Accounting Flow of Transactions

Flow of Transactions

Event

Event is the happening of anything but in accounting we discuss monetary events (If the financial position of a business is change due to the happening of event that Event is called Monetary Event). For example we buy stationary for business use, so this an event which change the financial position of the company.

The Voucher

Voucher is documentary evidence in a specific format that records the details of a transaction. It is accompanied by the evidence of transaction. Like we purchase stationary and we will record this in our voucher as Stationary Dr. & Cash/Bank Cr. With the total value of the stationary.

Sample of Voucher

The General Journal

The Journal is used to record financial transactions in chronological (day-to-day) order. All vouchers were first recorded in books of accounts. It was also called the Book of Original Entry or Day Book. But in present day accounting and especially with the introduction of computers for accounting, this book is not in use any more.

General Ledger – The ‘T’ Account

Ledger – is a book that keeps separate record for each account (Book of Accounts). The Account or Head of Account is systematic record of transactions of one type. An account in its simplest form is a T-shape. In recent accounting software when we have done our voucher then the mentioned accounts on the vouchers will record its certain value in their ledgers. Like stationary, cash, bank, office supplies, furniture etc. all these accounts will be having different ledgers/books with their Dr. or Cr. Balances.

Since the ledger keeps record of transactions that affect one head of account, therefore, it should provide all the information that a user may need.

Usually the ledger is required to provide following information:

·       Title of account

·       Ledger page number, called Ledger Folio / Account Code

·       Date of transaction

·       Voucher number

·       Narration / particulars of transaction

·       Amount of transaction

General Ledger Sample

Trial Balance

At the end of accounting period, a list of all ledger balances is prepared. This list is called trial Balance.

Trial balance is a listing of the accounts in your general ledger and their balances as of a specified date. A trial balance is usually prepared at the end of an accounting period and is used to see if additional adjustments are required to any of the balances. Since the basic accounting system relies on double-entry bookkeeping, a trial balance will have the same total debit amount as it has total credit amounts. Both sides of trial balance i.e. Debit side and credit side must be equal. If both sides are not equal, there are some errors in the books of accounts. Trial balance shows the mathematical accuracy of the books of accounts.

Limitations of Trial Balance

·       Trial balance only shows the mathematical accuracy of the accounts.

·       If both sides of trial balance are equal, books of accounts are considered to be correct. But this might not be true in all the cases.

·       If any transaction is not recorded at all, trial balance cannot detect the omitted transaction.

·       If any transaction is recorded in the wrong head e.g. if an expense

Trial Balance Sample

Profit & Loss Account

Profit & Loss account is an account that summarizes the profitability of the organization for a specific accounting period.

Profit & Loss account has two parts:

·       First part is called Trading account in which Gross Profit is calculated. Gross profit is the excess of sales over cost of goods sold in an accounting period. In trading concern, cost of goods sold is the cost of goods consumed plus any other charge paid in bringing the goods in salable condition. For example, if business purchased certain items for resale purpose and any expense is paid in respect of carriage or bringing the goods in store (transportation charges).

These will also be grouped under the heading of ‘cost of goods sold’ and will become part of its price. In manufacturing concern, cost of goods sold comprises of purchase of raw material plus wages paid to staff employed for converting this raw material into finished goods plus any other expense in this connection.

·       2nd part is called Profit & Loss account in which Net Profit is calculated. Net Profit is what is left of the gross profit after deducting all other expenses of the organization in a specific time period.

Profit & Loss Account Sample

Balance Sheet

It is a position statement that shows the standing of the organization in Monetary Terms at a Specific Time.

Unlike Profit and Loss that shows the performance of the entity over a period of time, the Balance Sheet shows the Financial State of Affairs of the entity at a given date. Balance sheet is the summarized analysis in a ‘T’ form of all assets and liabilities of the entity, with liabilities listed on left hand side and assets on right hand side. Asset is any owned physical object (tangible asset) or a right (intangible asset) having economic value to the owner. Liability is an obligation of the business to deliver goods or to provide a benefit in future.

Balance Sheet Sample