THE SYSTEM OF ACCOUNTING (ACCOUNTING CYCLE)

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Volume – I

YEAR 2015

WRITTEN BY: SYED AQEEL RAZA

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TABLE OF CONTENTS

< ACCOUNTING CYCLE>

Accounting Cycle…………………………………………………………….72-73

1- Source Documents…………………………………………………74-76

I -Cash Memo………………………………………………………………..77-79

Ii - Invoice………………………………………………………… ………….80-82

Iii - Instruments of Banks……..………………………… ……………83

a) Cheque Book……………………………………………… …………..83-85

b) Deposit Slip………………………………………………………………….86

c) Funds Transfer Form…………….………………… ……………..87-89

4-Vouchers………………………………………………………… ………90

a) Cash Payment voucher………………………… ……………….91

b) Cash Receipt Voucher………………………… ………………..92

c) Bank Payment Voucher……………………… ………………..93

d) Bank Receipt Voucher…..…………………… ……………….94

e) Petty Cash Voucher…..……………………… ………………..95

2- JOURNAL……………..……………………………… ……………..96

Kinds of Journals………………………………… ……………………..97

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1-General Journal………………………… ………………………98-100

2-Cash Book……………………………………………………………..101-102

3-Petty Cash Book……………………………………………………….103-105

4-Cash Receipt Journal………………………………………………..106-107

5-Cash Payment Journal………………………………………………108-109

6-Purchase Journal……………………………………………………..110-111

7-Purchase Returns & Allowances Journal………… ……..112-114

8-Sales Journal……………………………………………… ………. 115-116

9-Sales Returns and Allowances Journal………… ……..117-119

Debit & Credit Memorandum………………………… ……..120-123

3-General Ledger……………………………………… …………..124-128

4-Trial Balance (Unadjusted)……………………… ………..129-135

5-Adjustment……………………………………………………………136-137

6-Trial Balance (Adjusted)………………………… ……………138-142

7-Closing Entries…………………………………… ……………..143-144

8-Worksheet……………………………………… ……………….145-148

9-Final Statements……………………………… ……………..149-153

10-Post Closing Trial Balance………………… ……………154-156

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ACCOUNTING CYCLE

Accounting cycle means the collective processing of

accounting events of a firm repeated in the same order

in each accounting period. The business accounting cycle

is for one year in length. The steps begin when a

transaction occurs and end with its inclusion in financial

statements.

Here are following steps in accounting cycle:-

1- Source Document

2- Journal 3- Leger

4- Trial Balance unadjusted

5- Adjustments 6- Trial Balance Adjusted

7- Closing Entries

8- Worksheet 9- Finance Statement

10- Post Closing Trial Balance

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1- Source Document

The source document which describes the transactions

and events moves accounting cycle. The Cash Memo,

Invoice, Bill, Statement, Bank Instrument or any other

paper in black and white enables accountant to support

and proof the transaction incurred are source

documents. The accounting cycle involves sale,

purchase, inventory or any other system adopted by

company creating source documents manually or

electronically under trading, servicing and

manufacturing businesses.

The accounting cycle cannot move without source

document.


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Some source documents with their specimen using in

accounting are narrated below:-

1- CASH MEMO

2- INVOICE/BILL

3- INSTRUMENTS OF BANK

a) Cheque

b)Deposit Slip c) Funds Transfer Form

4) VOUCHERS

a) Cash Payment Voucher

b) Petty Cash Voucher

c) Bank Payment Voucher

d) Cash Receipt Voucher

e) Bank Receipt Voucher

f) Journal Voucher


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1- CASH MEMO

Cash Memo is the document of source when sale,

purchase or service is made in cash on the spot for

business, the seller have to give written instrument like

Cash Memo to the person purchased goods or acquired

services. The cash memo is made in duplicate or

triplicate according to the requirement of business.

Generally the Cash Memo contains:

Name, address and deals in of supplier or rubber

stamp, name and address of the purchaser, serial

number, date, quantity, description, rates of goods,

amount

Goods once sold will not be back. E. &.O.E. means

if there is any mistake in cash memo that is subject

to correction.

The cash memo must be signed by the duly

authorized person.


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In case of trade discount or cash discount, sales tax and

anything is shown separately or designed according to

nature of business of firm.


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CASH MEMO S.No.

Date

M/S.

Qty. Particulars Rate Amount

Total

Goods once sold will not be back.

E.&.O.E.

Signature


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2- INVOICE:

Invoice is the commercial document that controls the

sale of a product, inventory and taxes. It may be on cash

or credit. In case of credit, the amount will be receivable

by the purchaser or payable to the seller for a certain

period. The Invoice is made in duplicate or triplicate

according to the requirement of business manually or

electronically.

The Invoice is also known as bill, statement, sales invoice

or sales tax invoice.

It may usually contain as per specimen or design

according to nature of business of firm.


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COMPANY LOGO

Invoice No.

Date

COMPANY NAME

P.Order No.

(Company Slogan)

(Address )

No., Street, City, code

Phone, Fax

e-mail

SALES TAX NO.

To

Name

Company Name

Address

Phone No.

SALES TAX NO.

S.NO. QUANTITY DESCRIPTION RATE AMOUNT

SUB TOTAL

SALES TAX

TOTAL

THANK YOU FOR YOUR BUSINESS


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3- INSTRUMENTS OF BANK

a) Cheque Book

A small book containing 25, 50, and 100 leaves preprinted instruments issued by

bank to enable account holder to withdraw or transfer an amount from his

account.

The cheque book contains two portion of each leave one the large portion or

main portion called cheque which is presented into bank for payment the

amount written and another small portion called counter folio remains with the

account holder for record of withdrawals.

A cheque is an order, signed by account holder (drawer) to place an order to

bank (drawee) to pay a certain sum of money to the person’s name written on

the cheque (payee).


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b) Deposit Slip

The bank deposit slip or pay-in-slip is a small

preprinted form used to transfer funds by way of cash

or cheque into account to fill the information in the

required fields.

The pay-in-slip contains either two portion or in

duplicate. The small portion or duplicate copy of the

deposit slip is returned by bank to account holder

after acknowledge the amount in cash or cheque and

affixing the seal and officer’s signature.

Today computerized electronic machines are making

the same job.


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c) FUNDS TRANSFER FORM

The Bank issues preprinted form for making demand draft, pay order, funds transfer to other account of out station and other countries electronically.

The account holder has to fill the form and deposit the cash or cheque for the purpose. The bank or financial institution returns the small portion of form to

depositor after acknowledging the amount in cash and cheque with seal and signature. The charges for rendering services are deducted by bank.

Internet Banking is also useful for transfer funds from one account to another

account throughout country or worldwide.


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4) VOUCHERS

A written record of payment and receipt by way of cash

and bank is called voucher supported by evidence or

events that a transaction has taken place. To record

liabilities and adjustment journal voucher is used.


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a)-Cash Payment Voucher

CASH PAYMENT VOUCHER

Name of Company

Date

Voucher No.

C.B. Folio

DEBIT A/c

PAID TO

On account of Amount

Rs. Ps.

TOTAL

RUPEES

Prepared by: Checked by: Authorized by: Received By:


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b)-Cash Receipt Voucher

CASH RECEIPT VOUCHER

Name of Company

Date

Voucher No.

C.B. Folio

CREDIT A/c

Received from


Rs. Ps.

TOTAL

RUPEES



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c)-Bank Payment Voucher

BANK PAYMENT VOUCHER

Name of Company

Date

Voucher No.

C.B. Folio

DEBIT A/c

PAID TO


Rs. Ps.

TOTAL

RUPEES



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d) -Bank Receipt Voucher

BANK RECEIPT VOUCHER

Name of Company

Date

BP.V NO.

C.B. Folio

CREDIT A/c

Received from


Rs. Ps.

TOTAL

RUPEES



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e- Petty Cash Voucher

Name of Company

PETTY CASH VOUCHER No.

Paid to

Rupees Rs.

on account of



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2- Journal

A journal is a book or computer file in which monetary

transactions systematically are entered the first time

they are processed in chronological sequence to control

large number of transactions of a day.

A daily record of events or business is referred to diary as

private journal.


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KINDS OF JOURNALS

1- GENERAL JOURNAL

2- CASH BOOK 3- PETTY CASH BOOK

4- CASH RECEIPT JOURNAL

5- CASH PAYMENT JOURNAL 6- PURCHASE JOURNAL

7- PURCHASE RETURN AND ALLOWANCES

JOURNAL 8- SALES JOURNAL

9- SALES RETURN AND ALLOWANCES

JOURNAL


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1-GENERAL JOURNAL

In accounting, a first step for recording of financial

transactions is General Journal where double entry

book keeping entries are recorded by debiting one or

more account and crediting another one or more

accounts with the same total amount under accounting

equation.

A general journal entry includes the date of the

transaction, the titles of the accounts debited and

credited, and an explanation of the transaction also

known as narration.

There are some other journals used for special purposes

called Special Journals same as General Journal or book

of original entry.


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PAGE NO.

GENERAL JOURNAL

DATE DESCRIPTION REF. DEBIT CREDIT


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2-CASH BOOK

The Cash Book is usually maintained all cash receipts and

cash major payments including bank deposits and

withdrawals.

The cash book is periodically reconciled with the bank

statement as an internal auditing.

Large business organizations that have a number of

transactions of cash payments and cash receipts use cash

receipt and cash payment journals.


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3-PETTY CASH BOOK

Petty cash is a small amount of discretionary funds in the

form of cash used for payment of expenses. Because of

the inconvenience, cost of writing, signing, saving time

and energy of cashier, petty cash book is written where

cashier issues a cheque or cash from main cash book as

petty cash funds to petty cashier. The book keeping entry

for this initial fund would be to debit Petty Cash Funds

and credit bank account or main cash account

automatically.

Petty Cash Book contains five normally columns namely

(1) Receipt (2) Date (3) Description (4) Voucher Number

(5) Payments link to separate head of account.


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4-CASH RECEIPT JOURNAL

The Cash Receipt Journal is used to record cash receipt

only designed by the requirements of business and

below is commonly used;-


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CASH RECEIPT JOURNAL

DATE DESCRIPTION

OTHER ACCOUNTS: Cr. SALES

A/C RECEIVABLE: Cr. SALES CASH RECEIPT

Ref. Amount Cr. Ref. Amount DISCOUNT DR.

Dr.


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5-CASH PAYMENT JOURNAL

The Cash Payment Journal known as “Multi Columns

Cash Payment Journal” is used to record major cash and

bank payments in various ways designed according to the

requirement of the business.


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CASH PAYMENTS JOURNAL

DATE DESCRIPTION

Voucher OTHER ACCOUNTS Purchases Trnas- A/C PAYABLE Purchase CASH PAYMENTS

No. Ref. Amount portation Ref. Amount Discount

Dr. Dr. Dr.

Dr. Cr. Cr.


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6- PURCHASE JOURNAL

The Purchase Journal is used for recording transactions

relating to credit purchases of merchandise and not for

cash purchases as cash purchases of merchandise are

recorded in Cash Book or Cash Payment Journal.


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PURCHSASE JOURNAL

Page No.

DATE NOVICE NO. NAME OF SUPPLIER POST

AMOUNT Ref.


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7-PURCHASE RETURN AND ALLOWANCES JOURNAL

Purchase Return and Allowances Journal is a Book known

as Purchase Return outwards book and purchase return

day book, wherein purchaser records all the debit

memorandum of parties of Purchase returns to seller for

certain reasons. Buyer sends a debit note to the seller

contains the quantity of goods returned and reasons for

return of goods.

The Purchase return and allowances journal is the

summary of parties whom goods has returned and the

claim of returns has been adjusted making General

Journal Entry by debiting Account Payable and crediting

Purchase Return and Allowances under reference.


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PURCHASE RETURN AND ALLOWANCES JOURNAL

Page No.

DATE CREDIT MEMO NO. NAME OF SUPPLIER POST

AMOUNT Ref.


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8-SALES JOURNAL

The Sales journal is used to record credit sales of

merchandise and not for cash sales.


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SALES JOURNAL

Page No.

DATE ACCOUNT DEBITED INVOICE NO. POST

AMOUNT Ref.


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9-SALES RETURNS AND ALLOWANCES JOURNAL

Sales Return and Allowances Journal is a book, known

as Sales Return Inwards Book or Sales Return Day Book,

wherein seller records only all the credit memorandum

of Parties of sales returns to him by his customers for

sold reasons.

The sale return and allowances journal is the summary

of parties who returned the goods and the claim of

returns has been adjusted making General Journal

Entry by debiting Sales Return and Allowances and

crediting Account receivable under reference.


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SALES RETURNS AND ALLOWANCES JOURNAL

Page No.

DATE ACCOUNT CREDITED CREDIT POST

AMOUNT MEMO Ref.


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DEBIT AND CREDIT MOMORANDUM

If any defect in commodities found, the purchaser will

inform the supplier for deduction of amount payable by

debit memorandum. If the supplier accepts the request,

he will issue a credit memorandum for deduction of

amount receivable.

The debit memorandum reduces the liability to vendor

and credit memorandum reduces accounts receivable to

vendor.


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ACCOUNTING CYCLE 122

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ISSUED BY PURCHASER

SPECIMEN OF DEBIT MEMORANDUM

KARACHI TRADING COMPANY

P.O. BOX 990,

KARACHI- PAKISTAN

Debit Memorandum NO. 001

To:

Date: January 10,2015

M/s. Azad Traders

S.I.T.E., Karachi

We are debiting your account with the value of under mentioned goods

returned;

Qty. Particulars

Amount(Rs.)

5 Radio sets @ Rs.100 as per invoice.

500.00

No. 002 dated 12.1.2015

Less

Returned goods being of inferior quality

via Malik Transport Co.

E.&O.E.

Signature


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ISSUED BY SELLER

SPECIMEN OF CREDIT MEMORANDUM

AZAD TRADERS

S.I.T.E.,

KARACHI-PAKISTAN

To:

Credit Memorandum No. 10

Karachi Trading Co.,

Date: January 15,2015

P.O. BOX 990,

KARACHI- PAKISTAN

We are crediting your account with the value of under mentioned goods

Received from you for the reason stated in your Debit Note.

Qty. Particulars

Amount(Rs.)

5 Radio sets @ Rs.100 as per Debit Note No.

500.00

No. 0012 dated 10.1.2015

Less

Returned (goods being of inferior quality)

E.&O.E.

Signature


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3-GENERAL LEDGER

General journal shows debit and credit the accounts

head but the actual increase or decrease is ascertained in

an individual account and the group of accounts is known

as LEDGER or as book of final entry.

There are three types of accounts in ledger;

1- Standard Form

2- Skeleton Form “T” Shape.

3- Self Balancing Form


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GENERAL LEDGER COMPANY NAME LEDGER Account of

DEBIT CREDIT Dr. BALANCE

DATE PARTICULARS FOLIO Rs. Rs. or Rs.

Cr.

Standard Form of Ledger Account


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DATE PARTICULARS FOLIO DEBIT DATE PARTICUALRS FOLIO CREDIT

Standard Form of Ledger Account


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Cash Acc: No.

Specimen of Skeleton Form or "T" Shape Form


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DATE PARTICULARS FOLIO DEBIT PARTICUALRS FOLIO CREDIT

Specimen of self balancing form


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4-TRIAL BALANCE (UNADJUSTED)

All the ledger accounts are summarized into a statement

at the end of a period such as month, quarter or year

known as TRIAL Balance. An unadjusted trial balance is

the one which is summarized before any adjustments

made in ledger accounts.

The debit and credit result of account balance is taken or

kept in its proper place account related to;

Debit Balance Credit Balance

Assets Contra Assets

Expenses Liabilities

Prepaid expenses Capital

Drawing Revenue

The Trial balance is formed in two as to Standard Form

and Skeleton Form specified below;


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TRIAL BALNACE

AT THE END OF THE YEAR JUNE,30 2014

TITLE OF ACCOUNT Account DEBIT CREDIT

No. Rs. Rs.

Specimen of trial Balance standard form


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COMPANY NAME TRIAL BALNACE

AT THE END OF THE YEAR JUNE,30 2014

ASS

ETS

CO

NTR

A A

SSET

LIA

BIL

ITIE

S

PR

OP

RIE

TOR

SHIP

INC

OM

E

EXP

ENSE

S

Specimen of trial Balance Skeleton form


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5-ADJUSTMENT

In order to present a true and fair view of the financial

position, an entry is made in accounts which does not

record a transaction but made to rectify errors, missed

recording, not recorded properly or wrong amounts were

recorded previously or some transactions are recorded

only at the end of the year. These transactions or entries

are related with the adjustment, reversing, correction of

errors.

Below is the most common adjustment;

ACCRUED EXPENSES/UNRECRODED EXPENSES

PREPAID EXPENSES

DEPRESCIATION EXPENSES

BAD DEBITS/UNCOLLECTIBLE

UNUSED SUUPLIES OR MERCHANDISE

ACCRUED INCOME/UNRECORD EXPNESES.

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6-TRIAL BALANCE (ADJUSTED)

After adjusting and positing the entries into ledger

accounts, re-trial balance is prepared called adjusted trial

balance.

Like the unadjusted trial balance, the adjusted trial

balance accounts are listed usually in or order as “assets,

liabilities, and equity, income and expenses accounts.”

An adjusted trial balance is formatted exactly like an

unadjusted trial balance.


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7- CLOSING ENTRIES

Revenue, expense and capital withdrawal (dividend) accounts are temporary

accounts need to rest at the end of the accounting period through Income

Summary or Expense and revenue summary. Closing entries are the journal

entries used to transfer the balances of these temporary accounts to permanent

accounts. The closing journal entries may be in the form of a compound journal

entry if there are several accounts to close.

The sequence of closing process is as under:

1. Close the revenue accounts to Income Summary

2. Close the expense account to Income Summary 3. Close Income Summary to Retained Earnings

4. Close Dividends to Retained Earnings


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EXAMPLES

1. Close the revenue accounts to Income Summary

DATE ACCOUNTS DEBIT CREDIT

mm/dd Revenue XXXX.XX

Income Summary XXXX.XX

2. Close the expense account to Income Summary

DATE ACCOUNTS DEBIT

mm/dd Income Summary XXXX.XX

Expenses

3. Close Income Summary to Retained Earnings


mm/dd Income Summary XXXX.XX

Retained Earnings XXXX.XX

4. Close Dividends to Retained Earnings


mm/dd Retained Earnings XXXX.XX

Dividends XXXX.XX

4. Unrecorded expenses or accrued expenses



mm/dd Expense Account XXXX.XX

Accrued Expense XXXX.XX

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8- WORKSHEET

The worksheet means working paper containing different types of information

or accounting data prepared to minimize errors in the permanent record of

accounting, simplify work and for testing of ledger accounts, adjusting entries

and financial accounts.

The worksheet or working paper specimen below is very useful providing

information for;

Financial statement

Owner’s equity

Posting of adjusting entries in the accounting records

Recording of closing entries



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9-FINANCIAL STATEMENTS

At the end of the accounting period, financial statements

as income statement and Balance sheets are prepared to

close up all the financial activities during the year.

All the expenses and revenue accounts are closed by

Income Statement or Expense and Revenue Summary

showing Net Income or Net Loss for the period.

All the Assets, Liabilities and Proprietorship accounts are

presented in Balance Sheet.


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COST OF MERCHANDISE

The rule of cost of merchandise in profit and loss

summary is important to find out the net income or loss.

The amount of cost of merchandise sold is obtained by

the process of the following;


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COST OF MERCHANDISE SOLD STATEMENT

AT THE END OF THE YEAR 201..

COST OF MERCHANDISE SOLD

Merchandise Inventory (Opening) xxxx.xx

Purchases xxxx.xx

Less: Purchase Returns & Allows. xxx.xx

Less: Purchase Discount (+)xxx.xx (-)xxxx.xx

NET PURCHASES xxxx.xx

Add: Transportation in;

Cartage xxx.xx

Import Duties xxx.xx

Custom Duties xxx.xx

Clearing & forwarding Exp. xxx.xx

Freight Charges xxx.xx (+)xxx.xx

COST OF MERCHANDISE AVAILABLE FOR SALE xxxx.xx

LESS: MERCHANDISE INVENTORY (ENDING) (-)xxxx.xx

COST OF MERCHANDISE SOLD xxxx.xx

(Transferred to Profit & Loss Account)


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INCOME STATEMNET

PROFIT AND LOSS STATEMENT

AT THE END OF THE YEAR 201

SALES REVNUE:

Sales

Less: Sales Return & Allowances xxxx.xx

Less: Sales discounts xxxx.xx

(-)xxxx.xx

NET SALE xxxx.xx

LESS : COST OF MERCHANDISE SOLD (-)xxxx.xx

GROSS PROFIT OR LOSS (+/-)xxxx.xx

LESS EXPENSES

Operating Expenses xxxx.xx

General Expenses xxxx.xx

Financial Expenses

xxxx.xx (-)xxxx.xx

NET PROFIT OR LOSS (+/-)xxxx.xx

(Transferred to Capital Account)

If net sales exceed the cost of merchandise sold, it means

that there is gross income and if it is less to cost of

merchandise sold, there is gross loss. And for this,

expenses increase or decrease the gain or loss.


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BALANCE SHEETS

COMPANY NAME

BALANCE SHEET AS AT 30.06.2015

ASSETS Amount EQUITIES Amount

CURRENT ASSETS CURRENT LIABILITIES

Cash in hand xxxx.xx Accounts Payable xxxx.xx

Cash at Bank xxxx.xx Bank Over draft xxxx.xx

Accounts Receivable xxxx.xx Salaries Payable xxxx.xx

Stock xxxx.xx Wages Payable xxxx.xx

Unexpired Insurance xxxx.xx Utilities Payable xxxx.xx

Unexpired Rent xxxx.xx

XXXX.XX XXXX.XX

NON-CURRENT ASSETS LONG TERM LIABILITIES

Land xxxx.xx Mark-up xxxx.xx

Building xxxx.xx Loan xxxx.xx

Furniture & Fixtures xxxx.xx XXXX.XX

Office Equipment xxxx.xx OWNER'S EQUITY

Less : Accumulated Depreciation (F&F) (-)xxxx.xx Capital xxxx.xx

Less : Accumulated Depreciation (OE) (-)xxxx.xx Less: Drawing (-)xxxx.xx

TOTAL XXXX.XX TOTAL XXXX.XX


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10-POST CLOSING TRIAL BALANCE

A post closing trial balance contains only the balance

sheet accounts and their amounts i.e. assets, liabilities,

owner equities. It is prepared after closing the expenses

and revenue accounts.

The preparation of post-closing trial balance is the last

step of the accounting cycle and gives the assurance that

sum of debits equal the sum of credits before the start of

new accounting period. It provides the opening balances

for the next ledger accounts of the new accounting

period.

This is the end of the accounting cycle and in the next

accounting period; the accounting cycle will be repeated

again as before.

The following is the example of closing trial balance;


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COMPANY NAME

POST CLOSING TRIAL BALANCE

AT THE END OF THE YEAR JUNE, 30 201…

TITLE OF ACCOUNT DEBIT CREDIT

Rs. Rs.

Cash xxxx.xx

Accounts receivable xxxx.xx

Stock xxxx.xx

Prepaid Insurance xxxx.xx

Prepaid Rent xxxx.xx

Land xxxx.xx

Building xxxx.xx

Furniture & Fixtures xxxx.xx

Office Equipments xxxx.xx

Accounts Payable xxxx.xx

Bank overdraft xxxx.xx

Salaries Payable xxxx.xx

Wages payable xxxx.xx

Utilities Payable xxxx.xx

Mark up xxxx.xx

Loan xxxx.xx

Capital xxxx.xx

TOTAL XXXX.XX XXXX.XX


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ENDING WORDS

ON

ACCOUNTING CYCLE

Accounting covers all the department of life, the life

cannot move or survive without food and food comes

from money, money comes from doing business,

business needs accountancy and accountancy has

process like cycle revolves all finances resulting in

financial statements showing the true and fair financial

position enables businessman to take further decisions

on business movement.

The Accounting cycle which starts once has no break

either to carry on or wind up the business activities.

I tried a little to describe the subject concisely to follow

the concept within no time.

Your comments and support is assurance of writing

further.

Author

THE SYSTEM OF ACCOUNTING (ACCOUNTING CYCLE)

Education

Transcript of THE SYSTEM OF ACCOUNTING (ACCOUNTING CYCLE)