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.

A Discussion on Each of the Reserved Groups




1. Capital Account
This holds the Capital and Reserves of the company. Examples of ledgers that may be opened under this group are Share Capital, Partners' Capital A/c, Proprietor's Capital Account.

Reserves and Surplus [Retained Earnings]
Open ledgers like Capital Reserve, General Reserve, Reserve for Depreciation, etc.

2. Current Assets
Directly under Current Assets, you may find place for assets that do not fall under the following sub-groups:

Bank Accounts

For Current, savings, short term deposit accounts, etc.

Cash-in hand
Tally automatically opens one Cash A/c under this group. You are permitted to open more cash accounts, if necessary.

Note: An account under Cash-in-hand group or Bank Accounts/Bank OCC A/c group is printed as separate Cash Book in the traditional Cash Book format and does not form part of the Ledger.

Deposits (Asset)
In essence, a place for Fixed Deposits, Security Deposits, or any deposit made by the company (not received by the company, which is a liability).

Loans & Advances (Asset)
For all loans given by the company and advances of a non-trading nature, e.g., advance against salaries, or even for purchase of Fixed Assets. We do not recommend you to open Advances to Suppliers account under this group. Doing so gives rise to the difficulty in ascertaining advance position of a particular supplier and to adjust future bills against such advances. For further details, please refer to the section on Common Errors.

Stock-in-hand
This is a special group. You may wish to open accounts like Raw Materials, Work-in-Progress and Finished Goods. How the balances are controlled depends on whether you opted to maintain an integrated account-cum-inventory system in the company features. (refer to Company creation section for more details) Let's consider the options:

Integrated Accounts-cum-Inventory
You are allowed transactions in Inventory records and the account balances are automatically reflected in the Balance Sheet as Closing Stock. You are not allowed to directly change the closing balance of an account under this group.

Non-integrated Accounts-cum-Inventory
Accounts that fall under this group are not permitted any transactions. It allows you to hold opening and closing balances only. Since no vouchers can be passed for these accounts, they are the only accounts for which the closing balances can be directly altered (by an authorised user only)

Sundry Debtors
For your customer accounts. Do not open them under the Sales Account group, which is a revenue account. For more information on common and possible errors in grouping of accounts, please refer below to the separate paragraph on the topic.

3. Current Liabilities
You may open accounts like Outstanding Liabilities, Statutory Liabilities and other minor liabilities directly under this group. Sub-groups under Current Liabilities are Duties and Taxes, Provisions and Sundry Creditors

Duties and Taxes
For all tax accounts like VAT, MODVAT, Excise, Sales and other trade taxes. A convenient place to find the total liability (or asset in case of advances paid), as well as the break-up of individual items.

Provisions
For provision accounts like Provision for Taxation, Provision for Depreciation, etc.

Sundry Creditors

For trade creditors of the company. Do not open your supplier accounts under the Purchases Account group, which is a revenue account. For more information on common and possible errors in grouping of accounts, please refer below to the separate paragraph on the topic.

4. Investments

To group your investment accounts like Investment in Shares, Bonds, Govt. securities, long term Bank deposit accounts, etc. A convenient place to view the total investments made by the company.

5. Loans (Liability)
For loans, typically long term, taken by the company.

Bank OD Accounts [Bank OCC Accounts]
Tally gives two distinct types of Bank Accounts, The Bank OCC A/c is meant to record the company's overdraft accounts with banks. e.g., Bill Discounted A/cs, Hypothecation A/cs etc.

Note: An account under Bank OCC A/c group is printed as separate Cash Book in the traditional Cash Book format and does not form part of the Ledger.

Secured Loans
For term loans and other long/medium term loans that have been obtained against security of some asset. Tally does not verify the existence of the security. Typical accounts would be Debentures, Term Loans, etc.

Unsecured Loans

For loans obtained without any security .e.g., Loans from Directors/partners or outside parties.

6. Suspense Account
Theoretically speaking, this group should not exist. However, in modern accounting, many large corporations use a Suspense Ledger to track moneys paid or recovered, the nature of which is not yet known. The most common example is money paid for Travelling Advance whose details would be known only upon submission of the TA bill. Some companies may prefer to open such accounts under

Loans and Advances (Asset) group.
Please note that Suspense Account is a Balance Sheet item. Any expense account even if it has 'suspense' in its name, should be opened under a Revenue group like Indirect Expenses and not under Suspense Account group.

7. Miscellaneous Expenses (Asset)

This group is typically used more for legal disclosure requirements, like Schedule VI of the Indian Companies Act. It should hold incorporation and pre-operative expenses. Companies would write off a permissible portion of the account every year. A balance would remain to the extent not written off in Profit & Loss Account. Tally does not, however, show a loss, carried forward in the Profit & Loss Account, under this group. The Profit & Loss Account balance is shown separately in the Balance Sheet.

8. Branch/Divisions
This group is provided to keep the ledger accounts of all companies that are your company's branches, divisions, affiliates, sister concerns, subsidiaries, etc. This is a group of convenience. You may not wish to utilise it in this manner. Note that Tally permits Sales and Purchase transactions to take place with accounts opened here. Remember, these are their accounts in your books and not their books of accounts. Just treat them as you would any party account. If you wish to maintain the books of that branch/division on you computer, you must open a separate company. (Tally allows maintenance of multiple company accounts).

Revenue Primary Groups
9. Sales Account
For different sales accounts. The natural segregation of your sales accounts could be based on Tax slabs or type of sales. This also becomes a simple mechanism for preparation of Tax returns.

An example of such classification may be helpful:

Classify under Sales Accounts the following sub-groups

Domestic Sales

Export Sales

Now under Domestic Sales open the following ledgers:

Sales (10%)

Sales (5%)

Sales (exempt)

You may even open an account Sales Returns under the group Domestic Sales to view your net sales after returns (or the returns may be directly passed through journal against the specific sales account).

Please do not open customer accounts under this group. For more details on possible errors in this regard, please refer to the paragraph given below.

10. Purchase Account
This is similar to sales accounts, except for the purpose of the transaction.

11. Direct Income [Income Direct]
For non-trade income accounts that affect Gross Profit. All trade income accounts would naturally fall under Sales Accounts. You may wish to use this group for accounts like Servicing Contract Charges that follow sales of equipment.

If yours is a professional services company, you may not use the Sales Account group at all. Instead, open accounts like Professional Fees under this group.

12. Indirect Income [Income Indirect]

For miscellaneous non-sale income accounts, e.g., Rent Received and Interest Received.

13. Direct Expenses [Expenses Direct]
For manufacturing or direct trading expenses. These accounts determine the Gross Profit of the company.

14. Indirect Expenses [Expenses Indirect]
For all other administrative, selling or non-direct expenses.

Tally automatically opens the Profit & Loss Account which is a reserved primary account. You may use this account to pass adjustment entries through journal vouchers .e.g., transfer of profit or loss to Capital or Reserve account.

Classification of Account-heads

Tally follows the 'Single Ledger' concept of accounting, which is the modern way of managing accounts. This is in direct contrast to Subsidiary Ledger Accounting. Thus, all financial entries are performed using ledgers or account heads. Ledger account heads are created to identify transactions.

The single ledger concept does away with the need for sub-ledgers and corresponding control accounts in General Ledger. Ledger balances by themselves do not convey much without some form of classification. Tally, therefore, gives you a powerful way to group ledger information, which is meaningful in reports and compliant with laws. Groups, in Tally, serve to both classify and identify account heads according to their nature and enable presentation of summarised information.

Traditionally, grouping of accounts is a post-accounting activity that is done only when reports are needed. This has an inherent drawback of delayed reports that are not available at hand when required. Tally gives you great flexibility in setting up your chart of accounts.

It allows you to group your ledger accounts right at time of creating your accounts chart. Your reports and statements will reflect the desired classification at all times. Further, Tally permits you to re-group your ledgers anytime (with some minimal restrictions), should re-classification be necessary. We acknowledge that re-grouping is always possible and would, in practice, be resorted to, when there are changes in the nature of information. However, re-grouping can be done only by a user account that has requisite authority under the access control list.

At the highest level of grouping, accounts are classified into capital or revenue - more specifically into assets, liabilities, income and expenditure. Based on mercantile accounting principles, Tally provides a set of reserved groups and allows you to modify their names or create sub-groups.

The concept of sub-groups
Groups have a hierarchical organisation. At the top of the hierarchy are Primary Groups. These are the main asset, liability, income or expenditure groups of accounts that determine the entire accounting and their presentation, i.e., whether a ledger affects Profit & Loss Account (as a revenue item) or goes into the Balance Sheet. The Reserved Primary Groups and subgroups (shown indented) are:

Aliases for the groups are given in square brackets [ ].

1)Primary Groups of capital nature
Capital Account

a)Reserves and Surplus [Retained Earnings]

2) Current Assets

a)Bank Accounts

b)Cash-in hand

c)Deposits (Asset)

d)Loans & Advances (Asset)

e)Stock-in-hand

f)Sundry Debtors

3) Current Liabilities

a) Duties and Taxes

b) Provisions

c) Sundry Creditors

d) Fixed Assets

4) Investments

5) Loans (Liability)

a) Bank OD Accounts [Bank OCC Accounts]

b) Secured Loans

c) Unsecured Loans

6) Suspense Account

7) Miscellaneous Expenses (Asset)

8) Branch/Divisions

9) Sales Account

10)Purchase Account

11)Direct Income [Income Direct]

12)Indirect Income [Income Indirect]

13)Direct Expenses [Expenses Direct]

14)Indirect Expenses [Expenses Indirect]