Financial accounting notes

ACCOUNTING CYCLE: -
In practical life there is a fine process of accounting record from a
“Transaction to the Balance Sheet”. The process is consisted of two parts, i.e.
Recording and Summarizing.
In the first phase the transactions are recorded in various books of accounts, and in
the second phase we prepare Income Statement and Balance Sheet at the end of a
fiscal period.
Different Stages of Accounting:
TRANSACTIONS
(Vouchers)

entered into

JOURNAL

Purchases Journal
Purchases Returns and Allowances JournalSales Journal
Sales Returns and Allowances JournalCash Journals
CRJ and CPJJournal for NotesGeneral Journal
Misc. Journal
LEDGER

TRIAL BALANCE

ADJUSTMENTS

ADJUSTED TRIAL
BALANCE

FINANCIAL STATEMENTS
INCOME STATEMENT
AND
BALANCE SHEET

CLOSING ENTRIES

CLOSING TRIAL BALANCE

REVERSING ENTRIES

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 Financial accounting notes

JOURNAL:-
A book in which all the transactions of a business are recorded first is called
“Journal”. The transactions are recorded chronologically, i-e in order of occurrence.
It is also known as “Book of Original Record”, a book of “Original Entry” or “Day
Book”, because the day to day transactions are recorded in it. In very large units a
number of journals are prepared instead of one, e-g cash journal, sales journal etc.

LEDGER:-
When we bring together all the accounts of the same nature on one page, we
are in fact preparing a “ledger account”. A separate page for each account is
allocated in ledger, and all the transactions of the same nature are recorded on that
page in a summarized form. The term ledger is defined as, “A book which contains
the condensed and classified record of all the transactions of a business in shape
of accounts”.
• These are two forms of ledger. I-e, Periodical Balance form and Running
Balance form.
• Ledger can be classified as: General Ledger and Subsidiary Ledgers.

TRIAL BALANCE:-
Having posted all accounts from journal into ledger, it is better to prove the
accuracy of the post record before proceeding further. For this purpose, a list of
accounts is prepared which is called “Trial Balance”.

INCOME STATEMENT:-
The statement prepared to know the gross income and the net income at the
end of a particular period is known as income statement.

BALANCE SHEET: -
The Balance Sheet is the list of assets and equities prepared at a specific time.
It is also known as the statement of financial condition of a firm.

ADJUSTING ENTRIES:-
The entries which bring the balance of an account up to date to find out the
correct balance and correct information at the end of a fiscal period are called
“Adjusting Entries”. The following adjustments are necessary to be made at the end
of a financial year:
=>Accured Expenses / Unrecorded Expenses
=>Prepaid Expenses / Expenses paid in advance
=>Accured Revenue / Unrecorded revenue
=>Unearned Revenue =>Depreciation =>Interest on capital or drawings
=>Adjustments of A / R =>Unused Supplies =>Merchandise Inventories.

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 Financial accounting notes

ADJUSTED TRIAL BALANCE:-

A trial balance drafted after carrying out necessary adjustments in accounts
at the close of a given period to revise the figures appearing in the trial balance (pre-
adjusted) is known as “adjusted trial balance”.

REVERSING ENTRIES:-
Some sorts of entries are passed on the beginning of an accounting period to
reverse the effect of adjustments from the books of accounts. These are called
“reversing” or “readjusting entries”. These entries are passed on the first day of
the subsequent period.

CLOSING ENTRIES”-
On the preparation of income statement and balance sheet, it is necessary to
close all the temporary (nominal accounts. The journal entries passed to achieve this
purpose are called “closing entries”.

CLOSING TRIAL BALANCE:-

The main purpose of the preparation of such trial balance is to satisfy that
the ledger accounts are in balance for the beginning of the new accounting year.

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