Introduction

Who is this book for?

You have just finished 10th class. Maybe you're looking for a skill that can get you a job. Maybe someone told you "accounting mein scope hai" and you wondered — what even is accounting?

This book is for you.

It doesn't matter if you've never opened a computer. It doesn't matter if the word "GST" sounds scary. By the time you finish this book, you will be able to:

• Keep accounts for any small business
• File GST returns
• Use ERP software confidently
• Apply for jobs as a bookkeeper, GST practitioner, or CA office assistant

Meet the characters

This is not a boring textbook. This is a story.

You'll follow Meera Joshi, an 18-year-old from Bageshwar who joins a CA's office in Haldwani as a trainee. She knows nothing about accounting on Day 1. By the end, she's running the show.

Along the way, you'll also meet:

• Sharma Sir — the CA who mentors Meera. Patient, practical, full of real-world examples.
• Negi Bhaiya — the junior accountant who shows Meera the daily work, the software, and the shortcuts.
• Rawat Aunty — runs a kirana shop in Almora. Meera's first real client.
• Bisht Ji — runs a wholesale spice business. GST-registered, bigger transactions. Meera's second client.
• Pooja — Meera's friend who works at a bank. Shows up later to talk about career options.

Their stories are fictional, but every problem they face is real. Every concept in this book is taught through something Meera encounters, struggles with, or figures out.

How this book is organized

The book has six parts:

Part 1: Foundation — What is accounting? Why do businesses keep accounts? What do debit and credit mean? You start here even if you know nothing.

Part 2: Bookkeeping by Hand — Vouchers, journals, ledgers, trial balance, financial statements. Meera learns to do everything on paper first.

Part 3: Accounting on Computer — Meera learns to use Udyamo ERPLite, an ERP software. Everything she did by hand, she now does faster on computer.

Part 4: GST — What is GST? How to calculate it. How to file returns. This is the skill that gets you hired.

Part 5: Beyond Basics — TDS, payroll, fixed assets, bank reconciliation. The extra skills that make you stand out.

Part 6: Your Career — Where can this knowledge take you? How to get your first job.

Read Part 1 first. Then go in order. Each chapter builds on the last.

One more thing

Every chapter follows the same pattern:

1. A story — what Meera encounters that day
2. The lesson — Sharma Sir explains the concept
3. Hands-on practice — Meera does it herself
4. Quick recap — key points in bullet form
5. Practice exercise — now YOU try it

Don't just read. Do the exercises. That's how Meera learned, and that's how you will too.

Let's begin. It's Meera's first day at Sharma Sir's office.

What is Accounting & Why It Matters

Meera stepped off the bus at Haldwani bus stand, her backpack heavy with notebooks and a water bottle. She had a printed letter in her hand — an offer to join Sharma Sir's CA office as a trainee. She didn't know what a CA actually did all day. She didn't know what "accounting" really meant. But her father had said, "Meera, yeh seekh lo toh naukri pakki hai." So here she was, walking down a narrow lane behind the market, looking for a small blue board that read: V.K. Sharma & Associates, Chartered Accountants.

Meera's First Morning

Meera found the office on the first floor above a stationery shop. It was a small room with three desks, a printer, and shelves full of thick files. A ceiling fan wobbled slowly.

A young man looked up from his computer. "You must be Meera? I'm Negi. Come, sit here. Sharma Sir will be in by 11."

Meera sat on a plastic chair and looked around. Numbers. Numbers everywhere. Printouts taped to the wall. A calendar with tax dates circled in red. Stacks of paper with rows and columns.

"Negi Bhaiya, what is all this?" she asked.

Negi smiled. "This? This is accounting. Every number here tells a story about someone's business — how much they earned, how much they spent, how much tax they need to pay."

Meera blinked. "But... isn't that just writing down numbers?"

Negi shook his head. "That's what most people think. But there's a big difference between writing down numbers and doing accounting. You'll understand soon."

What is Accounting?

At 11 o'clock sharp, Sharma Sir walked in. He was a tall man with silver hair, reading glasses on a chain around his neck, and a calm smile. He carried a steel tiffin box and a newspaper.

"Ah, Meera! Welcome, welcome. Sit, sit. Negi, chai lao."

After the tea arrived, Sharma Sir pulled his chair close.

"So, Meera. Tell me. Do you keep track of your own money?"

Meera thought for a moment. "Yes, Sir. When Papa gives me money for the month, I write down what I spend — bus fare, notebooks, food."

"Good! That little notebook of yours — that is the beginning of accounting. You are keeping a record of money coming in and money going out."

He picked up a pen and wrote on a piece of paper:

Accounting = Keeping a complete, organized record of all the money that comes into a business and all the money that goes out — so that you always know where the money is and how the business is doing.

"That's it?" Meera asked.

"That's the heart of it," Sharma Sir said. "But the key word is organized. Anyone can scribble numbers in a diary. Accounting means recording them in a systematic way — following certain rules — so that the information is useful."

Your Personal Khata vs a Business Khata

Sharma Sir leaned back. "Meera, your personal notebook where you write expenses — that's your personal khata. It works for you because your life is simple. You have one source of money: Papa. You have a few expenses: bus, food, books."

"But a business? Even a small kirana shop? It has hundreds of things happening every day."

He counted on his fingers:

1. Buying goods — The shop buys rice, dal, soap, oil from different suppliers.
2. Selling goods — Customers buy things every hour.
3. Paying bills — Electricity, rent, phone.
4. Giving credit — Some customers say "likho, baad mein dunga" (write it down, I'll pay later).
5. Taking credit — The shop owner buys goods from a wholesaler and says "next week payment karunga."
6. Paying salaries — If there is a helper in the shop.
7. Paying taxes — GST, income tax.
8. Taking loans — Maybe from a bank to expand the shop.

"If you just scribble all of this in one diary with no system, you will get lost in a week," Sharma Sir said.

"So accounting is like my personal notebook," Meera said slowly, "but with rules, and for a business."

"Exactly right," Sharma Sir said.

The Torn Notebook — Rawat Aunty's Visit

Just then, the office door swung open and a woman walked in, slightly out of breath. She wore a simple salwar-kameez and carried a cloth bag.

"Sharma ji! I need help. The bank is asking for my accounts. I don't have any accounts. I have this."

She pulled out a battered notebook from her bag. The cover was torn. Pages were falling out. Some entries were in pencil, some in pen, some in blue ink, some in red. Dates were missing. Names were abbreviated. Some pages had tea stains covering the numbers.

This was Rawat Aunty — she ran Rawat General Store, a kirana shop in Almora.

Sharma Sir opened the notebook gently. "Rawat ji, let me see..."

He turned a few pages and read aloud:

• "Ramesh — 500" (Who is Ramesh? 500 for what? When?)
• "Oil — 2000" (Which oil? Bought or sold? From whom?)
• "Cash — 15000" (Cash came in or went out? On which date?)

Sharma Sir sighed kindly. "Rawat ji, I understand. You've been writing things down. That's good. But this is not accounting. This is just... notes. Let me show you the difference."

He called Negi over. "Negi, show Rawat ji the ledger for Bisht Traders."

Negi opened his computer and turned the screen toward Rawat Aunty. On it was a clean, organized table:

Rawat Aunty stared. "This is so clean. I can actually see what's happening."

"Yes," Sharma Sir said. "At any point, you can tell how much money you have. You can tell who owes you money. You can tell whom you owe money. You can tell if your business is making a profit or a loss."

"And this," he said, pointing at Rawat Aunty's torn notebook, "tells you nothing."

Rawat Aunty looked embarrassed. "But I'm just a small shopkeeper..."

Sharma Sir held up his hand. "Even the smallest shop needs proper accounts. Let me tell you why."

Why Even a Small Kirana Shop Needs Accounting

Sharma Sir poured more tea and settled in. Meera took out a fresh notebook to write everything down.

"There are five big reasons why every business — even a tiny one — needs to keep proper accounts."

Reason 1: Know if You Are Making Money or Losing Money

"Rawat ji, tell me honestly — is your shop making a profit?"

Rawat Aunty hesitated. "I think so... I mean, there is money coming in every day..."

"But do you know how much you spend every month? On buying stock, on rent, on electricity, on transport?"

She shook her head.

"Without proper accounts, you might FEEL like you are making money, but actually be losing money slowly. Many small shops close because the owner never realized they were spending more than they were earning."

The danger of no accounts: A shopkeeper in Pithoragarh once told Sharma Sir that his business was "going well." When they sat down and calculated properly, they found that the shop had been losing ₹3,000 every month for two years. The owner had been slowly spending his own savings without realizing it.

Reason 2: Get a Bank Loan

"You came to me today because the bank asked for your accounts. Banks need to see your accounts before giving a loan. They want to know: Is this business healthy? Can this person repay?"

"Without proper accounts, the bank cannot trust you. Your loan application will be rejected."

Reason 3: Pay the Right Amount of Tax

"The government collects tax from businesses. If you don't keep records, two things can happen:"

1. You pay too much tax — because you can't prove your expenses, so the government assumes you earned more than you did.
2. You pay too little tax — by mistake, and then the government charges you a penalty (extra money as punishment).

"Both are bad. Proper accounts mean you pay exactly the right amount. Not one rupee more, not one rupee less."

Reason 4: Keep Track of Udhar (Credit)

"Rawat ji, how many customers owe you money right now?"

Rawat Aunty thought hard. "Maybe... fifteen? Twenty?"

"How much total?"

"I... I'm not sure."

"See? You have given goods on credit to people and you don't even know how much they owe you. That's YOUR money. Without a record, some people will simply forget — or pretend to forget."

Reason 5: Make Better Decisions

"If you keep good accounts, you can answer questions like:"

• Which items sell the most?
• Which month has the highest sales?
• Am I spending too much on transport?
• Should I stock more of this item or less?

"Accounting gives you information. Information helps you make decisions. Good decisions help your business grow."

Rawat Aunty nodded slowly. "Sharma ji, I understand now. But where do I start?"

Sharma Sir smiled. "Don't worry. We'll help you. In fact, Meera here is going to learn accounting step by step. And as she learns, we'll organize your books too."

He turned to Meera. "Meera, you've just heard your first lesson. Let's make sure you understand it properly."

Writing Down Numbers vs Real Accounting

Meera had been scribbling notes furiously. Sharma Sir noticed and said, "Good. Now let me make the difference very clear."

"Think of it like this," Sharma Sir said. "You know how doctors write prescriptions?"

"Yes, in that terrible handwriting," Meera laughed.

"Exactly. But even though the handwriting is bad, every pharmacist in India can read it. Why? Because it follows a system. The drug name, the dosage, the frequency — it's always in a certain format. That's what accounting does for business numbers. It creates a system that everyone can follow."

What Happens When You DON'T Keep Accounts

Sharma Sir became serious. "Let me tell you some real problems I've seen in my thirty years as a CA."

Problem 1: Tax Notices and Penalties

"A shopkeeper in Rudrapur never kept any records. One day, he got a notice from the Income Tax Department. They estimated his income at ₹12 lakh and demanded tax on that amount. His actual income was only ₹4 lakh — but he had no records to prove it. He ended up paying tax on ₹12 lakh plus a penalty."

Problem 2: Loan Rejection

"A woman in Kashipur wanted to expand her tailoring business. She went to the bank for a ₹2 lakh loan. The bank asked for her accounts. She had nothing. Loan rejected. She had a good business, but she couldn't prove it on paper."

Problem 3: Partnership Fights

"Two brothers ran a hardware shop together in Ramnagar. No proper accounts. After five years, they fought bitterly. One said 'I put in more money.' The other said 'No, I did.' There was no record. The family was torn apart."

Problem 4: Invisible Theft

"A shop owner in Haldwani had a helper who was stealing ₹500 every day from the cash box. Without accounting, the owner never noticed. It went on for two years. That's ₹3,65,000 lost."

Problem 5: Business Failure Without Warning

"A restaurant owner thought his business was doing great because customers were always coming in. But he never tracked his expenses properly. By the time he realized he was spending more than earning, he was already ₹5 lakh in debt."

Meera looked at Rawat Aunty. Rawat Aunty looked worried.

"Don't worry," Sharma Sir said gently. "These problems happen when there is NO accounting. That's exactly what we are here to fix."

Accounting is a Language

Sharma Sir stood up and walked to the whiteboard on the wall.

"One last thing for today, Meera. I want you to think of accounting as a language."

"Hindi is a language. English is a language. And accounting? It is the language of business."

"Just like Hindi has grammar rules — subject, verb, object — accounting has rules too. Just like you learn Hindi words one by one as a child, you'll learn accounting words one by one."

"And just like knowing Hindi helps you talk to people across India, knowing accounting helps you understand any business anywhere in the world."

He wrote on the whiteboard:

Accounting = The language of business. It tells the story of a business in numbers. Anyone who knows this language can read any business's story.

"A shop in Almora and a company in Mumbai — both use the same accounting rules. That's the beauty of it. Once you learn this language, you can work anywhere."

Meera smiled for the first time that day. She could learn a language. She had learned Hindi and English. She could learn this too.

Meera's Task for the Day

Before Rawat Aunty left, Sharma Sir gave Meera her first task.

"Meera, I want you to sit with Rawat Aunty for ten minutes. Look at her notebook. Try to list all the things that are wrong with it. What information is missing? What would make it better?"

Meera sat with Rawat Aunty and examined the notebook page by page. After ten minutes, she had a list:

1. No dates on many entries — you can't tell when something happened.
2. No full names — just "Ramesh" or "oil." Who is Ramesh? Which oil?
3. No description — "500" doesn't tell you if it was received or paid.
4. Mixed up entries — buying, selling, expenses, all mixed on the same page with no separation.
5. No totals — the pages just go on and on with no monthly total or running balance.
6. Missing pages — some pages were torn out.
7. Two different handwritings — sometimes Rawat Aunty wrote it, sometimes her son did, in different styles.
8. No distinction between cash and credit — you can't tell if money actually changed hands or if it was udhar.

Sharma Sir read her list and nodded. "Excellent. Every single one of these problems is something that accounting solves. Over the next few weeks, I'll teach you exactly how."

Quick Recap — Chapter 1

What is accounting? — A systematic way of recording all the money that comes into and goes out of a business.

Why is it different from just writing numbers? — It follows rules, has a fixed format, and produces information that anyone can read and understand.

Why does every business need it?

• To know if you are making a profit or loss
• To get bank loans
• To pay the right taxes
• To track who owes you and whom you owe
• To make smart business decisions

What happens without it? — Tax penalties, loan rejection, fights, theft, business failure.

Key idea: Accounting is the language of business. Learn it, and you can work anywhere.

Practice Exercise — Try This Yourself

You don't need a shop to practice. Try this with your own life or your family's small expenses.

Exercise 1: Take a blank notebook. For the next three days, write down EVERY money transaction in your house. Follow this format:

Write at least 10 entries.

Exercise 2: After three days, add up all the "Money In" and all the "Money Out." Find the difference. What does that number tell you?

Exercise 3: Think about a small shop in your town or village. List at least 8 different types of transactions that happen in that shop every day. (Hint: buying stock, selling to customers, paying rent, giving credit...)

Exercise 4: Look at Rawat Aunty's messy notebook (the problems Meera listed). Which of these problems does YOUR notebook have? How will you fix them?

Fun Fact — The World's Oldest Accounts

Did you know that accounting is one of the oldest skills in the world? People in ancient Mesopotamia (modern-day Iraq) were keeping accounts on clay tablets over 5,000 years ago! They recorded how many bags of grain they had, how many sheep they sold, and who owed them what.

In India, Kautilya's Arthashastra (written around 300 BC) has detailed instructions on how a kingdom should keep its accounts. So when you learn accounting, you are learning a skill that is thousands of years old — and still one of the most useful skills on the planet.

And here's the best part: accounting will never go out of demand. As long as people do business, they will need someone to keep their books. That someone could be you.

Tomorrow, Meera will learn about the most basic building block of accounting — the transaction. What exactly counts as a transaction? Let's find out.

Money In, Money Out — Transactions

It was Meera's second day at the office. She arrived early, made tea for everyone, and sat at her desk with her notebook open. Yesterday she had learned WHY accounting matters. Today, Sharma Sir had promised to teach her the first real concept. "Today," he said, putting his steel tiffin on the desk, "we learn about transactions. This is the atom of accounting. Everything is built from this."

What is a Transaction?

Sharma Sir picked up two things from his desk: a pen and a ten-rupee note.

"Meera, I'll give you this pen. You give me ten rupees."

Meera laughed but played along. She took the pen. He took the ten-rupee note.

"What just happened?" he asked.

"You sold me a pen for ten rupees," Meera said.

"Correct. Something was exchanged. I gave you a pen. You gave me money. This exchange — this is a transaction."

He wrote on the whiteboard:

Transaction = Any exchange that involves money or something of money value.

"Every time money changes hands, or goods change hands, or a promise to pay is made — that is a transaction."

"Let me give you more examples from everyday life."

"So a transaction is not just buying and selling?" Meera asked.

"No! Paying rent is a transaction. Receiving a loan is a transaction. Paying salary to a helper is a transaction. Even putting your own money into your business — that is a transaction. Any event that changes the money picture of a business is a transaction."

Cash Transactions vs Credit Transactions

"Now," Sharma Sir said, "transactions come in two main types. This is important. Pay close attention."

Cash Transaction — Money Right Now

"When you buy chai and pay ₹15 immediately — the money changes hands on the spot. This is a cash transaction."

Cash Transaction = The payment happens immediately, at the time of the exchange.

"Note: 'Cash' here doesn't only mean paper notes and coins. If you pay by UPI, debit card, or bank transfer at the time of buying — it is still a cash transaction. The point is: the payment happened right away."

Credit Transaction — Money Later

"But sometimes the payment does NOT happen immediately. Rawat Aunty buys rice from a wholesaler. The rice is delivered today. But she pays the wholesaler next week. This is a credit transaction."

Credit Transaction = The goods or services are exchanged now, but the payment happens later. In Hindi, we call this udhar (उधार).

"Meera, do people in your village buy things on udhar?"

"All the time!" Meera said. "At our local shop, people say 'likh lo, mahine mein dunga.' The shopkeeper writes it in his bahi khata."

"Exactly. That bahi khata entry? That's recording a credit transaction."

Here is a comparison:

Money In vs Money Out

Sharma Sir drew two arrows on the whiteboard — one pointing inward, one pointing outward.

"Every transaction does one of two things from the business's point of view:"

Money In (Inflow)

"Money comes INTO the business. Examples:"

• A customer pays you for goods
• A customer repays an old udhar
• You receive a loan from a bank
• You put your own savings into the business

Money Out (Outflow)

"Money goes OUT of the business. Examples:"

• You buy stock from a supplier
• You pay rent
• You pay electricity bill
• You pay salary to your helper
• You repay a loan installment

"Some transactions involve money coming in. Some involve money going out. Your job as an accountant is to record BOTH — clearly, accurately, and on time."

Meera Visits Rawat Aunty's Shop

In the afternoon, Sharma Sir sent Meera and Negi Bhaiya to Rawat Aunty's shop in Almora. The bus ride from Haldwani took about three hours through winding mountain roads.

Rawat General Store was a small but busy kirana shop on the main road. Shelves were stacked with rice, dal, oil, soap, biscuits, spices, and detergent. Rawat Aunty's son helped her at the counter.

"Meera, I want you to sit here for two hours," Negi Bhaiya said. "Watch every transaction that happens. Write it down in your notebook. For each one, note down:"

1. What happened (description)
2. How much money (amount)
3. Cash or credit?
4. Money in or money out?

"I'm going to check on Bisht Ji's warehouse nearby. I'll be back by 5."

Meera sat on a stool near the counter, notebook in hand, and watched.

Two Hours at Rawat General Store

The shop was busier than Meera expected. In just two hours, she observed and recorded the following:

Transaction 1: A woman bought 2 kg rice (₹80), 1 kg dal (₹120), and a soap bar (₹35). She paid ₹235 in cash.

Transaction 2: Rawat Aunty's son unloaded a delivery from a supplier — 10 packets of biscuits, 5 kg turmeric, and 20 bars of soap. The delivery man had a bill for ₹4,200. Rawat Aunty said, "I'll pay on Saturday." The delivery man noted it and left.

Transaction 3: An old man came in and said, "Rawat ji, last month I took oil and dal on udhar. Here's ₹650." Rawat Aunty took the money and tried to find his name in her notebook.

Transaction 4: Rawat Aunty's son went to the post office next door and paid the electricity bill — ₹1,100.

Transaction 5: A school boy came in and bought a packet of biscuits (₹20) and a cold drink (₹30). Paid ₹50 in cash.

Transaction 6: Rawat Aunty gave a bundle of goods to a woman who said, "Didi, likho na, pension aayegi toh de dungi." The goods were worth ₹380. This was udhar.

Transaction 7: A man bought 5 kg flour (₹200) and paid through UPI. The phone beeped with "₹200 received."

Transaction 8: Rawat Aunty paid ₹200 to a boy who helped carry heavy sacks in the morning — his daily wage.

Transaction 9: A regular customer bought a large order — 10 kg rice, 5 kg sugar, 2 liters oil, and other items totaling ₹1,850. He paid ₹1,000 in cash and said, "Baaki next week." So ₹850 was on udhar.

Transaction 10: Rawat Aunty counted some cash from the register and put ₹5,000 in an envelope. "This is for the landlord," she told her son. "Give it to him tomorrow." She set it aside as rent.

Transaction 11: A woman returned a packet of dal saying it had insects. Rawat Aunty took it back and returned ₹120 in cash.

Transaction 12: Near closing time, Rawat Aunty bought tea and samosas from the stall next door for herself and her son — ₹60.

Meera Organizes Her Notes

On the bus ride back to Haldwani, Negi Bhaiya looked at Meera's notebook. "Good observations. Now let's organize them. Put everything in a table."

Meera drew a table and filled it in carefully:

Negi Bhaiya nodded approvingly. "This is much better than Rawat Aunty's torn notebook, isn't it?"

"So much better!" Meera said. "I can actually see what happened today."

Important Observations

Back at the office the next morning, Sharma Sir reviewed Meera's table. He pointed out several important things.

1. UPI is Still a Cash Transaction

"See transaction 7? The customer paid by UPI. You correctly marked it as 'Cash.' Many students get confused by this. Remember: cash transaction means payment is immediate. It doesn't matter if the payment is in notes, coins, UPI, bank transfer, or debit card. If the money moves right away, it's cash."

2. Part Cash, Part Credit is Common

"Transaction 9 is very realistic. A customer pays some amount now and some later. This happens all the time in Indian businesses. You need to record both parts clearly — the cash portion and the credit portion."

3. Returns are Transactions Too

"Transaction 11 — the customer returned bad dal and got a refund. This is called a sales return. It is a real transaction. Money went out. You must record it."

4. The Owner's Personal Expenses

"Transaction 12 — Rawat Aunty bought tea for herself. This is tricky. Is it a business expense or a personal expense? In proper accounting, we need to separate business expenses from personal expenses. We'll learn more about this later."

5. Setting Aside Money is Not Yet a Transaction

"Transaction 10 — she put money in an envelope for rent. Strictly speaking, the transaction happens when the money is actually PAID to the landlord. Putting it in an envelope is just preparation. But for simplicity at this stage, we recorded it because the money is committed."

Types of Transactions in a Small Business

Sharma Sir drew a chart on the whiteboard summarizing the different types of transactions a small shop like Rawat Aunty's deals with:

1. Sales Transactions

Selling goods to customers.

• Cash sales (customer pays now)
• Credit sales (customer pays later — udhar)

2. Purchase Transactions

Buying goods from suppliers to sell in the shop.

• Cash purchases (pay the supplier now)
• Credit purchases (pay the supplier later)

3. Expense Transactions

Spending money to run the business (not buying goods for resale).

• Rent
• Electricity
• Wages/salary
• Repairs
• Transport

4. Receipt Transactions

Receiving money that was owed to you.

• Customer repays udhar
• Receiving a refund from a supplier

5. Payment Transactions

Paying money that you owe.

• Paying a supplier for goods bought on credit
• Repaying a loan installment

6. Return Transactions

Goods coming back.

• Sales return (customer returns goods to you)
• Purchase return (you return goods to supplier)

7. Owner-Related Transactions

• Owner puts personal money into business (Capital)
• Owner takes business money for personal use (Drawings)

"Don't try to memorize all of these right now," Sharma Sir said. "Over the next weeks, you'll see each type many times. The important thing today is: you now know what a transaction is, the difference between cash and credit, and the difference between money in and money out."

Why Every Transaction Must Be Recorded

"Meera, one final thought," Sharma Sir said. "You watched Rawat Aunty's shop for just two hours and counted twelve transactions. In a full day, there might be fifty or sixty. In a month? Over a thousand."

"If you miss even one, the numbers won't add up at the end. Imagine losing track of just one ₹4,200 credit purchase. At the end of the month, your records will show ₹4,200 more than you actually have. The supplier will come asking for money, and you'll be confused."

"That's why accountants are careful people. Every. Single. Transaction. Must. Be. Recorded."

He tapped the table for emphasis.

"You'll learn HOW to record them properly in the coming chapters. For now, the skill you are building is: observation. Learning to notice every transaction as it happens. That's what you practiced today at Rawat Aunty's shop."

Quick Recap — Chapter 2

What is a transaction? — Any exchange that involves money or something of money value.

Two main types:

• Cash transaction — payment happens immediately (includes UPI, card, bank transfer)
• Credit transaction — goods/services now, payment later (udhar)

Two directions:

• Money In — money comes into the business (sales, repayments, loans received)
• Money Out — money goes out of the business (purchases, rent, salaries, bills)

Seven categories of transactions: Sales, Purchases, Expenses, Receipts, Payments, Returns, Owner-related.

Golden rule: Every single transaction must be recorded. Miss one, and your numbers won't add up.

Practice Exercise — Try This Yourself

Exercise 1: Visit a small shop near your home (kirana, stationery, chai stall — anything). Sit there for 30 minutes to one hour. Write down every transaction you observe in this format:

Try to record at least 8 transactions.

Exercise 2: For each transaction below, say whether it is Cash or Credit, and Money In or Money Out (from the shopkeeper's point of view):

Exercise 3: Think about your own household for one day. List every transaction that happens. Morning chai (₹ spent on milk, sugar, gas), school fees, bus fare, vegetable shopping, phone recharge — everything. You'll be surprised how many transactions happen in a single day!

Fun Fact — The Bahi Khata Tradition

India has one of the oldest accounting traditions in the world. The bahi khata (बही खाता) system has been used by Indian traders for centuries. Marwari businessmen, Gujarati traders, and shopkeepers across the country have kept their bahis in handwritten books with red cloth covers.

On Diwali, many Indian businesses start a new bahi khata — a fresh book for the new financial year. This is why Diwali is also called the festival of new beginnings for businesses. The old book is closed, and a new one is opened with a prayer to Goddess Lakshmi.

And in the hills of Uttarakhand, shopkeepers have kept their own style of udhar records for generations — often with just a name and an amount in a small notebook. What you are learning now is the organized, professional version of what your grandparents already knew by instinct.

The skill is in your blood. You are just learning to make it professional.

Next chapter, Meera learns the most powerful idea in all of accounting — the double-entry system. Every transaction has TWO sides. This changes everything.

The Double-Entry Magic

Meera came into the office on Day 3 with a question that had kept her up at night. "Sharma Sir, yesterday I recorded twelve transactions from Rawat Aunty's shop. I wrote what happened and how much money came in or went out. Is that not enough? What else is there?" Sharma Sir smiled his slow, knowing smile. "Meera, what you did yesterday was like describing a coin by looking at only one side. Today, I'm going to flip the coin over. Today, you learn the biggest idea in accounting. After today, you'll never look at money the same way again."

Every Transaction Has Two Sides

Sharma Sir placed a ₹100 note on the desk.

"Meera, suppose Rawat Aunty sells a packet of dal for ₹100. Cash payment. Simple transaction. What happens?"

"She gets ₹100," Meera said.

"Yes. Her cash increases by ₹100. But what else changes?"

Meera paused. "Um... her stock? She had one packet of dal. Now she doesn't."

Sharma Sir slapped the desk lightly in excitement. "Exactly! Two things changed. Her cash went up by ₹100. And her stock of dal went down by some amount. One transaction — TWO effects."

He walked to the whiteboard.

"Let me give you another example. Rawat Aunty pays ₹1,100 for the electricity bill. What changes?"

Meera thought. "Her cash goes down by ₹1,100."

"And?"

"And... she has used electricity. So there's an expense?"

"Perfect. Her cash decreased and her electricity expense increased. Again — one transaction, two effects."

He underlined the key idea on the whiteboard:

Every single transaction affects at least TWO accounts.

This is the fundamental rule of accounting. It is called the Double-Entry System.

"This idea," Sharma Sir said, turning to face Meera, "was described by an Italian mathematician named Luca Pacioli in the year 1494. More than 500 years ago. And it is still used by every business, bank, and government in the world today. It is one of the greatest inventions in the history of business."

The Seesaw Analogy

"Think of a seesaw," Sharma Sir said. "The kind children play on in the park."

"When one side goes up, the other side goes down. The seesaw always balances. If you put weight on one side, you must put equal weight on the other."

"Accounting works the same way. When one account is affected on one side, another account must be affected on the other side by the same amount. The books must always balance."

"If your books don't balance — if the two sides are not equal — it means you made a mistake somewhere. This built-in check is what makes double-entry so powerful. It catches errors automatically."

Debit and Credit — Left and Right

"Now, Meera, I need to teach you two words that confuse almost everyone in the beginning. But I'll make it simple."

He wrote two words in big letters:

DEBIT and CREDIT

"Forget everything you think you know about these words. Forget 'debit means minus' or 'credit means plus.' That's wrong. Those meanings come from banking, not accounting."

"In accounting:"

Debit = The LEFT side of an account

Credit = The RIGHT side of an account

"That's it. Debit means left. Credit means right. Nothing more."

He drew a simple T-shape on the whiteboard:

        Cash Account
  ________________________
  |  DEBIT    |  CREDIT   |
  |  (Left)   |  (Right)  |
  |___________|___________|
  |           |           |
  |           |           |

"Every account in accounting looks like this. It's called a T-account because of the T shape. The left side is Debit. The right side is Credit."

"When we record a transaction, we put an amount on the Debit side of one account and the same amount on the Credit side of another account. That's double-entry. Two entries. Always equal."

The Three Golden Rules

"Now comes the important part. How do you know which side to put the amount on? There are three simple rules. Accountants call them the Golden Rules of Accounting."

"But first, I need to tell you about three types of accounts."

Three Types of Accounts

"Don't worry if this feels new. You'll get used to it quickly. Now, the three Golden Rules."

Golden Rule 1: Real Account

Debit what comes IN. Credit what goes OUT.

"If cash comes into the business, you debit the Cash account. If cash goes out, you credit the Cash account. If stock comes in, you debit Stock. If stock goes out, you credit Stock."

Golden Rule 2: Personal Account

Debit the receiver. Credit the giver.

"If you pay money to the landlord (the landlord receives it), you debit the Landlord's account. If a customer pays you money (the customer is giving it), you credit the Customer's account."

Golden Rule 3: Nominal Account

Debit all expenses and losses. Credit all incomes and gains.

"If you pay rent, Rent is an expense — debit Rent. If you earn money from sales, Sales is income — credit Sales."

Sharma Sir drew a summary table:

"Meera, these three rules will guide you through every single transaction you ever record. Learn them. Memorize them. They are the grammar of accounting."

Meera's First Practice — One Transaction at a Time

"Enough theory," Sharma Sir said. "Let's practice. I'll take the transactions you recorded at Rawat Aunty's shop and we'll apply double-entry to each one."

Negi Bhaiya pulled up a chair. "I'll help too. I remember being confused at this stage."

Transaction 1: Customer buys rice, dal, and soap for ₹235, pays cash

"Two things change," Sharma Sir said. "Cash comes in. And goods (stock) go out."

• Cash is a Real Account. Cash is coming IN. So: Debit Cash ₹235
• Sales is a Nominal Account. It's income. So: Credit Sales ₹235

"See? Debit = Credit. The seesaw balances."

Transaction 2: Received delivery from supplier worth ₹4,200 on credit (pay Saturday)

"Goods came into the shop. But no cash went out. Instead, Rawat Aunty now owes the supplier."

• Purchases (or Stock) is a Real Account. Goods came IN. So: Debit Purchases ₹4,200
• Supplier's Account is a Personal Account. The supplier gave the goods. So: Credit Supplier ₹4,200

"No cash moved. But two accounts were still affected."

Transaction 3: Old man repays last month's udhar of ₹650

"Cash comes in. And the old man's debt to Rawat Aunty decreases."

• Cash is a Real Account. Cash comes IN. So: Debit Cash ₹650
• Old Man's Account (Debtor) is a Personal Account. He is giving money. So: Credit Old Man ₹650

Transaction 4: Paid electricity bill of ₹1,100

"Cash goes out. Electricity is an expense."

• Electricity Expense is a Nominal Account. It's an expense. So: Debit Electricity Expense ₹1,100
• Cash is a Real Account. Cash goes OUT. So: Credit Cash ₹1,100

Transaction 5: School boy buys biscuits and cold drink for ₹50, pays cash

• Cash — Real Account, comes IN: Debit Cash ₹50
• Sales — Nominal Account, income: Credit Sales ₹50

Transaction 6: Woman takes goods worth ₹380 on udhar

"Goods went out. But no cash came in. Instead, the woman now owes Rawat Aunty."

• Woman's Account (Debtor) is a Personal Account. She received goods. So: Debit Woman ₹380
• Sales is a Nominal Account. Income. So: Credit Sales ₹380

"Notice: even though no cash moved, we still recorded the sale. The sale happened. The money will come later."

Transaction 7: Customer buys flour for ₹200, pays by UPI

"Same as a cash sale. UPI is immediate payment."

• Bank/UPI Account — Real Account, money comes IN: Debit Bank ₹200
• Sales — Nominal Account, income: Credit Sales ₹200

Transaction 8: Paid ₹200 daily wage to helper boy

• Wages Expense — Nominal Account, expense: Debit Wages ₹200
• Cash — Real Account, goes OUT: Credit Cash ₹200

Transaction 9: Large order ₹1,850 — ₹1,000 cash, ₹850 on credit

"This one has three entries! Cash comes in, a debtor is created, and a sale is made."

• Cash — Real Account, comes IN: Debit Cash ₹1,000
• Customer (Debtor) — Personal Account, receives goods on credit: Debit Customer ₹850
• Sales — Nominal Account, income: Credit Sales ₹1,850

Total Debit: 1,000 + 850 = ₹1,850. Total Credit: ₹1,850. Balanced!

"See, Meera? Sometimes a transaction can affect THREE accounts. But the rule is the same: total debit must always equal total credit."

Transaction 10: Paid rent ₹5,000 in cash

• Rent Expense — Nominal Account, expense: Debit Rent ₹5,000
• Cash — Real Account, goes OUT: Credit Cash ₹5,000

The Complete Picture — All 10 Transactions

Meera now had all ten transactions recorded with double-entry. Sharma Sir asked her to make one big summary table.

Meera added up all the Debits: 235 + 4,200 + 650 + 1,100 + 50 + 380 + 200 + 200 + 1,850 + 5,000 = ₹13,865

She added up all the Credits: 235 + 4,200 + 650 + 1,100 + 50 + 380 + 200 + 200 + 1,850 + 5,000 = ₹13,865

"They match!" she said, eyes wide.

"They ALWAYS match," Sharma Sir said. "If they don't, you've made an error. That's the magic of double-entry. It has a built-in error detector."

Why Does This Matter?

Meera leaned back. "OK, Sharma Sir. I understand the system. But why go through all this trouble? Why not just write 'Cash In' and 'Cash Out' like I did yesterday?"

Sharma Sir nodded. He had expected this question.

"Three reasons."

Reason 1: Completeness

"Yesterday, when you wrote 'Cash In ₹235 for sale,' you only captured one side. You didn't capture that stock went down. With double-entry, you capture EVERYTHING. Nothing is hidden."

Reason 2: Automatic Error Checking

"If your debits don't equal your credits, you KNOW there's a mistake. Without double-entry, you could make errors and never notice."

Reason 3: You Can Build Financial Statements

"At the end of the month or year, all these debit and credit entries allow you to create powerful reports — Profit & Loss Statement, Balance Sheet. These reports tell you the complete health of a business. You can't build them from a simple 'cash in, cash out' list."

"Think of it this way," he said. "Your single-entry list from yesterday was like looking at a building from the front. You see the facade. Double-entry is like having the full blueprint — the front, back, inside, plumbing, wiring, everything."

Common Beginner Mistakes

Negi Bhaiya chimed in. "Meera, let me tell you the mistakes I made when I was learning this."

Mistake 1: Thinking Debit = Bad and Credit = Good

"No! Debit just means left. Credit just means right. Debiting Cash means your cash increased — that's good. Debiting Rent Expense means you spent money on rent — that's an expense. Debit is neither good nor bad."

Mistake 2: Forgetting to Identify the Account Type

"Before you can apply the Golden Rules, you must identify: Is this a Real, Personal, or Nominal account? If you skip this step, you'll put the amount on the wrong side."

Mistake 3: Recording Only One Side

"Sometimes beginners are so focused on one side that they forget the other. Always ask: 'What's the other side?' Every transaction has two sides. Always."

Mistake 4: Confusing the Business with the Owner

"If Rawat Aunty takes ₹500 from the shop's cash box for personal use, that's a transaction. The business is paying Rawat Aunty. Many beginners forget to record this because 'it's her own money.' No! In accounting, the business is a separate entity from the owner."

A Simple Way to Think About It

Sharma Sir could see Meera processing everything. He offered one more tool.

"Meera, whenever you face a transaction, ask yourself these three questions in order:"

Step 1: What are the two (or more) accounts involved?

Step 2: What type is each account — Real, Personal, or Nominal?

Step 3: Apply the Golden Rule for that type.

"Do this every time, and you'll never go wrong. After a few hundred transactions, it'll become automatic. Like riding a bicycle — you won't have to think about it."

Here is a quick reference you can keep handy:

Quick Recap — Chapter 3

The big idea: Every transaction affects at least two accounts. This is called the Double-Entry System.

Debit and Credit are not plus and minus. They mean Left and Right side of an account.

Three types of accounts:

• Real Account (things: cash, stock, furniture)
• Personal Account (people/organizations)
• Nominal Account (expenses, losses, incomes, gains)

Three Golden Rules:

1. Real Account: Debit what comes in, Credit what goes out
2. Personal Account: Debit the receiver, Credit the giver
3. Nominal Account: Debit expenses/losses, Credit incomes/gains

The test: Total Debits must ALWAYS equal Total Credits. If they don't, you made a mistake.

Practice Exercise — Try This Yourself

Exercise 1: For each transaction below, identify: (a) the accounts involved, (b) the type of each account (Real, Personal, or Nominal), and (c) which account to Debit and which to Credit.

Exercise 2: Here are some transactions already recorded. Check if they are correct. If not, fix them.

Exercise 3: Go back to the transactions you recorded during your shop visit (Exercise 1 from Chapter 2). Now apply double-entry to each one. Create a table like Meera did — with Debit Account, Debit Amount, Credit Account, Credit Amount. Do the totals match?

Fun Fact — The Man Who Changed Everything

Luca Pacioli was a Franciscan friar (a type of monk) and mathematician who lived in Italy in the 1400s. In 1494, he published a book called Summa de Arithmetica, which included a section on double-entry bookkeeping.

He didn't invent the system — Venetian merchants had been using it for at least a hundred years. But he was the first to write it down clearly in a book. For this, he is called the "Father of Accounting."

Here's the amazing thing: the system he described 530 years ago is basically the same system used by every company in the world today — from Rawat Aunty's kirana shop to Tata, Reliance, and Apple. The scale changes, the technology changes, but the core idea remains: every debit has a credit, and the books must balance.

Meera was learning a skill older than the printing press. And she was only on Day 3.

Next chapter, Meera learns the vocabulary of accounting — Assets, Liabilities, Capital, Revenue, Expenses. These are the building blocks that every account fits into.

Accounting Language — Words You Must Know

On Day 4, Meera arrived at the office to find Sharma Sir arranging a set of printed cards on his desk. Each card had one word written on it in big bold letters: ASSETS, LIABILITIES, CAPITAL, REVENUE, EXPENSES. "Today," he said, "we learn the vocabulary. Every profession has its own language. Doctors say 'fracture,' not 'broken bone.' Lawyers say 'plaintiff,' not 'the person who complained.' And accountants have their words too. After today, you will speak like an accountant."

Why Learn These Words?

Meera looked at the cards and felt a small knot of worry. "Sharma Sir, these sound complicated."

"They sound complicated," he agreed. "But they are not. Each word describes something you already know from everyday life. I'm just going to give you the professional name for it."

"Think of it like this. You know what dhaniya is, right?"

"Coriander," Meera said.

"Right. In English, it's coriander. In Latin, it's Coriandrum sativum. Three names for the same thing. Accounting words are the same — they're just professional names for things you already understand."

"Let's start. And we'll use Rawat Aunty's shop for every example, so everything feels real."

Assets — What You OWN

Sharma Sir held up the first card: ASSETS.

"An asset is anything valuable that the business owns or controls."

Asset = Something the business owns that has value. It helps the business earn money now or in the future.

"Let's walk through Rawat Aunty's shop and point to the assets."

He took out a photo of the shop interior (Negi Bhaiya had clicked it on his phone during their visit).

What are Rawat Aunty's Assets?

"Every single one of these is an asset," Sharma Sir said. "They all have value. They all help the business."

Meera raised her hand. "What about the udhar amounts? That's not cash. How is it an asset?"

"Excellent question! When a customer owes you money, that money is still yours — the customer just hasn't paid yet. It's called a receivable. It IS an asset because you expect to receive it. Of course, there's a risk the customer might not pay, but we treat it as an asset until we have reason to think otherwise."

Types of Assets

Sharma Sir drew a quick table:

"Current assets keep changing — stock gets sold, cash comes and goes. Fixed assets stay for a long time."

Liabilities — What You OWE

Sharma Sir held up the second card: LIABILITIES.

"A liability is the opposite of an asset. It's something you owe to someone else."

Liability = An amount the business owes to others. A debt or obligation.

"Back to Rawat Aunty's shop. What does she owe?"

"Liabilities are like promises," Sharma Sir said. "You promised to pay the supplier on Saturday. That promise is a liability. You promised to repay the bank loan over three years. That promise is a liability."

Types of Liabilities

Meera nodded. "So assets are what you have, and liabilities are what you owe."

"Exactly. Now here's the interesting part."

Capital — The Owner's Own Money

Sharma Sir held up the third card: CAPITAL.

"When Rawat Aunty started her shop years ago, she put in her own savings. Maybe ₹2,00,000 from her personal money. That money — her own money that she invested in the business — is called capital."

Capital = The owner's own money invested in the business. Also called Owner's Equity.

"Think about it this way. The business has assets. Some of those assets were bought with borrowed money (liabilities). The rest were bought with the owner's own money (capital)."

This leads to the most important equation in all of accounting:

Assets = Liabilities + Capital

"Everything the business owns (assets) was funded by either borrowing (liabilities) or the owner's own investment (capital). Always. Without exception."

Let's test it with Rawat Aunty's shop:

"See? Assets (₹2,12,000) = Liabilities (₹82,000) + Capital (₹1,30,000). It balances. It ALWAYS balances. This is called the Accounting Equation."

Meera stared at the numbers. "So if I know any two, I can calculate the third?"

"Yes! If you know Assets and Liabilities, you can calculate Capital. If you know Assets and Capital, you can calculate Liabilities. This equation is the backbone of accounting."

What About Drawings?

"One more thing about capital," Negi Bhaiya added. "Sometimes the owner takes money OUT of the business for personal use. Rawat Aunty might take ₹2,000 from the shop's cash box to pay for her son's school fees. This is called drawings."

Drawings = Money or goods the owner takes out of the business for personal use.

"Drawings reduce capital. If the owner puts money in (capital goes up) and takes money out (drawings reduce capital), the net capital at any time is:"

Net Capital = Capital Invested + Profits - Drawings

Revenue — Money Earned

Sharma Sir held up the fourth card: REVENUE.

"Revenue is the money the business earns from its main activity."

Revenue (also called Income or Sales) = Money earned by the business from selling goods or providing services.

"For Rawat Aunty, revenue is the money she earns from selling goods in her shop. If she sells ₹5,000 worth of goods in a day, her revenue for that day is ₹5,000."

"Note: revenue is NOT the same as profit. Revenue is the total money earned from sales. From this, you still have to subtract all your costs. What's left after subtracting costs is profit."

Types of Revenue

"For most small shops, almost all revenue comes from sales."

Expenses — Money Spent to Run the Business

Sharma Sir held up the fifth and final card: EXPENSES.

"Expenses are the costs of running the business."

Expense = Money spent to run the business and earn revenue. The cost of doing business.

"Rawat Aunty earns revenue by selling goods. But to earn that revenue, she has to spend money too."

The Profit Formula

"Now, Meera, you know what revenue is and what expenses are. The formula for profit is beautifully simple."

Profit = Revenue - Expenses

"If Rawat Aunty earns ₹1,50,000 in revenue in a month and her total expenses are ₹1,20,000, her profit is ₹30,000."

"If her expenses are MORE than her revenue — say revenue is ₹1,00,000 but expenses are ₹1,10,000 — then she has a loss of ₹10,000."

"This is why accounting matters. Without it, Rawat Aunty cannot tell if she is having a good month, a bad month, or breaking even."

More Important Words

"We've covered the Big Five," Sharma Sir said. "Now let me teach you a few more words that come up every single day."

Debtor — Someone Who Owes You Money

Debtor = A person or business that owes money TO your business. Usually a customer who bought on credit.

"Remember the woman who took goods worth ₹380 on udhar? She is Rawat Aunty's debtor. She owes Rawat Aunty money."

"In Rawat Aunty's books, the total amount that all customers owe her is called Sundry Debtors or Accounts Receivable."

"A debtor is an ASSET — because it's money that should come in."

Creditor — Someone You Owe Money To

Creditor = A person or business to whom YOUR business owes money. Usually a supplier who gave you goods on credit.

"The supplier who delivered ₹4,200 of goods and is waiting for payment on Saturday — he is Rawat Aunty's creditor."

"In Rawat Aunty's books, the total amount she owes to all suppliers is called Sundry Creditors or Accounts Payable."

"A creditor is a LIABILITY — because it's money you have to pay."

"An easy way to remember: Debtor — they are in your debt. Creditor — they gave you credit."

Stock / Inventory — Goods You Have for Selling

Stock (or Inventory) = The goods a business currently has available for sale.

"Everything on Rawat Aunty's shelves right now — every bag of rice, every bottle of oil, every packet of biscuits — is her stock. When she sells something, stock goes down. When she buys new goods from a supplier, stock goes up."

"Stock is an asset. It sits on the shelves waiting to be converted into cash through sales."

"At the end of every month or year, the shop owner counts all the goods physically. This is called a stock count or physical inventory. It's important because the actual stock on the shelf might be different from what the books say — due to theft, damage, or recording errors."

Goodwill — The Invisible Value

"Meera, one more interesting term. Suppose Rawat Aunty decides to sell her shop. The furniture is worth ₹40,000. The stock is worth ₹1,20,000. But a buyer might pay ₹2,00,000 for the whole business. Why?"

"Because... the shop has regular customers? People know it and trust it?" Meera guessed.

"Exactly! The shop has a reputation. Customers come to it out of habit and trust. That invisible value — the name, the reputation, the customer loyalty — is called goodwill."

Goodwill = The value of a business's reputation, customer relationships, and brand name. It's real value, but you can't touch it or see it.

"Goodwill is an asset, but a special kind. You can't weigh it or put it on a shelf. It only shows up in the books when a business is bought or sold."

"In Uttarakhand, many old shops have been running for two or three generations. People go there because their grandparents went there. That loyalty is goodwill. It has real value."

Putting It All Together — Rawat Aunty's Shop Map

Sharma Sir drew a large diagram on the whiteboard. "Let me map Rawat Aunty's entire shop to our accounting words."

The Five Categories — One More Look

Sharma Sir wanted to make sure Meera could classify anything into the right category. He gave her a rapid-fire quiz.

"I'll say something from Rawat Aunty's shop. You tell me: Asset, Liability, Capital, Revenue, or Expense."

"14 out of 14!" Negi Bhaiya clapped.

Meera grinned. She was starting to think in accounting language.

How These Words Connect to Double-Entry

"One last thing, Meera," Sharma Sir said. "Remember the double-entry system from yesterday? Let me show you how today's vocabulary connects to it."

"Every account in accounting falls into one of these five categories: Asset, Liability, Capital, Revenue, or Expense."

"And there are rules for how each category behaves with Debit and Credit."

"What does 'Normal Balance' mean? It means the side where you usually find the balance. Cash is an asset — its balance is usually on the Debit side. A bank loan is a liability — its balance is usually on the Credit side."

"You don't need to memorize this table right now. As you practice more transactions, it will become natural. But keep this page bookmarked. You'll come back to it many times."

The Story So Far

Meera closed her notebook and looked at the four days of notes she had taken.

• Day 1: She learned WHAT accounting is and WHY it matters.
• Day 2: She learned what a TRANSACTION is — the building block.
• Day 3: She learned that every transaction has TWO sides — double-entry.
• Day 4: She learned the LANGUAGE — Assets, Liabilities, Capital, Revenue, Expenses.

"Sharma Sir," she said, "I feel like I've just learned the alphabet. I know the letters. But I haven't written a sentence yet."

Sharma Sir smiled widely. "That's the perfect way to put it. In Part 2, you'll start writing sentences — recording transactions in journals, posting them to ledgers, and preparing financial statements. The real work begins."

"But remember: without the alphabet, you cannot write sentences. These four days gave you the foundation. Everything else is built on this."

Quick Recap — Chapter 4

Assets = What the business owns (cash, stock, furniture, debtors). Assets HELP the business.

Liabilities = What the business owes (supplier bills, bank loans). Liabilities are OBLIGATIONS.

Capital = The owner's own money invested in the business.

Revenue = Money earned from selling goods or services.

Expenses = Money spent to run the business.

The Accounting Equation: Assets = Liabilities + Capital. Always.

Other key terms:

• Debtor — a customer who owes you money (Asset)
• Creditor — a supplier you owe money to (Liability)
• Stock/Inventory — goods available for sale (Asset)
• Drawings — owner takes money out for personal use (reduces Capital)
• Goodwill — the invisible value of reputation and trust (Asset)

Practice Exercise — Try This Yourself

Exercise 1: Think of a real shop or business in your town. List at least 5 assets, 3 liabilities, and identify what the capital might be. Use the table format:

Does your equation balance? (Assets = Liabilities + Capital)

Exercise 2: Classify each item as Asset, Liability, Capital, Revenue, or Expense:

Exercise 3: Rawat Aunty's shop has the following at the end of the month. Calculate her Capital using the Accounting Equation.

Exercise 4: From the debtor/creditor section, answer these:

1. Ram bought goods worth ₹500 on credit from your shop. Is Ram a debtor or creditor?
2. You bought goods worth ₹3,000 on credit from Gupta Wholesale. Is Gupta Wholesale a debtor or creditor?
3. You are a debtor of whom? You are a creditor of whom?

Fun Fact — Accounting Runs the World

Every business in the world — from a tiny chai stall in Munsiyari to Apple Inc. in California — uses the same five categories: Assets, Liabilities, Capital, Revenue, Expenses. And they all follow the same Accounting Equation.

When you watch the news and hear "Reliance reported a profit of ₹15,000 crore," that number came from the same system you are learning. When the government announces its budget, the Finance Minister is essentially presenting a giant set of accounts for the entire country.

And here is something to motivate you: India has about 7 crore small businesses (MSMEs). Most of them need someone who understands accounting. Not all of them can afford a CA. Many of them need a trained bookkeeper — someone who can keep their books clean, file their GST, and help them understand their own numbers.

That person could be you. Four chapters in, and you already know the foundation. The language is yours. Now it is time to start using it.

In Part 2, Meera picks up her pen and starts recording transactions in a proper journal. The real bookkeeping begins.

Vouchers — The Proof of Every Transaction

Meera's second week at Sharma Sir's office. She walks in Monday morning and finds Negi Bhaiya surrounded by small slips of paper — some printed, some handwritten. "What are all these?" she asks. Negi Bhaiya grins. "These are vouchers. Every single rupee that moves — in or out — needs a voucher. No voucher, no proof. No proof, no accounting." He picks up one slip. "Rawat Aunty dropped these off Saturday. Her whole week's transactions. Today, you and I are going to sort them."

Why Vouchers Matter

Imagine this. You lend Rs. 500 to a friend in your village. A month later, your friend says, "I never borrowed money from you." You have no proof. No witness. No written note. What can you do? Nothing.

Now imagine the same thing in a business. Rawat Aunty buys goods worth Rs. 10,000 from a supplier. She pays cash. But there is no paper, no record. Later, the supplier says, "You still owe me Rs. 10,000." What will Rawat Aunty do?

This is why vouchers exist.

A voucher is a written document that proves a transaction happened.

It is the foundation of all accounting. Before you write anything in a journal or ledger, you need a voucher. The voucher is the source document — the original proof.

Think of it like this:

• A bus ticket is proof you paid for the ride.
• A receipt from a medical shop is proof you bought medicine.
• A bank deposit slip is proof you put money in the bank.

In accounting, a voucher is proof that money moved.

Sharma Sir puts it simply:

"Meera, remember this rule for life — no voucher, no entry. If there is no document to support a transaction, you do not record it. Ever."

The 6 Types of Vouchers

Not all transactions are the same. Money comes in. Money goes out. Money moves between accounts. Goods are sold. Goods are bought. Each type of transaction gets its own type of voucher.

Here are the six vouchers you must know:

Let us look at each one with a real example from Rawat Aunty's shop.

1. Receipt Voucher

Use when: The business receives money from someone.

Rawat Aunty sells groceries to a customer. The customer pays Rs. 350 in cash. Money is coming into the shop. This needs a receipt voucher.

Other examples:

• A customer pays an old bill
• The owner brings personal money into the business
• The business receives a refund from a supplier

Key point: Cash or bank balance increases.

2. Payment Voucher

Use when: The business pays money to someone.

Rawat Aunty pays her monthly shop rent of Rs. 5,000 to the landlord. Money is going out of the shop. This needs a payment voucher.

Other examples:

• Paying a supplier's bill
• Paying electricity bill
• Paying salary to a helper
• Buying office supplies

Key point: Cash or bank balance decreases.

3. Contra Voucher

Use when: Money moves between the business's own cash and bank accounts. No outside person is involved.

Rawat Aunty takes Rs. 20,000 cash from her shop counter and deposits it in her bank account at the SBI branch in Almora. The money is still hers. It just moved from one place (cash box) to another place (bank). This needs a contra voucher.

Other examples:

• Withdrawing cash from bank for shop use
• Transferring money from one bank account to another

Key point: Total money stays the same. It just changes location.

Think of it like pouring water from one glass to another. You still have the same amount of water.

4. Journal Voucher

Use when: There is no actual cash involved, but you still need to make an accounting entry.

At the end of the year, Sharma Sir tells Rawat Aunty that her wooden shelves (worth Rs. 15,000) have lost Rs. 1,500 in value due to wear and tear. This is called depreciation. No cash is paid to anyone. But the value of the shelves has gone down, so it must be recorded. This needs a journal voucher.

Other examples:

• Correcting a mistake in a previous entry
• Writing off a bad debt (a customer who will never pay)
• Adjusting prepaid expenses

Key point: No cash moves. But the books need to be updated.

5. Sales Voucher (or Sales Invoice)

Use when: The business sells goods or services.

Rawat Aunty sells 10 kg of rice, 5 kg of sugar, and 2 packets of tea to a customer. She makes a bill. This bill is the sales voucher.

Other examples:

• Any sale of goods — whether cash or credit
• Providing a service and billing for it

Key point: Goods or services go out. Revenue comes in.

6. Purchase Voucher (or Purchase Invoice)

Use when: The business buys goods or services.

Rawat Aunty buys stock for her shop — 50 kg rice, 20 kg dal, 10 kg sugar — from a wholesaler in Haldwani. The wholesaler gives her a bill. This bill is the purchase voucher.

Other examples:

• Buying raw materials
• Buying goods for resale
• Buying a service (like getting the shop painted)

Key point: Goods or services come in. Money goes out (or a payable is created).

What Goes on a Voucher?

Every voucher — no matter which type — must contain certain information. Think of it as the voucher's "ID card."

Here are the essential parts:

Sharma Sir explains:

"The narration is very important, Meera. It tells the story of the transaction. Write it clearly. Years later, if someone reads this voucher, they should understand what happened."

Sample Vouchers — Filled Out

Let us now see three real vouchers that Meera fills out for Rawat Aunty's shop.

Sample 1: Payment Voucher

Rawat Aunty pays rent of Rs. 5,000 for her shop for the month of July 2025.

╔══════════════════════════════════════════════════════════════╗
║                   RAWAT GENERAL STORE                       ║
║              Main Road, Almora, Uttarakhand                 ║
║                                                              ║
║                    PAYMENT VOUCHER                           ║
║                                                              ║
║  Voucher No.: PV-042            Date: 15-Jul-2025           ║
║                                                              ║
║  Paid To: Shri Pant Ji (Landlord)                           ║
║                                                              ║
║  Account Debited:  Rent Account                              ║
║  Account Credited: Cash Account                              ║
║                                                              ║
║  Amount: Rs. 5,000.00                                        ║
║  (Rupees Five Thousand Only)                                 ║
║                                                              ║
║  Narration: Being shop rent paid for the month of            ║
║  July 2025 to Shri Pant Ji, landlord.                        ║
║                                                              ║
║                                                              ║
║  Prepared By: Meera         Authorized By: Rawat Aunty      ║
║                                                              ║
╚══════════════════════════════════════════════════════════════╝

Why is Rent Account debited? Because rent is an expense. Expenses increase on the debit side.

Why is Cash Account credited? Because cash is going out. When cash goes out, you credit the Cash Account.

Sample 2: Receipt Voucher

A regular customer, Dimri Ji, pays Rs. 2,500 in cash to settle his old bill.

╔══════════════════════════════════════════════════════════════╗
║                   RAWAT GENERAL STORE                       ║
║              Main Road, Almora, Uttarakhand                 ║
║                                                              ║
║                    RECEIPT VOUCHER                           ║
║                                                              ║
║  Voucher No.: RV-078            Date: 15-Jul-2025           ║
║                                                              ║
║  Received From: Shri Dimri Ji                                ║
║                                                              ║
║  Account Debited:  Cash Account                              ║
║  Account Credited: Dimri Ji's Account (Debtor)              ║
║                                                              ║
║  Amount: Rs. 2,500.00                                        ║
║  (Rupees Two Thousand Five Hundred Only)                     ║
║                                                              ║
║  Narration: Being cash received from Shri Dimri Ji           ║
║  against his outstanding balance.                            ║
║                                                              ║
║                                                              ║
║  Prepared By: Meera         Authorized By: Rawat Aunty      ║
║                                                              ║
╚══════════════════════════════════════════════════════════════╝

Why is Cash Account debited? Because cash is coming in. When cash comes in, you debit the Cash Account.

Why is Dimri Ji's Account credited? Because he owed money (he was a debtor). Now that he has paid, his balance goes down. Crediting his account reduces what he owes.

Sample 3: Contra Voucher

Rawat Aunty deposits Rs. 20,000 cash into her SBI bank account.

╔══════════════════════════════════════════════════════════════╗
║                   RAWAT GENERAL STORE                       ║
║              Main Road, Almora, Uttarakhand                 ║
║                                                              ║
║                    CONTRA VOUCHER                            ║
║                                                              ║
║  Voucher No.: CV-011            Date: 15-Jul-2025           ║
║                                                              ║
║  Account Debited:  SBI Bank Account                          ║
║  Account Credited: Cash Account                              ║
║                                                              ║
║  Amount: Rs. 20,000.00                                       ║
║  (Rupees Twenty Thousand Only)                               ║
║                                                              ║
║  Narration: Being cash deposited into SBI Almora             ║
║  branch account.                                             ║
║                                                              ║
║                                                              ║
║  Prepared By: Meera         Authorized By: Rawat Aunty      ║
║                                                              ║
╚══════════════════════════════════════════════════════════════╝

Why is Bank Account debited? Because the bank balance is increasing. Bank is an asset. Assets increase on the debit side.

Why is Cash Account credited? Because cash is going out of the cash box. Cash is decreasing.

Notice: no outside party is involved. The money simply moved from one pocket to another.

How Meera Remembers the Types

Negi Bhaiya teaches Meera a simple trick:

"Ask yourself two questions. First — is cash involved? Second — which direction is the money going?"

Here is the decision flow:

Step 1: Is cash or bank involved in this transaction?

• YES, and money is coming IN → Receipt Voucher
• YES, and money is going OUT → Payment Voucher
• YES, but it is moving between our OWN cash and bank → Contra Voucher
• NO cash involved at all → Journal Voucher

Step 2: Is this a sale or purchase of goods?

• Selling goods → Sales Voucher
• Buying goods → Purchase Voucher

(Note: A cash sale will have both a sales voucher for the sale and a receipt voucher for the cash. In practice, many small businesses combine them into one document — the sales bill.)

Voucher Numbering

Sharma Sir is particular about numbering.

"Every voucher must have a unique number, Meera. This is how we track them. If voucher PV-042 goes missing, we know immediately because PV-041 exists and PV-043 exists, but 042 is gone."

The common system:

Numbering starts fresh at the beginning of each financial year (April 1).

Supporting Documents

A voucher alone is not enough. It should be attached to a supporting document — the original bill, receipt, or invoice that proves the transaction.

For example:

Sharma Sir keeps all vouchers in a file, organized by date. Each voucher has its supporting document stapled behind it.

"If the Income Tax officer ever visits, or if there is a GST audit," Sharma Sir says, "they will ask for vouchers. If you have them neat and organized, you are safe. If not..." He shakes his head. "Trouble."

Meera's First Voucher

It is 11 AM. Rawat Aunty calls the office.

"Sharma Sir, my helper Kamla needs her salary. Rs. 4,000 for July. Can Meera make the voucher?"

Sharma Sir nods at Meera. "Go ahead. You know what to do."

Meera thinks it through:

1. What is happening? Rawat Aunty is paying salary to Kamla.
2. Is cash involved? Yes.
3. Which direction? Cash is going out.
4. So which voucher? Payment Voucher.
5. Which account is debited? Salary Account (it is an expense — expenses are debited).
6. Which account is credited? Cash Account (cash is going out — cash is credited).

She fills it out carefully:

╔══════════════════════════════════════════════════════════════╗
║                   RAWAT GENERAL STORE                       ║
║              Main Road, Almora, Uttarakhand                 ║
║                                                              ║
║                    PAYMENT VOUCHER                           ║
║                                                              ║
║  Voucher No.: PV-043            Date: 15-Jul-2025           ║
║                                                              ║
║  Paid To: Smt. Kamla Devi (Helper)                          ║
║                                                              ║
║  Account Debited:  Salary Account                            ║
║  Account Credited: Cash Account                              ║
║                                                              ║
║  Amount: Rs. 4,000.00                                        ║
║  (Rupees Four Thousand Only)                                 ║
║                                                              ║
║  Narration: Being salary paid to Smt. Kamla Devi             ║
║  for the month of July 2025.                                 ║
║                                                              ║
║                                                              ║
║  Prepared By: Meera         Authorized By: Rawat Aunty      ║
║                                                              ║
╚══════════════════════════════════════════════════════════════╝

Sharma Sir checks it. "Perfect," he says. "Your first voucher. Many more to come."

Meera smiles. It is a small piece of paper. But it means something. She just created an official accounting document.

Quick Recap

• A voucher is a written document that proves a transaction happened.
• There are 6 types: Receipt, Payment, Contra, Journal, Sales, Purchase.
• Receipt Voucher = money comes in.
• Payment Voucher = money goes out.
• Contra Voucher = money moves between cash and bank (internal).
• Journal Voucher = no cash involved, just adjustments.
• Sales Voucher = goods or services sold.
• Purchase Voucher = goods or services bought.
• Every voucher must have: date, voucher number, amount (figures and words), accounts affected, narration, and authorization.
• No voucher = no entry. This is a golden rule.
• Always attach supporting documents (bills, receipts) to vouchers.

Practice Exercise — Try This Yourself

Identify the correct voucher type for each transaction below. Then fill out a complete voucher for any two of them.

Answers:

1. Purchase Voucher (and Payment Voucher for the cash payment)
2. Receipt Voucher (and Sales Voucher for the sale)
3. Contra Voucher
4. Payment Voucher
5. Receipt Voucher
6. Sales Voucher
7. Journal Voucher
8. Contra Voucher

Bonus: Pick any two transactions above and write out the complete voucher — with date, voucher number, accounts debited and credited, amount in words and figures, narration, and authorization.

Fun Fact

In ancient India, merchants kept records on palm leaves and cloth. The Arthashastra, written by Chanakya over 2,000 years ago, describes rules for keeping financial records and auditing them. Even back then, the principle was the same — write it down, keep proof, and check the numbers. When you fill out a voucher today, you are following a tradition that is older than most countries in the world!

In the next chapter, Meera will take all these vouchers and write them into a journal — the "diary" of accounting. The real bookkeeping begins.

The Journal — Writing It Down

It is Wednesday morning. Meera arrives at Sharma Sir's office to find a neat stack of vouchers on her desk — all from Rawat Aunty's shop. Yesterday, she learned what vouchers are. Today, Negi Bhaiya places a thick ruled notebook in front of her. "This," he says, tapping the cover, "is a journal. You know how people write diaries? Every night they write what happened that day? A journal is the diary of a business. Every transaction, in the order it happened, written here." He opens it to a blank page. "Today, you will fill an entire page."

What is a Journal?

In your personal life, you might keep a diary. You write the date, then you write what happened that day. "Went to the market. Met Priya. Bought new chappal for Rs. 300."

A journal is the same thing — but for a business.

It is a book where you record every transaction, one by one, in the order they happened. Each entry has the date, the accounts affected, the amounts, and a short description.

The journal is also called the "Book of Original Entry" because this is the first place a transaction gets recorded. The voucher is the proof. The journal is the record.

Sharma Sir explains:

"Think of it this way, Meera. The voucher is like a photograph — it captures one moment. The journal is like a film — it tells the whole story, scene by scene, in order."

The Journal Format

Every journal has five columns. Meera looks at the blank page and sees the column headings:

Let us understand each column:

Date — The date when the transaction happened. You write it once. If multiple transactions happen on the same date, you write the date only for the first entry. For the rest, you write "—" or leave it blank.

Particulars — This is where you write the account names and a narration. It follows a specific pattern:

• First line: The account being debited, followed by the letters "Dr."
• Second line: Starts with "To" and then the account being credited
• Third line: The narration in brackets — a short description of what happened

L.F. (Ledger Folio) — This is the page number in the ledger where this account is posted. You fill this later, when you transfer entries to the ledger. For now, leave it blank.

Debit (Rs.) — The amount being debited. Written on the same line as the debit account.

Credit (Rs.) — The amount being credited. Written on the same line as the credit account.

How to Write a Journal Entry — Step by Step

Sharma Sir walks Meera through the process:

Step 1: Read the voucher carefully. What happened? Who paid whom? How much?

Step 2: Identify the two accounts involved. Every transaction affects at least two accounts. (Remember double-entry from the earlier chapter?)

Step 3: Decide which account is debited and which is credited. Apply the rules:

• Assets increase → Debit
• Assets decrease → Credit
• Expenses increase → Debit
• Income increases → Credit
• Liabilities increase → Credit
• Liabilities decrease → Debit

Step 4: Write it in the journal. Follow the format exactly.

Step 5: Write the narration. Keep it short and clear.

Step 6: Draw a line under the entry. This separates one entry from the next.

Let us see a simple example.

Example Entry

Voucher: Rawat Aunty pays Rs. 5,000 rent for July 2025.

Step 1: Rent paid in cash. Rs. 5,000.

Step 2: Two accounts — Rent Account and Cash Account.

Step 3: Rent is an expense. Expenses increase on the debit side. So Rent A/c is debited. Cash is going out. Assets decrease on the credit side. So Cash A/c is credited.

Step 4 & 5: Write it:

That is one complete journal entry. Let us now do a full day.

Meera Journals a Full Day

It is 15th July 2025. Rawat Aunty had a busy day. Here are all the transactions that happened at Rawat General Store. Meera has the vouchers in front of her. She is going to record every single one.

Transaction 1: Opening Cash Balance

Rawat Aunty starts the day with Rs. 25,000 in the cash box. (This was already recorded. Meera does not need a new entry for this — it is the closing balance from yesterday.)

Transaction 2: Purchased Goods for Cash

Rawat Aunty bought stock (rice, dal, sugar, oil) from Haldwani wholesaler for Rs. 12,000. Paid in cash.

Why? Purchases is an expense — debit it. Cash is going out — credit it.

Transaction 3: Sold Goods for Cash

A customer bought groceries worth Rs. 1,800. Paid cash.

Why? Cash is coming in — debit Cash A/c. Sales is income — credit it.

Transaction 4: Sold Goods on Credit

Joshi Ji, a regular customer, bought goods worth Rs. 3,500 on credit (he will pay later).

Why? Joshi Ji now owes money — he is a debtor. Debtors are assets. Assets increase on the debit side. Sales is income — credit it.

Notice: Cash A/c is NOT involved here. No cash was exchanged. Instead, Joshi Ji's personal account is debited.

Transaction 5: Received Cash from a Debtor

Dimri Ji, who owed Rs. 2,500 from last week, came and paid his full balance in cash.

Why? Cash coming in — debit Cash. Dimri Ji's debt is now settled — credit his account to reduce what he owes.

Transaction 6: Paid Salary

Paid Rs. 4,000 salary to helper Kamla Devi.

Why? Salary is an expense — debit it. Cash going out — credit it.

Transaction 7: Paid Rent

Paid Rs. 5,000 shop rent to landlord Pant Ji.

Transaction 8: Paid Electricity Bill

Paid Rs. 1,200 electricity bill in cash.

Transaction 9: Deposited Cash into Bank

Rawat Aunty deposited Rs. 5,000 into her SBI bank account.

Transaction 10: Purchased Goods on Credit

Bought goods worth Rs. 8,000 from Bisht Traders on credit (will pay next month).

Why? Purchases is an expense — debit. Bisht Traders is a creditor now (we owe them) — credit.

Transaction 11: Sold Goods for Cash

Afternoon sale. Various customers bought goods totaling Rs. 4,200. All cash.

Transaction 12: Owner's Drawing

Rawat Aunty took Rs. 2,000 from the shop cash for personal use (her daughter's school fees).

Why? Drawings reduce the owner's capital — debit Drawings A/c. Cash goes out — credit Cash A/c.

This is important: when the owner takes money for personal use, it is NOT a business expense. It is a drawing. It reduces the owner's stake in the business.

The Complete Journal Page

Here is Meera's completed journal page for 15th July 2025:

Meera adds up both columns. Debit total = Rs. 49,200. Credit total = Rs. 49,200. They match!

Sharma Sir looks over her shoulder. "Good. The totals match. That is how you know you have not made a mistake. In the journal, the total of all debits must ALWAYS equal the total of all credits."

Compound Journal Entries

Sometimes, a single transaction involves more than two accounts. This is called a compound entry.

Example: Rawat Aunty buys goods worth Rs. 6,000 from a supplier. She pays Rs. 4,000 in cash and the remaining Rs. 2,000 on credit.

Three accounts are involved:

• Purchases A/c (goods coming in) — Debit Rs. 6,000
• Cash A/c (cash going out) — Credit Rs. 4,000
• Supplier A/c (credit balance) — Credit Rs. 2,000

Notice: The debit side (Rs. 6,000) still equals the credit side (Rs. 4,000 + Rs. 2,000 = Rs. 6,000). The golden rule of double-entry never breaks.

Common Mistakes Beginners Make

Negi Bhaiya warns Meera about mistakes he used to make:

1. Forgetting the narration. Without a narration, no one will know what the entry means six months later.

2. Writing the credit account first. Always write the debit account first, then the credit account with "To" before it.

3. Not drawing a line between entries. Without lines, entries blur together and it becomes confusing.

4. Wrong debit/credit. If you are unsure, go back to basics. Ask: what type of account is it (asset, liability, expense, income, capital)? Then apply the rule.

5. Mismatched totals. If your debit total and credit total do not match at the bottom of the page, there is a mistake. Go back and check every entry.

Quick Recap

• A journal is the book of original entry — the "diary" of a business.
• Format: Date | Particulars | L.F. | Debit | Credit
• The debit account is written first, followed by "Dr."
• The credit account is written second, starting with "To."
• The narration (in brackets) explains what happened.
• L.F. (Ledger Folio) is the page number in the ledger — filled in later.
• In a compound entry, more than two accounts are involved, but debits still equal credits.
• At the bottom of every page, total debits must equal total credits.
• No narration = unclear entry. Always write the narration.

Practice Exercise — Try This Yourself

Record the following transactions in journal format for Rawat General Store on 20th July 2025:

1. Started business with Rs. 50,000 cash.
2. Opened a bank account with SBI and deposited Rs. 30,000.
3. Bought shop furniture for Rs. 12,000, paid by cheque.
4. Purchased goods worth Rs. 15,000 on credit from Bisht Traders.
5. Sold goods for Rs. 6,000 cash.
6. Sold goods worth Rs. 4,000 on credit to Dimri Ji.
7. Received Rs. 2,000 from Dimri Ji.
8. Paid Rs. 800 for shop cleaning (miscellaneous expense).

After recording all entries, add up the debit and credit columns. Do they match?

Hints:

• Transaction 1: Cash A/c Dr., To Capital A/c
• Transaction 2: SBI Bank A/c Dr., To Cash A/c (this is a contra entry)
• Transaction 3: Furniture A/c Dr., To SBI Bank A/c
• For the rest, follow the same logic. Identify the two accounts. Decide debit and credit. Write the narration.

Fun Fact

The word "journal" comes from the French word jour, which means "day." So a journal is literally a "daily" record. And the French got it from the Latin word diurnalis, meaning "of the day." Across languages and centuries, the idea is the same — write down what happened, every day, without fail. Meera is now part of this centuries-old tradition!

In the next chapter, Meera will take all these journal entries and organize them into separate accounts — that is called the ledger. Think of the journal as a story told in order. The ledger is the same story, sorted by character.

Ledger — Organizing Accounts

Thursday morning. Meera opens the journal she filled yesterday and stares at the eleven entries. "I can see everything that happened on July 15th," she says. "But what if Rawat Aunty asks me — how much total cash do we have? Or how much does Joshi Ji owe us? I would have to read through every single entry and pick out the ones that mention cash or Joshi Ji." Negi Bhaiya nods. "Exactly. That is why we have the ledger. The journal tells you what happened, in order. The ledger tells you the complete story of each account, all in one place."

What is a Ledger?

Imagine you have a school notebook. You write Hindi notes, English notes, Math notes, Science notes — all mixed together, in the order the classes happen during the day. If someone asks, "Show me all your Math notes," you would have to flip through every page, picking out the Math parts. Messy, right?

Now imagine you have a separate notebook for each subject. All Math in one place. All Hindi in another. Much easier to find things.

That is exactly what a ledger does.

A ledger is a book where each account gets its own separate page.

• One page for Cash Account — all cash-related entries go here.
• One page for Sales Account — all sales entries go here.
• One page for Rent Account — all rent entries go here.
• One page for Joshi Ji's Account — everything about Joshi Ji goes here.

The journal is organized by date (what happened first, second, third...). The ledger is organized by account (everything about cash, everything about sales...).

Sharma Sir says:

"The journal is like a CCTV camera — it records everything in order. The ledger is like an album sorted by person — all photos of one person in one place."

The T-Account Format

Each ledger account is written in a special format that looks like the letter "T." That is why it is called a T-account.

Here is the basic structure:

                        Account Name
 ─────────────────────────────────────────────────────
      Dr. (Debit Side)     |     Cr. (Credit Side)
 ─────────────────────────────────────────────────────
 Date | Particulars | Amt  | Date | Particulars | Amt
 ─────────────────────────────────────────────────────
      |             |      |      |             |
      |             |      |      |             |

The left side is the Debit (Dr.) side. The right side is the Credit (Cr.) side.

Each side has three columns:

• Date — when the transaction happened
• Particulars — the name of the other account involved (very important!)
• Amount — the rupee amount

How to Post from Journal to Ledger

"Posting" means copying information from the journal into the correct ledger account. Here is the process, step by step.

Step 1: Pick a journal entry.

Step 2: Look at the account that was debited. Go to that account's ledger page. Write the entry on the left (debit) side. In the "Particulars" column, write "To [name of the credited account]."

Step 3: Look at the account that was credited. Go to that account's ledger page. Write the entry on the right (credit) side. In the "Particulars" column, write "By [name of the debited account]."

The key rule: In the Particulars column of a ledger, you always write the name of the OTHER account — the one on the opposite side of the journal entry.

Let us see how this works with one example.

Example: Posting a Rent Payment

Journal entry:

Posting to Rent Account (debited in journal, so write on the LEFT side):

                          Rent Account
 ─────────────────────────────────────────────────────
      Dr. (Debit Side)     |     Cr. (Credit Side)
 ─────────────────────────────────────────────────────
 Date    | Particulars| Amt | Date | Particulars| Amt
 ─────────────────────────────────────────────────────
 15-Jul  | To Cash    |5,000|      |            |

Posting to Cash Account (credited in journal, so write on the RIGHT side):

                          Cash Account
 ─────────────────────────────────────────────────────
      Dr. (Debit Side)     |     Cr. (Credit Side)
 ─────────────────────────────────────────────────────
 Date    | Particulars| Amt | Date | Particulars| Amt
 ─────────────────────────────────────────────────────
         |            |     |15-Jul| By Rent    |5,000

Notice how in the Rent Account, the Particulars says "To Cash" — telling you where the money went. And in the Cash Account, the Particulars says "By Rent" — telling you why the cash went out.

Meera Posts All Entries to Ledgers

Now Meera will post all 11 journal entries from July 15th into their respective ledger accounts. Let us build each ledger account one by one.

She has the following accounts to create:

1. Cash Account
2. Purchases Account
3. Sales Account
4. Joshi Ji Account
5. Dimri Ji Account
6. Salary Account
7. Rent Account
8. Electricity Expense Account
9. SBI Bank Account
10. Bisht Traders Account
11. Drawings Account

Let us do the most important ones in detail.

Ledger 1: Cash Account

Cash appears in many transactions on July 15th. Meera collects all of them:

Cash was debited (cash came in) in these entries:

• Cash sale: Rs. 1,800
• Received from Dimri Ji: Rs. 2,500
• Cash sale (afternoon): Rs. 4,200

Cash was credited (cash went out) in these entries:

• Purchased goods: Rs. 12,000
• Salary to Kamla: Rs. 4,000
• Rent: Rs. 5,000
• Electricity: Rs. 1,200
• Deposited in bank: Rs. 5,000
• Drawings: Rs. 2,000

Remember, Rawat Aunty started the day with Rs. 25,000 cash (balance brought forward from July 14th).

                          Cash Account
 ─────────────────────────────────────────────────────────
      Dr. (Debit Side)          |     Cr. (Credit Side)
 ─────────────────────────────────────────────────────────
 Date   | Particulars   | Amt   | Date   | Particulars      | Amt
 ─────────────────────────────────────────────────────────
 1-Jul  | To Balance b/d|25,000 | 15-Jul | By Purchases     |12,000
 15-Jul | To Sales      | 1,800 | 15-Jul | By Salary        | 4,000
 15-Jul | To Dimri Ji   | 2,500 | 15-Jul | By Rent          | 5,000
 15-Jul | To Sales      | 4,200 | 15-Jul | By Electricity   | 1,200
        |               |       | 15-Jul | By SBI Bank      | 5,000
        |               |       | 15-Jul | By Drawings      | 2,000
        |               |       | 15-Jul | By Balance c/d   | 4,300
 ─────────────────────────────────────────────────────────
        | Total         |33,500 |        | Total            |33,500
 ─────────────────────────────────────────────────────────
 16-Jul | To Balance b/d| 4,300 |        |                  |

How to read this:

• The left side shows all the times cash came in: opening balance (Rs. 25,000), two cash sales (Rs. 1,800 and Rs. 4,200), and receipt from Dimri Ji (Rs. 2,500). Total debit = Rs. 33,500.

• The right side shows all the times cash went out: purchases, salary, rent, electricity, bank deposit, and drawings. Total = Rs. 29,200.

• The difference is: Rs. 33,500 - Rs. 29,200 = Rs. 4,300. This is the closing balance (Balance c/d = "carried down").

• The closing balance is written on the smaller side to make both sides equal (Rs. 33,500 = Rs. 33,500).

• The next day starts with this balance as the opening balance (Balance b/d = "brought down") on the debit side (because cash is an asset, and assets have debit balances).

Ledger 2: Sales Account

Sales was credited in three entries:

                          Sales Account
 ─────────────────────────────────────────────────────────
      Dr. (Debit Side)          |     Cr. (Credit Side)
 ─────────────────────────────────────────────────────────
 Date   | Particulars   | Amt   | Date   | Particulars   | Amt
 ─────────────────────────────────────────────────────────
 15-Jul | To Balance c/d| 9,500 | 15-Jul | By Cash       | 1,800
        |               |       | 15-Jul | By Joshi Ji   | 3,500
        |               |       | 15-Jul | By Cash       | 4,200
 ─────────────────────────────────────────────────────────
        | Total         | 9,500 |        | Total         | 9,500
 ─────────────────────────────────────────────────────────
        |               |       | 16-Jul | By Balance b/d| 9,500

Sales is an income account. Income has a credit balance. So the closing balance goes on the debit side (the smaller side), and the opening balance for the next day goes on the credit side.

Total sales for the day = Rs. 1,800 + Rs. 3,500 + Rs. 4,200 = Rs. 9,500.

Ledger 3: Purchases Account

Purchases was debited in two entries:

                        Purchases Account
 ─────────────────────────────────────────────────────────
      Dr. (Debit Side)          |     Cr. (Credit Side)
 ─────────────────────────────────────────────────────────
 Date   | Particulars      | Amt   | Date   | Particulars   | Amt
 ─────────────────────────────────────────────────────────
 15-Jul | To Cash          |12,000 | 15-Jul | By Balance c/d|20,000
 15-Jul | To Bisht Traders | 8,000 |        |               |
 ─────────────────────────────────────────────────────────
        | Total            |20,000 |        | Total         |20,000
 ─────────────────────────────────────────────────────────
 16-Jul | To Balance b/d   |20,000 |        |               |

Purchases is an expense. Expenses have a debit balance. Total purchases = Rs. 12,000 + Rs. 8,000 = Rs. 20,000.

Ledger 4: Joshi Ji Account (Debtor)

Joshi Ji bought goods on credit. He owes Rs. 3,500.

                        Joshi Ji Account
 ─────────────────────────────────────────────────────────
      Dr. (Debit Side)          |     Cr. (Credit Side)
 ─────────────────────────────────────────────────────────
 Date   | Particulars   | Amt   | Date   | Particulars   | Amt
 ─────────────────────────────────────────────────────────
 15-Jul | To Sales      | 3,500 | 15-Jul | By Balance c/d| 3,500
 ─────────────────────────────────────────────────────────
        | Total         | 3,500 |        | Total         | 3,500
 ─────────────────────────────────────────────────────────
 16-Jul | To Balance b/d| 3,500 |        |               |

Joshi Ji is a debtor (someone who owes us). Debtors are assets. Assets have debit balances.

Ledger 5: Bisht Traders Account (Creditor)

We bought goods on credit from Bisht Traders. We owe them Rs. 8,000.

                      Bisht Traders Account
 ─────────────────────────────────────────────────────────
      Dr. (Debit Side)          |     Cr. (Credit Side)
 ─────────────────────────────────────────────────────────
 Date   | Particulars   | Amt   | Date   | Particulars   | Amt
 ─────────────────────────────────────────────────────────
 15-Jul | To Balance c/d| 8,000 | 15-Jul | By Purchases  | 8,000
 ─────────────────────────────────────────────────────────
        | Total         | 8,000 |        | Total         | 8,000
 ─────────────────────────────────────────────────────────
        |               |       | 16-Jul | By Balance b/d| 8,000

Bisht Traders is a creditor (someone we owe money to). Creditors are liabilities. Liabilities have credit balances.

Ledger 6: Rent Account

                          Rent Account
 ─────────────────────────────────────────────────────────
      Dr. (Debit Side)          |     Cr. (Credit Side)
 ─────────────────────────────────────────────────────────
 Date   | Particulars   | Amt   | Date   | Particulars   | Amt
 ─────────────────────────────────────────────────────────
 15-Jul | To Cash       | 5,000 | 15-Jul | By Balance c/d| 5,000
 ─────────────────────────────────────────────────────────
        | Total         | 5,000 |        | Total         | 5,000
 ─────────────────────────────────────────────────────────
 16-Jul | To Balance b/d| 5,000 |        |               |

Rent is an expense. Debit balance.

Balancing an Account — Step by Step

Meera asks Sharma Sir, "How exactly do I balance an account?"

Sharma Sir explains the steps:

Step 1: Add up all the amounts on the debit side. Add up all the amounts on the credit side.

Step 2: Find the difference between the two totals.

Step 3: Write the difference on the smaller side with the words "Balance c/d" (carried down). This makes both sides equal.

Step 4: Write the same amount on the bigger side below the total line, with the words "Balance b/d" (brought down) and the next date. This becomes the opening balance for the next period.

Which side does the balance go?

Meera writes this in her notebook and underlines it twice.

The "Particulars" Column — An Important Detail

Negi Bhaiya points out something that confuses many beginners:

"In the journal, you write 'Rent A/c Dr., To Cash A/c.' But in the ledger, you do it differently. On the Rent Account's debit side, you write 'To Cash.' On the Cash Account's credit side, you write 'By Rent.' You always write the name of the OTHER account."

Here is the rule:

• On the debit side of a ledger, write "To" followed by the name of the account that was credited.
• On the credit side of a ledger, write "By" followed by the name of the account that was debited.

This creates a cross-reference. If you are looking at the Cash Account and you see "By Rent — Rs. 5,000" on the credit side, you know immediately: Rs. 5,000 went out, and it went toward rent. You can then go to the Rent Account to see the other side.

Journal vs. Ledger — A Quick Comparison

Think of it like cooking: the journal is your recipe (step-by-step instructions). The ledger is your kitchen organized by shelf — spices on one shelf, dal on another, rice on another.

Filling in the L.F. Column

Remember the "L.F." column in the journal that Meera left blank? Now she can fill it in.

As she posts each journal entry to the ledger, she notes the ledger page number in the journal's L.F. column. And in the ledger, there is a corresponding column (sometimes called J.F. — Journal Folio) where she writes the journal page number.

This creates a two-way link:

• Journal → Ledger (L.F. column)
• Ledger → Journal (J.F. column)

If you ever need to trace a transaction back to its source, you can follow these page numbers like a trail.

Quick Recap

• A ledger gives each account its own page. All entries for that account are collected in one place.
• The format is a T-account: debit side on the left, credit side on the right.
• Posting means copying entries from the journal to the appropriate ledger accounts.
• In the Particulars column, write the name of the OTHER account — use "To" on the debit side and "By" on the credit side.
• Balancing an account: find the difference between debit and credit totals, write it on the smaller side as "Balance c/d", then bring it down as "Balance b/d."
• Assets and expenses have debit balances. Liabilities, income, and capital have credit balances.
• The L.F. (Ledger Folio) connects the journal to the ledger, creating a traceable trail.

Practice Exercise — Try This Yourself

Using the journal entries from the practice exercise in the previous chapter (the 8 transactions on 20th July 2025), post them to the following ledger accounts and balance each one:

1. Cash Account
2. SBI Bank Account
3. Capital Account
4. Furniture Account
5. Purchases Account
6. Sales Account
7. Bisht Traders Account
8. Dimri Ji Account
9. Miscellaneous Expense Account

Remember:

• If an account was debited in the journal, post it on the LEFT (debit) side of that account's ledger.
• If an account was credited in the journal, post it on the RIGHT (credit) side.
• In the Particulars column, write the name of the other account.
• After posting all entries, balance each account.

Check yourself: Does Cash A/c have a debit balance? Does Capital A/c have a credit balance? Does Sales A/c have a credit balance? If yes, you are on the right track.

Fun Fact

The word "ledger" comes from old English and Dutch words meaning "to lie" — as in, a book that lies open on a desk, always ready for reference. In medieval Europe, merchants kept their ledgers chained to their desks because they were so valuable. Losing your ledger was like losing your entire business history. Today, the ledger lives inside computer software, but the principle has not changed in 500 years. Every business in the world — from Rawat Aunty's kirana shop to Reliance Industries — keeps a ledger.

In the next chapter, Meera will take all the ledger balances and put them on one single page — the trial balance. It is accounting's way of asking: "Did I get everything right?"

Trial Balance — Does It All Add Up?

It is Friday. Meera has spent the week learning vouchers, journal entries, and ledger posting. She has filled pages and pages with entries. Her fingers are stained with ink. Now Sharma Sir puts a blank sheet in front of her. "Meera, you have posted all entries to the ledger. You have balanced every account. But how do you know there are no mistakes? How do you know you have not accidentally put Rs. 5,000 on the debit side when it should have been on the credit side?" Meera frowns. "I check each entry again?" Sharma Sir shakes his head. "That would take forever. There is a faster way. It is called the trial balance."

What is a Trial Balance?

Remember the golden rule of double-entry accounting? For every debit, there is an equal credit. If you follow this rule perfectly, then the total of all debit balances in your ledger should equal the total of all credit balances.

A trial balance is simply a list of ALL your ledger account balances, arranged in two columns — debit balances on one side, credit balances on the other. Then you add up both columns. If they match, your books are arithmetically correct.

Think of it like a weighing scale at a sabzi mandi. You put vegetables on one side and weights on the other. If the scale is balanced, you know the measurement is correct. If it tilts, something is wrong.

A trial balance is the weighing scale of accounting.

Sharma Sir explains:

"The trial balance does not tell you everything is correct. It tells you that your debits and credits are in balance. It is a first check — like tasting the dal before serving. If the salt is wrong, you know there is a problem. But even if the salt is right, the dal might still be missing something."

We will come back to what the trial balance cannot catch. First, let us learn how to prepare one.

The Trial Balance Format

The trial balance is a simple table:

Each row is one ledger account. You write its closing balance in either the debit column or the credit column — never both.

• Assets (Cash, Bank, Debtors, Furniture, Stock) → Debit column
• Expenses (Purchases, Rent, Salary, Electricity) → Debit column
• Drawings → Debit column
• Liabilities (Creditors, Loans) → Credit column
• Income (Sales, Commission, Interest Received) → Credit column
• Capital → Credit column

Meera Prepares Her First Trial Balance

Let us use the ledger accounts Meera created from the July 15th transactions. She balanced each account and found the following closing balances:

Wait — where did the Capital of Rs. 27,500 come from? This is Rawat Aunty's opening capital. It represents the owner's investment in the business. At the start of the period, the business had Rs. 25,000 cash and Rs. 2,500 receivable from Dimri Ji. That totals Rs. 27,500, which is the owner's equity.

Now Meera writes the trial balance:

Trial Balance of Rawat General Store as on 15th July 2025

Meera adds up the columns:

• Debit total: 4,300 + 5,000 + 3,500 + 20,000 + 4,000 + 5,000 + 1,200 + 2,000 = 45,000
• Credit total: 9,500 + 8,000 + 27,500 = 45,000

They match!

Meera lets out a breath. "It balances!"

Sharma Sir smiles. "Good. This means your journal entries were correct, your posting was correct, and your balancing was correct. The trial balance confirms it."

What Does the Trial Balance Prove?

The trial balance proves arithmetical accuracy. It confirms that:

1. Every debit entry in the journal was posted to the debit side of the correct ledger account.
2. Every credit entry was posted to the credit side.
3. The accounts were balanced correctly.
4. No entry was posted on only one side (which would throw things off).

In simple words: the math is right.

What the Trial Balance Does NOT Prove

This is very important. Sharma Sir makes Meera write this down twice.

"The trial balance is not perfect, Meera. There are some mistakes it CANNOT catch. Even if the trial balance matches, there could still be errors in your books."

Here are the errors that can hide even when the trial balance balances:

1. Error of Omission

A transaction was completely forgotten — not recorded in the journal at all.

Example: Rawat Aunty paid Rs. 300 for shop cleaning but Meera forgot to record it. Since it was never entered anywhere — neither debit nor credit — the trial balance still balances. But the books are wrong.

2. Error of Commission

The entry was made in the wrong person's account, but the right type of account.

Example: Meera received Rs. 2,500 from Dimri Ji but accidentally wrote it in Joshi Ji's account. Both are debtor accounts. The trial balance still balances. But Dimri Ji's records are wrong, and Joshi Ji's records are wrong.

3. Error of Principle

The entry was posted to the wrong type of account.

Example: Rawat Aunty buys a new wooden shelf for Rs. 3,000. This is furniture — an asset. But Meera records it as "Purchases." The trial balance still balances (both are debit entries). But the Purchases figure is too high, and the Furniture figure is missing.

4. Compensating Errors

Two different mistakes cancel each other out.

Example: Meera debited Rent A/c Rs. 500 extra, and separately credited Sales A/c Rs. 500 extra. The two errors cancel out. The trial balance still balances. But both Rent and Sales are wrong.

5. Error of Original Entry

The wrong amount was used for both debit and credit.

Example: Rawat Aunty paid Rs. 1,200 for electricity, but Meera recorded it as Rs. 1,400 in both the debit and credit. The trial balance balances (Rs. 1,400 = Rs. 1,400). But the actual amount is wrong.

6. Error of Reversal

The right accounts were used but on the wrong sides.

Example: Meera debited Cash and credited Sales (correct). But for the next entry, she debited Sales and credited Cash (reversed). The totals might still balance, but individual entries are wrong.

Sharma Sir says:

"This is why the trial balance is a first check, not the final check. Think of it like a medical test. If your blood pressure is normal, it does not mean you are perfectly healthy. But if it is abnormal, you definitely know something is wrong."

When the Trial Balance Does NOT Match

Now let us talk about what happens when the two columns do NOT add up to the same number. This means there IS an error. Here is how to find it.

Step 1: Re-add the columns

Simple arithmetic errors are the most common. Add the debit column again. Add the credit column again. Use a calculator if needed.

Step 2: Find the exact difference

Subtract the smaller total from the larger one. This difference gives you clues.

Step 3: Use the difference to find the error

Sharma Sir teaches Meera three tricks:

Trick 1: Is the difference divisible by 2?

If yes, divide it by 2. Look for that amount. You may have posted an entry on the wrong side.

Example: Debit total is Rs. 47,000 and credit total is Rs. 45,000. Difference = Rs. 2,000. Half of 2,000 = Rs. 1,000. Look for an entry of Rs. 1,000. You may have put it on the debit side when it should have been on the credit side (or vice versa). This doubles the error — hence the difference is twice the amount.

Trick 2: Is the difference divisible by 9?

If yes, you may have a transposition error — you switched two digits.

Example: You wrote Rs. 5,400 instead of Rs. 4,500. Difference = 5,400 - 4,500 = 900. And 900 / 9 = 100. This confirms a transposition error. Look for entries where digits may have been swapped.

Other transposition examples:

• 81 instead of 18: difference = 63, and 63 / 9 = 7
• 3,200 instead of 2,300: difference = 900, and 900 / 9 = 100

Trick 3: Is the difference the exact amount of one entry?

If yes, you may have forgotten to post that entry entirely (posted only the debit but not the credit, or vice versa).

Example: Difference is exactly Rs. 5,000. Check if there is a journal entry for Rs. 5,000 where one side was not posted.

Step 4: Check the ledger balances

Make sure each ledger account was balanced correctly. A simple addition mistake in one account can throw off the entire trial balance.

Step 5: Check the journal

Go back and verify that every journal entry has equal debits and credits.

A Practice Scenario: Finding the Error

Negi Bhaiya gives Meera a test. He hands her a trial balance that does not match:

Difference = Rs. 46,400 - Rs. 45,500 = Rs. 900

Is 900 divisible by 9? Yes! 900 / 9 = 100.

This suggests a transposition error. Meera checks each amount against the ledger. She finds that Salary Account was actually Rs. 2,700 in the ledger, but the journal showed Rs. 2,700 when the actual payment was Rs. 3,600. Wait — let us think again.

Actually, Meera checks the Debtors ledger and finds that the balance should be Rs. 7,200 but was posted from a journal entry of Rs. 2,700. Hmm, let her try again.

She checks the Salary Account. The ledger shows Rs. 2,700. But when she looks at the original voucher, it says Rs. 2,700. That is fine.

She then checks Rent Account. The ledger shows Rs. 3,000. The journal entry shows Rs. 3,000. The voucher shows Rs. 3,000. Fine.

Wait — she goes to the Sales Account. The ledger balance is Rs. 12,000. But she re-adds the credit entries: Rs. 1,800 + Rs. 3,500 + Rs. 4,200 + Rs. 3,400 = Rs. 12,900. Not Rs. 12,000! Someone wrote Rs. 12,000 instead of Rs. 12,900. The difference is Rs. 900. And 900 / 9 = 100. Classic transposition error — the digits were rearranged.

Correcting Sales to Rs. 12,900:

• Debit total: Rs. 46,400
• Credit total: Rs. 30,000 + Rs. 12,900 + Rs. 3,500 = Rs. 46,400

It matches now.

Negi Bhaiya grins. "You found it. Good detective work."

When to Prepare a Trial Balance

In practice, businesses prepare a trial balance:

• Monthly — to check that the month's entries are correct
• Quarterly — especially before filing GST returns
• Yearly — before preparing final accounts (Profit & Loss and Balance Sheet)

For Rawat Aunty's small shop, a monthly trial balance is enough. For Bisht Traders, who has more transactions, Sharma Sir likes to check quarterly.

The Suspense Account — A Temporary Fix

What if you cannot find the error right away? Sharma Sir teaches Meera a practical trick:

"If the trial balance does not match and you have spent a reasonable time looking, open a temporary account called Suspense Account. Put the difference there. This makes the trial balance balance for now. But remember — the Suspense Account is like a bandage, not a cure. You MUST find and fix the error eventually."

Example: Debit total = Rs. 46,400, Credit total = Rs. 45,500. Difference = Rs. 900. Credits are short by Rs. 900.

Later, when you find the error, you close the Suspense Account. In Meera's case, once she found the Sales error, the Suspense Account was no longer needed.

Trial Balance — A Visual Summary

Here is how the trial balance fits into the accounting cycle:

  Voucher  →  Journal  →  Ledger  →  Trial Balance
  (Proof)     (Record)    (Organize)   (Check)

1. Voucher — The original proof that something happened.
2. Journal — Record the transaction in order.
3. Ledger — Organize by account.
4. Trial Balance — Check that everything adds up.

And after the trial balance? The next step is preparing the final accounts — the Profit & Loss Account and the Balance Sheet. That comes in the next chapter.

Quick Recap

• A trial balance is a list of all ledger account balances in two columns: Debit and Credit.
• If Total Debits = Total Credits, the books are arithmetically correct.
• Assets, Expenses, and Drawings go in the Debit column.
• Liabilities, Income, and Capital go in the Credit column.
• The trial balance proves arithmetical accuracy.
• It does NOT prove that all entries are correct — it cannot catch errors of omission, commission, principle, compensation, original entry, or reversal.
• If the trial balance does NOT match, check: divisible by 2 (wrong side), divisible by 9 (transposition), or exact amount (missed posting).
• A Suspense Account is a temporary fix for unresolved differences.
• Always find and fix the actual error. The Suspense Account is not a solution — it is a bookmark.

Practice Exercise — Try This Yourself

Part A: Prepare the Trial Balance

Using the ledger accounts you prepared in the previous chapter's practice exercise (8 transactions on 20th July 2025), prepare a trial balance. List each account and its balance.

Your trial balance should include:

• Cash Account
• SBI Bank Account
• Capital Account
• Furniture Account
• Purchases Account
• Sales Account
• Bisht Traders Account
• Dimri Ji Account
• Miscellaneous Expense Account

Do the totals match?

Part B: Find the Error

The following trial balance has an error. Find it.

It balances! But there is an error hidden in it. Sharma Sir tells you that the actual salary paid was Rs. 4,500, not Rs. 5,400. And the actual debtors balance is Rs. 8,100.

What type of error is this? (Hint: 5,400 - 4,500 = 900. Is 900 divisible by 9?)

Fun Fact

The trial balance was invented because humans make mistakes. Even the most careful accountant can slip up after hours of writing numbers. Before computers, accountants in India would prepare trial balances under the light of kerosene lamps, carefully adding long columns by hand. If the balance did not match, they would sometimes work late into the night, checking entry after entry. Today, accounting software prepares the trial balance automatically in one click. But understanding how it works — as Meera now does — means you can spot problems that even the software might miss.

In the next chapter, Meera takes the trial balance and uses it to prepare the final accounts — the Profit & Loss Account and the Balance Sheet. This is where all the numbers come together to answer the big question: "Is the business making money?"

Financial Statements — The Big Picture

It is the last day of March. The financial year has ended. Rawat Aunty sits in Sharma Sir's office, looking nervous. "Sharma Sir, my husband keeps asking — is the shop making money? Or are we just busy for nothing?" Sharma Sir turns to Meera. "This is the moment everything comes together. All year, you recorded vouchers, wrote journal entries, posted to ledgers, prepared trial balances. Now we answer the only question that truly matters — is the business making money, and how healthy is it?" He places three blank sheets on the desk. "Today, Meera, you will prepare three statements: the Trading Account, the Profit & Loss Account, and the Balance Sheet."

Why Financial Statements Matter

Imagine you have been walking all day through the hills near Bageshwar. You are tired. You have been counting your steps, tracking the path, watching the markers. But at some point, you stop and look around. You ask: "How far have I come? Where am I now?"

Financial statements are that moment of stopping and looking around.

All year long, the journal records every step. The ledger organizes the steps by path. The trial balance checks the count. But the financial statements tell you the result of all those steps.

They answer two big questions:

1. Did the business make a profit or a loss? → This is answered by the Trading Account and Profit & Loss Account.
2. What does the business own and owe right now? → This is answered by the Balance Sheet.

Rawat Aunty does not care about journal entries or ledger postings. She cares about these two questions. And so does every business owner, bank manager, tax officer, and investor.

The Three Statements

For a small trading business like Rawat General Store, we prepare three statements at the end of the year:

The Trading Account feeds into the Profit & Loss Account. The Profit & Loss Account feeds into the Balance Sheet. They are connected like links in a chain.

Part 1: The Trading Account

The Trading Account answers a simple question: Did the shop make money by selling goods for more than they cost?

If Rawat Aunty buys rice for Rs. 40 per kg and sells it for Rs. 50 per kg, she makes Rs. 10 per kg. That Rs. 10 is called gross profit.

The Formula

Gross Profit = Net Sales - Cost of Goods Sold (COGS)

Let us understand each part.

Net Sales = Total Sales - Sales Returns (goods returned by customers)

Cost of Goods Sold (COGS) = Opening Stock + Purchases + Direct Expenses - Closing Stock

• Opening Stock = The goods that were already in the shop at the start of the year.
• Purchases = All goods bought during the year (minus any purchase returns).
• Direct Expenses = Expenses directly related to getting the goods ready for sale (freight, carriage, loading/unloading).
• Closing Stock = The goods still unsold at the end of the year.

Think of it this way: you started with some goods, you bought more goods, you spent money bringing those goods to the shop. That is your total cost. But not everything was sold — some goods are still sitting on the shelves. So you subtract the closing stock.

Trading Account Format

         Trading Account of Rawat General Store
            for the year ending 31st March 2026

 ─────────────────────────────────────────────────────────
    Dr. (Expenses/Costs)     |   Cr. (Revenue/Income)
 ─────────────────────────────────────────────────────────
 Particulars        | Amt(Rs)| Particulars       | Amt(Rs)
 ─────────────────────────────────────────────────────────
 To Opening Stock   | 45,000 | By Sales          |4,80,000
 To Purchases       |2,85,000| Less: Returns     |  (5,000)
 Less: Returns      | (3,000)| Net Sales         |4,75,000
 Net Purchases      |2,82,000|                   |
 To Carriage Inward |  8,000 | By Closing Stock  | 52,000
 To Freight         |  5,000 |                   |
                    |        |                   |
 To Gross Profit    |        |                   |
   (transferred to  |        |                   |
    P&L Account)    |1,87,000|                   |
 ─────────────────────────────────────────────────────────
 Total              |5,27,000| Total             |5,27,000
 ─────────────────────────────────────────────────────────

Reading the numbers:

Rawat Aunty started the year with Rs. 45,000 worth of goods on her shelves (opening stock). During the year, she bought goods worth Rs. 2,85,000 and returned Rs. 3,000 worth (damaged goods). She spent Rs. 8,000 on carriage (transport) and Rs. 5,000 on freight to get goods to her shop.

Total cost side = Rs. 45,000 + Rs. 2,82,000 + Rs. 8,000 + Rs. 5,000 = Rs. 3,40,000.

Her total sales were Rs. 4,80,000, minus Rs. 5,000 in sales returns = Rs. 4,75,000 net sales. At year-end, Rs. 52,000 worth of goods were still unsold (closing stock).

Total income side (before gross profit) = Rs. 4,75,000 + Rs. 52,000 = Rs. 5,27,000.

Gross Profit = Rs. 5,27,000 - Rs. 3,40,000 = Rs. 1,87,000.

This means Rawat Aunty made Rs. 1,87,000 just from buying and selling goods — before paying rent, salary, electricity, and other expenses.

Meera explains it to Rawat Aunty in simple words:

"Aunty, for every Rs. 100 of goods you sold, about Rs. 60 was the cost of the goods, and Rs. 40 was your margin. That margin is the gross profit."

Part 2: The Profit & Loss Account

The gross profit is not the final answer. Rawat Aunty still has to pay rent, salary, electricity, and many other expenses. The Profit & Loss (P&L) Account shows what is left after ALL expenses.

The Formula

Net Profit = Gross Profit + Other Income - All Indirect Expenses

• Gross Profit comes from the Trading Account.
• Other Income = Income not from selling goods (interest earned on bank deposits, commission received, etc.).
• Indirect Expenses = Expenses not directly related to goods (rent, salary, electricity, stationery, insurance, depreciation, etc.).

Profit & Loss Account Format

      Profit & Loss Account of Rawat General Store
           for the year ending 31st March 2026

 ─────────────────────────────────────────────────────────
    Dr. (Expenses)              |   Cr. (Income)
 ─────────────────────────────────────────────────────────
 Particulars          | Amt(Rs)| Particulars       | Amt(Rs)
 ─────────────────────────────────────────────────────────
 To Salary            | 48,000 | By Gross Profit   |1,87,000
 To Rent              | 60,000 |   (from Trading)  |
 To Electricity       | 14,400 | By Interest on    |
 To Telephone         |  3,600 |   Bank Deposit    |  2,400
 To Stationery &      |        | By Commission     |
   Printing           |  2,000 |   Received        |  1,500
 To Repair &          |        |                   |
   Maintenance        |  5,000 |                   |
 To Insurance         |  3,000 |                   |
 To Depreciation on   |        |                   |
   Furniture          |  2,500 |                   |
 To Miscellaneous     |        |                   |
   Expenses           |  4,000 |                   |
                      |        |                   |
 To Net Profit        |        |                   |
   (transferred to    |        |                   |
    Capital Account)  | 48,400 |                   |
 ─────────────────────────────────────────────────────────
 Total                |1,90,900| Total             |1,90,900
 ─────────────────────────────────────────────────────────

Reading the numbers:

Total indirect expenses = Rs. 48,000 + Rs. 60,000 + Rs. 14,400 + Rs. 3,600 + Rs. 2,000 + Rs. 5,000 + Rs. 3,000 + Rs. 2,500 + Rs. 4,000 = Rs. 1,42,500.

Total income = Gross Profit Rs. 1,87,000 + Interest Rs. 2,400 + Commission Rs. 1,500 = Rs. 1,90,900.

Net Profit = Rs. 1,90,900 - Rs. 1,42,500 = Rs. 48,400.

Meera turns to Rawat Aunty:

"Aunty, after paying everyone — Kamla's salary, the landlord's rent, the electricity board, everything — your shop made a net profit of Rs. 48,400 this year."

Rawat Aunty beams. "So we ARE making money! Not just running around for nothing."

Sharma Sir adds: "Rs. 48,400 in a year. That is about Rs. 4,000 per month profit. It is decent for a small kirana shop. But look at the numbers carefully — rent alone is Rs. 60,000. That is your biggest expense. If you could negotiate lower rent, your profit would jump."

This is the power of financial statements. They do not just show profit. They show where the money is going.

What Each Expense Means

Let Meera explain each line item so Rawat Aunty understands:

Part 3: The Balance Sheet

The P&L Account tells you about the year — how much money came in and went out. The Balance Sheet tells you about a single moment in time — what does the business own and owe on this exact date?

The Accounting Equation

The Balance Sheet is built on one equation:

Assets = Liabilities + Capital (Owner's Equity)

This equation must ALWAYS be true. It is like saying: "Everything the business owns was funded either by borrowing (liabilities) or by the owner's investment (capital)."

Think of it this way. Rawat Aunty's shop has shelves, stock, cash, and a bank balance. Where did the money for all of this come from? Either from Rawat Aunty herself (capital), or from suppliers she has not yet paid (creditors/liabilities).

Balance Sheet Format

         Balance Sheet of Rawat General Store
               as on 31st March 2026

 ─────────────────────────────────────────────────────────
   Liabilities & Capital     |        Assets
 ─────────────────────────────────────────────────────────
 Particulars        | Amt(Rs)| Particulars        | Amt(Rs)
 ─────────────────────────────────────────────────────────
                    |        |                    |
 Capital Account    |        | Fixed Assets       |
   Opening Balance  |2,00,000|   Furniture        | 25,000
   Add: Net Profit  |  48,400|   Less: Depreciation| (2,500)
   Less: Drawings   | (36,000)|  Net Furniture    | 22,500
   Closing Capital  |2,12,400|                    |
                    |        | Current Assets     |
 Current Liabilities|        |   Closing Stock    | 52,000
   Sundry Creditors | 35,000 |   Sundry Debtors  | 28,000
   Outstanding      |        |   Cash in Hand     | 15,400
     Expenses       |  4,500 |   Cash at Bank     | 78,000
                    |        |   Prepaid Insurance |  1,000
                    |        |   Interest Accrued  |    500
                    |        |                    |
 Loan (Long-term)   |        |                    |
   Bank Loan        | 45,500 |                    |
                    |        |                    |
 ─────────────────────────────────────────────────────────
 Total              |2,97,400| Total              |2,97,400
 ─────────────────────────────────────────────────────────

Let us break this down in plain language.

The Left Side: Liabilities and Capital

Capital Account:

• Rawat Aunty started the year with Rs. 2,00,000 as her investment in the business.
• The shop earned Rs. 48,400 net profit. This profit belongs to the owner, so it is added to capital.
• During the year, Rawat Aunty withdrew Rs. 36,000 for personal use (drawings). This reduces her capital.
• Closing capital = Rs. 2,00,000 + Rs. 48,400 - Rs. 36,000 = Rs. 2,12,400.

Current Liabilities:

• Sundry Creditors (Rs. 35,000): Money owed to suppliers for goods purchased on credit.
• Outstanding Expenses (Rs. 4,500): Expenses that have been incurred but not yet paid (like December electricity bill not yet paid by March 31).

Bank Loan (Rs. 45,500): A long-term loan taken from the bank for shop improvement.

Total Liabilities + Capital = Rs. 2,12,400 + Rs. 35,000 + Rs. 4,500 + Rs. 45,500 = Rs. 2,97,400.

The Right Side: Assets

Fixed Assets:

• Furniture: Original cost Rs. 25,000, minus Rs. 2,500 depreciation = Rs. 22,500 net value.
• Fixed assets are things the business uses for a long time — they are not for sale.

Current Assets:

• Closing Stock (Rs. 52,000): Goods still unsold on the shelves.
• Sundry Debtors (Rs. 28,000): Money owed by customers who bought on credit.
• Cash in Hand (Rs. 15,400): Cash in the shop's cash box.
• Cash at Bank (Rs. 78,000): Balance in SBI account.
• Prepaid Insurance (Rs. 1,000): Insurance paid in advance for next year.
• Interest Accrued (Rs. 500): Interest earned on bank deposit but not yet received.

Total Assets = Rs. 22,500 + Rs. 52,000 + Rs. 28,000 + Rs. 15,400 + Rs. 78,000 + Rs. 1,000 + Rs. 500 = Rs. 2,97,400.

Assets (Rs. 2,97,400) = Liabilities + Capital (Rs. 2,97,400)

The equation balances!

What the Numbers Tell Rawat Aunty

Meera sits with Rawat Aunty and explains the Balance Sheet in everyday language:

"Aunty, here is what your shop looks like right now:"

"Your shop owns things worth Rs. 2,97,400 in total — furniture, stock on shelves, money in the cash box, money in the bank, and money that customers owe you."

"Out of this, Rs. 35,000 is owed to your suppliers. Rs. 4,500 is owed in unpaid bills. Rs. 45,500 is a bank loan. So these are other people's money that is currently in your business."

"The rest — Rs. 2,12,400 — is YOURS. That is your capital. Your ownership in the business."

Rawat Aunty thinks about this. "So if I closed the shop today, sold everything, paid everyone I owe, I would be left with about Rs. 2,12,400?"

"Roughly, yes," Meera says. "Though selling stock quickly might mean you get less than Rs. 52,000 for it. And some debtors might not pay. But that is the basic idea."

How the Three Statements Connect

Here is the flow:

  Trading Account          Profit & Loss Account         Balance Sheet
  ───────────────          ─────────────────────         ──────────────
  Sales - COGS             Gross Profit                  Net Profit
       ↓                   + Other Income                    ↓
  = Gross Profit  ────→    - Indirect Expenses           Added to
                                ↓                        Capital Account
                           = Net Profit  ────────→       on Balance Sheet

1. The Trading Account gives you Gross Profit.
2. Gross Profit flows into the Profit & Loss Account, which gives you Net Profit.
3. Net Profit flows into the Balance Sheet, where it is added to the owner's Capital.

They are not three separate reports. They are one continuous story.

Common Terms Meera Should Know

Quick Recap

• Trading Account shows Gross Profit = Sales - Cost of Goods Sold.
• Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses - Closing Stock.
• Profit & Loss Account shows Net Profit = Gross Profit + Other Income - Indirect Expenses.
• Balance Sheet shows the financial position: Assets = Liabilities + Capital.
• Net Profit is added to Capital on the Balance Sheet. Drawings are subtracted from Capital.
• Fixed Assets are used in the business long-term. Current Assets change frequently.
• Current Liabilities are due within a year. Long-term Liabilities are due later.
• The three statements are connected — Trading feeds P&L, P&L feeds the Balance Sheet.
• These statements answer the ultimate questions: "Is the business profitable?" and "What is the business worth?"

Practice Exercise — Try This Yourself

Prepare the Trading Account, Profit & Loss Account, and Balance Sheet for a small shop called "Pahadi Provisions" using the following information for the year ending 31st March 2026:

Given Information:

Steps:

1. Prepare the Trading Account and find Gross Profit.
2. Prepare the Profit & Loss Account and find Net Profit.
3. Prepare the Balance Sheet and verify that Assets = Liabilities + Capital.

Hint for Gross Profit:

• Net Sales = 3,20,000 - 3,000 = 3,17,000
• COGS = 30,000 + (2,00,000 - 2,000) + 5,000 - 35,000 = 1,98,000
• Gross Profit = 3,17,000 - 1,98,000 = 1,19,000

Fun Fact

In India, the financial year runs from April 1st to March 31st. But do you know why? When the British ruled India, they brought their financial year system. But Britain itself changed to January-December later. India kept April-March because it aligns with the harvest cycles — the Rabi crop comes in around March-April, which was when merchants and landowners settled their accounts. So the Indian financial year is actually connected to the farming seasons of our land. When Rawat Aunty closes her books on March 31st, she is following a tradition tied to the agricultural rhythm of India.

In the next chapter, Meera learns about the Chart of Accounts — the organized master list of all accounts a business uses. It is like creating a map before starting a journey.

Chart of Accounts & Schedule III

Meera has now prepared vouchers, journals, ledgers, trial balances, and financial statements. She feels confident. Then one morning, Sharma Sir hands her the file of a new client — Bisht Traders, the wholesale spice business. Meera opens the file and her eyes widen. There are dozens of different accounts — CGST Input, SGST Output, Freight Outward, Godown Rent, Loading Charges, Trade Discount, Commission Paid, Commission Received... "How does anyone keep track of so many accounts?" she asks. Sharma Sir smiles. "With a Chart of Accounts. It is like a table of contents for all the accounts a business will ever use. Before you start any bookkeeping, you first create this chart. It is your map."

What is a Chart of Accounts?

Imagine you are building a new house. Before laying a single brick, you need a blueprint — a plan showing every room, every door, every window.

A Chart of Accounts (COA) is the blueprint of your accounting system. It is an organized, numbered list of every account the business will use.

Without a COA, things get messy fast. One person creates an account called "Electricity." Another creates "Electricity Expense." A third creates "Electric Bill Payment." Are these the same account or three different ones? Nobody knows. The books become confused.

With a COA, every account has:

• A unique number (like a roll number in school)
• A name (clear and standard)
• A group (which family it belongs to)

Sharma Sir explains:

"Think of it like the PIN code system. Every post office in India has a unique PIN code. 263601 is Almora. 263139 is Bageshwar. You do not confuse them because each has a number. Similarly, every account in your books gets a number. Account 4001 is Sales. Account 5001 is Purchases. No confusion."

The Five Main Groups

Every account in any business falls into one of five groups. Only five. No matter how big or small the business.

These five groups are the foundation. Everything else is a sub-group or a specific account within one of these five.

Let us explore each group with examples from Bisht Traders and Rawat Aunty's shop.

Group 1: Assets — What the Business Owns

Assets are things of value that the business owns or controls.

Sub-groups:

Fixed Assets (Non-Current Assets) — Things used in the business for a long time. They are not for sale.

• Land and Building
• Furniture and Fixtures
• Computers and Equipment
• Vehicles
• Godown (warehouse) structures

Current Assets — Things that change frequently, usually within a year.

• Cash in Hand
• Cash at Bank
• Stock (Inventory)
• Sundry Debtors (Accounts Receivable) — money customers owe
• Prepaid Expenses — bills paid in advance
• Advances to Suppliers — money paid to suppliers before receiving goods

Investments — Money put into fixed deposits, shares, etc.

Intangible Assets — Things of value that you cannot touch.

• Goodwill
• Trademarks
• Software licenses

For Rawat Aunty's small kirana shop, the main assets are: Cash, Bank Balance, Stock, Debtors, and Furniture.

For Bisht Traders (a bigger wholesale business), the list also includes: Godown, Vehicles, Computer Equipment, and Investments.

Group 2: Liabilities — What the Business Owes

Liabilities are debts and obligations — money the business must pay to others.

Sub-groups:

Non-Current Liabilities (Long-Term) — Debts due after more than one year.

• Bank Loans (term loans)
• Mortgages

Current Liabilities — Debts due within one year.

• Sundry Creditors (Accounts Payable) — money owed to suppliers
• Outstanding Expenses — bills received but not yet paid
• Short-term Loans
• GST Payable — GST collected that must be paid to the government
• TDS Payable — tax deducted that must be deposited

For Rawat Aunty: Sundry Creditors (Bisht Traders) and Outstanding Expenses.

For Bisht Traders: Bank Loan, Sundry Creditors, GST Payable, TDS Payable.

Group 3: Equity (Capital) — The Owner's Stake

Equity represents the owner's claim on the business after all liabilities are paid.

Sub-groups:

• Capital Account — the owner's investment
• Drawings Account — money the owner has taken out
• Reserves and Surplus — accumulated profits not withdrawn
• Current Year Profit/Loss — flows from the P&L Account

For a sole proprietorship like Rawat Aunty's shop, equity is simply Capital minus Drawings plus Profit.

For a company like a large version of Bisht Traders, equity includes Share Capital, Retained Earnings, and various Reserves.

Group 4: Income (Revenue) — Money Earned

Income is money the business earns through its operations and other sources.

Sub-groups:

Direct Income (Revenue from Operations):

• Sales of Goods
• Sales of Services

Indirect Income (Other Income):

• Interest Received (on bank deposits)
• Commission Received
• Rent Received (if the business sub-lets space)
• Discount Received (from suppliers for early payment)
• Profit on Sale of Asset

For Rawat Aunty: Sales is the main income. Interest on her bank deposit is other income.

For Bisht Traders: Sales of spices, Commission Received from other wholesalers, and Interest Received.

Group 5: Expenses — Money Spent

Expenses are costs incurred to run the business.

Sub-groups:

Direct Expenses (Cost of Goods Sold):

• Purchases of Goods
• Freight Inward / Carriage Inward
• Loading and Unloading Charges
• Customs Duty (for imported goods)
• Wages (of workers directly involved in production/handling)

Indirect Expenses (Operating Expenses):

• Salary (of office/admin staff)
• Rent
• Electricity
• Telephone and Internet
• Stationery and Printing
• Insurance
• Repair and Maintenance
• Depreciation
• Bank Charges
• Professional Fees (CA, lawyer)
• Travelling Expenses
• Miscellaneous Expenses

Tax Expenses:

• Income Tax (for the business, if applicable)

For Rawat Aunty: Purchases, Salary, Rent, Electricity are the main ones.

For Bisht Traders: All of the above, plus Godown Rent, Vehicle Expenses, Loading Charges, Commission Paid (to agents), and Travelling Expenses (sales staff visits clients in different cities).

Account Numbering System

Each account gets a unique number. The numbering follows a logical pattern so you can tell the group just by looking at the number.

Here is a common system:

When Meera sees account number 1201, she immediately knows it is an asset (1000 series) and a current asset (1200 sub-range). When she sees 5101, she knows it is an indirect expense.

Sharma Sir says:

"This numbering is not just for convenience. When you use accounting software, the software uses these numbers to automatically organize accounts into the right groups on the Balance Sheet and Profit & Loss Account. Get the numbering right, and the reports come out right."

Complete Chart of Accounts — Bisht Traders

Here is the full COA that Sharma Sir sets up for Bisht Traders, the wholesale spice business:

Assets (1000 - 1999)

Liabilities (2000 - 2999)

Equity (3000 - 3999)

Income (4000 - 4999)

Expenses (5000 - 5999)

That is over 60 accounts! Meera is a little overwhelmed. But Sharma Sir reassures her:

"You do not use all of them every day. Some accounts are used only once a year — like Depreciation or Bad Debts. But by having them all listed and numbered in advance, you never have to guess. When a new transaction happens, you look at the chart, find the right account, and use it."

Why GST Accounts Appear in the COA

Meera notices something new — accounts like "GST Input — CGST" and "GST Output — SGST."

Negi Bhaiya explains:

"Bisht Traders is GST-registered. When they buy goods, they pay GST to the supplier. That GST is recorded in the Input accounts (it is like money the government owes us back). When they sell goods, they collect GST from the customer. That GST is recorded in the Output accounts (it is money we owe to the government). At the end of the month, we calculate the difference — that is what Bisht Ji pays to the government."

We will cover GST in detail in Part 4 of this book. For now, just know that GST accounts are part of the Chart of Accounts.

Here is a simple summary:

Schedule III of the Companies Act, 2013

Sharma Sir now introduces a more formal concept.

"For Rawat Aunty's shop, which is a sole proprietorship, we can use any reasonable format for the Balance Sheet and P&L. But for a company — even a small private company — the government has prescribed a specific format. This format is in Schedule III of the Companies Act, 2013."

What is Schedule III?

Schedule III is a section of the Companies Act, 2013 that specifies exactly how a company must present its Balance Sheet and Statement of Profit and Loss. It tells you:

• What line items to show
• In what order
• How to group them
• What additional information (notes) to disclose

Even though Rawat Aunty and Bisht Traders may not be companies (they are sole proprietorships or partnerships), understanding Schedule III is important because:

1. Many employers will expect you to know this format.
2. If Bisht Traders ever becomes a company, this format will be required.
3. The chart of accounts should be designed so it can map to Schedule III easily.

Schedule III Balance Sheet Format (Simplified)

                    BALANCE SHEET
             as at 31st March 20XX

 ─────────────────────────────────────────────
 I. EQUITY AND LIABILITIES
 ─────────────────────────────────────────────

    1. Shareholders' Funds
       (a) Share Capital
       (b) Reserves and Surplus

    2. Non-Current Liabilities
       (a) Long-term Borrowings
       (b) Deferred Tax Liabilities
       (c) Other Long-term Liabilities
       (d) Long-term Provisions

    3. Current Liabilities
       (a) Short-term Borrowings
       (b) Trade Payables
       (c) Other Current Liabilities
       (d) Short-term Provisions

 ─────────────────────────────────────────────
 II. ASSETS
 ─────────────────────────────────────────────

    1. Non-Current Assets
       (a) Property, Plant and Equipment
       (b) Intangible Assets
       (c) Capital Work-in-Progress
       (d) Non-Current Investments
       (e) Deferred Tax Assets
       (f) Long-term Loans and Advances
       (g) Other Non-Current Assets

    2. Current Assets
       (a) Inventories
       (b) Trade Receivables
       (c) Cash and Cash Equivalents
       (d) Short-term Loans and Advances
       (e) Other Current Assets

 ─────────────────────────────────────────────

Notice some differences from the traditional format Meera used for Rawat Aunty:

• "Sundry Creditors" is now called "Trade Payables"
• "Sundry Debtors" is now called "Trade Receivables"
• "Furniture" falls under "Property, Plant and Equipment"
• "Stock" is now called "Inventories"
• "Cash at Bank" and "Cash in Hand" together are "Cash and Cash Equivalents"

The names are more formal, but the concepts are exactly the same.

Schedule III Profit & Loss Format (Simplified)

          STATEMENT OF PROFIT AND LOSS
        for the year ended 31st March 20XX

 ─────────────────────────────────────────────
 I.    Revenue from Operations        xx,xxx
 II.   Other Income                    x,xxx
 III.  Total Income (I + II)          xx,xxx

 IV.   Expenses:
       (a) Cost of Materials Consumed  xx,xxx
       (b) Purchases of Stock-in-Trade xx,xxx
       (c) Changes in Inventories       x,xxx
       (d) Employee Benefit Expense     x,xxx
       (e) Finance Costs                x,xxx
       (f) Depreciation and
           Amortisation Expense         x,xxx
       (g) Other Expenses               x,xxx
       Total Expenses                  xx,xxx

 V.    Profit Before Tax (III - IV)    x,xxx
 VI.   Tax Expense                     x,xxx
 VII.  Profit After Tax (V - VI)       x,xxx
 ─────────────────────────────────────────────

Mapping the COA to Financial Statements

Here is how the chart of accounts maps to the two main financial statements:

If the COA is set up correctly with proper grouping and numbering, the accounting software (or even a manual accountant) can automatically generate the Balance Sheet and P&L by sorting accounts into the right sections.

Tips for Creating a Good Chart of Accounts

Sharma Sir shares his experience:

1. Keep it simple to start. Do not create 100 accounts on Day 1. Start with 30-40 accounts. Add more as needed.

2. Be specific but not too specific. "Electricity" is good. "Electricity — Godown" and "Electricity — Office" is better for a larger business. But "Electricity — Light Bulb #3 in Back Room" is too much.

3. Use consistent naming. Decide a style and stick to it. If you write "Salary and Wages," do not also have an account called "Wages & Salary."

4. Number with gaps. Notice the numbering has gaps (1001, 1002... not 1, 2, 3...). This lets you insert new accounts later without renumbering everything. If you need an account between 1005 (Vehicle) and 1006 (Depreciation-Building), you can use 1005a or leave space in advance.

5. Separate GST accounts. For GST-registered businesses, always have separate accounts for CGST, SGST, and IGST — both input and output.

6. Match to the industry. A kirana shop has different accounts than a hotel or a factory. Customize the COA for the business.

Rawat Aunty vs. Bisht Traders — COA Comparison

Let us compare how a simple COA differs based on business size:

Meera sees the pattern. The bigger the business, the more detailed the COA. But the five main groups never change.

Meera Creates a COA for Rawat Aunty

As practice, Sharma Sir asks Meera to create a simple COA for Rawat General Store. Here is what she comes up with:

Sharma Sir reviews it. "Clean. Organized. Every account in its place. Well done, Meera. This is a solid chart of accounts for a small kirana shop."

Quick Recap

• A Chart of Accounts (COA) is a numbered, organized list of all accounts a business uses.
• Every account belongs to one of 5 groups: Assets, Liabilities, Equity, Income, Expenses.
• Assets = what the business owns (Fixed + Current).
• Liabilities = what the business owes (Long-term + Current).
• Equity = the owner's stake (Capital - Drawings + Profit).
• Income = money earned (Sales + Other Income).
• Expenses = money spent (Direct + Indirect).
• Account numbering follows a logical system: 1000s for Assets, 2000s for Liabilities, 3000s for Equity, 4000s for Income, 5000s for Expenses.
• Schedule III of the Companies Act, 2013 prescribes the format for Balance Sheet and P&L for companies.
• A good COA is simple, consistent, and customized for the business.
• GST-registered businesses need separate accounts for CGST, SGST, and IGST — both input and output.

Practice Exercise — Try This Yourself

Part A: Classify the Accounts

For each account below, identify which group it belongs to (Asset, Liability, Equity, Income, or Expense) and suggest a suitable account number using the numbering system described in this chapter.

Part B: Create a Chart of Accounts

Create a complete Chart of Accounts for a fictional business: "Kumaoni Handicrafts" — a small shop in Almora that sells handmade woolen shawls, wooden crafts, and local honey. The shop is GST-registered. The owner is Negi Ji. The shop has one employee. It has one bank account.

Include at least:

• 5 Asset accounts
• 3 Liability accounts
• 2 Equity accounts
• 3 Income accounts
• 8 Expense accounts

Number them properly using the system described in this chapter.

Fun Fact

The concept of a standardized chart of accounts goes back to the early 1900s in Europe. But India has had organized financial record-keeping for much longer. The Hundi system — used by Indian merchants for centuries — was an early form of organized accounting with specific categories for different types of transactions. When Bisht Ji's grandfather traded spices in the old mandis of Uttarakhand, he kept records in a bahi-khata (traditional account book) with categories remarkably similar to a modern chart of accounts. The names have changed. The software is new. But the idea of organizing money into categories? That is as old as trade itself.

This completes Part 2 — Bookkeeping by Hand. Meera now knows how to create vouchers, write journal entries, post to ledgers, prepare trial balances, build financial statements, and organize accounts. She can keep books for any small business using pen and paper. In Part 3, she will learn to do all of this on a computer using Udyamo ERPLite. The speed and power of software will amaze her — but only because she already understands what is happening behind the screen.

Meet Udyamo ERPLite — Your Digital Office

Meera arrived at the office on Monday morning and found Negi Bhaiya sitting in front of a computer screen, typing fast. Numbers were flying across the screen. Meera had spent the last few weeks learning accounting on paper — journals, ledgers, trial balance. But this looked different. This looked... fast.

"Negi Bhaiya, what software is that?" she asked.

Negi Bhaiya grinned. "This is Udyamo ERPLite. Everything you have been doing by hand? This software does it in seconds. Come, sit down. Today you learn the computer way."

What is ERP?

Let us start with a simple question. What does ERP mean?

ERP stands for Enterprise Resource Planning.

That sounds complicated. Let us break it down.

• Enterprise = a business or organization
• Resource = money, people, stock, machines — everything a business uses
• Planning = organizing and managing all of it

So ERP is one software that manages everything in a business — accounting, inventory, sales, purchases, salaries, taxes, reports.

Think of it like this. Rawat Aunty runs her kirana shop. She has:

• A notebook for daily sales
• A separate notebook for purchases
• A diary to track who owes her money
• Loose papers for GST bills
• A calculator for totals

That is five different places for five different things. What if she forgets to update one notebook? What if the numbers don't match?

Now imagine one single system where all of this lives together. When she makes a sale, the stock goes down automatically. The GST is calculated automatically. The customer's balance is updated automatically. The profit report changes automatically.

That is what ERP does.

Why Udyamo ERPLite?

There are many ERP software programs in the market. Tally, Zoho Books, Busy, QuickBooks — you may have heard of some of these.

Udyamo ERPLite is designed for Indian businesses. It follows Indian accounting standards. It understands GST. It follows Schedule III of the Companies Act (the standard chart of accounts we studied in the previous chapter).

Sharma Sir uses ERPLite in his practice for multiple clients. "Once you learn one good ERP," he told Meera, "you can pick up any other software quickly. The logic is the same everywhere."

Here is what ERPLite can do:

Don't worry if this list looks long. We will cover each one, step by step, in this chapter and the chapters ahead.

First Look — Logging In

Negi Bhaiya opened the browser on the computer. "ERPLite runs in your web browser," he explained. "You don't need to install anything heavy. Just open Chrome or Firefox, type the address, and log in."

Step 1: Open ERPLite

Negi Bhaiya typed the ERPLite address into the browser. The login screen appeared.

Step 2: Enter Your Credentials

Every user gets a username and password. Sharma Sir had created a login for Meera.

• Username: meera@sharmaassociates
• Password: (given by Sharma Sir)

"Never share your password," Negi Bhaiya said. "Every action you take in the software is logged under your name. If something goes wrong, they can check who did it."

Step 3: The Dashboard

After logging in, Meera saw the Dashboard. This is the home screen of ERPLite — the first thing you see every time you log in.

The dashboard showed several things at a glance:

• Cash Balance — how much cash the business has right now
• Bank Balance — how much is in the bank account
• Receivables — how much customers owe us
• Payables — how much we owe to suppliers
• Recent Transactions — the last few entries made

"Think of the dashboard like the front page of a newspaper," Negi Bhaiya said. "It gives you the headlines. If you want the full story, you go inside."

Navigating ERPLite — The Main Menu

On the left side of the screen, Meera saw a menu. This is the main navigation — the way you move around the software.

The menu has four main sections:

1. Masters

This is where you set up the foundation data — the things that don't change every day.

• Items — products and services you sell or buy
• Customers — people who buy from you
• Vendors — people you buy from
• Employees — people who work for you
• Chart of Accounts — the list of all account heads

Think of Masters like building the foundation of a house. You do it once, carefully. Then you build everything else on top.

2. Transactions

This is where the daily work happens.

• Voucher Entry — Journal, Receipt, Payment, Contra
• Sales — Proforma Invoice, Sales Order, Sales Invoice, Payment Receipt
• Purchase — Purchase Order, Purchase Bill, Payment

Every time money moves — in or out — you record it here.

3. Reports

This is where you see the results of all your entries.

• Trial Balance
• Profit & Loss Statement
• Balance Sheet
• Cash Flow Statement
• Day Book
• Sales Register
• Purchase Register
• Aged Receivables
• Aged Payables

"Reports are the whole point," Sharma Sir always said. "We do all this entry work so that at the end, the owner can see — am I making money or losing money?"

4. Settings

This is where you configure the software.

• Organization details (company name, address, GSTIN, PAN)
• Financial Year
• User management (who can log in, what they can access)
• Tax settings
• Number series (how vouchers are numbered)

You set this up once. After that, you rarely touch it.

Setting Up the Organization

"Before you can do anything," Negi Bhaiya said, "you have to tell the software WHO you are. Which company? What is the GSTIN? What financial year?"

This is called Organization Setup. It is the very first thing you do when you start using ERPLite for a new business.

Sharma Sir came over. "Let us practice. Set up my practice — Sharma & Associates — as a test."

Step 1: Go to Settings → Organization

Meera clicked on Settings in the left menu, then clicked Organization.

Step 2: Fill in the Details

A form appeared with several fields. Let us go through each one.

Company Name: This is the legal name of the business.

Meera typed: Sharma & Associates

Address: The registered address of the business.

Meera typed:

• Near SBI Branch, Haldwani
• District: Nainital
• State: Uttarakhand
• PIN: 263139

GSTIN: The 15-digit GST Identification Number.

"Every GST-registered business has a GSTIN," Negi Bhaiya explained. "It starts with the state code. Uttarakhand's code is 05."

Meera typed: 05AABCS1234A1Z5

"This is a sample number," Sharma Sir said. "In real life, you get your GSTIN from the government when you register for GST."

Let us understand the GSTIN format:

PAN: The Permanent Account Number (10 characters).

Meera typed: AABCS1234A

Notice that the PAN is embedded inside the GSTIN. Characters 3 to 12 of the GSTIN are the PAN.

Financial Year: The 12-month period for which you keep accounts.

In India, the financial year runs from 1st April to 31st March.

Meera selected:

• Start Date: 01-04-2025
• End Date: 31-03-2026

Currency: Indian Rupees (INR). This is the default.

Contact Details:

• Phone: 05946-XXXXXX
• Email: [email protected]

Step 3: Save

Meera clicked the Save button. A green message appeared: "Organization details saved successfully."

"That's it?" Meera asked, surprised.

"That's it," Negi Bhaiya smiled. "Now the software knows who we are. Every invoice, every report, every document will carry these details automatically."

Understanding the Financial Year

Sharma Sir noticed Meera looking confused about the financial year. He sat down to explain.

"Meera, think of it like the school year. School starts in April and ends in March, right? The financial year is the same. Every business in India starts its accounting year on 1st April and ends on 31st March."

"Why not January to December?" Meera asked.

"Because the government decided so," Sharma Sir said with a laugh. "The Income Tax Act says the financial year is April to March. So all businesses follow that. When you set up ERPLite, you tell it which financial year you are working in. All transactions you enter must fall within that year."

Important rule: If you are working in FY 2025-26, you can only enter transactions dated between 1st April 2025 and 31st March 2026. If you try to enter a transaction dated 15th April 2026, the software will not allow it — that belongs to FY 2026-27.

The Draft → Post Workflow

Before they finished for the day, Negi Bhaiya showed Meera one more important concept.

"In ERPLite, when you enter any transaction — a voucher, an invoice, anything — it first goes into Draft mode."

"What does that mean?" Meera asked.

"Draft means it is saved but not final. Think of it like writing a letter in pencil first. You can erase, change, correct. Once you are happy with it, you write it in pen. That is Posting."

Here is how it works:

"Why not just post everything directly?" Meera asked.

"Because mistakes happen," Negi Bhaiya said. "Imagine you enter an invoice for Rs. 50,000 but the correct amount is Rs. 5,000. If it posts immediately, the accounts are wrong. With drafts, you — or Sharma Sir — can review the entry before it becomes final."

In some offices, the workflow is even more structured:

1. Junior accountant (like Meera) creates the entry → it goes to Draft
2. Senior accountant (like Negi Bhaiya) reviews it → approves it
3. The entry is Posted → accounts are updated

This is called the approval process. It makes sure no entry goes into the books without being checked.

"For now," Sharma Sir said, "you will create entries in Draft. Negi Bhaiya will review them. Once he approves, they get posted. This way, you can learn without worrying about making permanent mistakes."

Meera felt relieved. A safety net while she learned.

What Meera Set Up Today

Let us list everything Meera did in this first session with ERPLite:

1. Logged in to ERPLite using her username and password
2. Explored the dashboard — saw Cash Balance, Receivables, Payables at a glance
3. Navigated the menu — understood the four sections: Masters, Transactions, Reports, Settings
4. Set up the Organization — entered company name, address, GSTIN, PAN, financial year
5. Understood the Draft → Post workflow — entries are reviewed before they become final

Not bad for a first day on the computer!

Quick Recap

• ERP stands for Enterprise Resource Planning — one software to manage all business operations
• Udyamo ERPLite is an Indian ERP software that supports GST, Schedule III Chart of Accounts, and the full accounting cycle
• The Dashboard is your home screen — it shows key numbers at a glance
• The Main Menu has four sections: Masters (foundation data), Transactions (daily entries), Reports (results), Settings (configuration)
• Organization Setup is the first step — enter company name, GSTIN, PAN, address, and financial year
• GSTIN is a 15-digit number that includes the state code and PAN
• The Financial Year in India runs from 1st April to 31st March
• The Draft → Post workflow lets you review entries before they become final
• Approval process means a senior person checks the entry before it is posted

Practice Exercise — Try This Yourself

You are setting up ERPLite for a new client. Here are the details:

Business Name: Kumaon Fresh Fruits Owner: Pankaj Mehta Address: Main Market, Ranikhet, District Almora, Uttarakhand - 263645 GSTIN: 05BMPPM5678B1Z3 PAN: BMPPM5678B Financial Year: 2025-26 Phone: 05966-XXXXXX Email: [email protected]

Tasks:

1. Write down the state code from the GSTIN. What state does it belong to?
2. Extract the PAN from the GSTIN. Verify it matches the PAN given above.
3. What are the start and end dates of FY 2025-26?
4. If Pankaj gives you a bill dated 5th April 2026, can you enter it in FY 2025-26? Why or why not?
5. List the four main sections of the ERPLite menu and write one thing you would find in each.

Bonus: If you have access to ERPLite, log in and set up this organization. Take a screenshot of the completed organization form.

Fun Fact

Did you know? The word "computer" originally meant a person — not a machine! In the early 1900s, "computers" were people (often women) who sat at desks and did calculations by hand. The first electronic computers were built to do these calculations faster. So when you use ERPLite, you are doing the same job that rooms full of people used to do — but you are doing it alone, in minutes. That is the power of technology. Meera from Bageshwar, sitting in Haldwani, using software built in India, managing accounts for businesses across Uttarakhand. Not bad at all.

Masters — Setting Up the Foundation

Meera came to the office early the next day. She was excited. Yesterday she had learned to log in and navigate ERPLite. Today, Negi Bhaiya had promised something more interesting.

"Before we enter a single transaction," Negi Bhaiya said, pouring chai, "we need to set up the Masters. Think of it like this — before you can cook, you need to buy the ingredients and arrange your kitchen. Masters are the ingredients of accounting software."

Sharma Sir walked in. "Today we set up Bisht Ji's business in the system. He is our biggest client. Wholesale spices — turmeric, cumin, coriander, red chilli. All the flavors of Uttarakhand." He smiled. "Let's get started."

What Are Masters?

In ERPLite, Masters are the foundation data — the information that you set up once and use again and again.

When you create a sales invoice, you don't type the customer's name, address, and GSTIN every time. You set it up once in the Customer Master. After that, you just select "Bisht Traders" from a dropdown, and all details fill in automatically.

There are five types of Masters in ERPLite:

Let us set up each one for Bisht Traders.

Item Master — What Does the Business Sell?

Bisht Ji runs Bisht Traders, a wholesale spice business in Haldwani. He buys raw spices from suppliers in Delhi and Rajasthan. He processes and packs them. Then he sells them to shops and restaurants across Kumaon.

His main products are:

• Turmeric Powder (Haldi)
• Cumin Seeds (Jeera)
• Coriander Powder (Dhaniya)
• Red Chilli Powder (Lal Mirch)
• Garam Masala (mixed spice blend)

Each product needs to be set up in the Item Master. Let us see what information we need.

Setting Up an Item

Meera clicked Masters → Items → New Item in the left menu.

A form appeared with these fields:

Item Name: The name of the product. Meera typed: Turmeric Powder

Item Code: A short code for quick reference. Meera typed: TUR-001

"Use codes that make sense," Negi Bhaiya suggested. "TUR for turmeric, CUM for cumin, COR for coriander. It helps when you have hundreds of items."

HSN Code: This stands for Harmonized System of Nomenclature. It is a number given to every product by the government for GST purposes.

"Every product in India has an HSN code," Sharma Sir explained. "Spices fall under Chapter 9 of the HSN classification. Turmeric powder is 0910 30 30."

"Don't worry about memorizing these," Negi Bhaiya said. "You can look them up on the GST portal. But always make sure the HSN code is correct — wrong code means wrong tax rate, and that means trouble with GST filing."

Unit of Measurement (UoM): How do you measure this item?

Meera selected: KG (kilogram)

Other common units are: PCS (pieces), LTR (litres), MTR (metres), BAG, BOX, DOZ (dozen).

GST Rate: The tax rate applicable to this item.

Most spices are taxed at 5% GST (2.5% CGST + 2.5% SGST for sales within the same state, or 5% IGST for sales between states).

Meera selected: 5%

Selling Price: The price at which Bisht Ji sells this item.

Meera typed: Rs. 180 per kg

Purchase Price: The price at which Bisht Ji buys raw turmeric.

Meera typed: Rs. 120 per kg

"The difference between selling price and purchase price is your gross margin," Sharma Sir pointed out. "Rs. 60 per kg on turmeric. That is 33% margin. Not bad for spices."

Category / Group: You can group items into categories.

Meera created a category called Whole Spices for cumin seeds and another called Ground Spices for powders.

Saving the Item

Meera clicked Save. The item appeared in the item list.

She then created the remaining items:

"Five items done," Meera said. "That was not too hard."

"Bisht Ji has about fifty items in reality," Negi Bhaiya said. "Different pack sizes, different qualities. But the process is the same for each one."

Customer Master — Who Buys From Us?

Bisht Traders sells spices to shops and restaurants. These are his customers. Let us set up one customer.

Meera clicked Masters → Customers → New Customer.

Customer Name: Nainital Spice Restaurant

GSTIN: 05AABCN9876A1Z2

"If the customer is GST-registered, always enter their GSTIN," Sharma Sir said. "It is needed on the tax invoice. If they are not registered — like a small shop — leave this blank."

Address:

• Mall Road, Nainital
• District: Nainital
• State: Uttarakhand
• PIN: 263001

Contact Person: Mr. Ravi Pandey

Phone: 94100XXXXX

Email: [email protected]

Credit Limit: This is the maximum amount this customer can owe you at any time.

Meera typed: Rs. 50,000

"Credit limit is important," Negi Bhaiya explained. "Bisht Ji sometimes supplies goods on credit — the customer pays later. But what if a customer keeps buying without paying? The credit limit is a safety check. If their outstanding balance reaches Rs. 50,000, the software will warn you before you create another invoice."

Payment Terms: How many days does the customer get to pay?

Meera selected: 30 days

This means if Bisht Ji sends goods on 1st January, the customer must pay by 31st January. If they pay later, they are overdue.

Meera saved the customer. Then she added two more:

• Almora Kitchen Supplies — a shop in Almora, credit limit Rs. 30,000, payment terms 15 days
• Kumaon Hotel Group — a hotel chain, credit limit Rs. 2,00,000, payment terms 45 days

Vendor Master — Who Do We Buy From?

A Vendor is someone you buy from. Bisht Ji buys raw spices from suppliers. These suppliers are his vendors.

Meera clicked Masters → Vendors → New Vendor.

The form looks very similar to the Customer form. In fact, many fields are the same — name, GSTIN, address, contact. The difference is the relationship: a customer buys from you, a vendor sells to you.

Vendor Name: Delhi Spice Suppliers Pvt Ltd

GSTIN: 07AABCD1234E1Z6

Notice the state code is 07 — that is Delhi. When Bisht Ji (Uttarakhand, state code 05) buys from a Delhi supplier (state code 07), it is an inter-state transaction. The GST will be IGST (not CGST + SGST). ERPLite handles this automatically based on the GSTINs.

Address:

• Khari Baoli, Old Delhi
• State: Delhi
• PIN: 110006

Contact Person: Mr. Ashok Gupta

Phone: 98110XXXXX

Payment Terms: 45 days

TDS Applicable: Yes

"What is TDS?" Meera asked.

"We will cover TDS in detail later," Sharma Sir said. "For now, just know that sometimes when you pay a vendor, you have to deduct a small percentage and send it to the government on their behalf. The vendor gets the rest. If TDS applies to this vendor, we tick this box."

Meera saved the vendor. She added one more:

• Rajasthan Masala Co. — GSTIN 08AABCR5678B1Z4 (state code 08 = Rajasthan), based in Jodhpur, payment terms 30 days

Employee Master — Who Works Here?

Bisht Traders has a few employees. The Employee Master stores their details for payroll (salary processing).

Meera clicked Masters → Employees → New Employee.

Employee Name: Rakesh Kumar

Designation: Warehouse Assistant

PAN: ABCPK1234A

"PAN is important for employees," Negi Bhaiya said. "If you pay someone a salary above a certain limit, you need to deduct TDS from their salary. Their PAN is required for TDS filing."

Bank Details:

• Bank Name: State Bank of India
• Account Number: 12345678901
• IFSC Code: SBIN0001234

"Why do we need bank details?" Meera asked.

"Because salaries are paid by bank transfer these days," Negi Bhaiya said. "ERPLite can generate a payment file that you upload to the bank. The bank then transfers salary to each employee's account automatically. No cash handling, no risk."

Salary Components:

• Basic Salary: Rs. 12,000 per month
• HRA (House Rent Allowance): Rs. 3,000 per month
• Conveyance: Rs. 1,600 per month
• Total: Rs. 16,600 per month

We will learn more about salary components and payroll in a later chapter. For now, Meera just entered the basic details.

Chart of Accounts — The Backbone

The Chart of Accounts is the list of all account heads used in the business. We studied this in detail in the previous chapter. The good news? ERPLite comes with a pre-loaded Chart of Accounts based on Schedule III.

Meera clicked Masters → Chart of Accounts.

She saw a tree-like structure:

├── Assets
│   ├── Non-Current Assets
│   │   ├── Fixed Assets
│   │   │   ├── Land & Building
│   │   │   ├── Plant & Machinery
│   │   │   ├── Furniture & Fixtures
│   │   │   └── Vehicles
│   │   └── Investments
│   └── Current Assets
│       ├── Cash & Cash Equivalents
│       │   ├── Cash in Hand
│       │   └── Bank Accounts
│       ├── Trade Receivables
│       ├── Inventory
│       └── Advance Tax
├── Liabilities
│   ├── Non-Current Liabilities
│   │   └── Long-term Loans
│   └── Current Liabilities
│       ├── Trade Payables
│       ├── GST Payable
│       │   ├── CGST Payable
│       │   ├── SGST Payable
│       │   └── IGST Payable
│       ├── TDS Payable
│       └── Salary Payable
├── Income
│   ├── Revenue from Operations
│   │   └── Sales
│   ├── Other Income
│   │   ├── Interest Income
│   │   └── Discount Received
├── Expenses
│   ├── Cost of Goods Sold
│   │   └── Purchases
│   ├── Employee Benefit Expenses
│   │   └── Salaries & Wages
│   ├── Administrative Expenses
│   │   ├── Rent
│   │   ├── Electricity
│   │   ├── Telephone
│   │   └── Office Supplies
│   └── Financial Costs
│       └── Bank Charges
└── Equity
    ├── Owner's Capital
    └── Retained Earnings

"All of this is already set up?" Meera was amazed.

"Yes," Sharma Sir said. "ERPLite follows Schedule III of the Companies Act. The standard accounts are pre-loaded. You can add more accounts if needed, but you should never delete the standard ones."

Adding a Custom Account

Bisht Ji sometimes earns income from renting out storage space in his warehouse. This does not fall under any existing account. Meera needed to create a new one.

She right-clicked on Other Income and selected Add Sub-Account.

Account Name: Warehouse Rental Income Account Type: Income Parent Group: Other Income

She clicked Save. The new account appeared under Other Income.

"That's how you customize," Negi Bhaiya said. "The structure is already there. You just add leaves to the tree."

Understanding Account Types

Every account in the Chart of Accounts has a type. This determines how it behaves:

"You learned this in the double-entry chapter," Sharma Sir reminded Meera. "The software follows the same rules. When you post a voucher, ERPLite checks that every debit has an equal credit. If the entry is not balanced, it won't let you save."

Linking It All Together

Now Meera understood something important. All the Masters are connected:

• When she creates a Sales Invoice, she selects a Customer (from Customer Master) and Items (from Item Master). The GST rate comes from the Item Master. The invoice posts to accounts in the Chart of Accounts (Sales, GST Payable, Trade Receivables).

• When she creates a Purchase Bill, she selects a Vendor and Items. The payment links to the vendor's bank details if paying online.

• When she processes Payroll, she uses Employee data — salary components, PAN, bank details.

Everything flows from the Masters.

Masters ──► Transactions ──► Reports

Items ──────┐
Customers ──┤
Vendors ────┼──► Vouchers, Invoices, Bills ──► Trial Balance, P&L, Balance Sheet
Employees ──┤
Chart of ───┘
Accounts

"Set up the Masters carefully," Sharma Sir said. "If the foundation is wrong, everything built on it will be wrong. A wrong GST rate in the Item Master means every invoice with that item will have the wrong tax. A wrong GSTIN in the Customer Master means every invoice to that customer will be rejected by the GST portal."

What Meera Set Up Today

Here is a summary of everything Meera created for Bisht Traders:

Quick Recap

• Masters are the foundation data in ERPLite — set up once, used repeatedly
• Item Master stores products/services with HSN code, GST rate, unit, and prices
• HSN Code is a government-assigned number for every product — it determines the GST rate
• Customer Master stores buyer details including GSTIN, credit limit, and payment terms
• Vendor Master stores supplier details — similar to customers but on the buying side
• Employee Master stores staff details including PAN and bank account for payroll
• Chart of Accounts is pre-loaded with Schedule III accounts — you can add custom accounts but should not delete standard ones
• Credit Limit prevents a customer from buying more than they should on credit
• Payment Terms define how many days a customer or vendor has to settle payment
• All Masters are interconnected — Items, Customers, Vendors, and Accounts all come together when you create transactions

Practice Exercise — Try This Yourself

Rawat Aunty runs Rawat General Store in Almora. She is a small kirana shop owner. She is NOT registered for GST (her turnover is below the threshold). She buys goods from local wholesalers and sells to neighborhood customers.

Task 1: Create Items for Rawat Aunty

Create Item Master entries for these products:

Notice that wheat flour (atta) has 0% GST — it is exempt. Not all food items are taxed the same.

Task 2: Create a Customer

Set up this customer for Bisht Traders:

• Name: Pahadi Kitchen Restaurant
• GSTIN: 05AADPK4567C1Z9
• Address: Lake View Road, Bhimtal, Uttarakhand - 263136
• Contact: Mrs. Sunita Pant
• Credit Limit: Rs. 75,000
• Payment Terms: 21 days

Task 3: Think About It

1. Why is it important to enter the correct HSN code for each item?
2. What happens if you set a credit limit of Rs. 0 for a customer?
3. Bisht Ji buys from a vendor in Uttarakhand (state code 05) and also from a vendor in Delhi (state code 07). How will the GST be different for these two purchases?

Fun Fact

The word "spice" comes from the Latin word species, which means "goods" or "merchandise." In ancient times, spices were so valuable that they were used as currency. Black pepper was called "Black Gold." Arab traders kept their spice routes secret for centuries. The spices that Bisht Ji sells from his Haldwani warehouse — turmeric, cumin, coriander — are the same spices that once built empires and launched ships across oceans. And here is Meera, tracking them in ERPLite, one HSN code at a time.

Voucher Entry in ERPLite

It was Wednesday morning. Bisht Ji himself had come to the office. He placed a thick folder on Meera's desk. Inside were bills, receipts, bank slips, and handwritten notes on small pieces of paper.

"This is one week's worth," Bisht Ji said. "Sales, purchases, cash received, cash paid, one bank transfer, and some adjustments. I need all of this entered into the system."

Meera stared at the pile. Negi Bhaiya pulled up a chair. "Don't worry," he said. "We will go through each one. By the end of today, you will know every voucher type in ERPLite."

Sharma Sir poured chai for Bisht Ji. "Meera, this is the real work. Everything you learned on paper — journals, debits, credits — this is where it comes alive on the computer."

The 8 Voucher Types

In the earlier chapters, you learned that every financial transaction is recorded using a voucher. A voucher is the basic building block of accounting.

ERPLite has 8 voucher types. Each one is designed for a specific kind of transaction.

"Think of it like this," Negi Bhaiya explained. "Each voucher type is like a different form. You use the right form for the right situation. You don't use a sales form to record a rent payment."

Let us go through each one, using Bisht Ji's folder of papers.

1. Journal Voucher — The All-Purpose Entry

The Journal Voucher is used for entries that don't involve direct cash or bank transactions. It is the most flexible voucher type.

When to use it:

• Depreciation entries
• Adjustments between accounts
• Opening balances
• Closing entries at year-end
• Any entry that doesn't fit the other types

Bisht Ji's paper: A note from Sharma Sir saying "Record depreciation on delivery van — Rs. 15,000 for the quarter."

Meera clicked Transactions → Voucher Entry → Journal.

She filled in:

What is the Narration field?

The narration is a short description of WHY this entry was made. It is not required by the software, but it is very important in practice.

"Always write a narration," Sharma Sir said firmly. "Six months from now, you will look at this entry and wonder — why did I debit depreciation? The narration tells you. It is your note to your future self."

Meera clicked Save as Draft. The voucher was saved but NOT posted yet.

2. Receipt Voucher — Money Coming In

The Receipt Voucher is used when money comes into the business — from a customer paying their bill, or from any other source of income.

Bisht Ji's paper: A bank slip showing Rs. 25,000 received from Nainital Spice Restaurant by NEFT transfer.

Meera clicked Transactions → Voucher Entry → Receipt.

When Meera selected "Nainital Spice Restaurant" from the dropdown, ERPLite automatically showed their outstanding invoices. She could see that Invoice #SI-2025-042 for Rs. 47,250 was pending. This Rs. 25,000 was a partial payment.

"The software knows how much each customer owes," Negi Bhaiya said. "When you record a receipt, it reduces their outstanding balance. After this entry, Nainital Spice Restaurant will owe Rs. 22,250 instead of Rs. 47,250."

Behind the scenes — the GL entry:

Bank goes up (debit). Receivables go down (credit). The double-entry rule is satisfied.

3. Payment Voucher — Money Going Out

The Payment Voucher is used when money goes out of the business — paying a supplier, paying rent, paying the electricity bill.

Bisht Ji's paper: A rent receipt from the landlord — Rs. 8,000 paid in cash for June 2025.

Meera clicked Transactions → Voucher Entry → Payment.

Behind the scenes — the GL entry:

Rent expense goes up (debit). Cash goes down (credit).

"Notice the pattern," Sharma Sir said. "Receipt means money comes in — bank or cash goes UP. Payment means money goes out — bank or cash goes DOWN. The other side of the entry depends on who you received from or paid to."

4. Contra Voucher — Moving Money Between Own Accounts

The Contra Voucher is used when you transfer money between your own accounts — for example, depositing cash into the bank, or withdrawing cash from the bank.

Bisht Ji's paper: A bank deposit slip — Rs. 50,000 cash deposited into SBI Haldwani.

"This is not an expense and not an income," Negi Bhaiya explained. "The money is just moving from one pocket to another — from the cash drawer to the bank account. The total money hasn't changed."

Meera clicked Transactions → Voucher Entry → Contra.

Behind the scenes — the GL entry:

Bank goes up. Cash goes down. Total assets remain the same.

"Think of it like transferring water from one glass to another," Meera said.

"Exactly!" Sharma Sir said. "That is a perfect analogy. The total water hasn't changed. Only the glass it is in."

5. Sales Voucher — Selling Goods

The Sales Voucher is used when you sell goods or services. We will cover the full sales cycle (quotation to payment) in the next chapter. For now, let us see a basic sales entry.

Bisht Ji's paper: A sales bill to Almora Kitchen Supplies — 20 kg Turmeric Powder and 10 kg Cumin Seeds.

Meera clicked Transactions → Sales → Sales Invoice.

Item Lines:

Since both Bisht Traders and Almora Kitchen Supplies are in Uttarakhand (same state), the GST is split into:

• CGST @ 2.5% = Rs. 202.50
• SGST @ 2.5% = Rs. 202.50
• Total GST = Rs. 405

ERPLite calculated all of this automatically based on the GST rate stored in the Item Master and the state codes from the GSTINs.

Behind the scenes — the GL entry:

6. Purchase Voucher — Buying Goods

The Purchase Voucher records purchases. We will cover the full purchase cycle in a later chapter. Here is a basic entry.

Bisht Ji's paper: A bill from Delhi Spice Suppliers — 100 kg raw turmeric at Rs. 120/kg.

Meera clicked Transactions → Purchase → Purchase Bill.

Item Lines:

Since Delhi Spice Suppliers is in Delhi (07) and Bisht Traders is in Uttarakhand (05), this is an inter-state purchase. So the GST is IGST (not CGST + SGST).

Behind the scenes — the GL entry:

Notice that GST paid on purchases goes to Input Credit (an asset), not to the payable account. This is because you can claim this amount back from the government. We will learn more about Input Tax Credit in the GST chapters.

7. Debit Note — Returning Goods to a Supplier

A Debit Note is issued when you return goods to a supplier, or when the supplier agrees to reduce the price.

Bisht Ji's paper: A note saying "Returned 10 kg damaged turmeric to Delhi Spice Suppliers."

Meera clicked Transactions → Voucher Entry → Debit Note.

"Why is it called a Debit Note?" Meera asked.

"Because you are debiting the supplier's account," Sharma Sir explained. "You are saying — you owe me Rs. 1,260 less now. Or you need to send me a refund. Your account in my books goes down."

Behind the scenes — the GL entry:

This is the reverse of the original purchase entry. Payables go down. Purchases go down. Input credit also goes down (because you returned the goods, so you can't claim the GST on them).

8. Credit Note — Customer Returns Goods

A Credit Note is issued when a customer returns goods, or when you give a discount after the sale.

Bisht Ji's paper: A note saying "Almora Kitchen Supplies returned 5 kg Turmeric Powder — shelf life expired."

Meera clicked Transactions → Voucher Entry → Credit Note.

"Why Credit Note?" Meera asked.

"Because you are crediting the customer's account," Sharma Sir said. "You are saying — you owe me Rs. 945 less now. I am giving you credit."

Behind the scenes — the GL entry:

Sales go down. GST payable goes down. Receivables go down. Everything reverses.

Debit Note vs. Credit Note — A Simple Summary

Students often get confused between these two. Here is a simple way to remember:

Simple memory trick: Debit Note = you bought something wrong. Credit Note = you sold something wrong.

Auto-Numbering

"Did you notice," Negi Bhaiya pointed out, "that you didn't type the voucher number? The system generated it automatically."

ERPLite uses auto-numbering for all vouchers. Each voucher type has its own number series: