Let’s Understand the world
of Accounting
Accounting stages
1. Transaction occured
2. Recorded in the Journal using a Journal
Entry.
event is translated into accounting language.
3. Journal is posted to Ledger
the information from all the journal entries in the
period is aggregated.
4. Ledger accounts are totalled.
5. Financial statements are prepared.
Fundamental Accounting Equation
Assets = Liabilities + Owners’ Equity
Cont’d
This equation is always in balance.
In order for this equation to remain in
balance, double-entry bookkeeping is
employed.
That
is, the recording of every transaction or
event must have at least two parts
Either an equal impact (increase or decrease) to
both sides of the equation or equal and opposite
impact to one side.
Therecording of every transaction must
keep this equation in balance.
CLASSIFICATION OF ACCOUNTS
ACCOUNTS
PERSONAL IMPERSONAL
ACCOUNTS ACCOUNTS
REAL NOMINAL
ACCOUNTS ACCOUNTS
Cont’d
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”
Personal A/c: Natural & Artificial person
Real A/c: Goods , Furniture, Building,
Goodwill, Trademark etc.
Nominal A/c: Rent, Electricity, Salary etc.
GOLDEN RULES FOR DEBIT AND
CREDIT
Debit the Receiver
Personal Account
Credit the Giver
Debit what comes in
Real Accounts
Credit what goes out
Debit all Expenses and
Losses
Nominal Accounts
Credit all Incomes and
Gains
In Short to learn..
Debit & Credit
All Journal entries have two “sides”:
Debit and Credit
For every journal entry, the total debits must
equal the total credits
This ensures that the fundamental accounting
equation (A = L + OE) is always in balance.
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.
Transaction #1
Received Cash from the Owner as an Investment
Received cash from owner as an investment, Rs.150,000.
What accounts are affected?
Cash and Capital
How is each account classified?
Cash is an asset
Capital, is owner’s equity
How is each account balanced changed?
Cash increases
Capital increases
How is each amount entered?
Cash is debited Assets = Liab. + O.E.
Capital is credited
Normal Debit Balance Normal Credit Balance
Increase by debiting Increase by crediting
Decrease by crediting Decrease by debiting
Journal Entry
Jan 16, 2020 Mr. Agarwal Started a business Rs.
15,0000/-
Date Particulars LF Debit Credit
Amount Amount
2020 Cash a/c 15,0000
Jan 16 Dr. 15,0000
To Capital a/c
(Being cash invested
to business)
Paid Cash for purchase of goods
What accounts are affected?
Cash and Goods
How is each account classified?
Both are assets
How is each balance changed?
Cash decreases
Goods increase
How is each amount entered in the accounts?
Cash is credited Purchase debited
Assets = Liab + O.E.
Normal Debit Balance Normal Credit Balance
Increase by debiting Increase by crediting
Decrease by crediting Decrease by debiting
Transaction #2
Paid Cash for Insurance in advance Rs 5000
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 Normal Credit Balance
Increase by debiting Increase by crediting
Decrease by crediting Decrease by debiting
Transaction #3
Purchase goods on Account (credit)
Bought supplies on account from Butler & Co. for Rs.
27,500
What accounts are affected?
Supplies and Butler & Co.
How is each account classified?
Goods are an asset
Butler & Co. is a liability
How is each account balance changed?
Goods increases
Butler & Co. increases
How is each amount entered in the accounts?
Goods is debited
Butler & Co. is credited
Transaction #4
Paid Cash on Account
Paid cash on account to Butler & Co, Rs. 27,500.
What accounts are affected?
Cash and Butler & Co.
How is each account classified?
Cash is an asset
Butler & Co. is a liability
How is each account balance changed?
Cash decreases
Butler & Co. decreases
How is each amount entered in the account?
Cash is credited
Butler & Co. is debited
Transaction #5
Received Cash from Sales
Received cash from sales, Rs.52,500
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 #5
Paid Cash for an Expense (rent)
Paid cash for rent, Rs.25000
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
Exercise…
Purchased a Building for Rs.20,00000/-
through cheque.
Paid Cash Rs.15,000/- to Sateesh.
Purchase new furniture for your company for
Rs.25,000 through cheque.
Paid Salary Rs.100000/- through cheque
Received Rent Rs.25000/- cash.
Sold goods for Cash Rs.35,000/-.
Mr Mani paid 300000 cash to Company and
got certain number of shares.
Bought machinery for Rs. 150000. Bank
Sold masks to Mr Mohan for Rs. 20000 in
cash
Sold masks to Mr Rajat for Rs. 50000 on
credit.
Paid Rs. 5000 cash for advertisement to an
agency Max advertisers.
Always Remember..(Revision)
