Single Entry System of Accounting.

This system of accounting is followed by those who are not trained enough for double entry system although they are engaging in business activities and concern to find out their profits.

First of all, I want to add that the word “single entry” should not be understood as "one entry accounting". It is a combination of double entry, single entry and even no entry.

The main idea behind this concept is to not record expense and income transactions. We only have to compare opening capital with closing capital to determine our profit.

Suppose you started business with cash 100000 rupees in the beginning of the year on 1^st Jan 2014.

And during the year you made some transactions which brought the following balances on 31^st Dec 2014:

Machine—40000 rupees; Stock—20000; debtors – 30000; Bank balance—60000; cash in hand—20000.

Creditors—50000.  Thus the total closing capital balances are – 120000.

Thus, the profit for the year is 120000(-) 100000=20000.

What I have done is just deduct opening capital from closing capital to find out the profit.

This system explains that if you are incurring any expenses, your cash gets reduced so no need to maintain the recording of expenses and income. On the other hand, if you are incurring any expenses on credit your creditor appears on the liability side of the balance sheet. So you have just seen that in every situation your balance sheet value gets affected by the transactions, that is why, the system appeals us to use only balance sheet value in determining profits.

To conclude, I must say that the chances of misappropriation, miscalculation, and fraud increases too much as there is not trial balance to check the error.

That is how I explained single entry system of accounting. If you have any doubt regarding this topic, please write me in the comment box below. 

What is Double Entry System of Accounting?

The most important and backbone of the Accounting is this double entry concept according to which, every transaction has double effect.  Your debit must be equal to credit. If we are purchasing any material on cash, we are debiting purchase a/c and crediting Cash a/c. In the asset side of Balance sheet, the cash gets reduced and stock appears with the same amount. Thus, your balance sheet gets equal.  The idea is at any point of time your assets must be equal to liabilities+ capital.

 Here comes the Equation:   Assets= Liabilities + capital

The concept reduces the mathematical error to greater extent as it allows us to prepare trail balance and we can check easily the effect of transaction in balance sheet. The concept gets preferred over Single Entry System.

Now take an example to see how things get easy under double entry accounting.

You introduce cash Rs 500000 into the business.

                                          Cash (debit) 500000

                                          To capital (credit) 500000

Cash is an item of asset so your asset gets increased and capital on the other hand also gets increased with the same amount and here your balance sheet gets matched. The equation will be:

                                            ASSET= Liabilities + Capital

                                            500000= Liabilities + 500000

Purchasing goods on credit valued 10000:

Here your asset got increased because stocks are coming in for 10000 Rupees and your liabilities also gets increased with the same amount as you have to pay to creditor.

                                           Asset= Liabilities + Capital

                                           510000=10000+500000

In this way the double entry accounting makes our accounting easy.

Hope you like it. If you have any questions regarding this topic, feel free to write me in comment box.

What is Securities Premium Account? and what are its utilizations?

1.   Here “Securities” means shares, debentures, bond etc. Listen! There is a difference between share premium and security premium. If I am saying share premium, it means I’m taking only equity and preference shares and on the other hand, security premium contains bonds and debentures also apart from shares. So security concept is a broad concept than share concept. Now, “Premium” means amount more than the face value of securities. Face value may be of 100, 10, 5, or even 1 Rupees/dollar.

If the company issues the securities more than face value, the excess of the amount over face value will be treated as premium and this premium is a reserve which is shown in balance sheet under the head “Reserve and Surplus” with the name “Security Premium Account” 

Suppose, a limited company with a face value of Rs10 issues 100000shares at a premium of Rs2. The journal entry would be:

Bank a/c      debit 1200000 (money received)

  To Equity Share Capital a/c 1000000(face value)

  To Security Premium a/c 200000(excess of the amount over face value)

The same rule will be applied for debentures and bonds.

But the question is why any company is going to issue its shares in premium?  

The answer is the management of that company believes that his company is doing good business and worth more than its face value. 

Is it profitable for the company? 

Yes! Definitely, the company is getting cash more than its face value so it’s a good sign for the company.

Is it profitable for the company if it issues debentures at a premium?

 Again the answer is Yes, Sure! Because, the company is getting more money than the money it will have to pay at the time of redemption of debentures.

Curious readers never stops to ask questions, their last question is –

What if company redeems its debentures at premium?

 Answer is –loss for the company because that company has to pay more than what it took at the time of issue of debentures. And the amount credited in the security premium account (if any) will be utilized first, to cover up this loss. (see point 4 below)

Now learn some more utilization of security premium account.

Utilization of security premium account-:

Sec 78 of the company act 1956, directs us to utilize the security premium account for the following purposes:

1.       Issuing fully paid bonus shares.

2.       Writing off Preliminary Expenses.

3.       Writing off the expense of or the commission paid or discount allowed on any issue of shares or debentures of the company.

4.       Providing for the premium payable on the redemption of preference shares or debentures of the company.

5.       In purchasing its own shares that is, Buy Back u/s 77A.

This was how I explained the above concept, hope you like it.If you have any question regarding this topic please feel free to ask in below mention comment box. 

What is Capital Reserve? and its utilization?

Capital Reserve is the reserve which is created out of capital profit. It is not ordinarily distributed as dividend to shareholders. The concept is if we generate profit from an extra-ordinary transaction we kept it as capital reserve to safeguard against any capital losses if arise in future.

The following are some examples of capital profits which should be credited to capital reserve:

1.    Profit on repayment of debentures. That is, redeem the debentures at discount.

2.    Profit on revaluation of assets.

3.    Profit earned through forfeiture and re-issue of shares. For detail knowledge of forfeiture please click here

4.    Profit earned prior to incorporation, and

5.    Profit on the acquisition of business etc.

Utilization of Capital Reserves: (The intention is to reduce capital losses)

a)    For issuing bonus shares.

b)    In writing off preliminary expenses.

c)    In writing off commission or expense or discounts etc on shares or debentures.

d)    For providing premium on the redemption of redeemable preference shares or debentures.

This was the short description of capital Reserve. If you have any questions, feel free to write me in the comment box below.

Suggestion for CMA -Financial Accounting (inter) for June 2015

I’m back again to help you prepare for CMA (inter) -Financial Accounting papers if you are appearing in June 2015. Today is 28^th March, and it’s about two months left for the examinations. I’ve prepared the following suggestion just to guide you about the preferences you should give to the chapters while preparing for the Financial Accounting papers. One thing we should keep in mind that in the professional examinations we cannot leave any chapters -we have to go through each and every topic. There is a short cut to just pass the paper but not to get good marks. After all exams are just a formalities our main intention is to learn everything in this stage before moving ahead to learn next. 

Anyway, following are my suggestions which you have to go through first and then others but don’t leave anything.

First start your preparation with Banking and Insurance. (And secure 20 marks)

2. Then Self Balancing and Sectional Balancing system. (And secure 10 marks) 

.

And these are very easy chapters; you can get it just within 1 week preparation.

3. Do Accounting Standards 7 and 9. I,e Construction Accounting and Revenue Recognition.(secure 10 marks again)

4. Then Investments Accounting (as13) and Insurance Claims (secure 10 marks).

Believe me! You can learn these also within 1 week.

Till now all the chapters are quite easy and scoring. With little effort you can secure at least 40 marks (if taking conservatively) with 15 days of preparations.

5. Now time has come for learning Hire purchase system because it is important than Royalty so put the Royalty Accounting for the last.

6. Branch Accounting is again preferred over Departmental. Do first Branch and put Departmental Accounting for the last.

Both Hire purchase and Branch can be done within 7 days. I will not talk about marks now onwards as there is no surety of them to come. It can happen that you prepare both chapters and they don’t come in exam but we are preparing for our studies; we have to learn everything which has good chances of coming in exams and the probability of them is more in compare to other chapters.

7. Do Accounting Standard 2, 4 and 5 thereafter, take Final Account because these three standards will come useful in solving the Final Account problems.

8. Here comes the important part, conversions of partnership firms.

These two chapters can again be done easily within seven days.

9. Then Single Entry and NTO (Income & expenditure and Receipts & payments)

Again seven days will be needed to do these chapters as they are pretty much lengthy.

10.  Now the time has come to do Depreciation Accounting and Accounting Standard 1, 10, 11, 15 and AS 16.

These can be done in 5 days.

Till now you have completed 80% of your syllabus and the total days you have taken is 41. You still have 19 days.  From this, deduct 7 days for revision, so finally you have 12 days to grab few more chapters in your bag.

11. Do Royalty and Departmental Accounting. (In 4 days)

12. Now go for p/l Appro, Admission, Retirement, Death and Dissolution. (IN 4 DAYS)

13. Now finally, Consignment, Bill of exchange and Joint Venture. (In 4 days).

Rest seven days Revision and you can get few more bonus days for revision in case you have already done few chapters mentioned above. And I’m sure somebody has done some chapters so far. 

And please do not leave any chapter just because it came in last term exam-these are misconceptions, anything can come in professional examinations.

This is just the planned study of how to maximize your effort in minimum time.

Hope I have helped you to minimize your stress a bit in exam time. Good luck!

Cash Book, Cheques and Bank draft

Cash book in detail:

Now if we talk about cash book, it is of three types;

·        Single Column Cash Book.

·        Double Column Cash Book.

·        Triple Column Cash Book.

Single column Cash Book--       

In Single Column Cash Book only cash transaction are recorded in the books. All the cash receipts are recorded in the left side and all cash payments are recorded in right side. There is also a column of ledger folio to support the basis of evidence that is, to record the page on which the respective ledger has been recorded.

Double Column Cash Book--

In the Double Column Cash Book apart from cash transaction, transactions by cheque are also being recorded in it. Thus it contains two column cash and bank apart from ledger folio column.

In this double column cash book we need to understand some important concepts:

Cheque:

Bank generally provides it depositor a cheque book containing 20 or more pages of cheque it allows depositor to withdraw money from bank or to give payment to the creditors.

In Negotiable Instrument Act cheque is defined as “an unconditional order, drawn upon a specified banker, signed by the maker, directing the banker to pay on demand a certain some of money only to the order of a person or to the bearer of the instrument”.

From the above definition it is clear that:

·        Cheque is an order.

·        There are three parties in the cheque 1) Maker, 2) Drawee and 3) Payee.

·        Maker is the person who draws cheque.

·        Drawee is the bank on which the cheque is drawn.

·        And Payee is the person who is named in the cheque for receiving payment.

Now there are two types of cheque:

Bearer Cheque and Order Cheque—let’s learn about them:

Bearer Cheque:

Bearer cheque is like cash- any person who presents the cheque in banks counter can get the payment. Means bank has no obligation to ascertain that the payment is made to the right person.

Order Cheque:

Unlike bearer Cheque, in order cheque bank has obligation to ascertain that the payment in made to the right person. And in this cheque, order is given to make payment to the specific person.

2. Bank Draft:

Bank Draft is the most important service done by the bank. In the bank draft, Banks make payment on the behalf of the payer and it is guaranteed by the issuing bank. What bank does is, immediately debits the amount in payers account and therefore has no risk. Thus the payee gets some surety once bank draft has been issued.  On the one hand bank has no risk for this service and on the other hand, bank charges fees for that service. Thus, payer, payee and banker all are benefited by this service.

This was how I explained about cash book and its related topics. I you have any question regarding these concepts please write on the comment box below.

Sub division of ledger and Cashbook--a Journalised ledger

Sub division of Ledger:

Today we are going to talk about sub division of ledger. Generally there are numerous ledger balances in any business so it’s necessary to categorize these ledgers so that one can get the account balances from different category of the ledgers. Suppose you have the business of Doll and lot of dolls are stored in a warehouse randomly in this case you will definitely like to categorize your dolls like plastic dolls, woolen dolls, cotton dolls, so that you can get to know how many dolls you have in each categories in the similar way all the ledgers are divided into five categories Debtors ledger, Creditors ledger, General ledger, Nominal ledger and Cash book so that you can get to know the balances from each type.

Let’s learn in detail:                  

Debtors ledger:

It contains ledger account of all the parties to whom goods are sold on credit. The total of balances on this ledger will give ‘sundry debtor’ for trial balance and balance sheet.

Creditors ledger:

It contains the ledger balances of all the parties from whom goods are purchased on credit. The total of balances on this ledger will give ‘sundry creditor’ for trial balance and balance sheet.

General ledger:

It contains all the real accounts such as Building, plant& machinery, office equipment etc.

Nominal Accounts:

It contains all those accounts which are normally looked upon as income and expenses such as rent, insurance, discount received and allowed, etc it also include purchase return, sales return, depreciation , purchase, sales etc.

Cash book:

It records all the cash and bank ledger accounts. Sometimes triple column cash book is made to record discount allowed or received in it.

Is Cashbook a journal or ledger?      

From the above definition it is interesting to note that cash book is both journal and ledger.

To understand this point, first we need to understand why cash book is prepared? In business cash transactions are huge and it is not possible to record journal entry for each cash transaction therefore it was decided to record cash transaction directly in one book called Cash Book.

It is called the book of original entry because cash transactions are first entered directly in cash book. Moreover, narration is recorded after each entry—the same thing we do in journal and last ledger folio column is also maintained in cash book-again the same thing we do in journal so from these angle cash book is journal.

Every transaction has dual aspect which we called double entry system the first one we write in one ledger account and other one we write in the opposite side of another ledger account –the same thing we do in cash book. Suppose, sales transaction has been taken place in cash, we would record “to sales” in debit side of cash book and “by cash” in credit side of sales account. So from this angle cash book is a ledger.

Thus the above explanation proved that cash book is a journalized ledger.

These was how I explained about ledger sub division and cash book in my next post we will understand in detail about cash book. If you have any question regarding this topic, please write in the comment box below.