Chapter – 1 Introduction to Accounting & Tally – Online Education & Certification

Need for an accounting System:

The purpose of accounting is to accumulate and report on financial information about the performance, financial position, and cash flows of a business. This information is then used to reach decisions about how to manage the business, or invest in it, or lend money to it. This information is accumulated in accounting records with accounting transactions, which are recorded either through such standardized business transactions as customer invoicing or supplier invoices, or through more specialized transactions, known as journal entries.

Once this financial information has been stored in the accounting records, it is usually compiled into financial statements, which include the following documents:

Income statement

Balance sheet

Statement of cash flows

Statement of retained earnings

Disclosures that accompany the financial statements

Definition for accounting:

Accounting is the process of systematically recording, measuring, and communicating information about financial transactions.

How does Accounting work?

At the heart of accounting is the double-entry bookkeeping method. This involves making at least two recording entries for every transaction: a debit in one account and a credit in another account. The method helps prevent errors because the sum of the debits should equal the sum of the credits. The three major financial statements produced by accounting are the income statement, the balance sheet, and the cash flow statement.

Accounting can be done on a cash basis (cash accounting) or on an accrual basis (accrual accounting). Cash accounting records cash inflows and outflows in the period in which they occur. Accrual accounting records income and expenses in the period to which they are attributable rather than when cash payments come and go. For example, a check written in April for March’s utilities would appear as a March expense under the accrual method and as an April expense under the cash method.

There are two general kinds of accounting. Financial accounting is the recording and communication of economic information in accordance with Generally Accepted Accounting Principles (GAAP) and is primarily for external users. Managerial accounting is the recording and communication of economic information that may or may not be in accordance with GAAP and is for internal users. Other accounting specialty areas exist, such as tax accounting, oil and gas accounting, or forensic accounting.

There are two kinds of users of accounting information: internal users and external users. Internal users are usually company managers who use accounting information to decide how to plan and control operations on a daily and long-term basis. External users are existing or potential investors, creditors, analysts, financial advisers, regulatory authorities, unions, and the general public. They use accounting information to make a myriad of decisions about whether to buy, hold, sell, lend, continue a relationship, or make an agreement.

The Financial Accounting Standards Board (FASB), the Securities and Exchange Commission (SEC), the IRS, and other regulatory bodies set accounting standards and requirements for accounting frequency and presentation.

Concepts and Conventions:

Business Entity Concept: A business and its owner should be treated separately as far as their financial transactions are concerned. For example, Owner’s personal travel expenses to Ooty should not be recorded as ‘Conveyance’; but as ‘Drawings’.

Money Measurement Concept: Only business transactions that can be expressed in terms of money are recorded in accounting, though records of other types of transactions may be kept separately. For example, if we asked to sum 3 Kgs with 2 Mtrs, is it possible? Instead, if we get monetary values for them, it is easy to sum up. Based on this, not only money but money’s worth i.e. credits also taken into consideration.

Dual Aspect Concept: For every credit, a corresponding debit is made. The recording of a transaction is complete only with this dual aspect. For example, buying a Car and issuing a cheque for its value. According Equation is the outcome of this concept. ‘Assets = Capital + Liabilities’ is known as accounting equation.

Going Concern Concept: In accounting, a business is expected to continue for a fairly long time and carry out its commitments and obligations. This assumes that the business will not be forced to stop functioning and liquidate its assets at “fire-sale” prices.

Cost concept: The fixed assets of a business are recorded on the basis of their original cost in the first year of accounting. Subsequently, these assets are recorded minus depreciation. No rise or fall in market price is taken into account. The concept applies only to fixed assets.

Accounting year concept: Each business chooses a specific time period to complete a cycle of the accounting process—for example, monthly, quarterly, or annually—as per a fiscal or a calendar year.

Matching concept: This principle dictates that for every entry of revenue recorded in a given accounting period, an equal expense entry has to be recorded for correctly calculating profit or loss in a given period.

Realisation concept: According to this concept, profit is recognized only when it is earned. An advance or fee paid is not considered a profit until the goods or services have been delivered to the buyer.

Accounting Conventions:

There are four main conventions in practice in accounting: conservatism; consistency; full disclosure; and materiality.

Conservatism is the convention by which, when two values of a transaction are available, the lower-value transaction is recorded. By this convention, profit should never be overestimated, and there should always be a provision for losses. Because of this convention, stock is valued at cost or market price whichever is lesser. And, an amount is provided for doubtful debts, if any.

Consistency prescribes the use of the same accounting principles from one period of an accounting cycle to the next, so that the same standards are applied to calculate profit and loss. For example, a firm changes method of depreciation from Written Down Value (WDV) to Straight Line Method (SLM). If so, the firm has to work out depreciation on both methods and show the difference due to method change.

Materiality means that all material facts should be recorded in accounting. Accountants should record important data and leave out insignificant information. For example, Rs.10/- to be paid to Tax Authorities, the same should be shown in FS, through the amount is negligible. Whereas Rs.10/- paid to Corporation as Parking Fee may be charged under traveling as it is not material.

Full disclosure entails the revelation of all information, both favorable and detrimental to a business enterprise, and which are of material value to creditors and debtors. For example, a company receives Rs.240000/- as rent in Chennai and pays Rs.180000/- as rent in Bangalore. Company’s accountant nets off these two and shows Rs.60000/- as rent received. This will definitely give a wrong picture, both rent received and paid should be shown separately.

Journalising Transactions:

Journalizing is the process of recording a business transaction in the accounting records. This activity only applies to the double-entry bookkeeping system.

Rules of Journalizing or Rules of Debit and Credit:

Under the double entry system, every financial transactions of a business has a double effect. That is, each transaction involves at least two accounts. One aspect of the transaction is debited in an account and the other credited in another account. The debiting and crediting of the accounts are done on the basis of certain rules. These rules are called rules of journalizing i.e. debit and credit. There are two alternative bases for the rules of debit and credit such as follows.

1. Rules of Debit and Credit based on the types of Account

2. Rules of Debit and credit based on the Accounting Equation

1. Rules of Debit and Credit Based on the types of Account

Under double-entry system an account is classified into three types. They are personal account, real account and nominal account. For each of these types of account, there are three separate rules of debiting and crediting the financial transactions. The rules of debit and credit under different types of account are as follows.

A. Personal Account

Personal account is an account of a person. A person can be a natural person such as people like us, an artificial person such as firms, organizations and institutions and a representative person such as debtors and creditors. Since a person, be it a natural, artificial or representative, can be the receiver of benefits or giver of benefits, the rule of debiting and crediting the account of the person is as follows:

* Debit the receiver of benefits

* Credit the giver of benefits

This rule states that whenever a person receives benefits is debited by the amount of the benefit received. On the contrary, whenever the person gives the benefits is credited by the amount of benefits given. For example, if cash is paid to Michael (Michael is a natural person), his account (Michael’s account) is debited since he is the receiver of the benefit (cash). If cash is received from City Enterprises (City Enterprises is an artificial person), its account (City enterprises account) is credited because it is the giver of benefits (cash).

B. Real Account

Real account is a record of an asset. An asset can be current asset such as cash, a fixed asset such as building and intangible asset such as goodwill. Since an asset, is a current, fixed or an intangible asset, can either come in the business through its purchase or go out of the business through its sales, the rule of debiting and crediting the real (asset) account is as follows:

* Debit what comes in

* Credit what goes out

This rule states that whenever some benefit in the form of asset come into the business through its purchase, its (asset) account is debited. Conversely, whenever some benefit in the form of asset goes out of the business through its sales, its (asset) account is credited. For example, if cash is invested in the business, cash (current asset) account is debited by the amount of cash. If furniture is purchased for cash, furniture (fixed asset) account is debited because it comes into and cash (current asset) account is credited because it goes out from the business in exchange for furniture.

C. Nominal Account

Nominal account is a record of expense or loss or income or gain. An expense or loss is the sacrifice of benefits in exchange for service used and an income or gain is the benefit earned in exchange for service rendered. Since the business makes expenses and earns incomes, the rule of debiting and crediting the expense and income (nominal) account is as follows:

* Debit all expenses and losses

* Credit all incomes and gains

This rule states that whenever some benefit is sacrificed in exchange for service used (expense made or loss suffered), its (expense) account is debited. On other hand, whenever some benefit is earned in exchange for service rendered, its (income or gain) account is credited. For example, when salary is paid, an expense is made by the business, therefore salary account is debited. On the other hand, when interest is received, an income is earned by the business, hence, interest received account is credited.

2. Rules of Debit and Credit Based on the Accounting Equation

Accounting equation is a statement of equality between the three basic elements of accounting. They are assets, capital and liabilities. Each and every financial transaction affects the three basic elements. However, the total of all assets is always equal to the total of capital and liabilities at any point in time. The rules of debiting and crediting an account based on the accounting equation can be summarized in the following way.

S.No.	Effect of Transactions	Debit or Credit
1	Increase in assets and expenses/losses	Debit
2	Decrease in assets and expenses/losses	Credit
3	Increase in capital, liabilities, income/gains	Credit
4	Decrease in capital, liabilities, income/gains	Debit

Posting to Ledgers:

Ledger posting is very important part of accounting system. As we know that to reach to any financial result, we have to go through so many process. For example, first of all, we must know to maintain proper account records. To maintain proper account records, one must know proper accounting system. And proper accounting system includes following important steps to be followed:-

To prepare the vouchers.

To enter the vouchers in to different type of day books.

Posting the entries from day books to ledger.

Totaling and Balancing of ledgers.

To prepare the trial balance

To prepare Trading Account, Profit & Loss Account and Balance Sheet.

After following the above procedures, all details relating to finance & accounts can be obtained very easily.

What is ledger?

In brief, Ledger is a summary of all accounts heads maintained by the business firm.

How to post the entries from day book to ledger?

Following are the procedures of posting of entries from day books to ledger:-

1. First of all, we have to open the accounts heads in ledger books. Ledger books contains similar type of pages having serial numbers. It also contains an index in beginning of ledger books. The name of account head is written in index of ledger and the same account head is written on any page of ledger. Then, the page number of that particular account head is written against that account head in index.

For Example: – Suppose, we want to open a Conveyance Expenses Account head in ledger. In this case, first, we shall write Conveyance Expenses Account in Index of ledger under ‘C’ alphabet and then we shall choose any page in ledger and on that page also, we shall write Conveyance Expenses Account. The page number, on which this Conveyance Expenses Account is written, should be written in index of ledger against Conveyance Expenses Account. So, when ever, we want to see the details of conveyance expenses account in ledger, first we shall open the index under alphabet ‘C’ then we will find out the page number of Conveyance Expenses Account and reach to particular page very easily. Same way, any number of accounts heads can be opened.

2. As we know that the ledger contains the columns like date, particulars, ledger folio, amount Dr., amount Cr. and balance Dr. or Cr. There is simple procedure of posting the entries from day book to ledger. All entries relating to the accounts heads, which are debited, should be posted to debit side of ledger account. Similarly, the credit entries of any account head should be posted in to credit side of that particular ledger account.

Preparation of Trial Balance:

Trial balance is a statement that lists out balances of all ledgers and confirms effectiveness of double entry by tallying totals of debits with credits. So after listing out all brought forward balances under respective nature i.e. Debit / Credit, an accountant should check whether the totals are matching with each other.

Preparation of Financial Statements:

We need two results i.e. exact profit or loss and financial position. These two can be arrived by re-arranging ledgers into two Financial Statements named as Profit & Loss Account and Balance Sheet.

Profit & Loss Account:

Profit & Loss Account deals with income and expenditure and helps to arrive at Profit / Loss. So all expenditure should be shown in the left i.e. debit side and income on the right i.e. credit side as in ledgers. Again, the account should be balanced and if balancing figure is on left side then it is profit; else, loss.

Balance Sheet:

Balance Sheet is a statement that lists out all Assets and Liabilities. Total of both sides should be equal.

Manual Vs Computerized Accounting:

Principally there cannot be any difference between manual and computerized accounting. But understanding environment changes will result in better performance.

Manual Accounting:

Manual accounting system consists of a set book called journal and ledger. All financial transactions, irrespective of their nature / behavior, will primarily be recorded in journal hook. Each side of which will be posted to the ledgers later. Periodically, every ledger will get balanced and all balances will be listed as Trial Balance. From Trial Balance, Income Statement and Balance lance Sheet will be prepared.

Demerits of this method may be listed as below:

I. Possibilities of errors / mistakes are high. This always gives problem in tallying a Trial Balance. Even a tallied trial balance may have errors of omission, duplication and compensating errors.

2. Its scope gets restricted with mere accounting. It is not competent to record and track entrepreneurial information, like bill details, cost center details and currency details, which is essential to run business in the modem world.

3. Since every document is prepared manually, it needs repeated recording. A sales activity needs preparation of invoice, entry in sales register and posting in sales, taxes & debtor’s ledgers. The same information has to be rewritten in different manner for filing sales tax returns. So this cannot be an absolute solution for modern business entity.

4. Access to books of accounts is restricted to a few accountants. Applying division of labour may stretch this to some extent.

Computerised Accounting:

Maintaining books of accounts with the help of any accounting software is known as computerised accounting. Normally, accounting softwares are menu driven programmes.

Menus will have options for input, process accounting data and output financial statements.

The following five are the basic elements of any accounting software:

Company Info: An option to input fundamental information about an entity whose books of accounts are going to be maintained. It includes setting business characteristics such as need for godowns, application of taxes, etc., of the entity.

Masters: Groups, Ledgers, MIS Heads, Cost Centers, Stock items and other heads which are necessary to keep up books and MIS are known as masters. In other words, all pre-requisites that are needed, Voucher entry.

Voucher Entry: Facility to record transactions in voucher format. Besides, Dr / Cr, this helps in tracking relevant entrepreneurial information also.

Display: Mode to view reports / statements on screen. It is a monitor for mistakes / errors too.

Print & Connectivity: Choice of either getting hard copies of reports or connecting with third party software.

Merits of computerised accounting system can be listed as below:

Since voucher entry validates arithmetical accuracy and sufficiency of each side, there is no question of tallying a Trial Balance. It will always tally.
Accounting software need not do the accounting alone. Side by side, it can take care of Inventory. MIS, Taxation and so on. So this can he termed as a Business Accounting Software.
This has the capability of processing stored information in any desired format. A sales voucher may get printed as an Invoice, reflected as an entry in sales register, used in sales tax computation statement.
Innumerable users may be permitted to access an entity’s books at a time.
Monotonous entries may get automated. E.g.: Taxable sales invoice entry may be programmed to get input of item, quantity & rate and to calculate taxes on its own.

It does, not mean that this system is error free. This has the following demerits:

In computerised accounting system, Book keeping starts from the point where accounting ends. In other words, User is defining Masters first and then entering Vouchers. In case of mistakes in defining Masters itself, the same will be carried out by any number of entries placed under this Master.
Authorising persons to access books, defining the level of access, tracking changes are big tasks in this atmosphere.
Data security is always a problem. Data may get corrupted / deleted at any moment. Still Accounting softwares are appreciated because of their speed, accuracy and coverage.

Accounting Softwares:

There are many accounting softwares available in the market.

Tally, Wings, Ex, Busy, AccPac, Profit and HCL Accountant are some of the popular accounting softwares. Among all, Tally enjoys almost monopoly status because of its 85% market share and product worthiness.

Tally as company:

Tally Solutions Private Limited is an Indian Company situated at Bangalore. Earlier it was named as Peutronics Private Limited and later got renamed. Since 1986 the Company is developing and marketing the Accounting Software by name ‘Tally’. Mr. Bharath Goenka is the Managing Director under whose guidance the software is entering into different stages.

Tally as Product:

The popular version of Tally was 4.5. It was a DOS based Version. Let as summarise the evolution of Tally us below:

Version	Features	Period
PFA	DOS Based Only accounting with Financial Statements	1988-90
3.0 to 3.12	Accounting with Cost center, Budget, Credit Limit	1990-91
4.0 to 4.5	Security, Audit Vault, Cash, Fund flows, Export / Import	1991-96
5.0 to 5.4	Windows based. Inventory features, Group Company, Multi Currency. Numbering Styles.	1996-01
6.3	Reorder Level, Ageing analysis, Scenario, ODBC, Single entry mode, Synchronization, e-Capabilities such as Mail, Unload. HT ML formats	2001-05
7.2	VAT. CST. TDS. Service Tax. Job costing^–	2005-07 (Parallel up to 9)
8.1	Multi Lingual Support, Fringe Benefit Tax. VAT Composite Return. Excise for Dealer	2006
9	POS. Enhanced Payroll. Export to Excel	2006-09
ERP 9	Remote Access, Control Centre, Support Centre, Refined TDS, Restructured Service Tax, Excise for Manufacturers, GST, e-Returns and so on.	Mar 2009 – 2020
Prime	Features such as godown management, multiple stock valuation, manufacturing, batch and expiry date, job costing etc.,	Since November 9th 2020

Why Tally?

Besides its simplicity, Tally is popular for its powers as listed below:

Computer literacy is not required. One who knows to use keyboard can operate Tally.
Menus in it are drill down menus. This leads a user in a guided track with clear vision.
It is one time and absolute solution for GST, TDS & e-TDS.
It has context oriented help facility. So user can call help facility wherever he gets struck.
Importing data from and exporting data to other software is possible.
Through TDL, Tally can get configured so as to cater licensee’s specific needs.

Chapter -1 Introduction to Accounting & Tally

Exercise 1: QUESTIONS

Pass journal entries for the following transections:

Ravi introduced capital Rs.100000, on 02/04/XX and started M/s Standard Tools.
On 3/4/XX, new current A/c opened with Indian Bank by depositing Rs.90000.
Table and Chairs purchased from Royal furniture for Rs.24000, by cheque no. 145251 dated 4/4/XX.
Rs.756, paid for tea, coffee expenses for office opening on 5/4/XX.
On 5/4/XX, goods worth Rs.56000/= purchased from M/s Tools & Equipments vide bill no. 724.
Vide bill 001, sold goods to M/s Super Agencies for Rs.34500/= on 7/4/XX.
On 8/4/XX. Tools & Equipments account settled by cheque no. 145252.
Office Stationeries purchased by cash for rs.468/=0n 10/4/XX
Super Agencies gave cheque no 787822 for their dues .on 12/4/XX

EXERCISE :1: ANSWER

Create a new company F3

Then create the following ledgers as shown in the below screenshorts:

(To create a ledger Gateway of Tally -> Create -> Ledger)