Jan 1, 2009

Common and Possible Errors in Grouping and Account Classification

Debtor/Creditor classification
Placing individual party accounts under Sales or Purchase Accounts groups
Accounts of parties with whom your company has trade relationship must be opened under any of the following groups (or sub-groups under them) only:

Sundry Debtors

Sundry Creditors

Branch/Divisions

Sales and Purchase account groups are meant for revenue accounts and would be reflected in the Profit &Loss Account. If you open party accounts under these groups, you will find it difficult to pass sales or purchase voucher transactions. For example, in a sales voucher transaction entry, you must debit an account which is a sundry debtor, branch/division or even a sundry creditor (why a creditor? - it will be explained soon). Moreover, other facilities like bill-wise allocation and tracking would not become available unless the accounts belong to one of these groups.

Opening two accounts of the same party
Tally has separately classified debtors, creditors and branch/divisions only for convenience. There is no operational distinction except for the purpose of keeping the accounts of a particular group together during displays and analysis. Thus you can pass both sales and purchase entries for a party account placed under Sundry Debtors.

We recommend that you use the classification depending on the most natural group for the party. For example, parties from whom you buy more frequently then you sell to, could be placed under Sundry Creditors, as that would be the natural place for you to look for his account. Tally does not restrict the accounts from having obverse balances. Thus, a Sundry Debtor can have a credit balance depending on the state of his account.

You would, therefore, note that you need not open two accounts of the same party - one under Sundry Debtors and another under Sundry Creditors. Remember, Tally restricts you from opening two identical ledger accounts. Of course, you may decide to circumvent by marking one account as "A & Co - S/Dr" and another "A & Co - S/Cr". Doing this would allow you to have two accounts of the same party under two groups, but you would lose the advantage of analysing his net position in one place. We recommend that you maintain a single account to obtain best benefits.

Placing expenditure items under a Liabilities group, e.g., the expenditure item 'Rates & Taxes' under the group 'Duties and Taxes'.

The group Duties and Taxes is specifically meant to handle taxation liabilities of your company. Rates & Taxes and other statutory expenses should be placed under Indirect Expenses.

Simply adhering to the reserved groups may be sufficient for many organisations. For greater diversity, Tally allows you to create your own groups, either as sub-groups or primary groups. Groups can be sub-classified to practically an unlimited level, to give a virtual accounting tree. At the lowest level, of course, would be the ledger account. An example of sub-groups would help illustrate the power of this facility:

The group Indirect Expenses can be sub-classified as under (ledgers given in italics):



Remember, that during voucher entry, only the ledger accounts are used, - and the grouping structure remains transparent, irrespective of the use of sub-classification.

This idea can be easily extended to other areas like Sundry Debtors, Sales Accounts, Purchase Accounts, etc. For example, Debtors and Creditors are very useful when sub-grouped according to geographical areas:



You may prefer to classify creditors according to their tax status, e.g.,



You can see that unlimited levels of sub-grouping is a convenience to be used thoughtfully. Use it to give a never before depth to your presentation of accounting information but take care to not carry it too far. Too many levels of sub-groups may make their use redundant and their management unwieldy. A simple guideline could be to create branches of sub-groups or ledgers only if they are two or more than in number. A situation where you have created groups as follows should be avoided:



Obviously, you could have done with simply creating ledgers directly under Marketing Expenses.

Note: While it is necessary to assign every ledger to a group/sub-group, it is not essential to have your own sub-classification of accounts; you may simply use the reserved groups for grouping your ledger accounts.

4 comments:

P.C.Dabral said...

यह देखकर बहुत प्रशन्नता हुई की आप मैकेनिकल इंजिनियर होकर एकाउंट के ऊपर ब्लाग लिख रहे है | मैं स्वयम एकाउंट से ही सम्बंध रखता हूँ इसलिए आपका ब्लॉग मेरी बहुत मदद करेगा |

sunil said...

Thank you for your appreciation.

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