Clear vs Sota

8/8/2019 Clear vs Sota

http://slidepdf.com/reader/full/clear-vs-sota 1/27

CLEAR Accounting

Capital Liabilities Expenses Assets Revenue

Foreword

There are very few sciences which have not advanced over the ages. The science

of book – keeping is one such.

Many books have been written on accounting systems and new books are still

being published. Every new book is aimed at providing a still simpler view of the

accounting system. New knowledge has never been added to the accounting

system.

The basic structure of book-keeping is the same all over the world, but knowledge

of the accounting terms used in different countries has become essential thanks to

globalization.

Similarly, knowledge of computerized accounting systems became essential thanks

to the ubiquitous presence of computers. Here again the manual and the

computerized accounting systems have no structural difference.

Introduction to Accounting

Definition: "Accounting is the art of recording, classifying, summarizing and

interpreting a business transaction."

All Business Transactions do not form Accounting Transactions. Accounting books

say that only those transactions which are capable of being measured in value or

monetary terms are to be considered in accounting.

All such monetary transactions have to be recorded and they are recorded in a

double entry format. There is a double entry in the accounts of the person who

received the money and another double entry in the accounts of the person whogave the money.

Financial Accounting

• provides information primarily to people outside the company

• provides information that would be helpful in attracting

o Equity and debt (useful in debt contracts)

o Credit from suppliers



o Customers

o Employees

Managerial Accounting• provides information to people inside the company

o Internal investment decisions

o Performance evaluation

Tax Accounting

• provides information to the tax authorities

Management Information System (MIS) goes far beyond the Managerial

Accounting. It monitors performance of the Organization in Financial as well as

Non-Financial terms.

Types of Accounts

An Account (Accounting Head) is an element used for recording Accounting

Entries. The minimum accounting heads to be maintained are CLEAR i.e. Capital

a/c, Liabilities a/c, Expenses / Losses a/c, Assets a/c, Revenue / Incomes a/c.

There are 3 Types of Accounts:

1. PERSONAL ACCOUNT - Any account that bears the name of a particular

person (including, of course, names of companies, suppliers, customers and

so forth). For instance, the Walters Account, the Mortimer Account, the

Calvin Motors Ltd. Account, and more.

2. REAL ACCOUNT - Any account for which that recorded on the account can

be really verified. For instance, the Cash Account (if the Cash Account

shows that we received $ 80, then we can check physically to see if we

have $ 80 in cash). Another example is the Goods Account. If the Accountshows that we received goods worth $ 100, then goods to that value should

be physically present in the warehouse.

3. NOMINAL ACCOUNT OR PROFIT AND LOSS ACCOUNT- Any account

that describes an expense or receipts (the name of the account will always

be followed by the words ' ... Expense Account' or '... Receipts Account'}.

2



Accounting Rules:

Following are the fundamental accounting rules in respect of the 3 account types:

Personal Account Debit the Receiver (Asset) Credit the Giver (Liability)Real Account Debit what comes in (Asset) Credit what goes out(Liability)

Nominal Account Debit Expenses / Loss

Debit Profit and LossAccount

Credit Income / Gain

Credit Profit and LossAccount

Accounting is recording the transactions relating to business. Only those

transactions that can be assessed / expressed in value / monetary terms are

capable of being called Accounting Transactions. Transactions which cannot

be assessed / expressed in value / monetary terms are Service Transactions and

are not to be considered in Accounting.

The Double Entry Convention

In bookkeeping, each single" commercial transaction is recorded twice. On the

"Received" side and then again on the "Gave" side. Each Account has two columns

“Received” and “Gave”. These are known as “Debit” and “Credit” respectively. Debit

column is on the left side of the page and the Credit column is on the right side of

the page.

In accounting there are two systems. The hard copy documents of Service

Transaction like receipt, invoice, check and so forth first lead to an entry of both

Debit and Credit in a book called “A Journal” in a chronological manner. The entries

are then copied to various Ledger Accounts. This process of transferring the values

from a Journal to a Ledger is known as Posting.

Once the entries have all been posted, the Ledger accounts are added up in a

process called Balancing. A list of transactions posted in the Ledger is made as

follows:

Account

Name

Debit

Transaction

Credit

Transaction

Debit Balance Credit Balance

3

Business Documents Journal Entry Transfer to Ledger



Total A B

Total C D

This arrangement is called the Trial Balance. The expression 'Trial Balance' comes,

from the fact the debit and credit columns must balance (hence the word balance).

That is sum of Debit Transactions must equal the sum of Credit Transactions (A =

B) and this is equal to the Journal Total. Similarly the Sum of Debit Balances must

equal the sum of Credit Balances (C = D). Thus the above table constitutes a trial

(check) that the records in the journal have been properly transferred to the nominal

ledger.

At the end of each year, the bookkeeping system produces two statements (directly

from the Trial Balance). Let us assume that we are concerned with the year ending

on December 12, xx. The two statements will be:

Statement 1 - The Profit and Loss Statement for the year ending December 31, xx.

Statement 2 - The Balance Sheet as on December 31, xx.

We need to have more understanding of business activities before we return to the

above financial statements.

4



Introduction to Service Oriented Transaction Architecture

(SOTA):

Service

Bill Gates states in his book “Business @ Speed of Thought” that there are two sets

of Processes in any Organization. One is the Core Service Process for which the

Organization owes its existence. For example the core process in a car

manufacturing industry is the making of cars and the core process in a hospital is

patient care. All other processes are subservient Business Processes. The SOTA

architecture implies development of IT System based on the Core Service Process.

The Business Process Data is a bye-product of the Core Service Process Data and

hence is not captured separately. Service is thus the core Entity of SOTA.

Service Elements:

All the types of Services have common basic elements:

A customer

A Service which is provided

A Provider

Entities

Provider provides a Service to a Customer. A Service is an entity. Customers and

Providers are Persons either actual people or Legal Persons; they are Person type

of an entity. Besides Person Entity and Service Entity, we need one more Entity for

Service Transaction and that is Concept Entity. Concept is a mental construct of

Real Life Phenomenon. The Concept Entities describe the Service Transactions.

For our purpose we will say that anything which is not a Customer, Provider or a

Service is a Concept.

Service Types:

What services do organizations or individuals provide?

1. CONSULTATIVE: This type of service involves a logical interaction

between a customer and a provider of service. Doctors, lawyers, and

management consultants provide consultative services. These services

have a outcome which gets documented.

5



Provider Customer Non Financial Service

Customer Provider Reciprocal Financial Service

2. PROCEDURAL: This type of service involves a physical interaction

between a customer and a provider. This service may also involve use of

equipment, machine or a hard or soft instrument. These services also

require documentation of outcome.

3. MATERIAL (CONSUMABLE): This type of service transfers the ownership of

a hardware or software from the provider to the customer. There is debit and

credit to material accounts of provider and customers.

4. FACILITY (USE OF HARD OR SOFT ASSET): The provider of the service allows

limited use of his hardware or software to the customer. Examples of hard

assets are airline seats, hotel rooms. Examples of soft assets are Internet

Service Providers. This service will involve blocking and release of the

asset.

5. BOOKING SERVICE: All the facility services and sometimes the other

types of services need booking. A service of any type if it needs booking

always needs a booking before a service request can be made.

6. INFORMATION: These services are rather complex. They involve various

Structures and Concepts which are the building blocks of information.

7. FINANCIAL: When anyone of the above types of services is given by a

provider to a customer, it generates a request for a Reciprocal Financial

Service whereby the

Customer of the earlier

Service is obliged to pay the

consideration to the Provider

of the Original Service. In the

Reciprocal Financial Service

the Recipient of the Original

Service becomes the Provider

of the Reciprocal Financial

Service who pays the consideration to the Provider of the Original Service

who now becomes Customer of the Reciprocal Financial Service.

Financial Services whereby a Provider allows a Customer temporary use of

money like a Loan or a Deposit are facility services. They are close ended

that is they have a limited time period and a price in the form of Interest.

Investment of Capital is an Open Ended Facility Service. These Facility

Services should form a separate Group of services under Facility Services.

Interest is thus a consideration payable for Facility Service. Deposit is an

6



External Services

AProvider Customer CInternal ServicesCustomer Provider

BProcured Services

PProvider CustomerFigure 1: A is a provider to the customer C. A

is a customer of B. B is a customer of P. Blue lines indicates

services and red lines requests. Services and requests flow in

opposite directions.

External Services

AProvider Customer CInternal ServicesCustomer Provider

BProcured Services

PProvider CustomerFigure 1: A is a provider to the customer C. A

is a customer of B. B is a customer of P. Blue lines indicates

services and red lines requests. Services and requests flow in

opposite directions.

anticipatory Reciprocal Financial Service to cover Original Services at a

later date. It may cover previously known or booked Original Services or

may cover Services not requested at the time of Deposit when it is called On

Account Deposit. Depreciation is notional and is a Report side calculated

field. Its value is based on the Original Price of Purchase.

Service Levels:

Services are transacted at three levels in an organization.

Level 1: External Services: Services provided by the organizations to external

organizations or persons.

Level 2: Internal Services: Services provided within the organization.

Level 3: Procured Services: Services procured by organizations from external

organizations or persons.

Scope of IT

There are only two IT activities on any System.

1. Registration: Before any transaction can be recorded on any IT

System, we need to Register Customers and Providers of Services

under various Person Entity Groups for example Patients, Employees,

Account holders etc. At the time of such Registration, we give values to

desired Person Attributes like Name, Date of Birth, and Telephone

Number etc. Similarly we need to Register various Concept Entities like

Departments. The Concept Entities bring standardization of values and

also add meaning to the values entered. We also need to register

various Services under various Service Entity Groups for example Bank

Locker Services, Savings Account Services, or Laboratory Services,

7



Room Services etc. At the time of Service Registration, we need to give

values to desired Service Attributes like Service Name, List Price etc.

Thus Attributes get their values during Registration. When Registering

Services we also need to Register all the Parameters of the Service that

should get their values on the IT System during a Service Transaction

like the Quantity Requested, Sale Price etc. These Parameters get

values during every Service Transaction.

2. Transaction: A Service Transaction starts with a Request for Service

and ends when all the Parameters get their values.

8



Conventional Accounting System and the SOTA

Business

Any business starts with the owner’s equity. The owner or promoter invests his

money to form an organization. The organization in turn owes the promoter his

(owners) equity.

(Owner's Name), Capital is the main owner's equity account. The amounts in all

the other owner's equity accounts

are eventually recorded in the

Capital account. Any monies the

owner invests in the business are

entered directly into this account.(Owner's Name), Withdrawals or

Drawing account sums the assets

(cash, inventory, etc.) that the owner takes out of the business for personal use.

The amount in this account is eventually recorded in the Capital account and

decreases the Capital account.

Capital Accounts are involved in all Service Transactions where the Owner of

the Business and the Owner’s Business Organization are Customer / Provider

of each other.

There is a catch here. An individual or a Person has many identities. A Person may

be an owner of a Business. All people who own the Business, should be Registered

as Owner’s of the Business. The Transactions which they would enter into as

Owners of the Business alone would involve Capital Accounts. The Person who

owns the Business can act in any other capacity and deal with the Business as a

Customer or Provider of any service in this independent capacity. For example a

Person who owns a Hospital may undergo a CT scan in the same hospital and may

pay for his CT Scan. For this Purpose he is Registered as a Person in “Patient

Group”. This transaction has no bearing on the Capital accounts.

The Services which will be transacted between the Owners and the Business are

common for all Organizations but they need to be registered. Once created, they

can be used for any organization.

To familiarize with the Journal and Ledger entries, let us presume Ibrahim invests

200,000 rupees by cash in a company. The typical Journal entry of the Transaction

that brings Owner’s Capital of Rs. 200,000 in a company is shown below.

9

Organization

Promoter

CapitalWithdrawals



This Transaction is also recorded in Cash Ledger and Capital Ledger as follows:

Cash Ledger:

Ibrahim Capital Ledger:

SOTA will record this Transaction as

Customer = M/s __________

Provider = Ibrahim

Service = Invest Capital (Facility Service)

Parameter 1 Mode of Payment = Cash

Parameter 2 Amount = 200,000

Parameter 3 Unit = Rupees

10

2,00,000



The Date and Time of Transaction are recorded from System at the actual when the

Cash was received and System Entry made for the same.

In the above transaction if the Capital was brought by a Cheque, then the Ledger of

the bank account in which the Cheque was deposited by the company will show aDebit entry exactly like that shown in the Cash Ledger above.

The Personal and Real Accounts are reflected in the Balance Sheet. The Nominal

Account Balance is consolidated in a single Profit and Loss (P&L) Account. The

Rules of Accounts for SOTA are as follows:

ServiceType of Service

OriginalService

ReciprocalFinService Debit Credit

ProcuredService Capital Complete

Openended

Bank / Cash /Equipment

Provider CapitalA/c

ProcuredService

NonMaterial complete

NotComplete

Profit & LossA/c

Provider Creditor A/c

ProcuredService

NonMaterial Complete Complete

Profit & LossA/c

Bank / Cash /Expense Prepaid

ProcuredService

NonMaterial

NotComplete Complete

ExpensesPrepaid Bank / Cash

ProcuredService Material Complete Complete

Equipment /Furniture A/c Cash /Bank

ExternalService

Allcomplete

NotComplete

Customer Debtors A/c Profit & Loss A/c

ExternalService All Complete Complete Bank / Cash Profit & Loss A/c

ExternalService All


Profit & LossA/c Customer A/c

There may be more than one person investing in a company and every investor will

have a Capital Ledger with his name. Every time an investor gives “Invest Capital

Service” to the Company, there will be a Credit entry in his Capital Ledger.

There will be thus be a “Withdraw Capital Service” by which the investor withdraws

amounts and these amounts will be entered on the Debit side of his Capital Ledger.Amounts and other resources borrowed by / for the business from outsiders are

Loan and not Capital. Conventional accounting treats these as Loaned Capital.

Many problems arise out of this in conventional accounting where the interest on

Loaned Capital is deductible for tax purpose but the dividend on Owners Capital is

not. To accommodate this, some countries allow deduction of dividend. The

business is responsible for the loan. The Loans affect Liabilities accounts and not

Capital accounts.

Injecting Capital into the Organization is a Procured open ended Facility Service

where the Owner is the Provider and the Organization is the Customer.

11



Owners Withdrawal or Dividend Payment is a Reciprocal Financial Service.

The owner of a business may bring personal assets like car, computer into the

company. The owners of the business may invest in the business by taking loans

personally and investing that in their name as capital contribution. The responsibilityfor this amount lies with the person who is borrowing the amount and not the

business. This should not be misunderstood as loaned capital for the business.

Let us see an example: Mrs. Raju Commenced business by bringing in the

following assets and liabilities of hers as her capital contribution.

Cash Rs. 50,000.

Motor Car Rs. 1,00,000

Furniture Rs. 20,000

Bank Loan (payable) Rs. 50,000

Journal entries for these transactions are shown below:

12



Sometimes the Journal entries are made in a Complex or Compound manner asfollows:

13



Whatever be the Journal entries, there are five Ledger accounts involved. Cash,

Mrs. Raju’s Capital, Motor Car, Furniture and the Bank Accounts.

By SOTA every individual transaction is recorded separately and the Report can be

printed whichever way one wants.

Liabilities:

What the future does not hold for you. LIABILITIES are what the business owes

outsiders. Following are some common liability accounts: When these amounts are

actually paid they constitute Expenses. Liabilities are unfinished Reciprocal

Financial Transactions of Procured Services.

Accounts Payable is what the business owes to people or companies that it has

purchased goods or services from on open account. This type of credit is normally

referred to as trade credit. These are unfinished Reciprocal Financial Services,

where the Procured Original Service of any type has been completed.

Unearned Revenue is used to record advance payments for goods or services that

have not yet been delivered. This is an anticipatory Reciprocal Financial Service

and is a Liability.

Customer Deposits is used to record deposits (such as rent deposits) that are

made to secure payment or cover damages to property, etc. They are Facility

Services if they have to be returned and are anticipatory Reciprocal Financial

Services if they are adjustable against the future Original Services.

It is interesting to note that Incomplete Reciprocal Financial Service for Procured

Services and Anticipatory Reciprocal Financial Service for External Service

14



constitute Liability. In the same manner Incomplete Reciprocal Financial Service for

External Services and Anticipatory Reciprocal Financial Service for Procured

Service are Assets.

Service Customer Provider OriginalService

ReciprocalFinService

AccountName CLEAR

ProcuredService Org Supplier complete

NotComplete

AccountsPayable Liability

ProcuredService Org Supplier


Advance for purchase /PrepaidExpenses Asset

ExternalService Patient Org complete

NotComplete

AccountsReceivable Asset

ExternalService Patient Org


Advance for Service Liability

Notes Payable are liabilities for which the business has issued (signed) a

promissory note to pay the lender what they borrowed, plus interest. Normally,

just the principal (what the business borrowed) is in the account. The interest is

reported in a separate account (Interest Payable) that will be discussed later.

Here some discussion is required. Any instrument of payment except cash is a

request for Payment Service generated by the Reciprocal Financial Service. This

Payment Service is completed when the payment actually happens by way of cashor in a bank account. Thus cheque, bank draft, credit card swipe are all requests for

Payment Service. In the same manner, Notes Payable is a request for Payment

Service.

Accrued Expenses Payable is a category of accounts that summarize things the

business has used but has not yet paid for. They are broken down into different

accounts such as: Salaries and Wages Payable (for salaries and wages that have

been earned by the employees but not yet paid); Interest Payable (for interest on

notes payable, etc., that has accumulated on the note but has not been paid). All

these are Accounts Payable for Procured services and hence Liabilities.

Liabilities

200-Accounts Payable

201-Notes Payable

205-Sales Tax-Payable

206-IncomeTax-Payable

209-Unemployment Taxes

220-Long-Term Debt-Mortgages Payable

15



221-Long-Term Debt-Bank Loan

225-Miscellaneous Accruals

Expenses

Income and Expenses constitute Nominal Accounts. Expenses are the cost of

generating revenues. In other words, expenses are the cost of doing business.

There are many different kinds of expenses with many different names, but they

normally fall into two or three different categories: cost of goods sold, selling

expenses, general and administrative expenses. Almost all expense account

names, with the exception of Cost of Goods Sold, end with "expense", such as,

Wage Expense, Rent Expense, etc. The amounts in expense accounts are

eventually put in the Capital account and these amounts decrease the Capital

account. All expenses are debited to expense accounts.

Expense Accounts are involved wherever; the Organization is a customer of the

non-Material Service Transaction. Procured Non-material services can be grouped

as different accounting heads as under:

Expenses (Debit) (Procured Non-Material Services)

500-Salaries and Wages

501-Contract Labor

503-Utilities

504-Telephone

505-Rent

508-Maintenance Expense

510-Interest

512-Travel Expense

513-Entertainment

514-Advertising

520-Miscellaneous Expenses

515-Dues and Contributions

What about Taxes?

502-Payroll Taxes

What service is the Organization receiving that makes it liable to pay consideration

of Tax. Logically it is a Facility Service given to the Organization by the Government

authorities. The Facility in this case is the temporary use of License to own a house,

16



earn income, sale goods which attract property tax, income tax and the sales tax

respectively as customer of these procured services.

When a person is employed, registration of employee takes place. Employment is a

Procured Facility Service. The Attributes of each Employee define his employmentcontract. These Attributes will be:

Date of joining

Designation

Department

Temporary / Permanent

Full time / Part time

Leave entitled per year Basic salary

Dearness Allowance

Bonus

Provident Fund Account Number

Income Tax PAN Number

When an employee works in an Organization, he is providing the Original Service

(Procured Facility Service) to the Organization. Similarly, when the telephone

service provides telephone facility to the Organization, it is providing the original

service.

The parameters of a employee work service are recorded on a daily basis:

Incoming Time

Outgoing Time

Date

The salary is calculated on the basis of this record.

By the contract of employment some money is payable to the employee, some to

the PF account and some to the Income tax account.

PF account and IT account are services provided by PF and IT to the employee.

You are paying the entire salary to the employee and he is paying the PF and IT by

a separate service.

In the parlance of SOTA, each expense account is a Service Group of Reciprocal

Financial Services. Thus there will be a Salaries and Wages Service Group which

will have all type of salary services like monthly pay, earned leave encashment,

bonus etc. Similarly there will be a Group called Utility Expenses which will have

17



Reciprocal Financial Services like Payment of Telephone Expenses, Payment of

Electricity Expenses and Payment of Advertising Expenses etc. Like the

Employees, Telephone Service Vendors, Electricity Vendors and Advertising

Service Vendors will be registered in Respective Person Groups.

There has to be record of original service transaction

The following common expense heads need some reconsideration. Following items

can be considered as Asset accounts rather than Expense accounts.

506-Office Supplies

507-Postage

509-Insurance

The one expense account which is exceptional is

511-Depreciation

What Service is given by whom to account for Depreciation? No Service is the

answer. Depreciation is no Service neither Original nor Reciprocal Financial. It is

just a field for the purpose of Report!

Assets

What the future holds for you. ASSETS are what the business

has or owns. Following are some common asset accounts:

Cash is money the business has on hand and in the bank.

Accounts Receivable is the amounts of money customers owe

the business for goods or services.

Inventory is the cost of goods a business buys to resell.

Prepaid Expenses is a category of accounts that summarize things that the

business pays for in advance, to use in the near future. They are broken down into

individual accounts such as: Supplies Inventory (for office supplies, etc.); Prepaid

Insurance (businesses pay for insurance sometimes two or three years in advance);

Prepaid Rent, Prepaid Interest, etc.

Land (Property), Buildings (Plant) and Equipment (all are sometimes called fixed

assets) are purchased to operate the business. They are expected to last a long

time.

Let us keep the Bank accounts and Cash accounts separate for the time.

18



Asset Accounts are involved wherever; the Organization is a Customer of the

Material Service Transaction and such transactions add to the Assets. Procured

Material Services can be grouped as different accounting heads as under:

Assets Accounts Examples (Procured Material Services)

103-Inventory

105-Materials and Supplies

120-Land

121-Buildings

123-Tools and Equipment

125-Automotive Equipment

127-Furniture and Fixtures

Purchase of above items increase the value of these Asset accounts by the value

equal to the purchase price of the Material Service. We can call these Assets as

Material Assets. (Ideally these should be called as Real Assets)

The other Assets are Money Assets (Ideally these should be called as Virtual

Assets) Examples of Money Assets are:

100-Cash in Banks

101-Petty Cash Fund

102-Accounts Receivable

107-Prepaid Expenses

108-Deposits

122-Accumulated Depreciation -- Buildings (Credit)

124-Accumulated Depreciation -- Tools and Equipment (Credit)

126-Accumulated Depreciation -- Automotive Equipment (Credit)

128-Accumulated Depreciation -- Furniture and Fixtures (Credit)

130-Organization Expenses (to be amortized)

Bank a/c is Debited when:

1. Cash paid into the Bank

2. Cheques received by the organisation towards the amounts it has to receive

and deposited in the bank for collection. This is recorded on the date of

deposit in the bank.

3. Interest due and depostied by the bank to the organisation on the bank

account balances.

19



4. Direct payments by the customers into the bank account.

5. Amounts collected by the bank on behalf of the customer like Dividends on

shares, Interest on Investments, Rent on property etc. Some of these may

be on a standing instruction.

6. Amount receivable towards a bill receivable honoured on the due date,

when it is collected by the bank.

7. Amount receivable on discounting bills by the bank.

Bank a/c is Credited when:

1. Cash withdrawn from the Bank

2. Cheques issued by the organisation towards the amounts it has to pay. This

will be recorded on the date of issue of the cheque

3. Interest and other charges collected by the bank towards the services it

provides the organisation like collection of outstation cheques etc

4. Amounts paid by the bank on behalf of the customer (organisation) like rent,

insurance premium, etc. Some of these may be on account of a standing

instruction.

5. Amount paid towards clearing a bill payable by a cheque or by the bank

directly on instructions to the bank.

6. Amount payable towards the dishonor of a bill discounted.

7. Cheques dishonored by the issuer

The Value of the above Assets increases in all Transactions where the

Organization is the Provider of the Original Service that is by earning Revenue.

Remember that all the above Asset Accounts increase with a debit entry to the

account.

As the fixed assets are used, their cost is written off systematically - this is called

depreciation. It is assumed that land cannot be used up; therefore, the cost of land

is never written off in this manner. As the cost of the other fixed assets is written off,

the amount is accumulated in an account that serves as an off-set against the cost

of the asset.

Accumulated Depreciation is the account that is used to report the total amount

that a fixed asset has been depreciated from the time it was acquired. The accounts

are specific to each asset account (for example, Accumulated Depreciation -

Buildings or Accumulated Depreciation - Equipment) and the balance in the

accumulated depreciation account is deducted from the balance in the

respective asset account to arrive at a net (undepreciated) cost for the asset.

This amount is called the Book Value of the asset.

20



Revenue

Revenue is what a business earns for what it is in business to do. For example,

what a dry cleaning business charges for cleaning a suit is revenue. Revenue

accounts can have many different names, but normally fall into one or two

categories: service revenue or sales revenue. The amounts in revenue accounts

are eventually put in the Capital account and these amounts increase the Capital

account. All revenues are credited to revenue accounts.

Sales (Revenue) Accounts (Credits)

400-Retail Sales

401-Wholesale Sales

402-Sales-Service

405-Miscellaneous Income

Revenue Accounts are involved wherever; the Organization is a provider of the any

Service Transaction and such transactions add to the assets.

For the preparation of MIS, Services provided by the Organization can be grouped

in various ways for Accounting Information. For example, they can be grouped by

the department that provides them like Room Charges, OT Charges, Laboratory

Services, and Radiology Services etc. They can be grouped as Doctors Charges,

Diagnostic Service Charges, Procedure Charges etc. Thus one service can be

grouped under different service groups to enable creation of a good MIS report.

Let us revert back to Accounting. We have seen various types of Accounts.

When the organization makes profit it owes that profit which it is supposed to return

to the promoter. On the other hand if the organization makes loss, it’s obligation to

the promoter decreases!

Profit = Revenue – Expenses

Revenue > Expense = Profit and Revenue < Expense = Loss

The purpose of the accounting system is to keep a record of the changes in Assets,

Liabilities and Owner's Equity (including Revenues and Expenses) and to report the

effects of those changes. The reports are called financial statements and there

are different financial statements to report different things.

Generally speaking, adjusting entries are made at the end of a period to ensure that

Revenues are reported when earned and Expenses are reported when incurred.

Adjusted Trial Balance is a trial balance after all adjustments have been: Analyzed,

Journalized, Posted and the affected accounts “Balanced”.

21



Financial Statements are used to report the financial position and results from

operating a business. They are the Balance Sheet, the Owner's Equity

Statement, the Income Statement and the Cash Flow Statement.

22



The Balance Sheet

Following are the transactions relating to M/s Trinity Foods, over an accounting

period from 1st June 2005 to 30th June 2006.

1. Started business with Capital Rs. 1,00,000

2. Paid into Bank Rs. 10,000

3. Bought Furniture and paid cash Rs. 25,000

4. Bought goods for cash Rs. 50,000

5. Bought goods from Ram on Credit Rs. 15,000

6. Sold a part of the goods for Rs. 75,000 and paid the proceeds into bank

directly

7. Sold the remaining goods on credit for Rs. 50,000 to Rahim

8. Paid Salaries and Wages Rs. 5,000

9. Paid rent by cheque Rs. 8,000

If you look at the above transactions carefully, you will see that some of these are

Original Service Transactions and some are Reciprocal Financial Transactions

(RFC) as shown in the tablel below:

TransID Service Customer Provider Level of Service Type of Service Amount

1 Invest Capital Org Owner Procured Facility 100,000RFS for 1Withdrawal /Dividend Owner Org RFS RFS

2 Transfer Money Bank Org External Facility 10,000

RFS for 2 Interest Org Bank RFS RFS

3 Purchase Furniture Org Supplier Procured Material

RFS for 3 Supplier Org RFS RFS 25,000

4 Purchase Goods Org Supplier Procured Material

RFS for 4 Supplier Org RFS RFS 50,000

5 Purchase Goods Org Ram Procured Material

RFS for 5 Ram Org RFS RFS 15,000

6 Sale Goods Buyer Org External Material

RFS for 6 Org Buyer RFS RFS 75,000

7 Sale Goods Rahim Org External Material

RFS for 7 Org Rahim RFS RFS 50,000

8 Employment Org Employee Procured FacilityRFS for 8 PaySalary Employee Org RFS RFS 5,000

9 Shop on Rent Org Landlord Procured Facility

RFS for 9 Landlord Org RFS RFS 8,000

23



The Accounting Cycle will start with the entry of the Transactions in a Journal in a

chronological manner followed by Posting which is the act of transferring the

information in the journal to the appropriate accounts.

The Debits and Credits to various accounts as a result of the above transactionsare shown below:

TransID Service Amount Status Debit Credit Transaction

1InvestCapital 100,000 Cash Capital CapitalRFS for 1Withdrawal /Dividend Not Due

2Transfer Money 10,000 Bank Cash AssetRFS for 2Interest Not Due

3PurchaseFurniture

RFS for 3 25,000 Complete Furniture Cash Asset

4PurchaseGoods

RFS for 4 50,000 Complete Purchase Cash Expense

5PurchaseGoods

RFS for 5 15,000 Incomplete Purchase Ram Expense

6 Sale Goods

RFS for 6 75,000 Complete Bank Sales Revenue

7 Sale Goods

RFS for 7 50,000 Incomplete Rahim Sales Revenue8 Employment

RFS for 8Pay Salary 5,000 Complete Salary Cash Expense

9Shop onRent

RFS for 9 8,000 Complete Rent Bank Expense

A trial balance is a list of all the above accounts and their balances. What we call

Debit balances are written in one column and Credit balances are written in one

column. Each column is totaled and compared to make sure that Debits = Credits.

24



Closing an account means to "bring the balance to zero". We close what we call

the temporary (or nominal) accounts. They are the temporary Owner's Equity

accounts - Revenues, Expenses and Withdrawals.

There are a total of 4 nominal accounts with either debit or credit balances.

Purchases a/c [Debit Balance]

Sales a/c [Credit Balance]

Salaries and Wages a/c [Debit Balance]

Rent Paid a/c [Debit Balance]

To ascertain the profit or loss made by the organization, the balance in these

accounts should be transferred to the "Profit & Loss a/c". Expenses viz. Purchases,Salaries and Rent will be Debited to P & L A/c and Revenue viz. Sales will be

Credited to P & L A/c.

The picture that emerges is as follows:

Account TID Debit Credit

Capital 100,000

Cash 1 100,000

2 10,000

3 25,000

4 50,000

8 5,000

Cash Total 100,000 90,000

P & L 4 50,000

5 15,000

6 75,000

7 50,000

8 5,000

9 8,000

P & L Total 78,000 125,000

Bank 2 10,0006 75,000

9 8,000

Bank Total 85,000 8,000

Ram 5 15,000

Rahim 7 50,000

Furniture 3 25,000

The Conventional Accounting Process followed so far is shown below:

25

Business Documents Journal Entry Transfer to Ledger

Balance Sheet Closing of Accounts Trial Balance



This process is laborious. We are just moving the same figures from one place to

another.

The Final Balance Sheet will look like this:

This Balance Sheet can easily obtained without resorting to any of the intermediary

reports of Journal, Ledger or closing of accounts. Under SOTA we resort to thefollowing Rules which are inbuilt and do not have to be created during registration

or transaction. The mode of payment is a parameter of service transaction and will

affect the Cash or bank account accordingly.

ServiceType of Service

OriginalService

ReciprocalFinService Debit Credit

ProcuredService Capital Complete

Openended

Bank / Cash /Equipment

Provider CapitalA/c

Procured

Service

Non

Material complete

Not

Complete

Profit & Loss

A/c

Provider

Creditor A/c

ProcuredService

NonMaterial Complete Complete

Profit & LossA/c

Bank / Cash /ExpensePrepaid

ProcuredService

NonMaterial


ExpensesPrepaid Bank / Cash

ProcuredService

MaterialAsset Complete

NotComplete

AssetEquipment /Furniture A/c

Provider Creditor Account

ProcuredService

MaterialAsset Complete Complete

Provider Creditor Account Cash /Bank

Procured

Service

Material

ConsumableExternalService

Allcomplete

NotComplete

Customer Debtors A/c

Profit & LossA/c

ExternalService All Complete Complete Bank / Cash

Profit & LossA/c

ExternalService All


Profit & LossA/c Customer A/c

26

Clear vs Sota

Documents

Transcript of Clear vs Sota