Overview to Accounting

Accounting is the systematic recording of day today transactions of a business. It is a continuous process. The object of recoding transactions is to review the financial performance of a company for certain period. It helps the management to analyze the recorded data and take necessary steps according to the findings.

Here you are going to learn how to maintain your books of accounts simply.

There are two kinds of books normally maintained in a firm.

1)      Day book
2)      Ledger book

What is day book?

Day book is the book where the day today transactions are recorded. It includes both cash and non cash transactions. Let us see how the day book looks like.

The picture shows a sample of day book. Here the “Date” column records the date of transactions.  The “Particulars” column records the accounts heads and narrations of the transactions. “L. F.” stands for Ledger Folio Number. It will be explained in the later stage. Receipts and payments column shows the amount and nature of transactions.

An example will make you clearer. Lets us say your firm received $ 500 as cash from a person named “xyz” on 01. Jan. 13. Here how it will be recorded.

Another example:

Your business name is ABC Co ltd. And you have following transactions on the day 01. Jan 2013.

1. Your last day (28-Jan-2013) cash balance was $1,200.00
2. On the day you received cash from  XYZ Co. $ 2,000.00
3. You paid electricity bill on the day $ 454.00
4. You purchased stationery for $ 14.00
5. You paid $ 40.00 for petrol.

Let us imagine you had above five transactions only on the day. How will be your day book looks like?

Here you have started your day book with your opening cash balance which was your last day’s closing cash balance $1,200.00. Then you posted your transactions and its narrations.  And at the end of the day you sum up receipts and payments. Then put the higher value on both totals and difference amount shows as your closing cash balance.

The same closing balance will be carried forward to the next day. Here you will be noted that the difference amount, i.e. total receipts – total payments will be carried forward to the opposite side (Receipt) side of the book.

All of the above transactions are cash transactions but in a business you will see both cash and non cash items. Example: Credit purchases, credit sales, bank transactions, etc. 

The next lesson will teach you how to record those transactions.