Accounting Process for CA Foundation: Chapter Guide

What this chapter covers

Accounting Process: topics in the order to study them

1. 1Accounting Equation and Rules of Debit and CreditEverything else depends on knowing which accounts to debit and credit, so you start here.
2. 2Journal and Journal EntriesThe journal is the first record of a transaction, and you need it before you can post anywhere.
3. 3Ledger Posting and Balancing AccountsLedgers collect journal entries by account, and balances from them feed the trial balance.
4. 4Subsidiary Books and Cash BookThese split the journal by type of transaction, and the cash book is needed for bank reconciliation.
5. 5Bank Reconciliation StatementIt builds directly on the cash book and is easier once you can read bank entries.
6. 6Trial BalanceYou need balanced ledgers first, because the trial balance lists their closing balances.
7. 7Rectification of Errors and Suspense AccountLast, because you must know the normal process and the trial balance to see which errors affect it.

How to prepare Accounting Process

1. Learn the debit and credit rules for each account type: assets, liabilities, capital, income and expenses. Then test yourself on 20 mixed transactions without looking.
2. Write journal entries for each transaction using the same layout: date, accounts, Dr or Cr, amount, and a short narration. Keep a habit of naming the accounts affected before writing.
3. Post a set of journal entries into ledger accounts, balance each one, and note the closing balance with its side. Check by agreeing totals.
4. Practise subsidiary books and the three-column cash book on one long problem. Pay attention to discount allowed and discount received, since they are posted differently.
5. For bank reconciliation, learn one method and stick to it: start with the cash book balance or the passbook balance, then adjust each item with a clear plus or minus. Always write the heading and the date.
6. Prepare trial balances from given balances, then sort errors into those that affect it and those that do not. Practise rectification entries, using the suspense account only when the trial balance does not agree.
7. Finish with timed mixed questions from past papers and ICAI practice questions. Mark yourself on format as well as on the final figure.

Common mistakes in Accounting Process

• Applying the wrong debit and credit rule by mixing up account types

  Fix: Classify every account before writing the entry. Say the type and the rule to yourself, then write Dr and Cr.

• Posting discount allowed and discount received to the wrong side

  Fix: Remember that discount allowed is a loss to you and sits on the debit side of the cash book. Discount received is a gain and sits on the credit side.

• Adding or subtracting bank reconciliation items in the wrong direction

  Fix: Pick your starting balance, then for every item ask whether it would raise or lower that balance. Write the direction next to the item.

• Assuming the trial balance agreeing means there are no errors

  Fix: Learn the list of errors that the trial balance does not reveal and state this in theory questions.

• Putting every error into the suspense account

  Fix: Use suspense only for errors that make the trial balance disagree (e.g., one-sided posting, wrong amount on one side, wrong totalling); errors that keep debits equal to credits are rectified without it.

• Leaving out narrations, headings and working notes

  Fix: Add a short narration, a proper heading and date, and show workings. Subjective papers give step marks for these.

Last-day revision: Accounting Process

• ✓Accounting equation: Assets = Liabilities + Capital.
• ✓Debit the receiver, credit the giver (personal accounts).
• ✓Debit what comes in, credit what goes out (real accounts).
• ✓Debit expenses and losses, credit incomes and gains (nominal accounts).
• ✓Journal entries need a date, the accounts, Dr or Cr, amounts and a narration.
• ✓Balance c/d is written on the side with the smaller total to make both totals equal. The account has a debit balance if the debit total is larger and a credit balance if the credit total is larger. Balance b/d is then brought down on the opposite side.
• ✓Discount allowed is an expense; discount received is an income.
• ✓Cash book: cash and bank columns can both be debited or credited, and a contra entry affects both.
• ✓Bank reconciliation reconciles the cash book balance with the passbook balance; it does not change the passbook.
• ✓A trial balance agreeing does not prove the books are free of errors.
• ✓Complete omission, errors of principle, compensating errors, and errors of commission where the correct amount is posted to a wrong account on the correct side (e.g., wrong account debited) do not affect the trial balance.
• ✓Use the suspense account only for a trial balance difference, and close it when the errors are found.

Accounting Process practice questions

• Under the accrual basis of accounting, rent of Rs 24,000 for the year ended 31 March was paid in cash on 1 April of the following year. How …
• A trial balance of Mehta & Co. shows total debits of Rs 5,48,000 and total credits of Rs 5,30,000. The difference was traced to the followin…
• Which of the following errors will NOT be disclosed by the trial balance?
• Rohan Traders purchased office furniture on credit from Sharma Furnishings for Rs 45,000. In which book of original entry should this transa…