1. Accounting System unit-II ACCT-103

2. SYSTEMS OF ACCOUNING Cash System Single Entry System Double Entry System ACCT-103

3. Cash System This system takes into account only cash receipts and payments on the assumption that there are no credit transactions. Even if there are any, they will not be recorded. This system may be suitable for charitable institutions like schools, colleges, social clubs, etc. ACCT-103

4. Single Entry System As the name itself implies, it deals with only one aspect of transaction. This system recognizes cash and personal items of the transactions and it ignores the impersonal items. So it is incomplete, inaccurate and unscientific. ACCT-103

5. Double Entry System This is the most scientific system that recognizes both the aspects of each transaction and also records each aspect. This system takes into account every business transaction in its double aspect, i.e., receiving benefit by one party and giving the like benefit by another. So it records the two-fold aspect of every business transaction. ACCT-103

6. Double Entry System continue… Example: When ‘A’ purchases a car, he receives the benefit in the form of a car and gives the benefit in the form of money. Similarly, the car seller receives the benefit in the form of money and gives the benefit in the form of a car. ACCT-103

7. Double Entry System continue… Definition The process by which the dual aspects of business transactions are recorded is known as the double entry book-keeping. It is a complete book-keeping in the sense that it records all the two aspects, debit and credit in each business transaction, in equal value. ACCT-103

8. CLASSIFICATION OF ACCOUNTS Every business deal with other “Person”, possesses “Assets”, pay “Expenses” and receive “Income”. So from the above, we can see every business has to keep An account for each person An account for each asset and An account for each expense or income. ACCT-103

9. CLASSIFICATION OF ACCOUNTS Accounts in the names of persons are known as “Personal Accounts” Accounts in the names of assets are known as “Real Accounts” Accounts in respect of expenses and incomes are known as “Nominal Accounts” ACCT-103

10. CLASSIFICATION OF ACCOUNTS ACCOUNTS PERSONAL ACCOUNTS IMPERSONAL ACCOUNTS REAL ACCOUNTS NOMINAL ACCOUNTS ACCT-103

11. PERSONAL ACCOUNTS Accounts in the name of persons are known as personal accounts. Eg: Babu A/C, Babu & Co. A/C, Outstanding Salaries A/C, etc. ACCT-103

12. REAL ACCOUNTS These are accounts of assets or properties. Assets may be tangible or intangible. Real accounts are impersonal which are tangible or intangible in nature. Eg:- Cash a/c, Building a/c, etc are Real Accounts related to things which we can feel, see and touch. Goodwill a/c, Patent a/c, etc Real Accounts which are of intangible in nature. ACCT-103

13. NOMINAL ACCOUNTS These accounts are impersonal, but invisible and intangible. Nominal accounts are related to those things which we can feel, but can not see and touch. All “expenses and losses” and all “incomes and gains” fall in this category. Eg:- Salaries A/C, Rent A/C, Wages A/C, Interest Received A/C, Commission Received A/C, Discount A/C, etc. ACCT-103

14. DEBIT AND CREDIT Each accounts have two sides – the left side and the right side. In accounting, the left side of an account is called the “Debit Side” and the right side of an account is called the “Credit Side”. The entries made on the left side of an account is called a “Debit Entry” and the entries made on the right side of an account is called a “Credit Entry”. ACCT-103

15. RULES FOR DEBIT AND CREDIT Personal Account Debit the Receiver Credit the Giver Real Accounts Debit what comes in Credit what goes out Nominal Accounts Debit all Expenses and Losses Credit all Incomes and Gains

16. Steps for finding the debit and credit aspects of a particular transaction Find out the two accounts involved in the transaction. Check whether it belongs to Personal, Real or Nominal account. Apply the debit and credit rules for the two accounts. ACCT-103

17. Exercise Purchased a Building for Rs.20,000/-. Paid Cash Rs.1,000/- to Satheesh. Paid Salary Rs.1000/-. Received Commission Rs.250/-. Sold goods for Cash Rs.3500/-. ACCT-103

18. The Accounting Equation Assets = Liabilities + Owner’s Equity Assets – Liabilities = Owner’s Equity

19. The Accounting Equation The equation must be in balance. If there is an increase to the left side the right side must increase as well. Or an increase to the left side could cause a decrease in another account on the left side.

20. ASSETS- LIABILITIES= OWNERS EQUITY 6000 – 2000 = 4000 Assets = 6000 Liabilities = 2000 Owners Equity = ? ACCT-103

21. Assets = ? Liabilities = 200 owners equity = 100 assets = liabilities + owners equity 300 = 200 + 100 ACCT-103

22. Assets = 25000 liabilities = 15000 owners equity = ? Assets- liabilities = owners equity 25000- 15000 = 10000 ACCT-103

23. Assets = Liabilities + Owner’s Equity Shift in assets Shift in assets: A shift that occurs when the composition of the assets has changed, but the total of the assets remains the same. – Example: Cash is used to purchase inventory. Both are assets – the composition has changed but the total of assets is still the same.

24. Assets = Liabilities + Owner’s Equity + Revenue Revenue Revenue: An amount earned by performing services for customers or selling goods to customers; it can be in the form of cash and/or accounts receivable. A subdivision of owner’s equity: as revenue increases, owner’s equity increases.

25. Assets = ? Liabilities = 200 owners equity = 100 revenue = 50 assets = liabilities + owners equity+ revenue 350 = 200 +100 + 50 ACCT-103

26. Assets = Liabilities + Owner’s Equity - Expense Expense Expense: A cost incurred in running a business by consuming goods or services in producing revenue; a subdivision of owner’s equity. When expenses increase, there is a decrease in owner’s equity.

27. Assets = ? Liabilities =65000 owners equity = 55000 expenses = 33000 assets = liabilities + owners equity – expenses 87000= 65000 + 55000 - 33000 ACCT-103

28. Assets = Liabilities + Owner’s Equity + Capital – Withdrawals Capital: Capital: The owner’s investment of equity in the company. Withdrawals: Withdrawals: A subdivision of owner’s equity that records money or other assets an owner withdraws from a business for personal use.

29. Assets = ? liabilities = 54328 owners equity 52471 capital =78654 withdrawals= 53210 assets= liabilities + owners equity + capital - withdrawals 132243= 54328+52471+78654 -53210 ACCT-103

30. Assets + Accounts Receivables = Liabilities + Accounts Payable + Owner’s Equity Accounts Payable Accounts Payable: Amounts owed to creditors that result from the purchase of goods or services on account: a liability. Accounts Receivable Accounts Receivable: An asset that indicates amounts owed by customers.

31. Assets = Liabilities + Owner’s Equity & beyond Review Review – When you increase your assets You increase your Owner’s Equity You have affected two accounts: Assets & Owner’s Equity The equation is in balance This is double-entry bookkeeping

32. Home assignment What do you mean by double entry system What are the rules of debit and credit ACCT-103

33. Subsidiary Books General Journal Special Journals Purchase Book Sales Book Purchase Return Book Sales Return Book Bills Receivable Book Bills Payable Book Cash Book Petty Cash Book ACCT-103

34. Journal Journal is the prime or original book of entry in which all transactions are recorded in the form of entries. Journalising is an act of recording or entering transactions in a Journal in the order of date. DateParticularsLFDebitAmount Credit Amount ACCT-103

35. Journal Entry Jan 1, 1981 Prakash Started a business Rs. 15,000/- DateParticularsLFDebitAmount Credit Amount 1981 Jan 1 Cash a/c Dr. To Prakash’s Capital a/c To Prakash’s Capital a/c (Being cash invetsed to business) 15,00015,000 ACCT-103