Accountancy Basics

Definition of Accounting:  Accounting is an art and science of recording, classifying, summarizing business transactions in a systematic manner.

 

Business is an activity that is conducting to render some kind of product or service to the society in order to earn profit.

 

Transaction is an event happened in the business premises.  Accountancy can only consider the transactions that are business related and can be expressed in terms of monetary values.

Steps to record a transaction under Double Entry System:

  1. Identify atleast 2 parties involved in the transaction.
  2. Identify basic account type of each party
  3. Apply Debit and Credit rules for each party based on account type
  4. Total Transaction amount to be debited once and again credit once.
    (i.e. total debited amount = total credited amount)

 

Basic Account Types:

  1. Personal Accounts: Ledgers opened in the name of person or firms. 
    Eg: Ram A/c, Pragathi&Co A/c, Bank A/c
  2. Real Accounts: Ledgers opened in the name of Fixed/Floating Asset
    Eg: Cash A/c, Machinery A/c, Furniture A/c
  3. Nominal Accounts: Ledgers opened in the name of an Expense, Loss, Income or Profit
    Eg: Salaries a/c, Received Rent a/c, Discount a/c

Debit/Credit Rules:

 

Debit

Credit

Personal a/c

Receiver

Giver

Real A/c

Coming in

Going out

Nominal A/c

Expense/Loss

Income/Profit

 

Note: While preparing accounts, we should think in the point of view of firm but not the owner.  Owner is the person who has given credit to the firm in the form of capital.  The invested capital should be kept for entire financial year (generally 1st april to 31st march).  Firm would return profit/loss to the owner as the result of business.  The amount utilized by the owner for his personal is to be considered as Drawings and the same is to be deducted from his capital.

Owner Transactions

Ex1: Ram started business with Rs. 50,000/-

 

Cash a/c                 – Real Accts           coming in  – Debit

Ram Capital a/c     – Personal Accts – Giver  – Credit

 

Cash a/c Dr            50000

          To Ram Capital a/c          50000

 

Ex2: Utilised Rs. 10,000 for personal use

 

Drawings a/c         Nominal accts        Expense       Debit

Cash a/c                 Real accts              going out     Credit

 

Drawings a/c Dr    10000

          To Cash a/c            10000

 

Ex3: withdraw Rs. 5,000/- for personal use

Drawings a/c         Nominal accts        Expense       Debit

Bank a/c                 Personal accts        Giver Credit

 

Drawings a/c Dr    10000

          To Bank a/c           10000

Bank Transactions

Ex1: Deposited Rs. 10000 into Bank a/c

 

Bank a/c       personal accts        receiver        debit

Cash a/c       real accts                going out     credit

 

Bank a/c Dr

          To cash a/c

 

Ex2: With draw Rs. 1000 from Bank a/c

 

Bank a/c       personal accts        Giver           Credit

Cash a/c       real accts                Coming in    Debit

 

 

Ex3: Transferred Rs. 5000 from Bank1 a/c to Bank2

 

Bank1 a/c     personal       giver            credit

Bank2 a/c     personal       receiver        Debit

 

Bank2 a/c Dr         5000

          To Bank1 a/c                   5000

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