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MGT101 - Financial Accounting - I - Lecture Handout 06

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FLOW OF TRANSACTIONS

Learning Objective

This lecture will cover following areas:
  • An overview of the flow of transactions.
  • An introduction to the basic books of accounts.
  • The General Ledger, and
  • The ledger balance

The Flow of Transactions

flow of transactions

Event
Event is the happening of any thing but in accounting we discuss monetary events

Monetary Events
If the financial position of a business is change due to the happening of event that Event is called
Monetary Event

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.

A Sample Voucher

Name Of Company
Type Of Voucher
Date: 1-1-20-- No: 01
Description Code
#
Debit
Amount
Credit
Amount
Cash 01 100,000  
Capital 02   100,000
       
Total:   100,000 100,000
Narration: Capital Introduced in Cash by Owner
Prepared By: Checked by:

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 and looks like this:

Title of Account

Left hand side.

Right hand side.

The Debit side.

The Credit side.

A Standard General Ledger

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

A Standard General Ledger

Capital Account (Title of Account) Account Code 02
Date Voucher Number Particulars
Narration
Debit Amount Credit Amount
20--        
Jan 01 01 Capital Account   100,000
         
    Capital Introduced in cash by Owner    

Recording From Voucher to General Ledger

Voucher
Date: 1-1-20-- No: 01
Description Code# Debit
Amount
Credit
Amount
Cash account 01 100,000  
Capital account 02   100,000
Narration: Capital Introduced in Cash by Owner

 

Capital Account (Title of Account) Account code 02
Date Voucher
Number
Particulars /
Narration
Debit
Amount
Credit
Amount
20--        
Jan 01 01 Cash account   100,000

Completing the Recording – Both Effects

Description Code# Debit
Amount
Credit
Amount
Cash account 01 100,000  
Capital account 02   100,000
Narration: Capital Introduced in Cash by Owner

 

Capital Account Account Code 02
Date Voucher
Number
Particulars / Narration Debit
Amount
Credit
Amount
20--        
Jan 01 01 Cash account   100,000

 

Cash Account Account Code 01
Date Voucher
Number
Particulars / Narration Debit
Amount
Credit
Amount
20--        
Jan 01 01 Capital account 100,000  

A Simple Presentation of a Recorded Transaction is as under:

Cash Account Code 01

Capital

Capital Account Code 02

Cash 100,000

The Ledger Balance

In the earlier lecture, we have discussed that in order to have the total figure in respect of each head of expense/income, asset/liability, we need to maintain different accounts. We had also said that each account may have figures on the debit as well as on the credit side. Therefore, the difference between the debit and the credit sides, known as the BALANCE, would represent the required total of the particular account.

The total of all balances on the Debit side is ALWAYS equal to the total of all balances on the Credit side. This is called the balancing of books of accounts. We will study about this concept at a later stage. The balance may be written out after every transaction in a third column or calculated at the end of a specific time period (an accounting period).

A Debit balance is shown without brackets and a Credit balance is shown in brackets (XYZ).

 

Cash Account Account Code 01
Date Voucher
Number
Narration /
Particulars
Debit
Amount
Credit
Amount
Balance
Dr/(Cr)
20--          
Jan 01 01 Capital account 100,000   100,000
Jan 01 02 Building account   50,000 50,000
Jan 02 03 Furniture account   10,000 40,000
Capital Account Account Code 02
Date Voucher
Number
Narration /
Particulars
Debit
Amount
Credit
Amount
Balance
Dr/(Cr)
20--          
Jan 01 01 Cash account   100,000 (100,000)

 

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