University of Calicut • CUFYUGP 2024

COM2FM106 (3): FOUNDATIONS OF ACCOUNTING

Unit 3.1: Preparation of the General Ledger: The Principal Book of Accounts

1. Meaning and Structural Significance of the Ledger

While the Journal is the book of prime entry recording transactions chronologically day-by-day, it fails to provide consolidated, real-time intelligence regarding specific accounts. If a business proprietor wishes to ascertain the net balance owed to a particular supplier, the total cash balance in hand, or the cumulative expenditure incurred on office rent over six months, reviewing hundreds of pages of chronological journal entries is practically impossible.

To resolve this operational limitation, all journal entries are systematically classified and transferred to the Ledger — universally termed the Principal Book of Accounts or King of All Books. A ledger is a bound or digital register containing a collection of all personal, real, and nominal accounts maintained by the enterprise.

2. Structural Format of a Ledger Account (The T-Account)

A standard ledger account is divided vertically into two identical halves, resembling the letter T:

• Left-Hand Side: The Debit Side (Dr.), representing receiving aspects, asset additions, and expense accumulations.
• Right-Hand Side: The Credit Side (Cr.), representing giving aspects, liability additions, equity capital, and revenue accumulations.

3. The Mechanics of Ledger Posting and Balancing

Posting is the procedural process of transferring recorded debit and credit transactions from the journal into the respective accounts in the ledger:

• Prefix Conventions: In manual bookkeeping, entries posted to the debit side are prefixed with the word "To" (signifying that the account is indebted to the corresponding account), while entries on the credit side are prefixed with "By".
• Journal Folio (J.F.): Records the specific page number of the journal from which the entry originated, ensuring a bidirectional audit trail.
• Balancing of Accounts: At the close of an accounting period (month, quarter, or year), every account is balanced:
  1. Both sides are summed up. If the total of the Debit side exceeds the Credit side, the difference is written on the credit side as "By Balance c/d" (carried down). This account is said to have a Debit Balance.
  2. If the Credit total exceeds the Debit total, the difference is entered on the debit side as "To Balance c/d". The account has a Credit Balance.
  3. On the first day of the next accounting period, these balances are brought forward: a debit balance is brought down to the debit side as "To Balance b/d" (brought down).

Unit 3.2 & 3.3: Comprehensive Cash Book Architecture & Banking Transactions

1. Dual Character of the Cash Book

The Cash Book holds a unique status in financial accounting — it functions simultaneously as a Book of Original Entry (Journal) and as a Principal Ledger Account. Because all cash and banking receipts and disbursements are entered directly into the Cash Book from source documents (counterfoils, pay-in slips, check stubs), no separate cash or bank account is opened in the general ledger.

2. Typology of Cash Books

3. Contra Entries: Definition and Mechanics

A Contra Entry occurs when a single transaction affects both Cash and Bank accounts simultaneously, requiring both debit and credit entries within the same two-column or three-column Cash Book:

• Cash Deposited into Bank:
  Debit Bank Column (Receipt into bank) & Credit Cash Column (Payment out of cash till).
• Cash Withdrawn from Bank for Office Use:
  Debit Cash Column (Receipt into cash till) & Credit Bank Column (Disbursement out of bank).
• Contra Notation: The letter 'C' is entered in the Ledger Folio (L.F.) column on both sides to indicate that the entry is completed within the Cash Book itself and requires zero posting to the general ledger.

Unit 3.4: The Petty Cash Book & The Imprest System

1. The Rationale of the Imprest System

If the chief cashier were required to disburse and record every petty transaction — such as paying ₹20 for office tea, ₹50 for auto-rickshaw fare, or ₹10 for postal stamps — the main Cash Book would become excessively voluminous and cluttered.

Under the Imprest System of Petty Cash:

1. The chief cashier advances a fixed sum (the Imprest Amount, e.g., ₹5,000) to the petty cashier at the start of a period.
2. The petty cashier disburses small payments against authorized petty cash vouchers (PCVs) and records them in an analytical petty cash book.
3. At the end of the period (week or month), the petty cashier submits the audited vouchers showing total expenditure (e.g., ₹4,320).
4. The chief cashier reimburses the exact sum spent (₹4,320), restoring the petty cash balance to its original imprest figure (₹5,000).

Unit 3.5 & 3.6: Depreciation Accounting: Concept, Nature, Causes & Determinants

1. Authoritative Definitions and Nature of Depreciation

Fixed assets (such as plant, machinery, furniture, delivery trucks, and computer equipment) are acquired to generate operating revenues across multiple accounting periods. Over time, their economic efficiency and productive capacity diminish. Depreciation is the systematic, permanent, and gradual reduction in the book value of a fixed tangible asset arising from wear and tear, passage of time, or obsolescence.

• According to Accounting Standard 6 (AS 6 / Ind AS 16): "Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset."
• Matching Principle Mandate: Charging depreciation is not an optional accounting luxury; it is a mandatory statutory requirement to ensure that asset costs are accurately matched against revenues generated, ensuring financial statements present a true and fair view of operating profits and financial position.

2. Conceptual Demarcation: Related Accounting Terms

3. Determining Factors of Depreciation

Calculating periodic depreciation requires the estimation of three mathematical parameters:

Unit 3.7: Methods of Depreciation: Straight Line Method (SLM) vs. Written Down Value (WDV)

1. Straight Line Method (SLM / Fixed Installment Method)

Under the Straight Line Method, an identical, uniform amount of depreciation is written off every year throughout the asset's economic life, reducing the book value to its scrap value (or zero).

2. Written Down Value Method (WDV / Diminishing Balance Method)

Under the Written Down Value Method, depreciation is charged at a fixed percentage on the book value (written down value) of the asset at the beginning of each year. Because the book value declines year after year, the annual depreciation amount progressively diminishes over time.

3. In-Depth Comparative Dissection: SLM vs. WDV

Unit 3.8: Accounting Treatment, Provisions & Asset Disposal Accounting

1. Methods of Recording Depreciation in Books of Accounts

There are two distinct accounting approaches for recording periodic depreciation:

• Approach 1: Charging Directly to Asset Account:
  Depreciation is debited to Depreciation A/c and credited directly to Asset A/c. The asset appears on the Balance Sheet at net written down value.
• Approach 2: Maintaining Provision for Depreciation Account (Accumulated Depreciation):
  The asset remains in the ledger at its original historical cost. Depreciation is credited to a separate Provision for Depreciation A/c. On the Balance Sheet, the Provision is shown as a deduction from the gross asset cost on the assets side.

2. Disposal of Fixed Assets & Asset Disposal Account

When an asset is discarded, sold, or destroyed, its book value and accumulated depreciation must be removed from the active ledgers:

Comprehensive Worked Practical Numerical Problems

Empirical Corporate Case Studies