Ravindra Varma: Journal - Modern and Treditional Approach - Types

Ravindra Varma: Journal - Modern and Treditional Approach - Types

Journal - Modern and Treditional Approach - Types

Introduction:- The word ‘Journal means’ a daily record. Journal is derived from French word ‘Jour’ which means a day. It is a book of original or prime entry written up from the various sources documents. Every transaction is recorded in the first instance and than it is posted to the ledger. The form in which it is recorded is called journal entry and recording or entering a transaction in the journal is known as Journalizing.

Rules of Journalizing:- The process of passing an entry in a journal is called Journalizing. The rule for Journalizing is same as that of rules of debit and credit. It is based on two facts. First is accounting equation and other is accounting approach.

1.)     Based on Accounting Equation:-

a)       Increases in assets are debits, decreases are credit.

b)       Increased in liability are credit, decreases are debits.

c)       Increases in capital are credits, decreases are debits.

d)       Increases in profits are credits, decreases are debits.

e)       Increases in expenses are debits, decreases are credits.

2.)     Based on Traditional Approach:-

a)       Debit the receiver, credit the giver

b)       Debit what comes in, credit what goes out.

c)       Debit all expenses and losses, credit all income and gains.

Following transactions are still recorded in the journal:

1.    Opening entries:- At the beginning of the year, the opening balances of assets and liabilities are journalized.

2.    Closing Entries:- At the end of the year final accounts are prepared. For preparing these accounts various are to be transferred to the trading and profit and loss account which is done by means of journal entries.

3.    Rectification entries:- When any error is detected in writing up the books then it is rectified by means of suitable journal entry.

4.    Adjustment entries:- Since accounting follows “accrual concept” therefore adjustment has to be done at the end of the year regarding:

a)       Expenses incurred but not paid,

b)       Expenses paid but benefit to be available in the next period,

c)       Income becoming due but not received,

d)       Income received in advance, and

e)       Charging depreciation on fixed assets, etc.

5.    Transfer entries:- If any amount is to transferred from one ledger account to the other, then it is done by means of journal entries.   

6.    Miscellaneous entries:-

a.)      Purchase and sale of fixed asses on credit,

b.)     Writing off of losses due to bad debt, fire, accidents etc,

c.)      Any extra concession to be allowed to any customer or any charge to be levied after the issue of the invoice, and

d.)     Any other item for which no subsidiary book has been maintained.

Invoicing Matching in P to P - Different Models

Invoice Matching is very important in P to P cycle (Procure to pay cycle is the other name of AP cycle). Accounting process in P to P starts with Matching.  Before process an invoice for payment, it is important to cross check whether the ordered quantity with the agreed price been received from the vendor.

The below are the different models of Matching process;

2-way matching

The process of verifying that purchase order and invoice information matches within accepted tolerance levels. Receivables uses the following criteria to verify two-way matching:
Invoice price <= Order price
Quantity billed <= Quantity ordered

3-way matching

The process of verifying that purchase order, invoice, and receiving information matches within accepted tolerance levels. Receivables uses the following criteria to verify three-way matching:
Invoice price <= Purchase Order price
Quantity billed <= Quantity ordered
Quantity billed <= Quantity received

4-way matching

The process of verifying that purchase order, invoice, and receiving information matches within accepted tolerance levels. Receivables uses the following criteria to verify four-way matching:
Invoice price <= Order price
Quantity billed <= Quantity ordered
Quantity billed <= Quantity received
Quantity billed <= Quantity accepted

Accounting Concepts and Conventions

ACCOUNTING CONCEPT

            Accounting Concept defines the assumptions on the basis of which Financial Statements of a business entity are prepared. Certain concepts are received assumed and accepted in accounting to provide a unifying structure and internal logic to accounting process. The word concept means idea or nation, which has universal application. Financial transactions are interpreted in the light of the concepts, which govern accounting methods. Concepts are those basis assumption and conditions, which form the basis upon which the accountancy has been laid. Unlike physical science, Accounting concepts are only results of broad consensus. These accounting concepts lay the foundation on the basis of which the accounting principals are formulated.

            Now we shall study in detail the various concept on which accounting is based. The following are the widely accepted accounting concepts.

1.)       Entity Concept:-  Entity Concept says that business enterprises is a separate identity apart from its owner. Business transactions are recorded in the business books of accounts and owner’s transactions in this personal back of accounts. The concept of accounting entity for every business or what is to be excluded from the business books. Therefore, whenever business received cash from the proprietor, cash a/c is debited as business received cash and capital/c is credited. So the concept of separate entity is applicable to all forms of business organization.

2.)       Money Measurement Concept:- As per this concept, only those transactions, which can be measured in terms of money are recorded. Since money in the medium of exchange and the standard of economic value, this concept requires that these transactions alone that are capable of being measured in terms of money be only to be recorded in the books of accounts. For example, health condition of the chairman of the company, working conditions of the workers, sale policy ect. do not find place in accounting because it is not measured in terms of money.

3.)       Cost Concept:- By this concept, the value of assets is to be determined on the basic of historical cost. Transaction are entered in the books of accounts at the amount actually involved. For example a machine purchased for Rs. 80000 and may consider it worth Rs. 100000, But the entry in the books of account will be made with Rs. 80000 or the amount actually paid. The cost concept does not mean that the assets will always be shown at cost. The assets may be recorded at the time of purchase but it may be reduced its value be charging depreciation.

            Many assets de not have acquisition cost. Human assets of an enterprises are an example. The cost concept fails to recognize such assets although it is a very important assets of any organization.

4.)       Going Concern Concept:- According to this concept the financial statements are normally prepared on the assumption that an enterprises is a going concern and will continue in operation for the foreseeable future. Transaction are therefore recorded in such a manner that the benefits likely to accrue in future from money spent. It is because of this concept that fixed assets are recorded at their original cost and depreciation in a systematic manner without reference to their current realizable value.

5.)       Dual aspect Concept:- This concept is the care of double entry book-keeping. Every transaction or event has two aspect. If any event occurs, it is bound to have two effect. For Rs.50000, on the other hand stock will increase by Rs.50000 and other liability will increase by Rs.50000. similarly is X starts a business with a capital of Rs. 50000, while on the other hand the business has to pay Rs. 50000 to the proprietor which is taken as proprietor’s Capital.

6.)       Realization Concept: - It closely follows the cost concept any change in value of assets is to be recorded only when the business realize it. i.e. either cash has been received or a legal obligation to pay has been assumed by the customer. No Sale can be said to have taken place and no profit can be said to have arisen. It prevents business firm from inflating their profit by recording sale and income that are likely to accrue, i.e. expected income or gain are not recorded.

7.)       Accrual Concept:- Under accrual concept the effect of transaction and other events are recognized on mercantile basic. When they accrue and not as cash or a cash equivalent is received or paid and they are recorded in the accounting record and reported in the financial statements of the periods to which they relate financial statement prepared on the accrual basic inform users not only of past events involving the payment and receipt of  cash but also of obligation to pay cash in the future and of resources that represent cash to be received in the future. For Example:- Mr. Raj buy clothing of Rs. 50000,a paying cash Rs. 20000 and sells at Rs. 60000 of which customer paid only Rs. 40000. So his revenue is Rs. 60000, not Rs. 40000 cash received. Exp. Or Cash is Rs. 50000, not Rs. 20000 cash paid. So the accrual concept based profit is Rs. 10000 (Revenue- Exp.)

8.)       Accounting Period Concept:- This is also called the concept of definite periodicity concept as per going concept on indefinite life of the entity is assumed for a business entity it causes inconvenience to measure performance achieved by the entity in the ordinary causes of business. Therefore, a small but workable fraction of time is chosen out of infinite life cycle of the business entity for measure the performance and loading at the financial position 12 months period is normally adopted for this purpose accounting to this concept accounts should be prepared after every period & not t the end of the life of the entity. Usually this period is one calendar year. In India we follow from 1^st April of a year to 31^st March of the immediately following years. Now a day because of the need of management, final accounts are prepared at shoter intervals of quarter year or in some cases a month such accounts are know a interim account.     

9.)       Matching Concept:- In this concept, all exp. Matched with the revenue of that period should only be taken into consideration. In the financial statements of the organization. If any revenue is recognized that exp. Related to earn that revenue should also be recognized. This concept as it considers the occurrence of exp. And income and do not concentrate on actual inflow or outflow of cash. This leads to adjustment of certain items like prepaid and outstanding expenses, unearned or accrued income.

            It is not necessary that every exp. Identity every income. Some exp. Are directly related to the revenue and some are directly related to sale but rent, salaries etc. are recorded on accrual basis for a particular accounting period. In other words periodicity concept has also been followed while applying matching concept.

 

10.)     Objective Concept:- As per this concept, all accounting must be based on objective evidence. In other words, the transactions recorded should be supported by verifiable documents. Only than auditors can verify information record as true or otherwise. The evidence should not be biased. It is for this reasons that assets are recorded at historical cost and shown thereafter at historical lass depreciation. If the assets are shown on replacement cost basis, the objectivity is lost and it become difficult for auditors to verify such value, however, in resent year replacement cost are used for specific purpose as only they represent relevant costs. For example, to find out intrinsic value of share, we need replacement cost of assets and not the historical cost of the assets. 

ACCOUNTING CONVENTIONS

            The term “Accounting Conventions” refers to the customs or traditions which are used as a guide in the preparation of accounting reports and statements. The conventions are derived by usage and practice. The accountancy bodies of the world may charge any of the convention to improve the quality of accounting information accounting conventions need not have universal application. Following are important accounting conventions in use:

1.)       Convention of consistency:- According to this convention the accounting practices should remain unchanged from one period to another. It requires that working rules once chosen should not be changed arbitrarily and without notice of the effect of change to those who use the accounts. For example, stock should be valued in the same manner every year. Similarly depreciation is charged on fixed assets on the same method year after year. If this assumption is not followed, the fact should be disclosed together with reasons.

            The principle of consistency plays its role particularly when alternative accounting methods is equally acceptable. Any change from one method to another method would result in inconsistency; they may seem to be inconsistent apparently. In case of valuation of stocks if the company applies the principle “at cost or market price whichever is less” and if this principle accordingly result in the valuation of stock in one year at cost and the market price in the other year, there is no inconsistency here. It is only an application of the principle.

            An Enterprise should change its accounting policy in any of the following circumstances only.

(i)    To bring the books of accounts in accordance with the issued accounting standard.

(ii)  To compliance with the provision of law.

(iii) When under changed circumstances it is felt that new method will reflect more true and fair picture in the financial statement.

2.)       Convention of Conservatism:- This is the policy of playing sale game. It takes into consideration all prospective losses but leaves all prospective profits financial statements are usually drawn up on a conservative basis anticipated profit are ignored but anticipated losses are taken into account while drawing the statements following are the examples of the application of the convention of conservatism.

   (i)     Making the provision for doubtful debts and discount on debtors.

   (ii)    Valuation of the stock at cost price or market price which ever is less.

   (iii)   Charging of small capital items, like crockery to revenue.

   (iv)   Showing joint life policy at surrender value as against the actual amount paid.

   (v)    Not providing for discount on creditors.

 

3.)       Convention of Disclosure:- Apart from statutory requirement, good accounting practice also demands that significant information should be disclosed in financial statements. Such disclosures can also be made through footnotes. The purpose of this convention is to communicate all material and relevant facts concerning financial position and results of operations to the users. The contents of balance sheet and profit and loss account are prescribed by law. These are designed to make disclosures of all materials facts compulsory. The practice of appending notes relative to various facts and items which do not find place in accounting statements is in pursuance to the convention of full disclosure of material facts. For example;

            (a)    Contingent liability appearing as a note.

            (b)   Market value of investments appearing as a note.

            The convention of disclosure also applies to events occurring after the balance sheet date and the date on which the financial statement are authorized for issue. Such events include bad debts, destruction of plant and equipment due to natural calamities’, major acquisition of another enterprises, etc. such events are likely to have a substantial influence on the earnings and financial position of the enterprises. Their not-disclosure would affect the ability of the users for evaluations and decisions.

4.)       Convention of Materiality:- According to this conventions, the accountant should attach importance to material detail and ignore insignificant details in the financial statement. In materiality principle, all the items having significant economics effect on the business of the enterprises should be disclosed in the financial statement.

            The term materiality is the subjective term. It is on the judgment, common sense and discretion of the accountant that which item is material and which is not. For example stationery purchased by the organization though not used fully in the concept. Similarly depreciation small items like books, calculator is taken as 100% in the year if purchase through used by company for more than one year. This is because the amount of books or calculator is very small to be shown in the balance sheet. It is the assets of the company.

Basic flow of Accounting in a dynamic view

ACCOUNTING CYCLE

The Series of business transactions which occur from the beginning of an accounting period to the end of an accounting period is referred any specific period of time for which a summary of business’s transaction is prepared.

Steps in Accounting Cycle:-

1.    Journalizing (Recording)

2.    Posting to Ledger (Classifying)

3.    Final Account (Summarizing)

Now Explain Steps:-

1    Recording:-  This is the basic function of accounting. All business transaction, as evidenced by some documents such as Sale bill, Pass book, Salary Slip ect are recorded in the books of account. This is called recording process.

2.   Classifying:-  All entries in the Journal or books of Original Entry should be posted to the appropriate ledger accounts to find out at a glance the total effect of all such transactions in a particular account.

3.    Summarizing:- It is concerned with the preparation and presentation of the classified data in a manner useful to the Internal a well as the external users of financial statements. This process leads to the preparation of the following financial statements:-

   a)  Trial Balance

   b)  Profit & Loss Account

   c)  Balance Sheet

   d) Cash flow Statement.