Welcome Friends, you are welcome to learnvern. I am Anshu Sachan.
In the last session we saw what are the accounting ledgers and what are the methods of writing the accounts. In today's session we will be learning some new things. We already understand what we call accounts, what are transactions, and what is a ledger. Various different terminologies that are used in accounting, like day book, sales book, purchase book. We know about it all. But, we still are not able to understand where to start our bookkeeping process.
Look, first of all, the first step is for you to understand which type of business you are involved in. Okay? Lets understand this with a simple example. Imagine I run a garage. I have a garage for two wheelers and four wheelers. I repair those vehicles. Right. And for that garage I have purchased some tires. Okay. So, when I will be posting this, then it will go in purchase. Getting me? And the same thing, If I am not a person who owns a garage, and do some other kind of business, but I have purchased some tires for my own vehicle. So what will be that? That would not go in my purchase, it will go in my motor expense. So, you can understand. The same tire is purchased. A purchase of a tire, that's the same transaction, would be different. For someone it can hit a purchase account and for someone it can hit the motor expense. Now, how will this be decided. It would be decided on the basis of, which business you are involved in. You need to identify your own business activity. Even when you are reviewing someone’s books of account. Someone might have called you to check their books of account, whether they are right or wrong. So the first thing that you need to do is, check which business you are involved in. Then only we would know, what will be the related transactions and what would be the main source of income and also the main source of expense. What the assets can be for the business and what the liabilities are for the business.
Suppose there is a coaching institute. As an example let's take a coaching institute. What would be the main source of income for that? It would be the tuition fees that are paid by the students, that would be their main source of income. Now, what would be the main source of expense for them? It could be the salary of the faculty, or it could be the white boards or the stationery that is being used in the institute, that will be their main expense. When you will be seeing this institute’s profit and loss statement or balance sheet, then you will find the main source of expense, but in you head you have already decided the main source of expense, that is faculty expense so, the faculty expense should be more. Then only you could cross verify, that the accounts are properly written or not. So the first thing, whether you are writing books of account or reviewing books of account. The very first step is, to understand, in which particular activity does this business deal with, what’s the main business. You need to look at that, it might be a consulting firm, it can be a manufacturing, retail or service industry, it can be a professional, it can be a job worker. So, these are various different types of business. And according to the business there would be different kinds of income and expenses, its assets and liabilities would also be different.
So, the very first step you need to find out is the business activity. The second one, what is its reporting period. I have earlier told you the meaning of the reporting period. It is for which time period the books of account is written. Like, in India, the books of accounting period is decided on two ways. The first is based on the calendar year that is from the month of January till December. The second one is the financial year, that is from APril to March. So,you need to decide, as for which period you need to write the books of account. The other thing when you review it then, you need to look at the reporting period. Now, how would you know it? If you are writing the account and you have the previous track then you need to consistently follow it. Generally the reporting periods do not change. YOu need to decide on a consistent basis, that if you want to go on a calendar basis then you will go with the calendar basis and if you have decided that you want to go on a financial year basis then you will have to continue with the financial year on a consistent basis.
I had said you need to maintain consistency. Only two things can happen, when you could change your consistency. Like I have been seeing from the last four years. The accounts that I have been writing in the calendar year, that is not giving me a clear picture. True and fair value, meaning the true value that my business has, or the actual picture, that is not close to the reality of the business, then if I change the reporting year from calendar year to financial year. Then I think that, the books of account would be very close to reality. So, in this condition I can change it. In the second condition, in which the government have given a notification. As whatever accounts are there in India, whatever businesses are happening everyone have to follow an accounting method, from April to March only.
So, these were the two conditions, one was when the government asked for the change and the other when you yourself feel like the changes would give you a better result. In these condition you can change your consistency. Okay. Now you have seen the activity and you have also seen the reporting period. You might ask, why should I check the reporting period. Suppose you have seen an account from the January to December reporting period. From January 21 to December 21, this is my reporting period. Okay.
Now, in that account, when you are preparing that account, and you got an invoice that is from January 2022, then that will not be recorded now. In which account would it not be recorded? It will not be recorded in the January 2021 account. It will be recorded in the 2022 account. So from here, a reporting period is decided, from that you would also know that in which books of account it will be recorded. Like suppose we are writing the books of account for 2021. And there is a bill for 2020. You should have recorded it last year, but it was not recorded, so you can record it in the current year and you will write it as “prior period expenses”. What is it called? Prior period expenses, you can maintain it like that. Now, how would you know that this is a future transaction and this is a prior period transaction? It would be clear when your reporting period is decided, when you have knowledge about the reporting period, when you know that this is the period for which you are writing or reviewing the books of account. Okay.
The third one is identifying the transaction. This will be there when you have incurred a transaction. Okay? I have told you earlier, that you do not have to record every transaction. Only transactions, which one? Financial transactions. Second one, it should be related to business. It should be related to your business. Suppose that there is an owner, you are an owner of a business, and from your personal amount, meaning your personal fund. You have given some money from that fund. So, would this transaction be recorded in your books of account? It would not be recorded. Why? It is not a business fund. It is your personal fund, and you have given money to someone from your personal capacity. So, what happens in this is. It would not hit the books of account, because there should be two things. It should be a financial transaction and it should be related to your business. If both of these things are fulfilled then only it would be recorded. So this was identification. Of what? Of a transaction. As if this transaction will come under the business or not.
Suppose, the owner has purchased a motor vehicle for himself. Means, he has purchased a vehicle from his own money. It should not hit the business then, but if he has taken the money from the business, for what? For his own needs, for purchasing his own motor vehicle. Then, yes, it would be recorded, and this will be a drawing, or a withdrawal of his. Understanding me? What he has done is, he has taken the business money for his personal use, so this would be a business transaction. Why? Because some money was taken out from the business account. So, yes, wherever the money is involved and when it is business related then it would be called a financial transaction and it will be recorded. We need to identify these.
Then the next one is, select the appropriate account type. Suppose, we take a transaction, we purchase some stationery. Okay? As we have purchased some stationary so the entry would be Stationary account debit, to, Cash and Bank. Okay. This is a very initial, very basic, journal entry. Double accounting system, so this much is debit and this much is credit. So, Postage stationary account debit to cash and bank. Now what happens here is, we have to select the appropriate account type. Whenever we are talking about account types, I want to talk about real account, nominal account and personal account. Okay?
Here I said postage account debit. Expense account is always a nominal account. Okay. To cash in bank. What is cash in bank? It is a real account. Okay? This means, one entry has been made, a transaction is done and its account type has also been decided. As this is a real account and this is a nominal account. Okay? Now, in regards to that, we passed the journal entry and the account type has been decided, and on the basis of that we will decide, which fundamental accounting rule to be followed, or which rule should be applied. Like in our case it is a postage account debit. Which type of account is it? It is a nominal account. What was the rule of nominal account? The expense will always be debited. Right? Which is the second one? To cash in bank. What is cash in bank? It is a real account. So, which account rule will be applied here? Credit the things that go out, whichever things that are leaving from your account will be credited. So, what is going on from here? Money is going out. Now, this entry is set and you have seen the transaction. Like, Postage stationary account credit to cash in bank. This has been bifurcated into account types as how many different kinds of accounts are getting hit. One is nominal and one is a real account. And then based on nominal and real, which accounting rules are being applied, based on that I have made the entry. Okay.
After that, entry is done, account type is done. Now what will we do? We will decide the appropriate ledger for it. As to which is the appropriate ledger for it. Okay. What's the meaning of ledger? The same thing with T format. Debit, description, if there is a note or number then that, and amount. Same thing on the credit side. Date, description, note or number and amount. Okay? So everytime, T format. Sometimes the ledgers are also known as control account. Wherever in the practical, if someone asks you to make a control account of something, then the control account means in the T format. Means in the debit and credit format. Okay?
So, here a postage expense named ledger will be opened, and the other one will be a bank account. In the postage expense, in its ledger, we will debit it, because the postage expense is debited. In the narration, I will write “by bank”. That means we have made the payment from the bank. What will we do with the bank? We will credit it, and in the narration we will write, for postage expenses. Okay?
So, these were certain processes. As of now, we have stopped till the ledger... What have we done till here? We got to know the activity. And the other thing that we did was, we got to know the reporting period. We have identified the transaction. We have also selected the appropriate account type. What are the rules that will be applied, that we also saw and understood. Then at last we have also selected the appropriate ledger.
Now what we will do further is, we will see that in the next session.
If you have any queries or comments……
In the next session, we will be seeing the further process of the bookkeeping process. Along with that we will also be seeing the pictorial flowchart of the bookkeeping process.
Until then, Thank Youuu…
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