DOUBLE ENTRY ACCOUNTING Accounting is defined as : Art of recording, classifying and summarizing In a significant manner And in terms of money Transactions

DOUBLE ENTRY ACCOUNTINGDOUBLE ENTRY ACCOUNTING

Accounting is defined as :Accounting is defined as :

Art of recording, classifying and summarizingArt of recording, classifying and summarizing

In a significant mannerIn a significant manner

And in terms of moneyAnd in terms of money

Transactions and eventsTransactions and events

Which are, in part at least, of a financial Which are, in part at least, of a financial charactercharacter

And interpreting the results thereof. And interpreting the results thereof.

Double entry book keepingDouble entry book keeping

Art enables one to attain Art enables one to attain objectivesobjectivesRecording of transaction in Recording of transaction in orderlyorderly mannermannerClassifying refers to Classifying refers to groupinggrouping of accounts of accountsSummarizing thro’ Summarizing thro’ Trial Balance, Trial Balance, TradingTrading, , Profit and Loss Account andProfit and Loss Account and Balance SheetBalance Sheet..Terms of money : common language that Terms of money : common language that is through the help of is through the help of money money example : example :

Double entry Double entry

If business has 6 machines, 10 tons of raw If business has 6 machines, 10 tons of raw materials, 10 fans etc, impossible to know which materials, 10 fans etc, impossible to know which is more value unless they are expressed in a is more value unless they are expressed in a common common language.language.

Financial character : recording is based on Financial character : recording is based on financial financial events. Poor lighting and ventilation, events. Poor lighting and ventilation, relationship between workers and management, relationship between workers and management, though affect the earning capacity cannot be though affect the earning capacity cannot be recorded due to constraints to express in recorded due to constraints to express in monetary terms. monetary terms.

Double entryDouble entry

Starts with recording and ends with Starts with recording and ends with presentation of financial information.presentation of financial information.

Each transaction or event has Each transaction or event has twotwo aspects aspects or sides : or sides : DEBITDEBIT and and CREDIT CREDIT

Accounting trail : it’s a sequence of Accounting trail : it’s a sequence of activities in an accounting activities in an accounting process process

Accounting trailAccounting trail

Transaction / eventTransaction / eventPreparation of vouchersPreparation of vouchers

Recording in the primary booksRecording in the primary booksPosting in the secondary booksPosting in the secondary books

Preparation of trial balancePreparation of trial balancePreparation and presentation of financial statementsPreparation and presentation of financial statements

MEANINGMEANING

Transaction : a monetary deal made Transaction : a monetary deal made between two parties. Transfer of money or between two parties. Transfer of money or money’s worth from one person to anothermoney’s worth from one person to anotherEvent : a happening of consequence to an Event : a happening of consequence to an entityentityVoucher : it’s a written document. Receipt, Voucher : it’s a written document. Receipt, Payment voucher and Journal voucher.Payment voucher and Journal voucher.Financial statements : end products of the Financial statements : end products of the accounting process. accounting process.

ACCOUNTING TERMSACCOUNTING TERMS

Capital : investments by owner either in Capital : investments by owner either in cash or in kind. It’s a claim on businesscash or in kind. It’s a claim on businessDrawings : withdrawal from business Drawings : withdrawal from business either in cash or in kind or botheither in cash or in kind or bothDebtor : owing from persons to business. Debtor : owing from persons to business. Collectively known as Sundry Debtors.Collectively known as Sundry Debtors.Creditor : owing from business to persons. Creditor : owing from business to persons. Collectively known as Sundry creditorsCollectively known as Sundry creditorsRevenue : it’s the income. Includes both.Revenue : it’s the income. Includes both.

Terms Terms

Expenditure : it’s the expenses incurred for Expenditure : it’s the expenses incurred for earning revenue. Cost of manufacture, earning revenue. Cost of manufacture, cost of sales, cost of service.cost of sales, cost of service.

Expense : expenditure whose benefit is Expense : expenditure whose benefit is enjoyed and exhausted immediately enjoyed and exhausted immediately example salary, rent, wages, premiumexample salary, rent, wages, premium

Goods : commodities or merchandise held Goods : commodities or merchandise held by businessmen for sale.by businessmen for sale.

CLASSIFICATION OF GOODSCLASSIFICATION OF GOODS

Purchases : goods bought for cash and Purchases : goods bought for cash and creditcredit

Sales : Goods sold for cash and creditSales : Goods sold for cash and credit

Sales Returns : Received from customerSales Returns : Received from customer

Purchase Returns : Returned to suppliersPurchase Returns : Returned to suppliers

Opening Stock : Beginning unsold goodsOpening Stock : Beginning unsold goods

Closing Stock : End unsold goodsClosing Stock : End unsold goods

ClassificationClassification

Customer : Person who purchased goodsCustomer : Person who purchased goodsSupplier : Person who sold goods Supplier : Person who sold goods Casting : Totaling of books of accountsCasting : Totaling of books of accountsInvoice : Statement prepared for saleInvoice : Statement prepared for saleAssets : Resources of the businessAssets : Resources of the businessLiabilities : Dues of the businessLiabilities : Dues of the businessEquity : Claims against assets by Equity : Claims against assets by owner owner

CLASSIFICATION OF ACCOUNTSCLASSIFICATION OF ACCOUNTS

Personal and ImpersonalPersonal and Impersonal

Personal Accounts include Customers Personal Accounts include Customers (Debtors) and Suppliers (Creditors)(Debtors) and Suppliers (Creditors)

Impersonal Accounts consists of Real and Impersonal Accounts consists of Real and Nominal Accounts.Nominal Accounts.

Real Account deals with AssetsReal Account deals with Assets

Nominal Account deals with income and Nominal Account deals with income and expensesexpenses

TYPES OF PERSONAL TYPES OF PERSONAL ACCOUNTSACCOUNTS

Natural Personal Accounts : Relate to Natural Personal Accounts : Relate to individuals or natural persons made of individuals or natural persons made of flesh and bones.flesh and bones.Artificial : Relate to artificial persons Artificial : Relate to artificial persons recognized by Law as persons – Manipal recognized by Law as persons – Manipal Learning Ltd, SBI, RBI, BEL. BHEL etc. Learning Ltd, SBI, RBI, BEL. BHEL etc. Representative : Groups or representative Representative : Groups or representative such as Debtors, Creditors, outstanding such as Debtors, Creditors, outstanding expenses and prepaid insurance. expenses and prepaid insurance.

REAL ACCOUNTSREAL ACCOUNTS

Tangible Real Account such as cash, Tangible Real Account such as cash, building , goods, furniture, machinery, building , goods, furniture, machinery, investments.investments.

Intangible Real Account such as Goodwill, Intangible Real Account such as Goodwill, Patent, Trade Marks, Preliminary Patent, Trade Marks, Preliminary expenses.expenses.

NOMINAL ACCOUNTSNOMINAL ACCOUNTS

Deals with expenses or losses and gains Deals with expenses or losses and gains and incomeand income

Known as fictitious accountsKnown as fictitious accounts

They do not represent any tangible assetsThey do not represent any tangible assets

They are not in existence and cannot be They are not in existence and cannot be seenseen

They are “Ghost” in natureThey are “Ghost” in nature

ACCOUNTING EQUATIONACCOUNTING EQUATION

Its known as Accounting Equivalence Its known as Accounting Equivalence conceptconcept

Basic Accounting Equation is :Basic Accounting Equation is :

ASSETS (A) = LIABILITIES (L) + ASSETS (A) = LIABILITIES (L) + EQUITYEQUITY (E) or A = L + E(E) or A = L + E

Each transaction will lead to a Each transaction will lead to a combination of other.combination of other.

Its unique Its unique

EFFECT OF EQUATIONEFFECT OF EQUATION

FIRST EFFECT FIRST EFFECT

Increase in Assets Increase in Assets

Decrease in AssetsDecrease in Assets

Increase in Liabilities Increase in Liabilities

IDENTICAL EFFECTIDENTICAL EFFECT


Increase in LiabilitiesIncrease in Liabilities

Increase in EquityIncrease in Equity

Increase in AssetsIncrease in Assets

Decrease in LiabilitiesDecrease in Liabilities

Decrease in EquityDecrease in Equity


increase in Assetsincrease in Assets


Effect of equationEffect of equation



Decrease in Equity Decrease in Equity





Increase in AssetsIncrease in Assets


Decrease in Assets Decrease in Assets

NOTE ON EQUITY NOTE ON EQUITY

Increase in Equity means introduction of capital.Increase in Equity means introduction of capital.Injection of funds will not occur frequentlyInjection of funds will not occur frequentlyOwner introduces funds through cash Owner introduces funds through cash contribution + available surplus returned by contribution + available surplus returned by business : excess of income over expenses.business : excess of income over expenses.Revised Equation is :Revised Equation is : A = L + Eo + (Y – X)A = L + Eo + (Y – X) where where Eo Eo is Equity at the is Equity at the beginning , beginning , Y Y is the Income and is the Income and X X is the is the Expenses; hence Expenses; hence Y – XY – X results in surplus which results in surplus which is invested in the business by the owner without is invested in the business by the owner without being withdrawn the surplus from the business. being withdrawn the surplus from the business.

UNIT 2 : PRIMARY BOOKS UNIT 2 : PRIMARY BOOKS

Transactions are entered first here.Transactions are entered first here.

If it is omitted, it escapes the processIf it is omitted, it escapes the process

Its known as “Journal” that is daily recordIts known as “Journal” that is daily record

Recording the transactions in the books is Recording the transactions in the books is known as “journalizing” known as “journalizing”

Steps involved : identifying a transaction, Steps involved : identifying a transaction, identifying the elements of the transaction, identifying the elements of the transaction, applying the ground rule and recording. applying the ground rule and recording.

GROUND RULES OF GROUND RULES OF JOURNALISATION JOURNALISATION

Increase in Assets and decrease in Increase in Assets and decrease in Liabilities + Equity = Liabilities + Equity = DEBITDEBIT

Decrease in Assets and increase in Decrease in Assets and increase in Liabilities + Equity = Liabilities + Equity = CREDITCREDIT

Expenses and Losses = Expenses and Losses = DEBITDEBIT

Income and Gains = Income and Gains = CREDIT CREDIT

RULES OF DEBIT AND CREDITRULES OF DEBIT AND CREDIT

Debit signifiesDebit signifies

Increase in Asset Increase in Asset accountsaccounts

Decrease in Liability Decrease in Liability accountsaccounts


Credit signifiesCredit signifies

Decrease in Asset Decrease in Asset accountsaccounts

Increase in Liability Increase in Liability accountsaccounts


What is difference between credits What is difference between credits and debits ?and debits ?

When you deposit money in a Bank, the When you deposit money in a Bank, the cashier will tell you “I’ll credit your cashier will tell you “I’ll credit your account”. You assume that cash is a credit account”. You assume that cash is a credit and so and so creditscredits are good. This view is are good. This view is further strengthened when reductions in further strengthened when reductions in the accounts are referred to as “debits”. the accounts are referred to as “debits”. Besides, if you remove the “i” from debit, Besides, if you remove the “i” from debit, you get the word “debt”. So, you think, you get the word “debt”. So, you think, “debits” are bad. “debits” are bad.

Credits and debitsCredits and debits

Unfortunately, this conditioning that we Unfortunately, this conditioning that we receive at the Bank causes real confusion receive at the Bank causes real confusion in the accounting class. Why ? Because, in the accounting class. Why ? Because, in accounting, we understand that our in accounting, we understand that our Bank Account is a debit account, and Bank Account is a debit account, and debts are credit accounts – just the debts are credit accounts – just the opposite of what most people would opposite of what most people would expect. expect.


In fact, debits and credits are neither good In fact, debits and credits are neither good nor bad. Each transaction that is made nor bad. Each transaction that is made whether it be a good transaction (deposits) whether it be a good transaction (deposits) or bad transaction (bills) has both a debit or bad transaction (bills) has both a debit and an equal credit. That’s why it is called and an equal credit. That’s why it is called “double entry” accounting. When the “double entry” accounting. When the cashier tells you that he or she will “credit cashier tells you that he or she will “credit your account”, they are also entering a your account”, they are also entering a debit for the same account that they do notdebit for the same account that they do not


tell you about. The same is true for the tell you about. The same is true for the debits to your Bank Account – there is also debits to your Bank Account – there is also a credit being generated the same time. a credit being generated the same time. For example when you deposit money with For example when you deposit money with your Bank Account, their liability to you your Bank Account, their liability to you increases. Since liabilities are credit increases. Since liabilities are credit accounts, they are crediting to your accounts, they are crediting to your account. When you withdraw cash from account. When you withdraw cash from the Bank, their liability to you decreases, the Bank, their liability to you decreases, hence your account is debited. hence your account is debited.

Credit and debitsCredit and debits

I think the best way to understand debits I think the best way to understand debits and credits is to identify two components and credits is to identify two components of each transaction :of each transaction :

What did you receive ?What did you receive ?

Where did come from ?Where did come from ?

Debit is what you Debit is what you receivereceive and the credit is and the credit is the the sourcesource of the item or service you of the item or service you received.received.

POINTS TO BE NOTED FOR POINTS TO BE NOTED FOR JOURNALISINGJOURNALISING

Read the transaction and identify the two accounts Read the transaction and identify the two accounts involved.involved.Identify the two elementsIdentify the two elementsFind the type of transaction :cash or creditFind the type of transaction :cash or creditCategorize the accounts, personal, real, nominalCategorize the accounts, personal, real, nominalApply the Golden RuleApply the Golden RuleEnter the date of transactionEnter the date of transactionEnter the amounts in respective columnsEnter the amounts in respective columnsWatch the wordings “received “ “paid” Watch the wordings “received “ “paid” Identify the Returns, either sales or purchases Identify the Returns, either sales or purchases Provide a narrationProvide a narration

TYPES OF JOURNALTYPES OF JOURNAL

Purchases Day Book to record credit purchasesPurchases Day Book to record credit purchasesSales Day Book to record credit salesSales Day Book to record credit salesReturn Outward : Returns to suppliersReturn Outward : Returns to suppliersReturn Inward : Returns from customersReturn Inward : Returns from customersBills Receivable : Acceptance by customersBills Receivable : Acceptance by customersBills Payables : Bill raised by suppliersBills Payables : Bill raised by suppliersCash Book to record cash and bank receipts Cash Book to record cash and bank receipts and payments.and payments.Journal Proper to record all residual transactions Journal Proper to record all residual transactions

ASSIGNMENTSASSIGNMENTS

Purchase and sale of goods for cashPurchase and sale of goods for cash

Purchase and sale of goods for creditPurchase and sale of goods for credit

Return of goods : Sales and PurchasesReturn of goods : Sales and Purchases

Purchase and sale of AssetsPurchase and sale of Assets

Transactions on income and expensesTransactions on income and expenses

Receipts and payments in cash and chequeReceipts and payments in cash and cheque

Transactions with owner : capital and drawingTransactions with owner : capital and drawing

Opening entryOpening entry

CASH BOOK CASH BOOK

Records daily cash receipts and paymentsRecords daily cash receipts and paymentsRefers to both cash and bank transactionsRefers to both cash and bank transactionsIts both book of prime and secondary which Its both book of prime and secondary which means it is both a Journal and a Ledgermeans it is both a Journal and a LedgerTypes : Simple, Double and Three columnTypes : Simple, Double and Three columnDebit indicates receipts and credit paymentsDebit indicates receipts and credit paymentsMaintenance of cash book avoids manipulation Maintenance of cash book avoids manipulation and enables reconciliation.and enables reconciliation.Discount columns are not balanced.Discount columns are not balanced.Debit side discount is loss and credit gain. Debit side discount is loss and credit gain.

Documents

DOUBLE ENTRY ACCOUNTING Accounting is defined as : Art of recording, classifying and summarizing In a significant manner And in terms of money Transactions