Presentation - 5 (Preparation of books of accounts).pdf

On book of accounts

1. Module –1
Unit -2
Preparation of Books of
Accounts

2. Account:
Anaccountisthecodeorlanguageinwhichaccountantsrecordand
suppliesinformation.Inshortitistheclassifiedsummaryofthe
recordedtransactions.
ClassificationofAccount:
1.PersonalAccount:
a.NaturalPerson:Thisaccountdealwithnaturalperson(e.g.
RamA/c,ShyamA/cCapitalA/c,DrawingsA/c,Debtor’sA/c,
Creditor’sA/cetc.).
b.ArtificialPerson:Thisaccountdealwithartificialperson
whichiscreatedbylaw.(e.g.AnyPublicorPrivatecompany
A/c,BankA/c,ClubA/c,InsurancecompanyA/c,NGOA/c,
CooperativesocietyA/cetc.).

3. c.Representativepersonal:Thisaccountreferstothose
accountswhichrepresentapersonoragroup.Itisnot
directlytheiraccountbutitrepresentsandislinkedto
them.(e.g.OutstandingexpenseA/c,PrepaidexpenseA/c,
AccruedIncomeA/c,IncomereceivedinadvanceA/c,
UnearnedcommissionA/cetc.)
2.ImpersonalAccount:
a.RealAccount:ThisaccountdealwithPropertiesand
Assetsofthebusiness.(e.g.LandA/c,BuildingA/c,Plant
A/c,,MachineryA/c,FurnitureA/c,GoodwillA/cetc.).
b.NominalAccount:ThisaccountdealwithAllexpenses,
losses,incomeandgains(e.g.RentA/c,SalaryA/c,
DividendA/c,CommissionA/c,,BaddebtsA/cetc.).

4. Debit Vs. Credit
Debit:Theterm“Debit”comesfromtheLatinwordDebitum.Anentry
madeonthelefthandsideofanaccountthatincreaseseithertheassets
ortheexpensesoftheorganisationanddecreaseseitherliability,revenue
orequityitem.Inshort,thetermDebitdenotedasDr.
Credit:Theterm“Credit”comesfromtheLatinwordCredere.An
entrymadeontherighthandsideofanaccountthatincreaseseither
liability,revenueorequityitemoftheorganisationanddecreaseseither
assetorexpense.InshortthetermCreditdenotedasCr.
Debtor:Theterm'debtor'referstoindividualsaswellasotherfirms,
banks,lendingcompaniesandmore.Ifanyoneowespaymentforgoods
orservicesgiventoanentityoracompany,thepersonowingmaybe
calledadebtor.
Creditor:Acreditorisanentitythatextendscredit,givinganotherentity
permissiontoborrowmoneytoberepaidinthefuture.AndAbusiness
thatprovidessuppliesorservicesanddoesnotdemandimmediate
paymentisalsoacreditor,astheclientowesthebusinessmoneyfor
servicesalreadyrendered.

5. System of Accounting
Double Entry System
ThissystemwasinventedbytheItalianmerchantLuco
Pacioliin1494AD.Accordingtothissystemevery
transactionhastwofoldaspects,i.e.onepartygivingthe
benefitandotherpartyreceivingthebenefitandevery
transactionisdividedintotwosides,debitandcredit.In
shortoneaccountistobedebitedandanotheraccountisto
becreditedforeverytransaction.Everytransactionaffects
twoaccountsinoppositedirection.

6. Advantages of Double Entry System
❑Underthissystembothpersonalandimpersonal
accountsaretobeopenedtokeepcompleterecordof
businesstransaction.
❑Itprovidesacheckonthearithmeticalaccuracythrough
TialBalance.
❑Itrevealsnetresultsofbusinessoperationthrough
TradingandProfitandLossAccount.
❑Underthissystemfinancialpositioncanbeknown
throughBalanceSheet.
❑Sinceerrorsandfraudscanbedetectedunderthis
system,soitreducethechanceofcommitingfraud.

7. Application of Golden Rules (Rules for Ascertaining Debit
and Credit in a Transaction )
PersonalAccount:
a.Debit=theReceiver/thepersonreceivingthebenefit
b.Credit=theGiver/thepersonsacrificesthebenefit
RealAccount:
a.Debit=Whatcomesin
b.Credit=Whatgoesout
NominalAccount:
a.Debit=AllExpensesandLosses
b.Credit=AllIncomesandGains

8. Types of accounts Debit Credit
Assetsaretheresourcesofa
business.
Increase Decrease
Liabilitiesareclaims
againstassets.
Decrease Increase
Owner’sequityrepresents
theowner’sinvestmentsin
acompany.
Decrease Increase
Expensesarethecostofthe
consumedassets
Increase Decrease
Income(i.e.Revenue)is
cashreceivedfrombusiness
Decrease Increase

9. Identification of Debit & Credit in a Transaction
Sl.
No.
Transaction Two fold
Aspect
(Name of
account)
Classificat
ion of
Account
Effect of
Transaction
(Golden
Rule
Applicable)
Debit
(Dr.)
&
Credit
(Cr.)
1. Cash deposited into
the bank
Bank A/c
Cash A/c
Personal
A/c
Real A/c
Receiver
Assets goes out
Debit
Credit
2.Cash withdrawn
formbank
Cash A/c
Bank A/c
Real A/c
Personal
A/c
Assetscomes in
Giver
Debit
Credit
3.Capital Invested in
a business
Cash A/c
CapitalA/c
Real A/c
Personal
A/c
Assets comes in
Giver
Debit
Credit

10. Sl.
No.
Transaction Two fold
Aspect
(Name of
account)
Classificat
ion of
Account
Effect of
Transaction
Golden
Rule
Applicable
Debit
(Dr.)
&
Credit
(Cr.)
4. Capital Invested in
a businessand
chequereceived for
the same
Bank A/c
Capital A/c
Personal
A/c
Personal
A/c
Receiver
Giver
Debit
Credit
5. Goods Purchased in
cash
Purchase
A/c
Cash A/c
Nominal
A/c
Real A/c
Expense
Assetsgoes out
Debit
Credit
6. Goods Sold in cashCash A/c
Sales A/c
Real A/c
Nominal
A/c
Assets comes in
Income
Debit
Credit
7Goods purchased in
credit
Purchase
A/c
Creditor
A/c
Nominal
A/c
Personal
A/c
Expense
Giver
Debit
Credit

11. Sl.
No.
Transaction Two fold
Aspect
(Name of
account)
Classificat
ion of
Account
Effect of
Transaction
Golden
Rule
Applicable
Debit
(Dr.)
&
Credit
(Cr.)
8. Goods sold in creditDebtor
A/C
Sales A/c
Personal
A/c
Nominal
A/c
Receiver
Income
Debit
Credit
9. Goods purchased
fromMr. Ram
Purchase
A/c
Ram A/c
Nominal
A/c
Personal
A/c
Expense
Giver
Debit
Credit
10. Goods sold to
Shyam
ShyamA/c
Sales A/c
Personal
A/c
Nominal
A/c
Receiver
Income
Debit
Credit
11. Cash withdrawn
from business by
owner
Drawings
A/c
Cash A/c
Personal
A/c
Real A/c
Receiver
Assets goes out
Debit
Credit

12. Sl.
No.
Transaction Two fold
Aspect
(Name of
account)
Classificat
ion of
Account
Effect of
Transaction
Golden
Rule
Applicable
Debit
(Dr.)
&
Credit
(Cr.)
12. Goods purchased in
cash from S.N Nag
& Co.
Purchase
A/c
Cash A/c
Nominal
A/c
Real A/c
Expense
Assets Goes out
Debit
Credit
13. Goods sold in cash
to R.S. Co. Ltd.
Cash A/c
Sales A/c
Real A/c
Nominal
A/c
Assets comes in
Income
Debit
Credit
14. Goods withdrawn
from business by
owner
Drawings
A/c
Stock A/c
Personal
A/c
Real
Account
Receiver
Assets goes out
Debit
Credit
15. Rent Paid Rent A/c
Cash A/c
Nominal
A/c
Real
Account
Expense
Assets goes out
Debit
Credit

13. Sl.
No.
Transaction Two fold
Aspect
(Name of
account)
Classificat
ion of
Account
Effect of
Transaction
Golden
Rule
Applicable
Debit
(Dr.)
&
Credit
(Cr.)
16.Salary Paid Salary A/c
Cash A/c
Nominal
A/c
Real A/c
Expenses
Assets goes out
Debit
Credit
17. Wages Paid Wages A/c
Cash A/c
Nominal
A/c
Real A/c
Expenses
Assets goes out
Debit
Credit
18.CommissionPaidCommission
A/c
Cash A/c
Nominal
A/c
Real A/c
Expenses
Assets goes out
Debit
Credit
19Rent ReceivedCash A/c
Rent A/c
Real A/c
Nominal
A/c
Assetscomes in
Income
Debit
Credit
20.Commission
Received
Cash A/c
Commission
A/c
Real A/c
Nominal
A/c
Assetscomes in
Income
Debit
Credit

14. Sl.
No.
Transaction Two fold
Aspect
(Name of
account)
Classifica
tion of
Account
Effect of
Transaction
Golden
Rule
Applicable
Debit
(Dr.)
&
Credit
(Cr.)
21. Interest ReceivedCashA/c
Interest A/c
Real A/c
Nominal
A/c
Assetscomes in
Income
Debit
Credit
22. Dividend ReceivedCash A/c
Dividend
A/c
Real A/c
Nominal
A/c
Assetscomes in
Income
Debit
Credit
23. Rent due but not
paid
Rent A/c
Outstanding
Rent A/c
Nominal
A/c
Personal
A/c
Increase in
Expenses
Increase
Liability
Debit
Credit
24. Salary paid in
advance
Prepaid
Salary A/c
Salary A/c
Real A/c
Nominal
A/c
Increase in
Assets
Decrease in
expense
Debit
Credit

15. Sl.
No.
Transaction Two fold
Aspect
(Name of
account)
Classificati
on of
Account
Effect of
Transaction
Golden
Rule
Applicable
Debit
(Dr.)
&
Credit
(Cr.)
25. Interest duebut
not receivable
Accrued
Interest
A/c
Interest
A/c
Real A/c
Nominal
A/c
Increase in
asset
Increase
Income
Debit
Credit
26.DividendReceived
in advance
Dividend
A/c
Dividend
Received
in Advance
A/c
Nominal
A/c
Personal
A/c
Decrease in
income
Increasein
Liability
Debit
Credit