21/06/2006                                                                                    Page: 3

ACCOUNTS BASICS

TRIAL BALANCE:  Trial balance statement is prepared to ascertain the arithmetical accuracy of ledger accounts, location of errors, preparation of financial statements. The debit and credit balances of various ledger accounts are entered. Closing stock does not appear in the Trial Balance.

DEPRECIATION:  The value of Fixed Assets purchased goes on reducing every year due to wear and tear, efflux of time, obsolescence, continuous use of asset.  This fall in value of asset is treated as loss or expenditure.  It is shown in the Balance Sheet as a deduction from the Fixed Asset.

PROVISION FOR BAD DEBTS:  Bad debts often occur and they are a loss. Where it is certain that a debt can not be recovered, then the amount is credited to the Debtors account to close it and debited to Bad Debts account.  This account is shown in Profit and Loss account as an expense.

BALANCE SHEET:   Statement which sets out the Assets and Liabilities of a firm or an institution as at a certain date.  Since even a single transaction will affect the related asset or liability the balance sheet is true only at a certain period of time. Balance sheet should give essential  information about:

1. Original cost of Fixed Assets, amount of Depreciation till date, Net asset value.

2. In case of Investments, market value as on date of balance sheet should be shown in the balance sheet as a Note.

3. Mode of valuation of Closing stock should be indicated as to whether it is at cost or market value.

4. All Outstanding Expenses, Accrued Income, Advance Income, Prepaid Expenses should be duly accounted.

BANK RECONCILIATION STATEMENT:  A statement prepared every month end by comparing the Cash Book and the Bank Statement.

Two important differences which can occur between Cash book and Bank book are:

1. Omitting an entry found in the Cash book or Bank Statement.

2. Entry not recorded in Cash book or Bank statement due to different dates of a transaction.

Entry to be made in CASH BOOK:  Bank charges, Bank interest, Dishonoured cheques, Bankers Order, Payments, Receipts, any omissions.

Entry to be made in BANK BOOK:  Cheques issued not presented for payment, Cheques deposited not cleared, clerical errors.

SIMPLE RECONCILIATION TIP in case of NORMAL BALANCE Cash Book Balance & REVERSE in case of O/D Cash Book Balance: 

1. ADD all items of difference found in CR side of Cash book and Cr side of Bank book.

2. DEDUCT all items of difference in Dr side of Cash book and Dr side of Bank book.

Home |  AccountsBasics1 |  AccountsBasics2 |  AccountsBasics3 |  AccountsBasics4 |  AccountsBasics5 |  AccountsBasics6 |