Billing procedure
A bill (or invoice) is a written record of a sale. It is the first proof for the books.
Parts of a bill
- Seller's name, address and tax registration number (for example GSTIN in India, VAT number elsewhere).
- Bill number (in serial order) and date.
- Buyer's name (and address for credit sales).
- Items: description, quantity, rate, amount (quantity × rate).
- Discount, tax and the grand total; payment mode.
- Signature or stamp; terms such as return rules.
Kinds of bills
- Cash memo: for a cash sale; payment at once.
- Credit invoice: goods given now, payment later.
- Debit note / credit note: sent when goods are returned or prices corrected.
Steps
- Check items and prices.
- Write or print the bill with a new serial number.
- Collect payment (or record the amount due).
- Give the original to the customer; keep a copy for the books.
Accounting basics: double entry
Bookkeeping is recording deals. Accounting goes further: it sorts, sums up and explains them.
An account is a record of one item, such as Cash, Sales, Rent or a customer. It has two sides: debit (Dr) on the left and credit (Cr) on the right.
Double entry rule
Every deal affects at least two accounts with equal debit and credit totals.
- Assets and expenses go up on the debit side.
- Liabilities, capital and income go up on the credit side.
Example: goods sold for cash ₹500 → debit Cash ₹500, credit Sales ₹500.
Because both sides are always equal, the accounting equation holds: Assets = Liabilities + Capital.
Journal, ledger and subsidiary books
Journal
The journal is the book of first entry. Deals are written in date order: date, accounts debited and credited, amounts and a short note (narration).
Ledger
The ledger is the main book. Each account gets its own page (a T-account). Moving an entry from the journal to the ledger is called posting. At the end of the period each account is balanced: total both sides; the difference is the balance.
Subsidiary books
| Book | Records |
|---|---|
| Cash book | All cash received and paid (often bank too) |
| Purchases book | Credit purchases of goods |
| Sales book | Credit sales of goods |
| Purchase returns book | Goods sent back to suppliers |
| Sales returns book | Goods returned by customers |
| Petty cash book | Small daily expenses (tea, postage) |
| Journal proper | Anything that fits no other book |
Using them saves time, lets several people work at once and makes errors easier to find. A trial balance then lists all ledger balances to check that total debits equal total credits.
Trading and profit and loss account
Trading account (gross profit)
Cost of goods sold (COGS) = opening stock + purchases + direct expenses − closing stock.
Gross profit = net sales − COGS. If COGS is bigger, it is a gross loss.
Profit and loss account (net profit)
Net profit = gross profit + other income − indirect expenses (rent, salaries, electricity, advertising, depreciation).
Worked example
Opening stock ₹10,000; purchases ₹50,000; closing stock ₹15,000 → COGS = 10,000 + 50,000 − 15,000 = ₹45,000. Sales ₹70,000 → gross profit = ₹25,000. Expenses ₹9,000 → net profit = ₹16,000.
Net profit belongs to the owner and is added to capital in the balance sheet.
Try it: in the 3D and at home
In the last 3D step, raise expenses until net profit turns into a loss. Then raise closing stock and see gross profit grow. At home: for one week, write every rupee you receive and spend in a small 'cash book' with two columns, In and Out. At the end, find your balance.
Key formulas and definitions
- Amount on bill = quantity × rate
- Assets = Liabilities + Capital
- Total debits = Total credits
- COGS = Opening stock + Purchases + Direct expenses − Closing stock
- Gross profit = Net sales − COGS
- Net profit = Gross profit + Other income − Indirect expenses
Worked examples
1. A bill has 5 registers at ₹60 and 2 geometry boxes at ₹120, with 5% tax. Find the total.
5 × 60 = 300; 2 × 120 = 240. Subtotal = ₹540. Tax = 0.05 × 540 = ₹27. Total = ₹567.
2. Bought goods on credit from Mehta & Co. for ₹8,000. Which accounts are debited and credited, and in which subsidiary book is it written?
Debit Purchases ₹8,000; credit Mehta & Co. ₹8,000. Written in the purchases book.
3. Paid rent ₹3,000 in cash. Give the entry.
Debit Rent (expense) ₹3,000; credit Cash ₹3,000. Written in the cash book.
4. Cash account: debit side total ₹12,000, credit side total ₹7,500. Find the balance.
12,000 − 7,500 = ₹4,500 debit balance (cash in hand).
5. Opening stock ₹20,000; purchases ₹80,000; carriage inward ₹2,000; closing stock ₹25,000; sales ₹1,05,000. Find gross profit.
COGS = 20,000 + 80,000 + 2,000 − 25,000 = ₹77,000. Gross profit = 1,05,000 − 77,000 = ₹28,000.
6. Gross profit ₹28,000; salaries ₹12,000; electricity ₹3,000; commission received ₹1,000. Find net profit.
Net profit = 28,000 + 1,000 − 12,000 − 3,000 = ₹14,000.
Common mistakes
- Writing only one side of a deal. Every deal needs an equal debit and credit.
- Putting credit sales in the cash book. Credit sales go in the sales book; only cash deals go in the cash book.
- Forgetting closing stock in the trading account. It must be subtracted, or COGS is too high and profit too low.
- Mixing gross and net profit. Gross profit is before rent, salaries and other indirect expenses; net profit is after.