All About Maintaining Accounts At Low Cost- Do It Yourself - Professionals - Accounting - TIK Share

All About Maintaining Accounts At Low Cost- Do It Yourself


CA Pulkit Sharma

2014-02-05

Accounting is not a rocket science, but more important than rocket science. A wrong book keeping can destroy even big business. A careful and systematically accounting helps not only to maintain the transaction records but helps in generating the reports which are helpful for business planning.

The article below will help startups to understand the concepts of accounting.

Suppose you run a business and have one client. The transactions with the client are:

  1. Provided services for 10,000 Rs.
  2. Provided services for 12,500 Rs.
  3. Received 4750 Rs.
  4. Provided services for Rs. 18900 Rs.
  5. Received Rs. 2750 Rs.

Accounting is not defined legally. You can adopt your own methods to record the transactions. For instance you will record the above transactions in a simple manner.

CLIENT ACCOUNT

PARTICULARS

AMOUNT

BALANCE

Bill Raised

10,000

10,000

Bill Raised

12,500

12,500

Money Received

4,750

17,750

Bill Raised

18,900

36,650

Money Received

2,750

33,900

 

Similarly you will maintain the Cash book to track Cash balances:

CASH BOOK

PARTICULARS

AMOUNT

BALANCE

Money Received

4,750

4,750

Money Received

2,750

750,0

 

The above transactions are very few in volume and numbers. Think if the business has 500 clients and daily transactions are up to 1000.

The situation will be different. To overcome this problem accounting masters found the best way to record the transaction. They call it DOUBLE ENTRY SYSTEM.

Double Entry System means every transaction that you record shall affect two accounts. For example in above case every transaction affects cash and client accounts.

Benefit of double entry system is that incase you forgot to record a transaction; payables + Income, Expenses  + receivables will not tally.

An example of Double Entry System with transactions:

  1. Sold services worth 100 to Ram
  2. Sold services worth 200 to shyam
  3. Sold services worth 250 to Raghu
  4. Received 175 from Shyam
  5. Received 125 from Ram
  6. Sold Service for 300 to Ram
  7. Received 750 from Raghu

Lets account the above transactions.

CLIENTS ACCOUNTS

RAM

TRANSACTION NUMBER

PARTICULARS

AMOUNT

BALANCE

1.

Raised Bill

100

100

5.

Money Received

125

-25

6.

Raised Bill

300

275

 

SHYAM

TRANSACTION NUMBER

PARTICULARS

AMOUNT

BALANCE

2.

Raised Bill

200

200

4.

Money Received

175

25

 

RAGHU

TRANSACTION NUMBER

PARTICULARS

AMOUNT

BALANCE

3.

Raised Bill

250

250

7.

Money Received

750

-500

 

SALES ACCOUNTING

TRANSACTION NUMBER

PARTICULARS

AMOUNT

BALANCE

1.

Raised Bill

100

100

2.

Raised Bill

200

300

3.

Raised Bill

250

550

6.

Raised Bill

300

850

CASH BOOK

TRANSACTION NUMBER

PARTICULARS

AMOUNT

BALANCE

4.

Money Received

175

175

5.

Money Received

125

300

7.

Money Received

750

1050

 

Balances of Each Account:

Client Accounts (Total closing Balance of Ram, Shyam and Raghu) = -200

Cash Closing Balance                                                                                        =   1050

Total Cash and Receivable                                                                              =   850

 

Sales Account Balance should be equal to 850.

 

The above example is a well explained use of Double entry System. Try the above example and miss a entry in either of account. The balances will not tally.

 

 

From above example we can make that every transaction is heating two accounts. Though accounting is also a vast field like any other profession, but I will try to write here on concepts and explain how you can maintain your accounts.

 

We will try to keep our self limited to a simple method. We will divide the all possible transaction in five heads.

 

INCOME HEAD - Under this head we shall categories all earnings. All sources which provide income to business shall be grouped under this head. In above example SALES ACCOUNTING table is to be grouped under this head.

CLIENT HEADHere we shall group all the clients. In above example Ram, Shyam and Raghu are grouped under this head.

EXPENSE HEAD All Expenses incurred in business should be grouped under this head. For example you may make accounts say Tea, Stationary, Salary etc.

SUPPLIER HEADThe Suppliers of all expenses should be grouped under this head, Example Employees accounts, vendors accounts etc .

CASH HEADAll money paid or received should be grouped under this head.

 

After that we have divided all the transactions under the heads, we can record the transaction in respective heads.

 

What is a transaction?

Transaction is any event in business which involves some monetary benefits or monetary losses. Any event which does not have any monetary affect should be avoided.

Each transaction should be broken in different outcomes. In above example consider first transaction, “Sold Services to Ram for 100” In this transaction 2 accounts are associated. First “Sold Services”, second “to Ram”. This transaction should affect two accounts Income and Client. Income will increase and Client Receivable will increase.

 

Each transaction should affect minimum 2 heads*.

 

Example:

 1.       Provided service for Rs. 1 Lakh to Mr. A

First we will break this transaction, 1st provided Service (Income Head) to Mr. A (Client Head). So, recording this transaction should affect 2 Heads.

 2.       Received Rs. 1 Lakh from Mr.A

Again we should break the transaction in 2 parts. Fits Received money (Cash Head), second from Mr. A (Client Head).

 3.       Received Bill for Rs. 5000 for Tea Expenses

Break it in two parts, Received Bill (Supplier Head) and Tea Expenses (Expense Head)

 

Now we are ready with basic concepts (these concepts are not standard as contained in Text books, they are very complex to understand for a non-accounting person).

 

Try above examples with dummy transactions and see whether you got it right.

 

Next step is “How to maintain these things in Excel?

Everyone wants to have the things in computers, its fast and time saving. We will learn how to maintain accounts in excel based on above concept.

 

To maintain your accounts in excel as per the above explanations follow these steps:

  1. Create an Excel File and name the Excel Sheets as Income Head, Cash Head, Expense Head, Supplier Head, Client Head.
  2. Open Income Head Tab.
  3. Create Heads in a Raw and format it as a table.
  4. Repeat Step 2 and 3 for all tabs.
  5. Once the Basic Database is ready, you can use the file to maintain the accounts.

 

With this excel file you can filter the clients/Expenses/Supplier and get the balances. Sample Excel File for Download

Accounts-in-Excel-Do-it-Yourself-by-Tikshare.xlsx 

CA Pulkit Sharma

2014-02-05

This is a part of continuous efforts to improve the accounting systems in Indian Startups. Please feel free to elobrate the topic.

No one is perfect and neither me, the above explanation may lack a depth explanation or may have gramatical mistakes. As the topic are editable, please bring the issues you feel need to be addressed. I will edit and correct it.

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