Welcome Friends, you are welcome to learnvern. I am Anshu Sachan.
In the last session we saw, transaction vs financial transaction. And about how to identify a financial transaction. Then we saw the financial accounting of the financial transaction. How to do accounting in Books of Account.
Now, we have talked about books of account, I have said something to you about the books of account. If you are talking about it in practical life, then the books of account is generally known by its shortcut, that is BOA, or it is just called accounts. So today, we will be learning about the books of account. You can see on your screen, the meaning of books of accounts is, a place where the recording of all the transactions happens. Whether it is a physical book or a digital one. Right.
Physical books, you might know, 10 to 15 years ago when the softwares like Tally were not there, still the business transactions used to occur, as there were business. The income tax was still there, the books of account were still there, and also the accounts. The book keepers used to keep a physical book. But as we progressed, as India became digitised, the world became digitised. New innovation kept happening in the field of accounts. As you all might know, the most famous accounting software in India is called Tally. In which the requirements of the smallest business to the largest one are fulfilled. In almost 90 percent of cases, the businesses are using Tally. Apart from tally there are a lot of softwares like Sap. Sometimes, as the company starts to grow, they start to create their own softwares for accounting. So, do we consider those to be books of account? Yes, if the day to day business transactions are being recorded, either in a hardcopy or either on a software or even in an excel. You might have made a microsoft excel in which you record sales and purchase, only two things. My business is very small, there are hardly 10 to 12 transactions performed in a day. So I don't want to pay the money for tally software. I do not wish to invest my money in software, because these softwares are also expensive. So if I am doing 10 to 15 transactions daily, I am maintaining a simple excel.
Now, why excel? I could have used a physical book. You might know, keeping a physical book, writing in it, then keeping it stored, maintaining it, is quite difficult. It is usually a better option to maintain an excel. In any business that is around nowadays, a computer is a pre-requirement for the functioning. If you want to do the business, then you should have the computer. For any business, a computer is required so that I can maintain the record of the day to day transaction.
So, the very basic requirement is to maintain the day to day transaction in a basic way in excel. So, this is also known as the books of accounts. In short, if the day to day transaction that has been happening is being recorded in a place by me then it will be called a books of account. You can also look at the screen. I have given you both the examples. We used to maintain a physical book a while ago, called a ledger. The second one is based on softwares like Tally.
Let's look ahead, as to what are the things that are added in the books of account. In any business the entries might get changed according to the business, it might get added or subtracted. But the things that you can see on your screen are called general accounts. These are the things that will be there in any book. Whether it is a small business or a large one, whether it is a retail industry or a service industry. These books would remain common. The first one is a sales book. As the name suggests, it used to record the day to day sales transaction, that will be recorded. It can be an advance from the customer, or a sale to the customer on a credit basis. Take the product today and pay me the amount in 30 days. So, those invoices would be booked in the sales book. All the invoices that will be raised or issues, will be maintained in the sales book. It will be a type of sales ledger.
The second one is a purchase book. You know the meaning of purchase, whatever thing that I purchase, either it is material, or any other expenses. Sometimes what happens is, a business maintains two different books according to its requirements. One is a purchase book and one is an expense book. Now the reason for maintaining two different books for purchase and expense.
Imagine that I am in a retail business. So what I do is, I purchase from manufacturers. Then further I sell to the retailers. That means in my accounts of my business, the day to day transactions of the sales and purchase of materials are very much. Okay. So what I do is, a different sales book and a different purchase book and the day to day expenses that I have, like postage expense, or stationary expense, or some cleaning expense or some office expense or a salary book, or I pay salary to my employees. So all these I will keep in an expense book. Which means when you get into a practical life, then you might see there are two books. One is for purchase separately, which is used generally for the material purchase and the other one for the expense. These expense can be your cash payment or it is also possible that it is your electricity expense. Okay. For that you can pay a cheque or you book an invoice and then make a payment. So it can include cash expenses and also the credit expense. That expense book is maintained separately.
The second one is a bank book. You all might know that, whatever bank transaction that we will do, on a day to day basis for our business associated with the bank. Suppose, we have issued a cheque to Mr A which is our supplier. Okay. As soon as we have issued the cheque of 10k. You need to make an entry. As it is a bank, check is issued, money will go out. So the bank will be credited. What will be debited in front? Mr A will be debited. If we have given advance or credit to him, so Mr A will get debited and the bank will get credited.
So any entries related to the bank, where will I maintain it? In the bank book. Suppose that If the bank has charged some interest, or if they have levied some accounting charges or service charges, or consolidated changes, those charges he has debited from our account. So, where will all that be recorded? It will be recorded in our bank book.
Then the next one is Petty cash, you should know that when you are doing a business then there are some expenses that keep on happening on a day to day basis. Like tea expenses, or flowers expenses for the Prayers that we do in the morning. All these small expenses that happen daily. So, what happens everyday is, you keep 500, 600 or 800 or even 1000 rupees in your cash drawer, according to the size of your business. So that you can payout the small expenses from there. So the small expenses that you do can be recorded in a petty cash book. Why is it called petty, because it is a small amount, like 500, 600, 1000, according to your business. How will this amount be decided? On a day to day basis, how much amount of money are you paying for the expenses, in cash. Like this, you would maintain a petty cash book.
Another one is Inventory Book. It can also be called a stock register. Suppose we make machinery, so we have 5 to 10 machinery in stock and we already have the order for 5 to 6 machinery. So, when we make a purchase we will have an inward register and when we make a sale there will be an outward register. Inward means, machinery received and outward means machinery was sent. Okay. So the stock that we will be maintaining, like this much on “As on date”, on today's date if we receive an order then, will I be able to fulfil the order or not?
Or if I personally need to place a purchase order of something, so that I will purchase something and then I can sell it further to a customer. So this all is called inward and outward register. What is it called? Inward and Outward.
In many places, it also happens, that inward and outward is so much, that there is also a store keeper. Then it is also called a store book. Store keeper maintains the inventory, and the book is called store keeper book or else inventory book or else stock book. Right.
Then the next one is a fixed asset. You all know, if you want to start a business then you need some kind of investment. You need some fixed assets, like some kinds of computers and other things like air conditioners and refrigerators, if your business requires it, you might need a refrigerator. So what are all these? These are your fixed assets. And, as the time passes there would be some wear and tear, the price of the item would also decrease and depreciation would be added to it. You might know about depreciation of fixed assets. As we use the fixed assets, the depreciation is clubbed to it. The amount of it starts to depreciate slowly.
Imagine you bought a refrigerator for 25 to 30 thousand, and after 2 to 3 years. The value of it would not be 30 thousand, it would have depreciated and its value would be near to 15 to 18 thousand. So there is also a fixed asset register. Suppose during the year, that is our reporting period, in that time we have bought machinery or we bought a refrigerator. That is our fixed asset, that is an addition to our fixed asset. Like we have 10 to 12 refrigerators and now we have one more. So that is an addition. Now, where would it be maintained? It would be maintained in the fixed asset. Likewise suppose, you have bought a vehicle for the business. Your business is in such a way that you have a requirement for that vehicle. You need that vehicle in that business. So what you do is, you purchase a car. Then that vehicle will be an addition to the fixed assets of the business. So where will it go? It would go in addition. Okay. Fixed asset addition. And where will it be shown? In the fixed asset register.
Similar to this, there is depreciation. So every month or annually, by whichever means you decide, you will need to calculate the depreciation of the asset. Okay. Where would this thing be maintained? It would be shown in the fixed asset register, as we bought a vehicle for 50 thousand and on a rate of 10 percent we have calculated the depreciation of 5k for this vehicle. So after 1 year, the value of it is 45 thousand in the books of account.
Now let's also suppose that we have sold a vehicle in the current vehicle. I have had it for the last 5 to 6 years, and it was under the name of the business, and I had also shown it in the fixed asset register. Also, I have been annually depreciating it, and now in the current year, I have sold this vehicle. So, where will the effect of it appear? In the fixed asset register.
Anything related to the fixed assets, like purchase or either depreciate, or even if it is stolen, or became obsolete, or you might have sold it. All of its effects would appear in the fixed assets register. Okay.
If you have any queries or comments….
In the next session, we will be learning about what the fundamental accounting rules are and what the fundamental accounting assumptions are and also the various accounting types.
Until then, Thank You.
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