DOUBLE ENTRY ACCOUNTING Accounting is defined as : Art of recording, classifying and summarizing In a significant manner And in terms of money Transactions and events Which are, in part at least, of a financial character And interpreting the results thereof.

Double entry book keeping Art enables one to attain objectives Recording of transaction in orderly manner Classifying refers to grouping of accounts Summarizing thro’ Trial Balance, Trading, Profit and Loss Account and Balance Sheet. Terms of money : common language that is through the help of money example :

Double entry If business has 6 machines, 10 tons of raw materials, 10 fans etc, impossible to know which is more value unless they are expressed in a common language. Financial character : recording is based on financial events. Poor lighting and ventilation, relationship between workers and management, though affect the earning capacity cannot be recorded due to constraints to express in monetary terms.

Double entry Starts with recording and ends with presentation of financial information. Each transaction or event has two aspects or sides : DEBIT and CREDIT Accounting trail : it’s a sequence of activities in an accounting process

Accounting trail Transaction / event Preparation of vouchers Recording in the primary books Posting in the secondary books Preparation of trial balance Preparation and presentation of financial statements

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

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

Terms Expenditure : it’s the expenses incurred for earning revenue. Cost of manufacture, cost of sales, cost of service. Expense : expenditure whose benefit is enjoyed and exhausted immediately example salary, rent, wages, premium Goods : commodities or merchandise held by businessmen for sale.

CLASSIFICATION OF GOODS Purchases : goods bought for cash and credit Sales : Goods sold for cash and credit Sales Returns : Received from customer Purchase Returns : Returned to suppliers Opening Stock : Beginning unsold goods Closing Stock : End unsold goods

Classification Customer : Person who purchased goods Supplier : Person who sold goods Casting : Totaling of books of accounts Invoice : Statement prepared for sale Assets : Resources of the business Liabilities : Dues of the business Equity : Claims against assets by owner

CLASSIFICATION OF ACCOUNTS Personal and Impersonal Personal Accounts include Customers (Debtors) and Suppliers (Creditors) Impersonal Accounts consists of Real and Nominal Accounts. Real Account deals with Assets Nominal Account deals with income and expenses

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

REAL ACCOUNTS Tangible Real Account such as cash, building, goods, furniture, machinery, investments. Intangible Real Account such as Goodwill, Patent, Trade Marks, Preliminary expenses.

NOMINAL ACCOUNTS Deals with expenses or losses and gains and income Known as fictitious accounts They do not represent any tangible assets They are not in existence and cannot be seen They are “Ghost” in nature

ACCOUNTING EQUATION Its known as Accounting Equivalence concept Basic Accounting Equation is : ASSETS (A) = LIABILITIES (L) + EQUITY (E) or A = L + E Each transaction will lead to a combination of other. Its unique

EFFECT OF EQUATION FIRST EFFECT Increase in Assets Decrease in Assets Increase in Liabilities IDENTICAL EFFECT Decrease in Assets Increase in Liabilities Increase in Equity Increase in Assets Decrease in Liabilities Decrease in Equity Decrease in Liabilities increase in Assets Decrease in Equity

Effect of equation Decrease in Liabilities Increase in Equity Decrease in Equity Increase in Liabilities Decrease in Assets Increase in Equity Decrease in Liabilities Increase in Assets Increase in Liabilities Decrease in Assets

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

UNIT 2 : PRIMARY BOOKS Transactions are entered first here. If it is omitted, it escapes the process Its known as “Journal” that is daily record Recording the transactions in the books is known as “journalizing” Steps involved : identifying a transaction, identifying the elements of the transaction, applying the ground rule and recording.

GROUND RULES OF JOURNALISATION Increase in Assets and decrease in Liabilities + Equity = DEBIT Decrease in Assets and increase in Liabilities + Equity = CREDIT Expenses and Losses = DEBIT Income and Gains = CREDIT

RULES OF DEBIT AND CREDIT Debit signifies Increase in Asset accounts Decrease in Liability accounts Decrease in Equity Credit signifies Decrease in Asset accounts Increase in Liability accounts Increase in Equity

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

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

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

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

Credit and debits I think the best way to understand debits and credits is to identify two components of each transaction : What did you receive ? Where did come from ? Debit is what you receive and the credit is the source of the item or service you received.

POINTS TO BE NOTED FOR JOURNALISING Read the transaction and identify the two accounts involved. Identify the two elements Find the type of transaction :cash or credit Categorize the accounts, personal, real, nominal Apply the Golden Rule Enter the date of transaction Enter the amounts in respective columns Watch the wordings “received “ “paid” Identify the Returns, either sales or purchases Provide a narration

TYPES OF JOURNAL Purchases Day Book to record credit purchases Sales Day Book to record credit sales Return Outward : Returns to suppliers Return Inward : Returns from customers Bills Receivable : Acceptance by customers Bills Payables : Bill raised by suppliers Cash Book to record cash and bank receipts and payments. Journal Proper to record all residual transactions

ASSIGNMENTS Purchase and sale of goods for cash Purchase and sale of goods for credit Return of goods : Sales and Purchases Purchase and sale of Assets Transactions on income and expenses Receipts and payments in cash and cheque Transactions with owner : capital and drawing Opening entry

CASH BOOK Records daily cash receipts and payments Refers to both cash and bank transactions Its both book of prime and secondary which means it is both a Journal and a Ledger Types : Simple, Double and Three column Debit indicates receipts and credit payments Maintenance of cash book avoids manipulation and enables reconciliation. Discount columns are not balanced. Debit side discount is loss and credit gain.