 Namaste. In our earlier modules, we have discussed about financial statements, then we have discussed various conceptual aspects like corporate governance, like evolution of accounting. Today, we are going to go back to the very first step of accounting. If you remember the accounting has three steps. One is recording of transactions, summarizing and preparation of financial statements. Normally, the students are first taught about recording and then they go to financial statements. We have followed a reverse path, we have first understood what is a final output in the form of balance sheet, then P and L, then cash flow and now we are going to understand what is a recording part of it. The main purpose of changing this sequence because this course is mainly for non-accounting students like engineers or management students who are less interested in recording, they are more interested in reading and analyzing the statements. So we have tried to understand the balance sheet, P and L and cash flow. Now we will discuss what are the basic transactions. Using those transactions, you get a summary and from that summary, you have made the P and L and balance sheet. So this is popularly known as journal entries or ledger entries, we will not go into too much of details of it, I will just give an overview as to what is journal, what is ledger and so on and in the next PPT of this module, we will see how basic P and L and balance sheet is prepared. So that in next sessions, we can talk about preparation of corporate P and L and balance sheet. Okay, to first begin with the recording of financial transactions. So we are going to discuss about journal, ledger and subsidiary books. These are the major books of accounts. These are not final accounts, but from here the recording aspect starts. Now first one is journal. Now this is called as a book of original entry because all the transactions are first recorded in journal and the effects are decided here in journal. Recording of transaction is many coins called as journalizing of entries. Entries are recorded normally in a chronological manner. These are very important. In earlier days, we used to have physical books where people will actually write the journal entries. Now most of the accounting is computerized. So journal entries happen within the system, within the system ledgers are created and within the computer system, the final accounts are created. But keep in mind, the correctness of journal entries has not gone down, in fact it has increased. If there is a any kind of mistake in the journal entry, it is going to be carried in the ledger and it is going to be carried in the final account. So either an entry in the amount or entry in the very conceptual, a mistake in the very conceptual understanding of the entry is going to distort the final accounts completely. So keep in mind that journal entries have not lost relevance, only thing is instead of from the book today they are made in some so computer software. But understanding of these entries is very important. Now this is a specimen of traditional journal where you write date, particular, ledger folio, debit amount and credit amount. Even in computerized system, a similar type of entry is to be made. Now here what we have tried to do is give a list of simple transactions and the entries for those transactions. So that you understand that for a particular transaction how an entry is passed. So goods sold for cash 5000, cash deposited in bank 3000. Now if you take these two simple entries, the journal entries for them is like this. The goods are sold for cash. So cash comes in, we get more cash. That is why cash account is debited and our sales are increasing. So sales account is credited. Keep in mind that cash is an asset. So by debiting it the cash increases, sales is an income. So by crediting it the sales increases. So cash account to sales account. This is how the entry is written. The debit amount for cash is 5000, the credit amount for sales is 5000. It is necessary that total of debit and credit should match for every entry, then only the final balance sheet will be tallied. Are you getting it? For those who do not have any commerce or such type of accounting background, this may be very new. But this forms the basis of all other entry or various entries or various accounting which is done in future. The next entry was cash deposited in bank. So remember here what is done is the bank balance is increasing and the cash balance is decreasing. So we say bank account debit 3000 to cash account 3000. That means the cash account is credited by 3000 and here the date is written. Are you getting me? Now we can take hundreds of transactions and go on writing more and more entries. As I told you we are not going into too much details. This is just to make you understand what a journal is. I hope that much is clear to you. The next one is ledger. Now from the journal the entries are classified and grouped for a particular account and they are written under a particular account in what is known as a ledger. In the old days physically the ledgers used to be written and they were called as principle books of entries. Journal is a primary book where the entries first made. From there it is transferred to ledger and ledger is a main book that is why it is called as a principal book of accounts. This is a specimen of ledger. You can see here this side is for debit, this side is for credit. Date, particular, JF, JF is a journal folio and the amount. Same way date, particular, JF and amount. We will write here DR for debit, CR for credit and ABC account is the heading of a particular account. So getting it it has two sides and for every account a separate ledger account is required to be opened in the ledger book. The two and buy is written on debit and credit side. Now a simple case is given so that we can prepare ledger accounts for the given transactions. Prepare ledger accounts for RAM and company. Opening balances are given, cash, debtors, craters and capital and some simple transactions are given, purchase of goods on credit, cash sales, goods sold on credit and paid cash for expenses. Further cash received from debtors, cash paid to creditors. Now I will request you to take print out of this particular case. The case has been shared with you and now try to look, try to solve it and then check with the solution. Now this is how in the books of RAM and company the ledger will appear. First account prepared is cash account. It follows like this two balance brought down 1500. You can see here the opening balance of cash was given. It was not given whether it is debit or credit but since you know that cash is an asset it is going to have a debit balance of 1500. Then there was a cash transaction on 4th April, cash sales of 2400. So we have sold goods and we have got cash. So this will go on debit side in the ledger. On 15th April again there is a cash transaction, paid cash for rupees 250 for expenses. So your paid cash, cash will go down, it will appear as a credit transaction. You can just see these transactions here, are you getting me? So opening balance 1500 on this is a debit side. On 4th April 2 sales 2400 on 15th April by expenses 250, we will go back again. Next cash transaction on 18th April cash received from debtors 1200 and on 22nd April paid cash to creditors 800. You can see here cash received from debtors will appear on debit side because the money has come in. So two debtors 1200 and amount paid to creditors is by creditors on 22nd April 800. So we have recorded all the transactions in the period related to cash and at the last day that is on 30th of April we will calculate the balance, are you getting it? So we will take total here which is 5100 and deduct these two amounts we get a balance of 4050. That means the cash in hand at the end of the month that is on 30th April is 4050, are you getting it? So what you would have realized is we have summarized, we have categorized and summarized the transactions. We were given the raw transactions, since we want to prepare a cash account we have classified only those transactions which are related to cash. So first one was opening balance of cash, then cash sales, then cash expenses, cash received from debtor and cash paid to creditor. Only those items or those entries related to cash will come in the ledger account known as cash account. This is very much of common sense but I am just repeating it for those who are perhaps doing it for the first time, are you getting it? This is how a separate ledger account is created for every asset or a liability or a income or expense and transactions related to that account are recorded in the ledger. So this is cash account, the balance will be carried here so that in the next month that is from May, first May it says two balance brought down, now below this we can make the account for May. So you can see accounting period concept, the accounts are being closed at the end of a particular month. So at the end of April we get the balance, it becomes the opening balance for the next month. Now similarly we have prepared purchase account, purchase account there was only one entry, two creditors, there was a cash purchase of goods for 3000 and that much is balanced carried down. For sales, sales are on credit side, there were two sales, one for cash sale, the other one was credit sale. This is the total sales for the month balance brought down is 3650, are you getting it? Next is debtors, debtors are the customer balances or receivables from customers, there is only one transaction of sale on 7th April 1250, the amount is received by cash 1200 and the balance is 1250. So if you see carefully you will realize that the opening balance of 1200 is received on 18th April and a fresh sale the amount of 1250 is yet to be received till 1st May, getting it? Perhaps they have a credit period of one month, so last month's balance is received, this month's balance is due, it is carried to the next month. Creditors there was only one credit purchase on 2nd April for 3000, the balance is still pending, we have already paid the opening balance of 800 on 22nd of April. So these are the accounts of receivables and payables, this is a very small company very less number of transactions, but that will give you an idea as to how a particular account can be prepared for even for a larger company. Then the expense account, there was only one entry for expense, for cash expense, this 250 rupees is a balance of expenses, capital account there is no entry, normally the capital will not change every month, so opening balance of 1900 is carried as a closing balance. So are you getting me? Now there is one more topic known as subsidiary books, we have just seen that journal entries are passed then leisure accounts are prepared, but what happens is in most of the businesses similar type of entries come in very large number like purchases, sales and cash, so there is no point in making journal entry every time, instead of that we will prepare a register and record all the purchases in one register, all the sales in one register, all cash transactions are recorded in a special book known as cash book, where the cashier will record only the cash transactions. So in subsidiary books instead of having one journal for a similar type of transaction number of books are prepared which are called as subsidiary books, these are the books of original entry, from there the transactions are transferred to leisure, are you getting it? So this is the procedure, in the olden days physical maintenance was required, so different books could be maintained at different point of time, like in sales depot there will be sales book, in the hands of cashier there will be cash book, etcetera, nowadays everything is done by computer system, but even in computer system subsidiary books are maintained and authority of making certain type of transactions will lie in certain type of people. So typical subsidiary books are cash book for all cash transactions, purchase book for purchases, sales book for say credit sales, purchase return book, sales return book, then bill receivable book for recording transactions of promissory notes and so on, bills payable book and there is one journal proper. Now all the similar transactions will go in sale, purchase, cash book, etcetera, but the transactions which do not get recorded in any of the subsidiary books will be recorded in the journal proper, if there are any rectification of mistakes to be done, they will also be recorded in journal proper. So this was a very short summary of important books like journal, leisure and subsidiary books, as I told we are not going into details of it, but those who are more interested in the topic, perhaps can go to some book of accounting and go for more details about the books of accounts. Now we will continue this discussion and try to prepare, take a very simple case and prepare PNL and balance sheet from trial balance. Now first we will discuss about cash system and mercantile system. We have already discussed about one of the concepts known as accrual concept. In cash system of accounting what happens is only those transactions which are related to cash are recorded. So suppose you have a very small let us say panwala, whenever sale happens the person records it as a cash sale, if there is a purchase the person records it as a cash purchase. Suppose any sales are made on credit, it will be recorded in a separate diary, but the sales will be recorded only when the cash is received. This is called as a cash system of accounting, earlier government system used to be mostly on cash basis. Example is this, suppose the December salary is paid on 5th of January, then in the cash system it is recorded in January because the payment has made in January, though it is a expense of December it is not recorded in December, this is called as a cash system. Now in general cash system has lot of lacunae, it is not a foolproof system. So we need a mercantile system where all rentries are made irrespective of cash received or not, as and when a particular transaction is due, it needs to be recorded and afterwards its payment or receipt is recorded. So transaction occurs when a particular contract is entered, when an understanding is reached about sale or purchase or about incurring expense, it needs to be recorded, that is also called as a accrual system, that is why I told you that in our concepts you have read about the accrual concept, using the accrual concept the system of accounting which is followed is called as a mercantile system. Cash basis of accounting has lot of lacunae, that is why most of the businesses have converted their accounting system to mercantile system, except for very small businesses now the cash system is not much in use, are you getting it? Now let us go to a small case where perhaps you will understand how to make a small PNL and balance sheet, this is not for a company, so not in a particular format, just to understand from the trial balance how to make PNL and balance sheet. First of all what do you understand by trial balance? We have just discussed what is a ledger, in ledger there are various accounts and at the end of the period the balances are calculated for each account, now those balances are listed in a list which is called as a trial balance. Now trial balance has many advantages because it gives you the list of all the accounts, it also helps us to ensure to find out if there are any mistakes, if there are any errors in the ledger the trial balance will not tally, so that the total of debit should match with total of credit in a trial balance which gives a initially we feel that most of the things are correct, of course it is not a foolproof method, there could be still some errors, but largely it helps us in finding out many of the errors. Now a small trial balance is given, you can see here and using this trial balance you are required to make PNL account and balance sheet, this is not for in the company format, you can use any format, but just try to make a PNL and balance sheet. So first of all read the items of the trial balance, mark whether a particular item is a PNL item or a balance sheet item and then take them to PNL or balance sheet. I hope you have got the print out, if you are not you can stop the video here, take the print out and then go for the next step. So we will discuss a few of them, first is cash. Now cash is what type of item, it is a asset, so it should go under the assets, trade debtors again asset in the balance sheet, rent, rent is a expense in PNL salary, expense in PNL please note these items, trade creditors, liabilities in balance sheet, insurance, expense in PNL, in the same manner try to note all other items in the trial balance. I think it is very simple, opening stock this goes in PNL account as a expense, is it done? So please complete the exercise and then I will show you the solution. So PNL account is now to be made in two parts, the first part is known as trading account. So we have recorded sales opening stock purchases, the balance is called as gross profit which is 65,000. Since there is no closing stock you do not find here closing stock, if there would have been closing stock it would have come here. Then there is a listing of all other expenses. So gross profit is 65,000, you list out all the expenses and you get net profit of 30,300. As the name suggests as I told you it is not for any company so it is not in a particular format but it is just given for you to understand how to make a simple PNL. Then we go to balance sheet, balance sheet you know has two sides assets and liabilities. On asset side we have recorded motor vehicle, machinery, daters and cash, capital and trade creditors. The net profit 30,300 from PNL is to be carried in the balance sheet. We have already discussed that profit represents the owners funds. This amount belongs to the owners that is why it is shown below the capital. I hope it is now clear to you how to prepare a very starting point a simple PNL and balance sheet. In coming sessions we are going to make PNL and balance sheet for various types of companies taking the actual data from the balance sheets of companies. This was basically a starting point for you to understand how a simple PNL and balance sheet can be made from the trial balance. I hope it is clear to you. So, we will stop here. Namaste.