LIABILITIES-A FINANCIAL PROMISE

In business ,'Liability' represents an obligation* to pay in the future and it also represents a promise to perform a service in future.

*Obligation=promise

In accounting, there is a term called  'payables' which is most frequently used to denote liabilities specially short term liabilities.

Let's understand the nature of liabilities with the help of an example:
_ suppose you purchased a raw material worth ₹100000 from a supplier and you promised him to pay the amount after 1 month.
In this situation you owe him ₹ 100000 and this amount is a liability for you.
Here the supplier will issue you a document called 'Bills payable'.
(Bills payable=It's a credit instrument  which is received on a credit purchase.)

Like Assets ,as we have discussed earlier , liabilities are also of  2 types:

    Now let's understand the accounting nature of liabilities-

ASSETS-A COMPANY'S BACKBONE

As backbone gives support and shape to the  human body similarly ' Asset' gives a crucial support to the business firm.

Now let's discuss what an Asset  actually mean in the business world:

• In simple language an asset is something  which someone can own.
• In accounting,asset is something which can be owned and controlled by businesses to  produce value in terms of profit & wealth.

  In order to understand the significance of  Assets let's know it's types in field  of Accounting:

Now let's understand it's accounting treatment-

UNDERSTANDING THE ACCOUNTING CYCLE

Accounting sometimes may be the most boring and confusing topic but if you want a sustainable financial life it is very useful and important .So lets make it simple and interesting by first understanding the basics through Accounting Cycle.The steps of Accounting Cycle are discussed below:

1. Recognizing Financial Transactions

Financial Transaction are events that involves exchange of money for a consideration*. These type of transactions are two part transaction involving a buyer and a seller.
(Consideration=Something in return)

Kinds of Financial Transactions-

• Purchases are the transactions incurred by an entity to acquire the goods and services which it further decides to sale in the Ordinary Course of Business. Purchase transactions can be done by way of Cash or Credit according to the agreement of purchase.
• Sales are transactions which an entity undertakes to further sell the purchased goods & services.Sales are core income producing activity in the business without which no business can survive.Like purchases, sales can also be made in cash as well as credit.
• Receipts are transactions which are end products of any financial transaction. Receipts may be made in cash or in bank accounts.Reciepts are the end product of a sale.
• Payments are also like receipts end products of any financial transaction. Payment may also be done by either Cash or by bank accounts.Payment are the end product of a purchase.

2. Source Documents

  Every financial transaction involves documentary evidences.These documentary evidences are also known as financial instruments in accounting. Lets discuss some of them:

• CASH MEMO:It is used for  purchases and  sales made in cash.
• INVOICES: It is used for credit sales and purchases.
• RECEIPT:It works as a proof a payment made on account of a business transaction.
• VOUCHERS: These are used for recording business transactions .It helps in furthur verification.

There are many more financial instruments like hundies,cheques,pay-in-slips,drafts etc.

3. Preparation of  Journal

     In   Journal,also known as Book of  Original Entry, every  financial transaction is initialy recorded.

    

•    Every financial transaction affects two or more accounts (a/c) and every a/c has its unique nature either its Debit(Dr) or Credit(Cr).
• X&Y represents the affected accounts(a/c)
• L.F. represents the page no. in the ledger books in which each a/c is individually classified.
• EXAMPLE:Entry for cash purchase  of rs 10000

           Purchase a/c                   Dr                  10000

              To cash a/c                                              10000

4. Posting in ledger

    After recording transaction in journal  it is posted  in ledger books.In these books each a/c is individually classified.

     

    

    Here it must be noted that X a/c has a unique nature of debit.Any increase in value of X will be shown on debit side and any decrease will be shown on credit side.

 In ledger A/C both sides must be equal.If debit and credit sides dont tally the balancing figure(Difference between debit &credit) is taken to TRIAL BALANCE.

5. Preparation of  Trial  Balance

    

• Trial balance is a statement which is prepared by taking into consideration the balancing figures of the respective ledger a/c.
• If the balance is on the Debit side of the ledger a/c, it will be shown in the debit coulumn of trial balance and the same will be applicable to the balance of the credit side.
• The two sides of the trial balance i.e. debit and credit must be equal.If there is any difference,it represents that some error has crept into previous steps.
  
    

6. Preperation of Final Accounts

• Trial Balance forms the basis of preparing Final Accounts.
• final accounts invoves Statement of  Profit&loss Account and Balancesheet.
• Statement of P/L a/c represents the profitability of the business entity by calculating gross and net profit.
• Balancesheet represents the financial position of the entitity by showing the Assets &Liabilities of the business firm.

*Detailed explanation related to final accounts will be discussed later.

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