Unit 2: Accounting Systems

1. Preparation of Cash Book and Bank Reconciliation Statement

Cash Book:

  1. Meaning: A cash book is a special journal used to record all cash receipts and payments, including bank transactions.

  2. Types: Can be single column (cash), double column (cash & bank), or triple column (cash, bank & discount).

  3. Format: Includes date, particulars, voucher number, and amount columns for both receipts (debit) and payments (credit).

  4. Advantages: Acts as both a journal and ledger, provides daily cash/bank balances, and helps in managing liquidity.

  5. Contra Entries: Entries affecting both cash and bank accounts (e.g., cash deposited into bank) appear on both sides.

Bank Reconciliation Statement (BRS):

  1. Purpose: Reconciles differences between the cash book balance and bank statement balance.

  2. Causes of Differences: Timing differences like cheques issued but not presented, deposits in transit, or bank charges.

  3. Preparation: Begins with one balance (e.g., as per cash book) and adjusts for reconciling items to match the other.

  4. Importance: Helps identify errors and ensures accuracy in cash-related records.

  5. Frequency: Usually prepared monthly or at the end of each accounting period.

2. Profit and Loss Account

  1. Objective: Determines the net profit or loss of a business for a specific period by matching revenues against expenses.

  2. Structure: Includes income such as sales and services, and expenses like cost of goods sold, salaries, rent, etc.

  3. Operating vs Non-Operating Items: Differentiates between regular operations and incomes/expenses not related to main business.

  4. Adjustment Entries: Includes accruals, prepayments, bad debts, and provision for depreciation.

  5. Result: The closing balance represents net profit or net loss, which is transferred to capital or retained earnings.

3. Balance Sheet with Adjustments (including for Non-Corporate Entities)

  1. Purpose: Shows the financial position of the business on a particular date, listing assets, liabilities, and owner’s equity.

  2. Structure: Divided into two sides—assets (current and non-current) and liabilities (current and long-term) including capital.

  3. Adjustments: Include outstanding expenses, prepaid expenses, depreciation, provision for doubtful debts, etc.

  4. Non-Corporate Entities: Sole proprietorships and partnerships show capital accounts, drawings, and do not follow corporate format.

  5. Accuracy: Must be prepared after incorporating all adjustments and ensuring the accounting equation (Assets = Liabilities + Capital) balances.

4. Cash Flow Statement

  1. Definition: Shows inflows and outflows of cash and cash equivalents over a period.

  2. Purpose: Helps assess liquidity, financial flexibility, and cash management efficiency.

  3. Classification: Divided into three activities—Operating, Investing, and Financing.

  4. Indirect Method: Starts with net profit and adjusts for non-cash and working capital changes (most commonly used in practice).

  5. Importance: A mandatory part of financial statements for companies, helps stakeholders understand cash generation and usage.

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