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Accounting is one of the foremost and prominent career avenues in industries all over the world. Although the basic concept and premises surrounding the subject of accountancy remains the same, the application of these accounting principles in Indian industry has undergone a sea-change with the modern-day computer applications such as Tally 9.0 ERP Version, SAP and Oracle signaling a transformation of accounting formats from the traditional manual book-keeping system which involved a lot of time and effort with the attendant risks of human error involved in the preparation of books of account.
The basic rules of accounting are conceptualized in the form of three categories of accounts namely personal, real and nominal accounts. In the case of personal accounts, the rule states debit the receiver, credit the giver. In the case of real accounts, the rule states debit what comes in and credit what goes out. In the case of nominal accounts, the rule states debit all expenses and losses and credit all incomes and gains.
The books of account maintained in a trading concern can be divided into cash book, bank book, purchases book, sales book, journal and general ledger. The cash book has a debit balance which implies that all assets have debit balances and all liabilities have credit balances. All income in cash is credited in the cash book and all expenses in cash are debited in the cash book. Under the Income-Tax Act,1961 care has to be taken to ensure that there are no cash payments exceeding Rs 20000 individually, in which case ,this will be disallowed and added back to the taxable income of the entity for the assessment year.
In case of the bank book, in any practical situation involved, there will always be a difference between the bank book maintained by the company and the bank statement issued by the bank in which the company holds a banking account. In such a case, the usual practice involved is to prepare a bank reconciliation statement preferably monthly, which reduces a lot of time and effort in ticking off unresolved entries in the books of account. These days, with the advent of softwares such as Tally and SAP, the preparation of bank reconciliation statement does not involve any meticulous use of human effort.
Care has to be taken to ensure that all cheques are crossed and no cheque should be made outstanding for more than three months from the date of issue, in which case the cheque will be returned. It should also be ensured that a cheque is drawn only after ensuring that there are sufficient funds in the account, failing which criminal prosecution could be launched on the drawer of the cheque under Section 138 of the Negotiable Instruments Act.
A purchases ledger records the details of all purchases made during an accounting period. It should be noted that only revenue purchases are routed through the purchases ledger. A sales ledger records the details of all sales made during an accounting period. It should be noted that only trading sales are to be routed through the sales ledger.
A journal is an important book of accounts maintained by a trading concern. Here, all capital purchases and sales, depreciation entries, provisions, salaries , taxes to be paid and revenue expenditure are periodically entered . All write-offs and write-backs have to be periodically updated. But, it is to be noted that this has to be done under the signature of the approved authority.
General Ledger is another important book of account. It contains all expense and income accounts, debtors and creditors ledger and taxes, duties and cesses.It has to be ensured in the expense accounts that any expenditure involving deduction of TDS entails deduction of TDS and timely remittance of dues to the government without any fee or penalty to be paid. In the case of Income accounts, it has to be noted that credit is given to taxes to be collected and remitted to the government treasury in time.
In the case of Debtors ledger, it has to be ensured that as Sundry Debtors is an asset, it has to have an opening debit balance. It also has to be ensured that sales to government entities are backed by a firm assurance of delivery in time, failing which it entails the prospect of liquidated damages, which is a financial drain on the trading entity. It also has to be ensured that all sales are received in time as this will have a severe repercussion on the working capital situation of the company.
Sundry Creditors should have an opening credit balance. It has to be ensured that sundry creditors are paid in time.
~Prithvi Sudhindra
[ Admin note: Prithvi has more than than 10 years of experience in teaching english, accounts and income-tax as a home tutor. To enroll for his classes, refer to his profile here.
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