3 No matter what the form of the record, the basic rule of bookkeeping remains the same: the concept of debit and credit. The five.

No matter what the form of the record, the basic rule of bookkeeping remains the same: the concept of debit and credit. The five key steps are ... Book-keeping and Accounting The process of book-keeping and accounting may be summarized into the following five steps:

A. BOOKKEEPING I. Translate transactions into debits and credits in a journal Post the debits and credits to ledger accounts. 3. Balance the ledger accounts to summarize the net effect of the entries. 4. Extract a trial balance to check the arithmetical accuracy of the postings.

B. ACCOUNTING 5. From the trial balance prepare the accounting reports, balance sheet and income statement (profit and loss account) with AS

Accounting Language Accounting has been called the language of business. Like any language, it can never express our thoughts with absolute precision and clarity.

Accounting Language Our task of learning this language is complicated by the fact that many of the words used in accounting mean almost, but not quite, the same as they mean in every-day life.

Accounting Language We must learn to think of words in their accounting rather than their popular meaning. In this course, we have used a standard set of English and American accounting terms, although certain other terms are also of accounting terms reinforces your basic grasp of the language.

8 The following list indicates some of the major differences between English and American terminology : English Term American Term Debtors Accounts receivable Creditors Accounts payable Stock of goods Inventory Share capital Capital stock Profit Income Accumulated profits Retained earnings Profit and loss account Income statement

Meaning of Profits Sales, less cost of sales and less expenses, equals profit. Sales equals cost of sales, plus expenses, plus profit.

Assets and Liabilities
(a) In our balance sheets we shall (for bookkeeping) always record assets on the left side, and liabilities and owner's equity on the right side.

(b) Remember: Debtors are receivables Creditors are payables Stock is inventory Accumulated profit is retained earnings Profit is income

BUSINESS TRANSACTIONS
Transactions may be for cash or for credit. In a credit transaction liability is incurred but cash is transferred later as a separate transaction. All transactions have a "dual aspect" (debit & credit) and thereby affect two items on the balance sheet.

Accounting conventions recognize transactions at particular times.
For example: Sales transactions are generally recognized when the goods leave the seller's premises, whereas Purchase transactions arc normally recognized when the goods are received by the buyer.

Classification Of Accounts
PERSONAL ACCOUNT NATURAL: Owner’s account, Debtors and Creditors account etc. ARTIFICIAL: Accounts of corporate bodies and institutions , for example Government, clubs limited Company, Cooperative Society etc. REPRESENTATIVE: These accounts represent certain persons or group of persons

REAL ACCOUNT Tangible account: Building account, furniture account, office equipments etc. Intangible account: goodwill, patents, trademarks, copyrights etc.

NOMINAL Expenses and losses : rents, electricity, all the cost associated with production and supply etc. Income and gains: interest income, all the revenue inflows etc.

Golden Rules in Accounting
For Personal Account: Debit: the receiver Credit: the giver For Real Account: Debit what comes in Credit what goes out Nominal Account Debit all Expenses and Loses Credit all Gains and Profit

Temporary and Permanent Accounts
Assets Liabilities Owner’s Capital Temporary Accounts Revenues Income Summary Expenses Withdrawals The closing process applies only to temporary accounts.

Analyzing Transactions into Debit and Credit Parts
Accounting equation was used to record daily business transactions. Problem too many accounts too many transactions A separate record is kept for each account

Accounts T-account an accounting device used to analyze transactions
The accounting equation can be representated as a “T” Assets = Liabilities + Owner’s Equity Left side Right Side The accounting equation and a T-account must always remain in balance.

Accounts (continued)... Debit
an amount recorded on the left side of a T-account Credit an amount recorded on the right side of a T-account The t-account will serve as a basic device for analyzing transactions All accounts will have a NORMAL BALANCE Assets = Liabilities + Owner’s Equity Left Side Right Side Debit Side Credit Side Normal Balance Normal Balance

We can use debits and credits instead of pluses and minuses
Accounts (Assets)... ASSETS Left Side Right Side Debit Side Credit Side Normal Balance INCREASE DECREASE When an asset account increases, DEBIT that asset account. When an asset account decreases, CREDIT that asset account We can use debits and credits instead of pluses and minuses

Accounts (Liabilities)...
We can use debits and credits instead of pluses and minuses LIABILITIES Left Side Right Side Debit Side Credit Side Normal Balance DECREASE INCREASE When a liability account increases, credit that liability account. When a liability account decreases, debit that liability account.

Accounts (Owner’s Capital)...
We can use debits and credits instead of pluses and minuses Owner’s Capital Left Side Right Side Debit Side Credit Side Normal Balance DECREASE INCREASE When a capital account increases, credit the capital account. When a capital account decreases, debit the capital account.

Accounts (Sales)... We can use debits and credits instead of pluses and minuses Sales Right Side Credit Side Normal Balance INCREASE When the sales account increases, credit the sales account. The Revenue Account (Sales) has a normal Credit balance because it increases Capital, which has a normal Credit balance.

Accounts (Expenses)... We can use debits and credits instead of pluses and minuses Expenses Left Side Debit Side Normal Balance INCREASE When an expense account increases, debit the individual expense account. Expense accounts increase when you pay cash for an expense. The Expense accounts (Utilities Expense, Rent Expense, etc.) have a normal Debit balance because they decrease Capital, which has a normal Credit balance.

Basic Rules Regulating the Increases and Decreases of Account Balances
Account balances increase on the normal side of an account Account balances decrease on the side opposite the normal balance side of an account

Analyzing How Transactions Change Accounts
Each transaction affects at least two accounts. Each account has its own t-account. Each transaction must have at least one debit and at least one credit. Debits must always equal credits.

Four questions are asked when analyzing transactions into debit and credit parts.
What accounts are affected? - use the chart of accounts for reference How is each account classified? is it an asset, liability, owner’s equity, revenue, or expense? How is each account balance changed? Is the account balance increased or decreased? How is each amount entered in the accounts? is the amount debited or credited?

Transaction #1 Received Cash from the Owner as an Investment
Received cash from owner as an investment, Rs 10,000. What accounts are affected? Cash and Ms Karina, Capital How is each account classified? Cash is an asset Ms Karina, Capital, is owner’s equity How is each account balanced changed? cash increases Ms Karina, Capital increases How is each amount entered? cash is debited Ms Karina, Capital is credited Assets = Liab + O.E. Normal Debit Balance Increase by debiting Decrease by crediting Normal Credit Balance Increase by crediting Decrease by debiting

Transaction #2 Paid Cash for Supplies
Don’t Forget... Debits must always equal credits!!! What accounts are affected? Cash and Supplies How is each account classified? Both are assets How is each balance changed? Cash decreases Supplies increase How is each amount entered in the accounts? Cash is credited Supplies is debited Assets = Liab + O.E. Normal Debit Balance Increase by debiting Decrease by crediting Normal Credit Balance Increase by crediting Decrease by debiting

Transaction #3 Paid Cash for Insurance
What accounts are affected? Cash and Prepaid Insurance How is each account classified? Both are assets How is each account balance changed? Cash decreases Prepaid Insurance increases How is each amount entered in the accounts? Cash is credited Prepaid Insurance is debited Assets = Liab + O.E. Normal Debit Balance Increase by debiting Decrease by crediting Normal Credit Balance Increase by crediting Decrease by debiting

Transaction #4 Bought Stationery on Account
Don’t Forget... Debits must always equal credits!!! Bought stationery on account from Navneet Stationery Rs What accounts are affected? Stationery and Stationery Supplies. How is each account classified? Supplies is an asset Navneet Stationery is a liability. How is each account balance changed? Stationery increases Navneet Stationery increases How is each amount entered in the accounts? Stationery is debited Navneet Stationery is credited

Transaction #5 Paid Cash on Account
Paid cash on account Navneet Stationery , Rs 1,360. What accounts are affected? Cash and Navneet Stationery How is each account classified? Cash is an asset Navneet Stationery is a liability How is each account balance changed? Cash decreases Navneet Stationery decreases How is each amount entered in the account? Cash is credited Navneet Stationery is debited

Transaction #6 Received Cash from Sales
Don’t Forget... Debits must always equal credits!!! Received cash from sales, Rs What accounts are affected? Cash and Sales How is each amount classified? Cash is an asset Sales is a revenue account (has a normal credit balance) How is each account balance changed? Cash is increased Sales is increased How is each amount entered in the accounts? Cash is debited Sales is credited

Transaction #7 Paid Cash for an Expense
Paid cash for rent, Rs What accounts are affected? Cash and Rent Expense How is each account classified? Cash is an asset Rent Expense is an expense with a normal debit balance How is each account balance changed? Cash decreases Rent Expense increases How is each amount entered in the accounts? Cash is credited Rent expense is debited

Transaction #8 Paid Cash to Owner for Personal Use
Contra Account An account that reduces a related account on a financial statement Drawing is a contra account - it reduces capital Paid cash to owner for personal use, Rs What accounts are affected? Cash Ms Karina, Drawing How is each account classified? Cash is an asset Ms Karina, Drawing is a contra capital account with a normal debit balance. How is each account balance changed? Cash decreases, Ms Karina, Drawing increases How is each amount entered in the account? Cash is credited, Ms Karina, Drawing is debited

3 No matter what the form of the record, the basic rule of bookkeeping remains the same: the concept of debit and credit. The five.

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3 No matter what the form of the record, the basic rule of bookkeeping remains the same: the concept of debit and credit. The five.

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Presentation on theme: "3 No matter what the form of the record, the basic rule of bookkeeping remains the same: the concept of debit and credit. The five."— Presentation transcript:

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