Definition: In the accounting world, Journal refers to a book wherein transactions are logged for the very first time, and that is why it is also called as “Book of Original Entry“.

In this book, all the regular business transactions are entered sequentially, i.e. as an when they arise. After that, the transactions are posted to the Ledger, in the concerned accounts. When the transactions are recorded in the journal, they are called as Journal Entries.

As per Double Entry System of Book Keeping, every transaction affects two sides, i.e. debit and credit. So, the transactions are entered in the book as per the Golden Rules of Accounting, to know which account is to be debited and which one is to be credited.

Types of Journal

There are two types of the journal:

• General Journal: General Journal is one in which a small business entity records all the day to day business transactions
• Special Journal: In the case of big business houses, the journal is classified into different books called as special journals. Transactions are recorded in these special journals on the basis of their nature. These books are also known as subsidiary books. It includes cash book, purchase day book, sales day book, bills receivable book, bills payable book, return inward book, return outward book and journal proper.
  The journal proper is used for entering infrequent transactions such as opening entries, closing entries and rectification entries.

Journalizing Process

The process of recording transactions in the journal is called Journalizing. The transactions are recorded in the journal in the manner of their occurrence along with a suitable explanation, called ‘Narration‘ which supports the entry.

The steps involved in the process of Journalizing are as under:

• Identification of Accounts: The first and foremost step in any given transaction is to identify the accounts which are being affected with it.
• Recognition of Account type: Once the accounts are identified, the type of account is ascertained, i.e. whether it is a personal account, real account or nominal account.
• Applying the golden rules of accounting: The rules of debit and credit, i.e. the golden rules of accounting are to be applied to the accounts which are affected by the transactions.

The debit and credit sides of the journal must be equal. There are some transactions in which you will find there are more than one debit for a single credit, more than one credit for a single debit or multiple debits and credits for an entry. Such entries are called as a compound journal entry. Nevertheless, the aggregate amount of debit and credit in an entry must tally.

Format of Journal

• Date: In this column, we mention the date of the transaction along with the month in which the transaction took place. The year is indicated at the top only once and not repeated with every date.
• Particulars: This column indicates the accounts which are affected, i.e. debited or credited, by the transaction. In the very first line, we write the account which is debited and then in the extreme right of the same line and column we write Dr. which indicates Debit.
  In the next line, after leaving some space, we write the account which is credited starting with the preposition ‘to’. A small narration for the respective transaction is given in the third line which explains the entry in the brackets, and it starts with the word ‘being’.
• Voucher Number: In this column, we enter the number written on the voucher of the concerned transaction.
• L.F. or Ledger Folio: As we know that transactions entered in the journal are then taken to the Ledger, in their respective accounts. In this column, the page number concerning the entry in the ledger is mentioned.
• Dr. Amount: The amount to be debited for a particular entry is written in the same line, where the debited account is indicated.
• Cr. Amount: The amount to be credited for a particular entry is written in the same line, where the concerned credited account is written.

All the columns are to be filled at the time of recording the transaction in the journal, except the ledger folio column which is filled when the transaction is posted to the ledger.

The journal entries may extend to multiple pages, and so both the two columns are totalled at the end of each page, with the word Total c/f, i.e. carried forward. Further, at the beginning of the next page, the amounts in debit and credit columns in the previous page is written with the words Total b/f, i.e. brought forward. Finally, on the last page of the entry, the Grand Total is written, and the columns are totalled.

Definition: Ledger implies the principal books of accounts, wherein all accounts, i.e. personal, real and nominal are maintained. After recording the transactions in the journal, the transactions are classified and grouped as per their title, and so all the transactions of similar type into are put in a particular account.

Format of Ledger

A ledger account is T-shaped, having two sides, wherein the left part of the account represents the debit side, whereas the right part of the account, is the credit one. Both the sides consist of four columns, as you can see in the specimen below:

Posting

When the debit and credit items are transferred from journal to the specific ledger accounts, the process is called as Posting. The rules with respect to the ledger posting are discussed as under:

• Individual accounts are to be opened in ledger book for each group, i.e. purchases, sales, cash etc. and the entries from the journal are posted to their account.
• It should be kept in mind that the account name used in ledger should be the same used in the journal.
• In the date column, we enter the date of the transaction.
• While posting the entries in the debit side, we add the prefix ‘To’ with the concerned accounts posted in the particulars column and the prefix ‘by’ is used with the accounts entered in the particulars column of the credit part.
• When it comes to posting the entries, the accounts debited in the journal are to be debited in the ledger, however, reference is given to the concerned credit account.
• The accounts are balanced at the end of each month or financial year. And to do so both the sides are totalled first and then the difference between the two sides is ascertained. This difference is called the balance, which is added to the side which falls short. When the credit side is greater than the debit side, it is called a credit balance which is indicated as ‘To balance c/d’.On the other hand, when the debit side is in excess of the credit side it is termed as debit balance, which is indicated as ‘By balance c/d’. Here, the word c/d refers to carried down. Similarly while opening the account for the next month or period. The balance on the debit balance is taken to the debit side as ‘To Balance b/d’ and vice versa. The word ‘b/d’ expands to brought down.
• In the folio column, we will enter the page number of the journal from which entry is posted to the ledger.
• The amount column is filled with the respective amount against the entry.

Subdivision of Ledger

The ledger is subdivided into two major categories:

1. Personal Ledger: Personal Ledger, implies the ledger that records details of every transaction about the persons, concerned with the accounting unit.

• Debtors Ledger: Debtors are the persons to whom goods are sold. So, it includes the accounts of individual trade debtors of the entity are covered in this category.
• Creditors Ledger: Creditors are the persons or firm from whom we purchase the goods. So, it encompasses the accounts of individual trade creditors of the business enterprise.

2. Impersonal Ledger: The ledger that records all the entries relating to assets, liabilities, incomes and Expenses. It is divided into two categories:

• Cash Book: It is the book that contains all the cash and bank transactions.
• General Ledger: The ledger in which all the entries with respect to real and nominal account are recorded. It is known as the general ledger. It is further divided into two categories:
  • Nominal Ledger: The ledger accounts relating to incomes such as Sales A/c, Rent received A/c, Commission earned A/c, Interest received A/c, etc. and expenses such as Wages A/c, Salaries A/c, Purchases A/c, Electricity A/c. Rent Paid A/c, Commission Paid A/c, etc. are covered in this category.
  • Private Ledger: The ledger in which entries concerned with assets and liabilities are entered is called Private Ledger.

Ledger is the King of all Books and that is why it is also known as the book of final entry wherein account-wise balance of each account is ascertained. It helps in the preparation of trial balance and financial statement, i.e. profit & loss account, balance sheet, and cash flow statement.

Definition: The word ‘inventory’ refers to the collection of unsold goods ready for sale in the normal course of business. In finer terms, it implies the stock held by the business in the process of production to serve as a buffer, which ensures proper supply of materials and maintains the smooth functioning of the business.

The type of inventory depends on the nature of the business concern. As a manufacturing entity may consist of inventories raw material, work-in-process and finished goods. On the other hand, the trading entity includes products bought for the purpose of resale in their existing state. In case of a concern involved in the construction business, projects that are under construction is termed as inventory.

Valuation of Inventory

The determination of the value of inventory plays a crucial role in the preparation of financial statement, as it decides the authenticity of final accounts. The reasons for the valuation of inventory, are discussed in the points given below:

• Ascertainment of Income: Inventory valuation is important for ascertaining the real income that a business entity earns in a financial year. For the determination of the gross profit, cost of goods sold has to be matched with the respective revenue of the financial period.
• Statutory Compliance: As per Companies Act, 2013, valuation is must for each category of stock, i.e. raw materials, work in progress and finished stock, which appears under the head inventory in the financial statements.
• Ascertainment of Financial Position: The value of inventory must be known, at the time of preparation of balance sheet, to determine the financial position of the business. So, the authenticity of balance sheet highly depends on the accuracy of the value of inventory.
• Liquidity Position: Inventory comes under the category of net working capital, which helps in ascertaining the firm’s overall liquidity position.

The valuation of inventory is based on cost or net realisable value whichever is lower. It is regulated by the Principle of Conservative Accounting, according to which any expenses or losses from the transactions are recorded immediately, whereas any gains or profits are recognized when they actually become due for payment.

The term cost includes the cost of purchase, cost of conversion and all the other costs spent to bring the inventories in the present condition and location. On the other hand, the Net Realizable Value (NRV) is the estimated selling price of the inventory excluding the estimated cost of completion and anticipated costs required to make a sale.

Inventory Record System

Inventory
Definition: The word ‘inventory’ refers to the collection of unsold goods ready for sale in the normal course of business. In finer terms, it implies the stock held by the business in the process of production to serve as a buffer, which ensures proper supply of materials and maintains the smooth functioning of the business.

The type of inventory depends on the nature of the business concern. As a manufacturing entity may consist of inventories raw material, work-in-process and finished goods. On the other hand, the trading entity includes products bought for the purpose of resale in their existing state. In case of a concern involved in the construction business, projects that are under construction is termed as inventory.

Valuation of Inventory
The determination of the value of inventory plays a crucial role in the preparation of financial statement, as it decides the authenticity of final accounts. The reasons for the valuation of inventory, are discussed in the points given below:

Ascertainment of Income: Inventory valuation is important for ascertaining the real income that a business entity earns in a financial year. For the determination of the gross profit, cost of goods sold has to be matched with the respective revenue of the financial period.
Statutory Compliance: As per Companies Act, 2013, valuation is must for each category of stock, i.e. raw materials, work in progress and finished stock, which appears under the head inventory in the financial statements.
Ascertainment of Financial Position: The value of inventory must be known, at the time of preparation of balance sheet, to determine the financial position of the business. So, the authenticity of balance sheet highly depends on the accuracy of the value of inventory.
Liquidity Position: Inventory comes under the category of net working capital, which helps in ascertaining the firm’s overall liquidity position.
The valuation of inventory is based on cost or net realisable value whichever is lower. It is regulated by the Principle of Conservative Accounting, according to which any expenses or losses from the transactions are recorded immediately, whereas any gains or profits are recognized when they actually become due for payment.

The term cost includes the cost of purchase, cost of conversion and all the other costs spent to bring the inventories in the present condition and location. On the other hand, the Net Realizable Value (NRV) is the estimated selling price of the inventory excluding the estimated cost of completion and anticipated costs required to make a sale.

Inventory Record System

Inventory Record System, as the name suggests is one that is concerned with keeping a track of physical quantities and the complete monetary valuation inventories sold and in hand. It helps you in recording the goods as and when it reaches the warehouse or godown, and also when it is issued for the purpose of sale. It ensures that the records maintained by the business enterprise are up-to-date.

Basically, there are two systems of maintaining a record of inventory, i.e. Perpetual Inventory System and Periodic Inventory System.

Periodic Inventory System

Otherwise called as a Physical inventory system, it is a method of determining the value of unsold inventory along with its physical quantities. In this method, an actual physical count is undertaken with respect to the measurement and weight of all the inventory units at a specific date. The calculation of the cost of goods sold is given hereunder:

Cost of Goods Sold = Opening inventory + Purchases – Closing Inventory

One of the major limitations of the physical count is that normal business operations are hampered during the process of physical verification of stock. Further, the cost of goods sold is the residual figure. Hence it is not easy to recognize the loss of stock, out of damage, theft or pilferage.

Perpetual Inventory System

A system of ascertaining the value of inventory in which the inventory balances are entered after every receipt and issue of stock. In addition to this, physical inventory is checked and compared with the balances shown in the books to date, to ensure reliability and accuracy. That is why it is called Continuous Stock Verification.

According to this system, the cost of goods issued is determined instantly with the help of ledger account wherein the receipt and issue of goods is entered perpetually and the balance of goods left is considered as the inventory in hand. The calculation of closing inventory is given as under:

Closing Inventory = Opening Inventory + Purchases – Cost of Goods Sold

The primary drawback of a perpetual inventory system is that closing inventory is taken as the balancing figure which encompasses the loss of goods too.

Of the two systems, the perpetual inventory system is regarded as the costlier one. However, it provides better information in comparison to the periodic inventory system.

Definition: Kaizen is a Japanese term which means “continuous improvement” on which Lean Manufacturing System is based. It refers to the continuous improvement and examination program constantly going on in the organization that stresses on the effective waste management, during the manufacturing process, as a result of which costs is further reduced below the initial standards stipulated at the time of designing the product.

In this technique, incremental improvements are made to the product undergoing production process, continuous reduction in production cost and constant improvement in designing and developing the product.

In finer terms, the Kaizen Costing is the sustenance of existing cost levels for the products under the manufacturing process by way of collective efforts to attain the intended cost level.

Kaizen Costing aims at eliminating wastes and losses in the process of production, assembly and distribution, along with removing the unnecessary steps during these processes and implementing economic re-designs for the product. Thus, it reduces extra costs at each stage.

Kaizen Costing Principles

• Continuous improvements in the present situation, at an agreeable cost.
• No limits to the improvement level that has to be implemented.
• Advocates collective decision making and knowledge application.
• Concentrates on waste or loss elimination, system and productivity improvement.
• Establishing standards and then continually working on improving them.
• Participating all employees and covering every business area, i.e. all the levels, departments and units.

The primary assumption behind Kaizen Costing is that nothing is perfect, so there is always a room for improvements and reductions in the variable costs. So, slight, additional changes are regularly applied and maintained during the production stage of the product life cycle, over a long period, leading to substantial improvements.

Types of Kaizen Costing

• Asset-Oriented or Organization-oriented: Kaizen costing activities are planned and directed as per the requirement of the firm or deal.
• Product-Oriented: Kaizen costing activities are undertaken in specialised projects with great focus on value analysis.

Kaizen Costing is laid out to redo many value engineering steps until the production of the product continues and constantly working on upgrading the process and thus eliminating the extra costs. However, the cost reduction arising from Kaizen costing is quite less than those attained with value engineering.

Nevertheless, Kaizen Costing is still essential for the organization as competitive pressures will force the firms to reduce the price of the product over time and any possible savings in the costs facilitate in achieving the intended profit margins while continually working on reducing cost.

Hence, in Kaizen Costing method ensures production of a product while meeting the desired quality, usability, customer satisfaction and reasonable price, to maintain its competitiveness.

Definition: Bank Reconciliation Statement (BRS) refers to a statement which an entity prepares on a particular date to match the bank balance indicated in the cash book with the balance shown by the bank’s passbook, by displaying the reasons for differences between the two.

The entity can prepare BRS any time during the financial period, as per the requirement.

Significance of Bank Reconciliation Statement

• It is a useful mechanism for internal control of an entity’s cash inflows and outflows, that facilitates the identification of frauds and errors, if any, occurred while entering the transaction in the cash book or the passbook.
• It helps to ascertain any unnecessary delays in the cheque clearance.
• It helps to know the exact position of the bank account.
• It also prevents cash embezzlement, as there are instances when the cashiers only pass entries in the books but don’t deposit the money in the bank. Thus, with the help of BRS, it is always easy to keep a check on such acts.

As the bank prepares the passbook, all the transactions are recorded from the purview of the bank, but at the same time, in the cash book, the transactions are recorded from the customer’s point of view, i.e. the entity’s standpoint. However, the bank column of the cash book and bank statement, i.e. passbook, keeps a track of the deposits and withdrawals made by the entity.

Therefore, the cash book and passbook are expected to tally, but practically, this happens rarely due to the time gap between the entries made. That is why, the preparation of Bank Reconciliation Statement is vital, to find out the causes of differences in the two and eliminating them.

Reasons for Difference

• Timing: When there is timing difference in recording the transactions in cash book and passbook, then also they will not tally.
  Example: Alpha Ltd. issued a cheque to Beta Ltd. recorded immediately in the bank column of cash book, but the bank will enter the transaction in the passbook only when the cheque is presented by the Beta Ltd. in the bank.
• Transactions: The bank undertakes some transactions without notifying the customer.
  Example: Interest Credited by bank, Locker rent charged by the bank, Bank Charges debited by the bank, etc. In such cases, the bank credits or debits the account immediately, but the entry is made to the cash book when it comes to the knowledge of the customer.
• Errors: If there is any error or omission while preparing the account, either by the bank or the client, may also lead to disagreement.

Nevertheless, the primary reason for the variance in the balance of the two is items appearing in the cash book but not in the passbook and items showing up in passbook but not in the cash book.

Rules for Addition and Subtraction

So, the Bank Reconciliation Statement is mainly used to locate the reasons for discrepancies and errors (if any) in the two books. Furthermore, it is used to identify and prevent frauds and cash embezzlement by the staff, while recording the transactions.

Definition: Petty Cash Book is a ledger book, which is used to record petty cash expenses formally in chronological order, with the date. For this purpose, a petty cashier is appointed by the firm, to pay for small payments (usually below Rs. 200) and keep a record of the same.

Petty cash implies a small amount of cash in hand, with the petty cashier, who uses the amount to pay for petty cash expenses.

Petty cash expenses are the expenses which occur regularly and repeatedly but are not related to the usual business line such as postage, stationery, stamp, carriage, travelling expenses, cartage, and other expenses (commonly recorded under sundry expenses). These expenses are high in frequency but too small in amount to pay through a cheque or credit/debit card.

Imprest System Petty Cash Book

In this system, the petty cashier is entrusted with a specified amount at the beginning of every month, fortnight or week. The cashier makes payment out of the amount granted to him. At the month end the petty cashier, after making payments from the amount, gives the payment voucher to the main cashier, who reimburses the amount to the petty cashier at the end of the month. So, the petty cashier will have the same fixed amount at the beginning of the next period.

This system is called the imprest system of petty cash and the amount so granted is termed as a float. The amount of float is decided in such a manner, that it may be sufficient to meet petty expenses, for the stipulated term. The balance left in the petty cash book indicates the amount remaining with the petty cashier.

Imprest system petty cash book is quite helpful when the firm uses analytical petty cash book, wherein the book has one column to track the receipt of the amount, from the chief cashier and several other columns to write down expenses under the specific head. The various columns are totalled to show the reason for making payments, and then the respective ledger accounts are debited.

The reimbursement of the amount is made by the chief cashier, to the petty cashier only when the latter prepares a statement that provides the details of all expenses with a date which are backed by vouchers, as well as the vouchers are arranged sequentially.

Format of Petty Cash Book

The extreme left column of the petty cash book is to record the receipts of cash, then in the date column, dates on which transaction took place are recorded.

Next to the date column, there is a column to record the voucher number. In the particulars column, the purpose of an expense is written and simultaneously in the money column, of various expenses, the amount is recorded. There is a sundries column in the book, to record infrequent payments. Lastly, there is a total column, to record the total amount.

Advantages of Petty Cash Book

• Saving of time of the main cashier.
• Convenient recording of small transactions.
• Effective control over cash payments.
• Saving of efforts in recording small expenses in the cash book and then entering the same in the ledger.

The petty cashier balances the book periodically. The difference in the total receipts and total disbursements is the balance left with the petty cashier, which is carried forward to the next period as well as, he/she will be reimbursed for the amount actually spent.

Definition: Assets refers to the resources of economic value which are owned and controlled by a business entity, owing to events in the past, which are expected to generate monetary benefit in future. In the balance sheet, assets appear in the second part, i.e. after equity and liabilities.

Classification of Assets

Assets are classified into two major categories, i.e. non-current assets and current assets discussed as under:

• Non-Current Assets: The assets which are acquired by the business for long term use, to raise the profit potential of the company and whose total value will not be realized in a financial year is called as Non-current assets or Long term assets. Expenses incurred to acquire these assets are capital in nature.

• Fixed Assets: As the name suggest, fixed assets are the capital assets which are acquired by the business for a fixed term and are not expected to be consumed or converted during the ordinary course of business. Here, the word ‘fixed asset’ means the resources which are supposed to last long and remain in use for more than one accounting year. While entering in the Position statement, i.e. Balance Sheet, these assets usually appear in their in the book value, which is calculated by deducting depreciation from the purchase price.
• Tangible Assets: Tangible Fixed Assets are the assets which can be seen and touched, i.e. they are available in their material form. These assets are land, building, vehicles (used for business purpose only), plant and machinery, equipment, furniture and fixtures, etc. which are owned by the enterprise for business use only and not for sale, consumption or personal use. These assets can be used as collateral security to extend loans for the enterprise.
• Intangible Assets: These indicate intellectual property, i.e. the long term assets which are not in physical form. Further, intangible assets are classified as definite intangible assets and indefinite intangible assets. In case of definite, tangible assets, the assets are there with the company for a definite, i.e. fixed term, and includes patent, copyright, trademark, franchises, etc. On the other hand, indefinite intangible assets are those that remain with the company, until it continues, such as goodwill, brand name, etc.
• Non-Current Investments: As the name signifies, these are the long term investments whose value will be received after a definite term, usually more than a year.
• Long-Term Loans and Advances: The loans and advances provided by the company as debt, to individuals or companies for more than a year.

Current Assets: These are the assets which a company holds for a short period only. Current assets are supposed to be sold or consumed within a period of one year. The cash generated by selling these assets is used to funds business operations. It includes cash and cash equivalents, debtors, bills receivable, inventory, prepaid expenses, short term loans and advances, and marketable securities such as treasury bills.

Hence, assets are nothing but the property that a company owns, having financial value, that is capable of inducing cash flows. At the time of emergency, these assets can be used to meet the business obligations.

Definition: Liability, as the name suggests, is a legal obligation which reflects an amount that the company owes to outside parties, i.e. banks, financial institutions, individuals or entities, whose settlement may lead to the outflow of the firm’s economic resources.

In finer terms, liabilities are a company’s financial debts, which indicates creditors claim on business assets that need to be paid off when they become due for payment. These liabilities arise as a result of past events, i.e. to acquire a long term asset, to start another unit or to improve business operations.

The liabilities appear in the first part of the balance sheet, as “equity and liabilities“. The capital contributed by the owners is commonly called as internal liability, whereas the liability paid to the outside parties is considered as an external liability. External liability occurs out of credit transactions or funds raised by the firm from external parties.

Classification of Liabilities

On the basis of the holding period, liabilities are classified as:

1. Non-current Liabilities: Otherwise called as long-term liabilities, these are the debt owed by the company for a long period, which implies that it will become due after a year. These are one of the significant source of funds for the enterprise that they acquire to fulfil their immediate cash requirements of buying a capital asset or invest in new projects.

• Long-term borrowings: Long-term borrowing implies the amount owed by the company to outside parties, for a term, more than a year. It includes mortgage bonds, debentures, bonds payable, term loan, long term notes payable. The long term debt of a company decides its leverage and solvency position.
• Other long-term liabilities: It refers to the financial obligations which become due for payment after one year, such as capital lease, pension or post-retirement benefits to employees, workmen compensation fund, employee provident fund, etc.
• Deferred tax liabilities: It implies the tax liability of the organisation, for the present financial year.
• Long-term provisions: Long term provision represents the amount kept aside by the firm to fulfil, any anticipated obligation, whose amount is uncertain and the period of occurrence is also not known.

2. Current Liabilities: These are short term liabilities which are expected to be repaid in the enterprise’s regular operating cycle, i.e. within one year. These determine the company’s liquidity position as they play a crucial role in working capital management of the enterprise.

• Short-term borrowings: These are the obligations which fall due for payment within a period of one year. It includes bank overdraft, short term loans and advances, etc.
• Trade payables: It refers to the amount payable by the firm to the suppliers for raw material delivered or services consumed during a financial year. It includes bills payable and creditors.
• Other current liabilities: The financial obligations which become due for payment during the normal operating cycle, comes under other current liabilities. It includes lease payments, interest payable, accrued expenses, and so forth.
• Short term provisions: It covers the amount kept aside, for future expected liability, that fall due within a year.

3. Contingent liabilities: These liabilities are not actual liabilities, but they can turn out as actual liability as a result of happening of certain future events. And so, if these events fail to occur, no such liability will arise. Hence, in better words, it is a potential obligation whose occurrence depends on the outcome of a future event. These do not appear in the balance sheet; instead, it is an off-balance sheet item, as it appears as a footnote.

Therefore, liability is the claim of the individuals or entities other than the owners of the enterprise, which is denoted by assets less owner’s equity.

Definition: Fund Flow Statement implies a snapshot of the movement of funds, i.e. inflow or outflows of the firm’s financial assets for a specific period. It represents, “from where the funds are received and where the funds are utilised” by the company during a particular period.

The word ‘fund‘ refers to a sum of money, which is used to finance the firm’s day to day operations and acquire assets for the business. The flow of funds represents the movement of funds, i.e. the change in economic resources, from one asset or liability to another. In this way, the fund flow statement implies a method of analysing the changes in the firm’s financial position, between two balance sheet dates.

Fund flow statement is useful in knowing the changes in the structure of assets, liabilities and capital. It shows whether the sources of funds coincides with its application and indicates the accuracy of a firm’s financing and investment decisions. Unlike the cash flow statement, which is prepared on a cash basis, the fund flow statement is prepared on an accrual basis.

Preparation of Fund Flow Statement

Step 1: Preparation of Statement of Changes in Working Capital: Statement of Changes in working capital is a summary that shows the net increase or decrease in the working capital of the business.

The working capital of the firm increases if there is an increase in the current assets or decrease in the current liabilities. However, the working capital of the firm decreases if there is a decrease in the current assets and an increase in the current liabilities.

Further, there will be no change in the working capital if there is a realization from debtors or bills receivable or payment made to creditors or bills payable, goods are sold on credit and goods are purchased on credit.

Step 2: Determination of Funds from Operations: Funds from operations refers to the profit earned or loss incurred from the regular business operation. The ascertainment of funds from the operation is vital for the preparation of fund flow statement.

Step 3: Preparation of Fund Flow Statement: After recognizing the funds/loss from operations, fund flow statement is prepared, which will show the net increase or decrease in the working capital.

Basically, any change in the assets and liabilities may result in the inflows and outflows of funds, but not always, as in case of depreciation or revaluation of assets, there is no inflow or outflow of funds. Hence, only those assets or liabilities will become a part of the statement, which actually leads to the flows of the fund to/from the business.

Definition: Single Entry System, is the oldest and most straightforward method of keeping records of financial transactions, which is rarely prevalent these days. In this system, only one side of the transaction is recorded, because of the absence of any prescribed rules and so the records maintained are more or less incomplete.

In a nutshell, single entry system of bookkeeping lacks the duality concept and so the financial transactions are recorded only once and not in their two-fold aspects, as debit and credit.

Characteristics of Single Entry System

• Maintenance of Cash Book: Cash Book is prepared and maintained, in which both business and personal transactions are included.
• Personal Accounts: Only personal accounts are created and maintained, whereas the real and nominal accounts are not given due weight, in this system.
• Original Vouchers: Under this system, original vouchers play an important role, as they help in gathering information about the date of transaction, amount, parties, discount (if any) and so forth.
• Final Accounts: In Single Entry System, it is quite difficult to prepare final accounts, due to unavailability of nominal and real accounts. So, to prepare the financial statement, the available information is analysed and converted into a double entry system, by determining the missing figures, after that Trading and Profit & Loss Account is prepared. Further, the figures of assets and liabilities are calculated from the information at hand, but they are also estimates. Hence, the Statement of Affairs is prepared in place of the Balance Sheet.
• Profit or Loss: Profit earned or loss sustained is estimated, out of the information available and so exact profits is not ascertained.
• Suitability: The system is appropriate for small businesses, like sole proprietorship business and partnership firms, as they maintain records of cash and credit transactions only.

Types of Single Entry System

• Pure Single Entry System: In this method, only the personal accounts are maintained and there is no information present, concerning the sales and purchases, cash in hand, and bank balance.
• Simple Single Entry System: In a simple single entry system, cash book is maintained along with the personal accounts and these are maintained as per double entry system of bookkeeping. Cash received or paid, from/to business debtors or creditors are merely written on the bills issued or received.
• Quasi Single Entry System: In this system, subsidiary books such as sales book, purchases book, bills receivable book and bills payable book are maintained in addition to cash book and personal accounts.

Single Entry System is simple and easy to maintain as it does not need any professional accountant to keep the records up to date. And so this system is quite helpful for small businesses and trades operated solely by individuals. Further, the system is quite economical.

Limitations of Single Entry system

It is an unscientific method of keeping business records because it does not follow the duality concepts (meaning that every transaction affects two sides). Profit or loss ascertained and reported are simply estimates, which cannot be considered as actual and accurate, because of not maintaining real and nominal accounts.

Moreover, it is not easy to detect frauds and errors (if any). The firm may also face difficulties in raising loans because the banks and financial institutions cannot rely on financial information provided by the entity. Due to this very reason, this method is not adopted by companies, and they have to maintain their books of accounts as per the Companies Act.