know the kind of assets the Enterprise holds and their respective valued

F. It facilitates preparation of trial balance and thereafter preparation of financial statement i.e. profit and loss Accounts and balance sheet.

JOURNAL AND ADVANTAGES OF JOURNAL

A journal is a book in which transactions are recorded in the order in which they occur i.e. chronological order. A journal is called a book of prime entry or original entry, because all the  business transactions are entered first in this book. The process of recording a transaction in journal is called journalizing. The entry made in the journal is called journal entry.

Advantages of journal entries

A. Chronological order

Transaction are recorded in a chronological journal. Hence, when any information is required, the information can be traced out quickly and easily.

B. Explanation of transaction

Each journal entry entered in the journal gives brief narration explanation of the transaction. Such as invoice no. For purchased or sales, cheque no. For  receipt payment by cheques etc.

C. Record of both aspects

Both debit and credit aspect of a transaction are recorded in journal. Since the amount recorded in debit amount column and credit amount to column must be equal. Therefore the possibility of committing errors is reduced and the detection of errors, if  any, committee become easy.

ACCOUNTING CYCLE AND MAJOR STEPS IN ACCOUNTING CYCLE

The accounting cycle is the process of recording business transaction and processing accounting data to generate useful financial information i.e. financial statement including income statement, balance sheet, cash flow statement and statement of shareholders equity. The time period principle required that a business should prepare it's financial statement after a specified period of time, say a year, a quarter or on a monthly basis. This is achieved by following the accounting cycle during each period. Accounting cycle starts from recording individual transaction  in the books of accounting and ends at the preparation of financial statement and closing process.

Major steps in accounting cycle

1. Identify the transaction

2. Analyzing and recording transaction via journal entries

3. Posting transaction to ledger accounts

4. Preparing unadjusted trial balance

5. Preparing adjusting entries at the end of the period.

6.  Preparing adjusted trial balance

7. Preparing financial statement

8. Closing temporary Accounts via closing entries

9. Preparing post closing trial balance

CLASSIFUCATION OF ACCOUNTS

In double entry bookkeeping system all the transitions are divided into two typed of accounts. Personal accounts and impersonal accounts. The impersonal accounts are further sub divided into Real accounts and normal accounts. This there are three types of accounts in all. They are personal accounts, real accounts and nominal accounts. They are explained as under.
A. Persoonal accounts
Personal accounts related natural persons, artificial persons and representative personal accounts.
 Ramesh's a/c Khan's a/c; natural persons
Ram &co. A/c Andhra bank a/c : artificial persons.
Out standing salaries a/c and rent receivable a/c:representative persons
B. Real accounts
Real accounts related to both tangible and intangible assets.
Tangible assets- buildings a/c, machinerya/c.
Intangible assets- Goodwill a/c, copy rights.
C. Nominal Accounts
Nominal accounts related to expenses, losses incomes and gains.
Expenses: salary a/c wages a/c purchase a/c.
Losses: depreciation, bad debts stock lost by fire
Income:sales a/c, commission received a/c etc
Gains: bad debts recovered, increase in the value of assets etc.