Double Entry Accounting

MEANING OF DOUBLE ENTRY ACCOUNTING EVERY BUSINESS TRANSACTION INVOLVES RECEIVING ASPECT AND GIVING ASPECT. EVERY DEBIT HAS AN EQUIVALENT CREDIT.

CASH AND MERCANTILE SYSTEM OF DOUBLE ENTRY SYSTEM In cash system, transactions are recorded only if cash is received or paid. E.g. Government accounting. In mercantile system, cash and credit transactions are recorded. E.g. Credit sales or purchases, salary payable, rent receivable, interest accrued but not received, depreciation provided, etc.

IDENTIFICATION OF TYPES OF ACCOUNTS Personal accounts : Accounts of debtor & creditors, natural & artificial persons like bank, club a/c, salary payable, outside rent account etc. Real accounts : Tangible & Intangible real accounts ( All assets accounts) Nominal accounts : Impersonal accounts (All expense & income accounts) e.g. salary account

Classification of Accounts Personal Real Nominal Natural personal Tangible real Artificial personal Intangible real Representative personal

ACCOUNTING TRAIL Identify the transaction Preparation of vouchers Recording as journal entries Preparation of ledger accounts Balancing the ledger accounts Preparation of trial balance Financial statement

TRANSACTIONS EVENTS A transaction (either cash or credit) is a business activity involving transfer of money or money’s worth. Assets acquired or sold, liabilities incurred or paid, expenses paid or payable, incomes received or receivable. Events which are neither cash nor credit transactions but it has an impact on the financial position of a business. Provision of bad debts, provision for repairs, depreciation, taxation, transfer of profit towards reserve fund or sinking fund or investment fluctuation fund.

Rules of debit and credit In respect to personal accounts : - Debit the receiver & credit the giver In respect to real accounts : - Debit what comes in & credit what goes out In respect to nominal accounts : - Debit all expenses & losses and credit all incomes & gains.

Rules of debit & credit Types of accounts Debit Credit Personal account The receiver The giver Real account What comes in What goes out All expenses & losses All incomes & gains Nominal account

Pass Journal Entries Suchitra started her business with cash Borrowed from Mahesh Purchased furniture Purchased furniture from Mohan on credit Purchased goods for cash Purchased goods from Ram on credit Sold goods for cash Sold goods to Shyam on credit Received cash from Shyam Paid cash to Ram Deposited into bank Withdrew cash for personal use Withdrew from bank for office use Withdrew from bank for personal use

Paid Ram by cheque Paid salary Paid rent by cheque Goods withdrawn for personal use Paid an advance to suppliers of goods Received an advance from customers Paid interest on loan Paid installment of loan Interest allowed by bank

Accounting equation Sources of Funds = Application of funds Or Owner’s equity = Asset Owner’s equity + outside liabilities = Assets

Accounting equation Liabilities + proprietor’ equity = Assets where, L = liabilities P = proprietor’s equity A = assets hence, L + P = A OR P = A – L OR L = A – P OR A – L- P = ZERO

Effect of transactions on Accounting Equation Increase in one asset with decrease in another asset. Increase in asset with increase in liability. Increase in asset with increase in owner’s equity. Increase in liability with decrease in liability. Increase in liability with decrease in equity. Decrease in asset with decrease in liability. Decrease in asset with decrease in equity.

MADAN COMMENCED BUSINESS WITH CASH OF RS. 70000. SHOW WHAT ACCOUNTS ARE AFFECTED IN THE FOLLOWING TRANSACTIONS. ALSO SHOW THE ACCOUNTING EQUATION FOR THE TRANSACTIONS MADAN COMMENCED BUSINESS WITH CASH OF RS. 70000. PURCHASED GOODS ON CREDIT RS. 14000 WITHDREW FOR PRIVATE USE RS. 3000 GOODS PURCHASED FOR CASH RS.12000 PAID WAGES RS. 5000 PAID TO CREDITORS RS. 10000 SOLD GOODS ON CREDIT( CP 18000) RS. 22000 SOLD GOODS ON CASH( CP 3000) RS. 6000 PURCHASED FURNITURE FOR CASH RS. 5000 RECEIVED FROM DEBTORS RS. 11000

Ganesh started business with a capital of Rs. 40000. SHOW WHAT ACCOUNTS ARE AFFECTED IN THE FOLLOWING TRANSACTIONS. ALSO SHOW THE ACCOUNTING EQUATION FOR THE TRANSACTIONS Ganesh started business with a capital of Rs. 40000. He purchased stock of goods Rs. 30000. He sold goods on cash Rs. 40000 cost of which is Rs. 25000. Bought goods on credit Rs. 10000. Sold goods on credit for Rs. 18000 (c.p. Rs. 10000) Paid sales commission Rs. 5000. Received cash discount Rs. 3000. Purchased furniture Rs. 10000. Received cash from debtors Rs. 15000. Paid cash to creditors Rs. 6000.