Accounting for manager 1st starting from basics

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Copyright © 2009, New Age International (P) Ltd., Publishers
Published by New Age International (P) Ltd., Publishers
All rights reserved.
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ISBN (13) : 978-81-224-2715-8

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DEDICATED
TO
LORD VENKATESWARA


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Preface – Sharing
My Thoughts
Aim of this book is to prepare ‘Managers of Tomorrow’ from the scratch in ‘Accounts’,
in fact, from the fundamentals of Accounting — ‘Double Entry Principles’, with the
perspective from the view point of Management, not from Accounting Professional.
Why so many students fail in “Accounting for Managers” (different Universities give various
names for this subject) in the first semester of MBA or MCA? Failure rate in this subject is
more, compared to other subjects. This subject, often noticed, is the cause of anxiety for many,
while preparing for exams.
Trend of admission into MBA has undergone a sea change, of late. Students who do not
have any background in commerce related subject have been joining MBA. This is the primary
reason. They experience difficulty in understanding the subject, with no accounting background,
earlier. The second reason is with the curriculum of all most all the universities. Present syllabus
presupposes that the students already know the fundamentals of accounting and starts with the
preparation of financial statements. Even students of MCA do not have any prior knowledge of
this subject and read it for the first time. Good institutes provide some guidance on fundamentals,
allocating two or three sessions. However, this much of teaching is not adequate. Above all,
most of the books do not cover the fundamentals of accounting. Students feel shy to go through
primary books to learn the rudiments of Double Entry Principles. Students often say their
fundamental concepts are not clear, even after passing this subject. They find difficulty for the
second semester, again, when they are to read the advanced subject ‘Financial Management’.
How to resolve the problem and provide the required level of knowledge?
I have attempted to follow the philosophy of Mahatma Gandhi ‘Simple Language, Noble
Thinking’ in his autobiography “My Experiments with Truth”. My conscious effort has been to
make the language easily understandable and standard of content in book enjoyable.

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Contents

My basic objective to write this book is to meet the wishes of non-commerce students, who
are always my target, while teaching. This book starts with fundamentals. I have adopted the
approach ‘Self-learning should be easy learning’. I always think how a book should be, if I were
in their shoes. This book is the product of my thinking-process in that direction. I call Hindi
medium students as “Hindimithra” as they often experience difficulty with English language.
Deliberately, I have kept the language simple to understand to meet their expectations.
After my lecture in accounts, I often enjoy the standing ovation of my students, expressing
their joy, as I well understand their problems and tailor my teaching to suit the needs of noncommerce students. My dream is to have their joy seen in their eyes, after reading this book,
with no fear for this subject. Many of my non-commerce students share their confidence to
take finance specialization; once they get my assurance that I would not overstay in U.S.A.,
which I visit every year, during their specialization session. I owe something to repay their love
and affection.
My colleagues say my books are often with a specific ‘Focus’. Yes, again this book — fourth
in a row of success story—is to meet the customized demands of UGC syllabus of MBA and
MCA, totally, in one book, covering fundamentals too. All they need, they can find in one book,
without being bulky. Many universities have adopted more or less the same syllabus, changing
the name of the subject and so this book meets the requirements of the first semester, wherever
they are.
My aim is to meet the aspirations of non-commerce students as well those who could not
study in English medium, earlier. When I fulfill the wish of this group, I know, students who
enjoy background in accounts would find this book quite refreshing to read.
The best thing that has happened in my life is to marry Sandhya as my partner. What I can
give, in return, except expressing my mute love to her for her affection, care, balancing the whole
family, and above all meticulous planning, behind me, for reaching the heights in my life with
which I am happy. I wish to tell her, many fail to express their gratitude for what they receive

and at times could not give, in return, what they all receive in family relationship.
I have my family members Radhi, Kalyan, Dheera and Kish, and my lovely little American
grandsons — Theer and Tarkh — who have extended their support in one way or other, not
preventing me to write this book too, to steer the book to a happy ending.
CA C. Rama Gopal


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Contents

Acknowledgement
I acknowledgement the support and encouragement of my well-wisher in writing this book:
1. Dr. D.P. Sharma, Ex.-Vice Chancellor,
Barkatulla University, Bhopal–462024.

2. Prof. Dr. Sameer Sharma, Amity International Business School, Amity University,
Sector 44, Noida, U.P.

3. Dr. C. Srinivasulu, Vijaypuri North–
508203, Andhra pradesh.
5. Colonel V.G. Kondalkar, Professor,
V.N.S. Institute of Management, Bhopal.

4. Prof. P.K. Chopra, Director, V.N.S.
Institute of Management, Bhopal.
6. Dr. Vikas Shrotriya Reader, Department of
Management Studies, Swami Keshv Anand
Institute of Technology, Management &
Gramothan, Jaipur (Rajasthan).

8. Dr. Salman Nusrat Zaidi, Oman Government College, Muscat, Oman.
10. Dr. Ramakanta Patra, Principal, NSHM
Business School, Durgapur, West Bengal.

7. Prof. S.K. Bagchi, Banking & Finance,
NMIMS University, Mumbai.
9. Dr. Bijay Bhujabal, Member of the
Faculty, ICFAI Business School, ICFAI
University, Dehradun.

CA C. Rama Gopal


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Contents
Preface
Acknowledgement

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ix

1. SCOPE AND MEANING OF ACCOUNTING
1.1 Introduction
1.2 Need and Role of Accounting
1.3 Meaning of Book-keeping and Accountancy
1.4 Accounting — Science or Art

1.5 Definition and Explanation of Accounting
1.6 Users of Accounting
1.7 Scope/Branches of Accounting
1.8 Systems of Accounting
1.9 Objectives/Advantages of Accounting
1.10 Limitations
1.11 Terminology Often Used — Some Basic Terms

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2
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7
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14

2.

23

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
2.1
2.2
2.3
2.4

2.5
2.6

Introduction
Need of Accounting Principles
Generally Accepted Accounting Principles
Characteristics of Accounting Principles
Accounting Concepts
Accounting Conventions

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25
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Contents

xii

3. DOUBLE ENTRY PRINCIPLES AND JOURNAL
3.1
3.2
3.3
3.4
3.5
3.6
3.7

Introduction
Double Entry System
Rules of Debit and Credit
Advantages of Double Entry Book-keeping
Accounting Cycle
Rules of Journalising or Process of Journalising
Tips for Journalising

4. LEDGER POSTING AND TRIAL BALANCE
4.1 Introduction
4.2 Ledger
4.3 Posting
4.4 Difference Between Journal and Ledger
4.5 Advantages of Ledger
4.6 Rules Regarding Posting
4.7 Posting of Compound Journal Entries
4.8 Balancing an Account
4.9 Opening of Accounts in Ledger, Without Journalizing
4.10 Trial Balance
5. PREPARATION OF FINAL ACCOUNTS WITH ADJUSTMENTS
5.1 Meaning of Final Accounts
5.2 Why This Name – Final accounts?
5.3 Preparation of Final Accounts
5.4 Meaning and Need of Adjustment Entries
5.5 Adjustments in Final Accounts
5.5.1
Closing Stock
5.5.2
Outstanding Expenses

5.5.3
Prepaid or Unexpired Expenses
5.5.4
Accrued Income
5.5.5
Unearned Income or Income Received in Advance
5.5.6
Depreciation
5.5.7
Interest on Capital
5.5.8
Interest on Drawings
5.5.9
Interest on Loan
5.5.10
Classification of Debtors

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Contents

5.5.11
Bad Debts
5.5.12
Provision for Bad and Doubtful Debts

5.5.13
Accidental Losses
5.5.14
Commission Payable on Net Profits
5.6 Closing Entries
5.7 My Balance Sheet Not Tallied
6. INVENTORY VALUATION
6.1
6.2
6.3
6.4
6.5
6.6
6.7
6.8
6.9
6.10
6.11
6.12
6.13
6.14

Introduction
Inventory – Meaning
Objectives of Inventory
Receipts and Issue of Materials — Documentation
Records in Stores
Conditions — Good Method for Valuing Issues
Methods of Pricing Material Issues
First in First Out (Commonly Called FIFO)

Last in First out (Commonly Called LIFO)
Average Cost
Base Stock
Inflated Price Method
Specific Price
Inventory Systems
6.14.1
Periodic Inventory System
6.14.2
Perpetual Inventory System
6.14.3
Perpetual Inventory is Better Than Periodic Inventory
6.15 Valuation of Inventory for Balance Sheet Purposes

7.

DEPRECIATION
7.1 Introduction
7.2 Meaning of Depreciation
7.3 Need for Depreciation
7.4 Objectives for Providing Depreciation
7.5 Methods of Depreciation
7.6 Change in Method of Depreciation — Disclosure
7.7 Basic Factors for Calculation of Depreciation
7.8 Depreciation Accounting
7.9 Sale of Fixed Asset

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Contents

xiv

8.

ANALYSIS OF FINANCIAL STATEMENTS
8.1
8.2
8.3
8.4
8.5
8.6
8.7
8.8
8.9

9.

Introduction
Purpose of Financial Analysis
Main Objective of Financial Analysis
Users of Financial Analysis
Types of Financial Analysis

Major Tools of Financial Analysis
Comparative Financial Statements
Trend Analysis or Trend Ratios
Common-size Statements (CSS)

RATIO ANALYSIS
9.1 Introduction
9.2 Meaning of Financial Ratio
9.3 Standards of Comparison
9.4 Types of Ratios
9.4.1
Differences between Analysis and Interpretation of Financial
Statements
9.5 Different Terms in Ratio Analysis
9.6 Liquidity Ratios
9.6.1
Current Ratio
9.6.2
Problem of Window Dressing
9.6.3
Liquid / Quick /Acid Test Ratio / Near Money Ratio
9.6.4
Cash Ratio or Absolute Liquid Ratio
9.7 Leverage Ratios
9.7.1
Debt-Equity Ratio
9.7.2
Total Debt Ratio (TD Ratio)
9.7.3
Coverage Ratios

9.8 Activity Ratios
9.8.1
Inventory Turnover Ratio / Inventory Velocity
9.8.2
Debtors’ (Receivables) Turnover Ratio / Debtors’ Velocity
9.8.3
Total Assets Turnover Ratio
9.8.4
Working Capital Turnover Ratio
9.8.5
Creditors / Payable Turnover Ratio
9.9 Profitability Ratios
9.9.1
Profitability Ratios Based on Sales
9.9.2
Profitability Ratios Based on Investment
9.10 Trading on Equity

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9.11
9.12
9.13
9.14
9.15

Impact of Capital Gearing Ratio
Relevance of Ratio Analysis for Predicting Future
Limitations of Ratio Analysis
Ratios May Become Meaningless
Summary of Ratios and Their Purpose

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10. SOURCES AND APPLICATION OF FUNDS
10.1 Need of Funds Flow Statement
10.2 Concept of Funds
10.3 Meaning of Flow of Funds
10.4 Meaning & Objectives - Funds Flow Statement
10.5 Utility of Funds Flow Statement to Different Parties
10.6 Sources of Funds
10.7 Is Depreciation a Source of Funds?
10.8 Application or Uses of Funds
10.9 Procedure for Knowing Whether a Transaction Finds a Place in Funds Flow
Statement
10.10 Preparation of Funds Flow Statement

10.11 Funds Flow Statement, Income Statement and Balance Sheet
10.12 Limitations of Funds Flow Statement

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11. CASH FLOW STATEMENT
11.1 Importance of Cash
11.2 Cash Flow Statement
11.3 Need of Cash Flow Statement
11.4 Objectives of Cash Flow Statement
11.5 Classification of Cash Flows
11.6 Procedure for Preparing Cash Flow Statement
11.7 Steps Involved in Preparing Cash Flow Statement
11.8 Calculation of Cash from Operations
11.9 Methods of Preparing Cash Flow Statements
11.10 Calculation of Cash Flows from Operating Activities
11.11 Differences Between Funds Flow Statement and Cash Flow Statement
11.12 Limitations
11.13 Statement of Changes in Financial Position (Total Resources Basis)

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12. MANAGEMENT ACCOUNTING

337

12.1
12.2

Introduction
Divisions of Accounting

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264
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292

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Contents

xvi

12.3
12.4
12.5
12.6
12.7
12.8
12.9
12.10

Financial Accounting
Concept of Management Accounting
Management Accounting-Definition
Importance and Need of Management Accounting
Role of Management Accounting in Management Process
Objectives/Functions of Management Accounting
Differences Between Financial Accounting and Management Accounting
Limitations of Management Accounting

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343

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13. COST ACCOUNTING
13.1 Introduction
13.2 Costing and Cost Accounting
13.3 Objectives of Costing
13.4 Cost Centre and Cost Unit
13.5 Elements of Cost
13.6 Classification of Costs
13.7 Difference Between Allocation and Apportionment
13.8 Methods of Costing
13.9 Techniques of Costing
13.10 Importance (Advantages) of Cost Accounting
13.11 Limitations of Cost Accounting

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14. COST RECORDS-RECONCILIATION OF COST AND FINANCIAL

ACCOUNTS
14.1 Organising Cost Accounts
14.2 Cost Records
14.3 Reconciliation Between Cost and Financial Records
14.4 Reasons for Disagreement in Profit
14.5 Procedure of Reconciliation
14.6 Tips for Reconciliation
14.7 Treatment for Certain Items

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15. STANDARDS COSTING AND VARIANCE ANALYSIS
15.1 Introduction
15.2 Meaning and Definition of Standard Costing
15.3 Steps involved in Implementing Standard Costing
15.4 Utility of Standard Costing
15.5 Preliminaries for Establishment of Standard Costing
15.6 Variance Analysis

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Contents

15.7
15.8
15.9
15.10

Material Cost Variance
Labour Cost Variance
Advantages of Standard Costing
Limitations

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16. BUDGET AND BUDGETARY CONTROL
16.1 Needs of Modern Management
16.2 Meaning of Budget and Budgeting
16.3 Meaning and Nature of Budgetary Control
16.4 Objectives of Budgetary Control
16.5 Requisites for Successful Budgetary Control System

16.6 Essential Steps for Installation of Budgetary Control System
16.7 Advantages of Budgetary Control
16.8 Classification of Budgets
16.9 Differences between Fixed and Flexible Budget
16.10 Preparation of Cash Budget
16.11 Limitations of Budgetary Control
16.12 Comparison of Standard Costing with Budgetary
Control

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416

17. ZERO-BASE BUDGETING
17.1 Introduction
17.2 Meaning
17.3 Differences Between Traditional Budgeting and Zero
Base Budgeting
17.4 Steps for Preparation of Zero Base Budgeting
17.5 Benefits of Zero Base Budgeting
17.6 Limitations of Zero Base Budgeting

17.7 Conclusion

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424

18. COSTING FOR DECISION-MAKING BREAK EVEN ANALYSIS

429

18.1
18.2
18.3
18.4
18.5

Introduction
Decision-Making Process
CVP Analysis
CVP Analysis and Break-even Analysis
Break-even Analysis
18.5.1
Contribution
18.5.2
PV Ratio or Contribution Ratio
18.5.3
Angle of Incidence

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Contents

xviii

18.6
18.7
18.8

Advantages or Uses of Break-even Chart
Assumptions of Break-even Analysis
Limitations of Break-even Analysis and Break-even
Charts
Margin of Safety
Cash Break-Even Point
Multi Product Break-Even Point (Composite Break-Even Point)

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19. MARGINAL COSTING – ACCEPT OR REJECT DECISIONS
19.1 Introduction
19.2 Behaviour of Fixed and Variable Overheads
19.3 Marginal Costing as a Technique
19.4 Definition
19.5 Basic Characteristics of Marginal Costing
19.6 Mechanism of Marginal Costing
19.7 Marginal Costing and Profit
19.8 Assumptions of Marginal Costing
19.9 Fixation of Selling Price, Below Marginal Cost
19.10 Advantages of Marginal Costing
19.11 Accept or Reject Decision-making
19.12 Fixation of Selling Price, Below Marginal Cost
19.13 Limitations or Disadvantages of Marginal Costing

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20. MARGINAL COSTING – MAKE OR BUY DECISIONS
20.1 Application of Marginal Costing – Make or Buy Decision
20.2 Application of Marginal Costing, in Case of Additional
Fixed Costs
20.3 Other Considerations than Cost

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481

21. ABSORPTION COSTING OR FULL COSTING

483

18.9
18.10
18.11

21.1
21.2
21.3
21.4
21.5

21.6
21.7
21.8

Concept
Objective of Absorption Costing
Differences between Marginal Costing and Absorption Costing
Valuation of Closing Stock Under Absorption Costing and Marginal Costing and
impact on Profit
Impact of Fixed Costs on Cost of Production per unit under Absorption Costing
would be misleading
Effect of Opening and Closing Stock on Profits
Presentation of Data
Limitations of Absorption Costing

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CHAPTER

1
Scope and Meaning
of Accounting

ˆ

Introduction

ˆ

Need and Role of Accounting

ˆ

Meaning of Book
-keeping and Accountancy
Book-keeping

ˆ

Accounting — Science or Art

ˆ

Definition and Explanation of Accounting

ˆ

Users of Accounting

ˆ

Scope/Branches of Accounting
z

Financial Accounting

z

Cost Accounting

z

Management Accounting

ˆ

Systems of Accounting

ˆ

Objectives/Advantages of Accounting

ˆ

Limitations

ˆ

Terminology often used — Some Basic TTerms

erms

ˆ

Check Y
our Understanding
Your

ˆ

Pick up the Most Appropriate

ˆ

Recall your Memory

ˆ

Objective Questions

ˆ

Interview Questions


CHAPTER

1
Scope and Meaning
of Accounting

ˆ

Introduction

ˆ

Need and Role of Accounting

ˆ

Meaning of Book
-keeping and Accountancy
Book-keeping

ˆ

Accounting — Science or Art

ˆ

Definition and Explanation of Accounting

ˆ

Users of Accounting

ˆ

Scope/Branches of Accounting

z

Financial Accounting

z

Cost Accounting

z

Management Accounting

ˆ

Systems of Accounting

ˆ

Objectives/Advantages of Accounting

ˆ

Limitations

ˆ

Terminology often used — Some Basic TTerms
erms

ˆ

Check Y
our Understanding
Your

ˆ

Pick up the Most Appropriate

ˆ

Recall your Memory

ˆ

Objective Questions

ˆ

Interview Questions


Accounting for Managers

2

1.1 INTRODUCTION
Accounting is an ancient art, as old as money itself. In the beginning, accounting has been
elementary. The modern system of accounting owes its origin to Pacoili who lived in Italy in
18th Century. Pacioli codified rather than invented the system of accounting and he is widely

regarded as the “Father of Accounting”. Even in our country, Chanakya has clearly indicated
the need of Accounting and Auditing in his book “Arthashastra”. The Indian system of accounting
is as scientific and systematic as the one developed in the West. We do not lag behind the West
in the origin and development of accounting.
1.2 NEED AND ROLE OF ACCOUNTING
Many consider accounting has a role to play only in business and not in domestic life. This is
not, factually, correct. In fact, we see the beginning of accounting in every wise housewife. In
case, a housewife records her domestic transactions, connected with money, regularly, she can
collect a lot of valuable information. Many intelligent housewives, though not literate, maintain a
small dairy to record receipts on one page and all payments on the other page. Receipts are not
always many, either in the form of income of the husband, her supplementary earnings, gifts
from relations etc. List of payments is relatively more on different items say milk, education,
entertainment, food, and clothing and, finally, planned commitments on savings etc. She can
conveniently find out how much she has spent on the different items of expenditure, at the end
of the month. This exercise helps her in planning her expenditure as income is, often, beyond
her control. The family, not she alone, can learn useful lessons, when they review, where they
have gone wrong in estimating or not controlling their spending. It would, equally, facilitate the
family to plan and achieve their dreams, together, be it owning a home, car to drive, long term
goals of children’s education, retirement life and many more things, they wish to achieve.
Yes, the need of Accounting is more for business.
Accounting is the language of business.

The main purpose of language is communication of ideas. Similar is the purpose and role of
accounts for a business is. A businessman has to keep a systematic record of the financial activities
of his firm so that he can know the financial position. What it owns are assets and what it
owes are the liabilities. It is necessary for every businessman to know where he stands in many
respects:
(i) What he owns?
(ii) What he owes?
(iii) Whether he has earned profit or suffered loss over a period?

(iv) What is his financial position? Is he better off or moving towards bankruptcy?
Only accounts give answers to these questions.


Scope and Meaning of Accounting

3

Currently, the form of business has been joint stock company, in many growing areas, these
days. By law, these firms have to keep the books of accounts to meet the requirements of
Companies Act.
The purpose of accounting is narrow to many. Many consider the role of accounting is limited
to maintain books of accounts for a limited purpose of filing income-tax return to satisfy the
curiosity income-tax department. This is only a part of the full story.
The chief objective of maintaining books of accounts is to ascertain the
operational results and find the financial position of the organisation.

But, the above is not the end; rather it is only a beginning, in the modern era.
The role and importance of accounting in a firm depends more on the person who heads
the role. Many think the role of accounting is to record transactions in books of accounts. With
the pace of computerisation, the role of accounting for recording the transactions has diminished.
Importance of analysis of accounts along with control, coordination and
achievement of the objectives of the firm has occupied more importance.

Need of accounting is not limited to business organisations. Even the non-profitable firms
like clubs, charitable institutions, hospitals, and education institutions maintain books of accounts
to know their state of affairs.
Now a days, the combined role of accounting and finance has assumed more importance
than the individual role of accounting. It is no surprise the finance manager can change the
fortunes of the organisation, if he is, really, competent. For this reason, he is associated with

every decision-making process, from recruitment of staff to the final stage, liquidation. No wonder,
the organisation may sink, if he fails to deliver that is expected of him. A good finance manager,
normally, is an asset to the firm he works in, while he becomes a liability, if he is not practical
in making the objectives of accounting and finance to tailor the needs of business!
1.3 MEANING OF BOOK-KEEPING AND ACCOUNTANCY
Some people take both the terms ‘Book-keeping’ and ‘Accountancy’ as synonymous terms. Both
the terms are different from each other. However, there is no universally accepted line of
demarcation or division between the two.
Book-keeping is the art of recording business transactions in a set of books
of accounts.

Transaction means any dealing, expressed in terms of money. The books in which the
transactions are recorded are called ‘Books of Accounts’. Book-keeping is concerned with
preparation of vouchers, recording transactions in a journal and posting in the ledger. Book-keeper
arrives at the final balances of different accounts, after totaling the accounts. The job of a bookkeeper is to the extent of preparing trial balance, duly tallied. Book-keeping is mainly of clerical
nature.


Accounting for Managers

4

Any one who has basic knowledge of the principles of book-keeping can maintain the books
of accounts. On the other hand, accountancy requires deep knowledge of the principles and their
application. Though, book-keeping and accountancy are different in several aspect, they are
supplementary to each other.
Book-keeping and accounting are not synonymous (inter-changeable) terms.
The job of an accountant commences where the work of a book-keeper ends.

Accountant guides a book-keeper and reviews the job, done by him. Normally, a book-keeper

works under the supervision of an accountant. The functions of an Accountant can be summarised
as under:
(i) Examination of entries made in the books of accounts
(ii) Verification of trial balance
(iii) Rectification of errors, if any, in accounts
(iv) Recording the adjustments
(v) Preparation of trading account
(vi) Preparation of profit and loss account
(vii) Preparation of balance sheet
(viii) Analysis of results and
(ix) Deriving conclusions and communication of the results.
An accountant is required to have much higher skill and knowledge, compared to a Book-keeper.
The larger the firm, higher is the responsibility of an accountant.
1.4 ACCOUNTING — SCIENCE OR ART
Accounting is a science as well as an art.

It is a science as accounts are prepared in accordance of with certain basic principles and
laws, which are universally accepted. However, accounting is not a perfect science like Physics
or Chemistry, where experiments can be conducted in a laboratory and specific conclusions are
drawn. Some people have reservations to treat accountancy as science.
Accounting is, definitely, an art. Art is a technique, which helps in achieving the desired
objectives. Accounting has some definite objectives to be fulfilled. Accounting is an art because
it prescribes the process through which the objectives are fulfilled. The American Institute of
Certified Public Accountants also defines accounting as an art.
Accountancy involves recording the transactions and maintaining books of
accounts in the prescribed manner, regularly, according to certain rules and
regulations for achievement of the objectives of the firm.


Scope and Meaning of Accounting

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1.5 DEFINITION AND EXPLANATION OF ACCOUNTING
The American Institute of Certified Public Accountants, which has played a noble part in the
development of Accounting, defines the concept “Accounting” as follows:
“Accounting is the art of recording, classifying and summarising in a
significant manner and in terms of money, transactions and events which
are, in part, at least, of a financial character, and interpreting the results
thereof”.

Once, we break the definition for better understanding, we find the term ‘Accounting’ contains
the following components:
(A) Recording: Recording is the basic function of Accounting. Events and transactions,
which are of financial character, either fully or partly, are recorded in an orderly manner in
books of accounts. The transactions are recorded in a journal, as and when they happen or
occur. Journal is further sub-divided into cash journal or cash-book (for recording cash
transactions), Purchases Journal (for recording credit purchases) and Sales Journal (for
recording credit sales). All these books are called subsidiary books. If subsidiary books are
maintained, the transactions are not recorded in the journal and are recorded in these books,
directly. Only those transactions that do not find a place in subsidiary books are recorded in
the journal.
After recording all transactions in the journal, if they are, later, posted into different accounts
of the ledger, work-load would be heavy. In fact, work is duplicated too. To reduce the
avoidable work-load, each firm maintains subsidiary books, depending upon its individual
requirements.
Subsidiary books would serve the function of a journal as well as a ledger.
They are a journal as each transaction is recorded, individually, and a ledger
as the total of the account is shown.

It is not necessary to record all financial transactions, first, in the journal, if the concerned
subsidiary book is maintained, before posting is made into the concerned accounts. Say, cash
transactions are posted into the cash-book, directly, without posting them in the journal.
(B) Classifying: All similar transactions are grouped and posted in one book, which is called a
‘Ledger’.
The objective of classification is to find a summary of the entries of same
nature at one place.

This book ‘Ledger’ contains different nature of accounts. For example, there may be separate
heads of accounts such as Salaries, Traveling Expenses, Repairs, Printing and Stationery
etc. We are interested to know the total amount under each head of account for our
understanding and control. All accounts find a place in the ledger. Transactions belonging to