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14/02/20141.1.1 Presentation on Double Entry System of Book keeping.

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1 14/02/20141.1.1 Presentation on Double Entry System of Book keeping

2 Content Table Introduction What is Double Entry System? Advantages of Double Entry System What is Credit & Debit? Classification of A/cs Rules of Double Entry Abbreviations used Over view of Cash book, Journal, Trial Balance, General Ledger, Income & Expenditure A/c & Balance Sheet Class room Exercise Summary 14/02/20141.1.2

3 What is double entry system?  The accounting equation is the very heart of a double entry accounting system Assets - Liabilities = Equity + (Income – Expenses)  For every change in value of one account in the Accounting Equation, there must be a balancing change in another.  This concept is known as the Principle of Balance  You will always be concerned with at least 2 accounts, Necessary to keep the accounting equation balanced 14/02/20141.1.3

4 Advantages of Double Entry It is possible to keep a full record of dual aspect of each transaction. Transactions are recorded in a scientific and systematic manner and thus the books of accounts provide the most reliable information for controlling the Organization efficiently and effectively. Since the total debit under this system be equal to total Credit, arithmetical accuracy of the books can be tested by means of a trial balance. An income and expenditure accounts can be prepared to know the excess income/ expenditure during a particular period and to know how such excess income/ expenditure has arisen The financial position of the Organization can be readily ascertained by preparing a Balance Sheet. Frauds are prevented, because alteration in accounts becomes difficult and discovery of irregularities is facilitated. 14/02/20141.1.4

5 Debit / Credit ( Left Side / Right Side )  Balancing changes (or transfers of money) among accounts is done by debiting one account and simultaneously crediting another  Accounting debits and credits do not mean “decrease” and “increase”  Debits and Credits each increase certain types of accounts and decrease others  In asset and expense accounts, debits increase the balance and credits decrease the balance  In liability, equity and income accounts, debits decrease the balance and credits increase the balance  Debits are always on the “left side”, credits are always on the “right” side 14/02/20141.1.5

6 Classification of Accounts Personal Account:- When a transaction involved with a person known as personal account such as Mr. Krishna & sons, ABC Ltd. co., Mr. Rama’s A/c etc. Nominal Account:- All recurring expenses/incomes are known as Nominal Account, such as salary, Rent, Interest etc. Real Account:- Other than above two accounts all fall under this category, such as Machinery, Furniture etc 14/02/20141.1.6

7 Rules of Double Entry System In case of Personal Account – – Debit the receiver and Credit the giver. In case of Nominal Account- – Debit all expenses and losses and Credit all income and liabilities. In case of Real Accounts – – Debit what comes in and credit what goes out. 14/02/20141.1.7

8 Abbreviations used  a/c – account  B/S – Balance Sheet  c/d – carried down  b/d – brought down  b/f – brought forward  Dr – Debit record  Cr – Credit record  G/L – General Ledger: (or N/L – Nominal Ledger)  P&L – Profit & Loss  TB – Trial Balance 14/02/20141.1.8

9 Cash Book : Cash transactions entered chronologically and ledger accounts are prepared Cash book is a subsidiary book It is also a ledger and principal book, it serves as cash a/c and book a/c All receipts are entered on the debit side payments are entered on the credit side It never shows a credit balance & serves the functions of journal also 14/02/20141.1.9

10 Journal Accounting transactions are entered as they occur It shows account names, amount and where those accounts are recorded in debit or credit side of accounts. A journal entry is called “balanced” when the sum of debit side amounts equals to sum of credit side amounts 14/02/20141.1.10

11 General Ledger The complete set of account for a business entry It is the reference book It is used to classify and summarize transactions It is also useful for preparation of financial statements Valuable source of information for managerial purpose 14/02/20141.1.11

12 Trial Balance Total of all debit entries in ledger should equal to total of all credit entries It is prepared at the end of the accounting period Equality will be checked by preparing a two column schedule It lists the account titles in numerical order Debit balances in left column & credit balances in right column Total of left column should agree with right column 14/02/20141.1.12

13 Income & Expenditure A/c It shows the revenues and expenses of a organization Excess of Income over Expenditure is Profit Excess of Expenditure over Income is Loss It is prepared at the end of an accounting period It shows net results of operations 14/02/20141.1.13

14 Balance Sheet Balance Sheet Accounts - are Assets, Liabilities, and Equity - are used to track the changes in value of things you own or owe you own Assets is the group of things that you own, that have value - Anything that has convertible value - What you theoretically could sell for cash you owe Liabilities is the group of things on which you owe money Anything which you must pay back at some time you own Equity is the same as "net worth“ what you own - What is left over after you subtract your liabilities from your assets - The portion of your assets that you own outright, without any debt 14/02/20141.1.14

15 Suspense Account An account used temporarily to carry doubtful receipts & payments or discrepancies pending their analysis and permanent classification It can be repository for monetary transactions entered with invalid account numbers The account specified may not exist, or it may be deleted/frozen Suspense accounts should be cleared when the proper account is determined. 14/02/20141.1.15

16 Sundry Account Sundry accounts are used for miscellaneous purposes Sundry accounts are usually temporary or in- process accounts They must be cleared to a zero balance at the end of each accounting period 14/02/20141.1.16

17 Summary Now you have understood-  What is Double entry system of Book keeping  Advantages of Double Entry System  What is Credit & Debit?  Classification of A/cs  Rules of Double Entry  Abbreviations used in accounting  Over view of Cash book, Journal, Trial Balance, General Ledger, Income & Expenditure A/c & Balance Sheet 14/02/20141.1.17

18 Quiz 14/02/20141.1.18

19 14/02/20141.1.19

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