Cash book and bank book, Accounting Period, Trial Balance and its limitations

<< flow of transactions, books of accounts, General Ledger balance

Profit & Loss account from trial balance, Receipt & Payment, Income & Expenditure and Profit & Loss account >>

Financial Accounting (Mgt-101)

Lesson-7

Areas Covered in this lecture

Cash book and bank book.

Accounting Period.

Trial Balance and its limitations.

Flow of Transaction

In Financial Accounting, any business transaction flows as follows:

The business transaction is recorded in a voucher. The voucher is the first document prepared in the

financial accounting.

All credit transactions are then posted in the journal.

In these days, voucher is directly fed in the books of accounts by means of computers.

From the books of accounts, trial balance is prepared, which shows the arithmetic accuracy of the

accounting system.

Finally, financial statements. i.e., Profit & Loss Account and Balance Sheet is prepared from trial

balance.

Cash Book & Bank Book

Cash book and bank book are part of general ledger.

All entries including payables and receivables are recorded in the general ledger. Expenses, income,

assets and liabilities are recorded in different head of accounts to analyze the expenses incurred in

different head of accounts.

Due to large volume of transactions, entries related to cash and bank are recorded in the separate

books.

Cash Book

All cash transactions (receipts and payments) are recorded in the cash book.

Cash book balance shows the amount of cash in hand at a particular time.

Format of cash book is here under:

Cash Book

Account Code 01

Receipt Side

Payment Side

Date No. Narration / Ledger

Receipt Date No. Narration / Ledger Payment

Particulars Code

Amount

Particulars Code Amount

Cash Book

Account Code 01

Financial Accounting (Mgt-101)

Date

Voucher

Narration /

Ledger

Receipt Payment

Balance

Number

Particulars

Code

Amount Amount

Dr/(Cr)

Two formats of cash book are shown above. In the first format, receipt side and payment side are

shown separately. In the second format, two columns are shown for receipt and payment with an

extra column of balance. The balance column shows the net balance of cash available for use.

The ledger code shows the code of that head of account which contains the second effect of the

cash transactions because debits and credits are always equal in financial accounting.

Both of these formats are correct. A business can use any format considering its policies and

requirements.

Bank Book

All bank transactions are recorded in the bank book.

The balance of bank book reflects the cash available at bank at a particular time.

Format of bank book is hereunder:

Bank Book (Bank Account Number)

Account Code 02

Date

Voucher

Chq.

Narration /

Ledger

Receipt

Payment

Balance

Number

No.

Particulars

Code

Amount

Dr/(Cr)

The format of bank book is same as that of cash book except the column of cheque no.

This column is added in the format because all payments made by cheque and the number of

cheque is written in that column to keep the accounting record updated.

Accounting Period

Accounting period is any period for which a profit and loss account is prepared.

The length of the accounting period can be anything between one day to one year

The legal or statutory definition is a maximum of one year.

The only exception in this case is the formation of a new company which is formed before the

start of accounting period.

Financial Accounting (Mgt-101)

Financial year ("a period of 12 month duration")

In Pakistan, financial year starts from 1st of July and ends on 30th of June.

Exceptions are:

o Specialized business. e.g., Textile, banks, Sugar mills etc.

Financial reports can be made for a week or a month, depending upon the requirements of the

company.

Debit & Credit Balances

It has already been mentioned that both sides i.e. Debit and credit side of a ledger must be equal.

If debit side of a ledger is greater that credit side. The balance will be written on the credit side and

it will be called Debit Balance. The reason being, the balance is written on the credit side because of

excessive debit balance. Therefore, it is called Debit Balance. For example:

Title of Account

Account Code 01

Debit Side

Credit Side

Narration /

Receipt

Narration /

Payment

Date

No.

Date

No.

Particulars

Amount

Particulars

Amount

100,000

80,000

20,000

30,000

120,000

110,000

Balance

10,000

A Debit Balance

Similarly, if credit side is greater than debit side, the balance will be written on the debit side. This

balance is called. Credit Balance. For Example:

Financial Accounting (Mgt-101)

Title of Account

Account Code 01

Debit Side

Credit Side

Narration /

Receipt

Narration /

No.

Date

No.

Payment

Particulars

Amount

Particulars

Amount

80,000

100,000

30,000

20,000

110,000

120,000

Balance

10,000

A Credit Balance

Trial Balance

At the end of accounting period, a list of all ledger balances is prepared. This list is called trial

Balance.

Both sides of trial balance i.e. Debit side and credit side must be equal. If both sides are not equal,

there are errors in the books of accounts.

Trial balance shows the mathematical accuracy of the books of accounts.

Limitations of Trial Balance

Trial balance only shows the mathematical accuracy of the accounts.

If both sides of trial balance are equal, books of accounts are considered to be correct. But this

might not be true in all the cases.

If any transaction is not recorded at all, trial balance can not detect the omitted transaction.

If any transaction is recorded in the wrong head e.g. if an expense is debited to an assets account.

Trial balance will not be able to detect that mistake too.

Financial Accounting (Mgt-101)

A Sample Trial Balance

Name Of The Organization

Trial Balance As On (Date on Which Trial Balance is Drawn)

Title of Account

Account

Debit

Credit

Code

Amount

Cash in Hand

Cash at bank

Capital

Assets

Liabilities

Income

Expenses

Total

xyz

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