Unit –1 Basic of Accounts

Accounting Equation & Journal & Ledger & Trial Balance

Accounting
Equation
Total Assets = Total Equities
OR
Assets = Internal Equity + External Equity
OR
Assets = Capital + Liabilities
OR
Capital = Assets - Liabilities

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Accounting Equation
Accounting
Equation
Examples
Double Entry system of recording transactions
 Step – 1 : Ascertain the variables (I.e., Assets,
Ascertain Liabilities or Capital) of an equation affected by
a transaction

Procedure for
Step – 2 : Find out the effect (in terms of
developing an Find out increase or decrease) of a transaction on the
variables of an equation

accounting
equation
Step – 3 : Show the effect on the appropriate
side of an equation and ensure that the total of
Show right-hand side is equal to the total of left-hand
side.
Practical
Question
Practical Question

Question 1:
What will be effect of the following on the Accounting Equation?
(i) Started business with cash ₹ 45,000
(ii) Opened a Bank Account with a deposit of ₹ 4,500
(iii) Bought goods from M\s. Sun & Co. for ₹ 11,200
 ▪ Total Assets
▪ = Cash + Bank +Stock

Solution: 1
▪ = 40,500 + 4,500 +11,200
▪ = Rs 56,200
▪ Liabilities = 11,200
▪ Capital = 45,000

S. No. Assets = Liabilities + Capital

Transactions Cash Bank Stock Creditors
+ + =
(Rs) (Rs) (Rs) (Rs) (Rs)
(i) Started business with cash 45,000 = 45,000
45,000 = 45,000
(ii) Opened a Bank Account with a – 4,500 + 4,500 =
deposit
40,500 + 4,500 = 45,000
(iii) Bought goods from M/s. Sun & 11,200 = 11,200
Co.
40,500 + 4,500 + 11,200 = 11,200 + 45,000
Practical
Question 2:
Show the Accounting Equation for the following

Question
transactions:

₹
(i) Gopinath started business with cash 25,000

(ii) Purchased goods from Shyam 10,000

(iii) Sold goods to Sohan costing ₹ 1,800 1,500

(iv) Gopinath withdrew from business 5,000

Practical Question

Question:3
Show the effect of the following transactions on the Accounting Equation:
(i) Started business with cash Rs 50,000.
(ii) Salaries paid Rs 2,000.
(iii) Wages Outstanding Rs 200.
(iv) Interest due but not paid Rs 100.
(v) Rent paid in advance Rs 150.
 Question:4

What will be the effect of the following on the Accounting

Equation?

(i) Harish started business with cash Rs 18,000

Practical
Question (ii) Purchased goods for Cash Rs 5,000 and on credit Rs 2,000

(iii) Sold goods for cash Rs 4,000 (costing Rs 2,400)

(iv) Rent paid Rs 1,000 and rent outstanding Rs 200

 Practical Question

Question:5
Prepare Accounting Equation from the following:
(i) Started business with cash Rs 1,00,000 and Goods Rs 20,000.
(ii) Sold goods worth Rs 10,000 for cash Rs 12,000.
(iii) Purchased furniture on credit for Rs 30,000.
Meaning of an
Account (A/c)
▪ An account is a summary of relevant
transactions at one place relating to a
particular head.

▪ It records not only the amount of

transaction but also their effect and
direction.
 Classified in to two ways:

Classification 1) Traditional Classification

of Accounts

2) Accounting Equation Based

Classification
Classification based on Traditional
Approach
Types of Accounts Meaning Examples
Personal Accounts These accounts are related to Natural – Ram's A/c
natural persons, artificial persons Artificial – Ram & Co.'s A/c
and representative persons Representative – Debtors A/c
Real Accounts These accounts relate to the tangible Tangible – Land A/c
or Intangible real assets Intangible – Goodwill A/c
Nominal Accounts These accounts relate to Losses, Expenses & Losses – Purchase A/c,
Expenses , profit and gains Loss by fire A/c
Profit & Gains – Sales A/c, Discount
received A/c
Classification based on Accounting Equation
Types of Accounts Meaning Examples
Assets Accounts These accounts relate to Land A/c, Building A/c, Cash
Tangible or Intangible real A/c, Goodwill A/c etc.
assets
Liabilities Accounts These accounts relate to the Trade Creditors A/c, Bank
financial obligations of an Overdraft A/c, Long term loans
enterprise towards outsiders A/c etc.
Capital Accounts These accounts relate to Capital A/c , Drawings A/c
owners of an enterprise
Revenue Accounts These accounts relate to the Sales A/c, Discount received
amount charged for goods sold A/c, Dividend received A/c,
or services rendered or Interest received A/c
permitting others to use
enterprise's resources yielding
interest, royalty or dividend
Expenses Accounts These accounts relate to the Purchase A/c, Discount
amount incurred or lost in the allowed A/c, Interest Payable
process of earning revenue A/c, Loss by Fire A/c etc.
Classify the following accounts
A/c Head A/c Head A/c Head A/c Head
Capital brough in Drawings A/c Building Purchased Purchases A/c
A/c
Sales A/c Carriage Inward Paid Carraige Outward Paid Cash received A/c
A/c A/c
Cash Paid Interest Paid Interest received Commission Paid
Commission received Discount allowed Conveyance charges Sales promotion
expenses
Entertainment Subscription paid Subscription received Light, Power &
expenses Electricity
Telephone, Postage & Insurance Premium Bad Debts written off Bad Debts recovered
Telegram paid
Discount received Printing & Stationery Furniture & Fixture Bank A/c
bought Purchased
Wages & salaries paid Travelling charges Current A/c of a Loan A/c of a partner
partner
Sales Return Outstanding Salary Bank Overdraft Prepaid rent A/c
Meaning and Rules of Debit and Credit

Debit means to enter an amount of transaction on the left side of an account and Credit
means to enter an amount of transaction on the right side on an account.
Abbreviated form
Dr. Stands for Debit
Cr. Stands for Credit
Both debit and credit may represent either increase or decrease depending upon the
nature of an account.
Rules for Debit and Credit when accounts are based on
Traditional approach

Types of accounts Rules for Debit Rules for Credit

For Personal accounts Debit the receiver Credit the receiver
For Real accounts Debit what comes in Credit what goes out
For Nominal accounts Debit all expenses & losses Credit all Incomes & gains
Rules for Debit and Credit when accounts are based on
Accounting Equation approach

Types of accounts Rules for Debit Rules for Credit

For Assets accounts Debit the increase Credit the Decrease
For Liabilities accounts Debit the decrease Credit the increase
For Capital accounts Debit the decrease Credit the increase
For Revenue accounts Debit the decrease Credit the increase
For Expenses accounts Debit the increase Credit the decrease
Meaning of Journal
A Journal is a book in which transactions are recorded in
the order in which they occur I.e., in chronological order.

A journal is also called as a book of prime entry because all

business transactions are entered first in this book.

The process of recording transaction in a Journal is called

Journalizing.

An entry made in the Journal is called a "Journal entry".

Format of a Journal
Journal In the books of

Date Particulars L.F. Debit Amount (Rs) Credit Amount (Rs)

YY/MM/DD ..........A/c Dr.
To …............A/c
(Narration starts with
"Being")
Total Debit Total(Rs) Credit Total (Rs)
Analysis of transactions
Transaction: Somu commenced printing business with cash Rs. 50,000.
Analysis: This is a cash transaction as cash is involved.
Analysis of transactions
Transaction: Bought goods for cash Rs. 4,000
Analysis: This is a cash transaction as cash is involved.
Analysis of transactions
Transaction: Purchased goods from Rahul for Rs. 10,000 on credit
Analysis: This is a credit transaction.
Discount

An allowance or benefit given by the seller to the buyer or by a creditor to debtor is

known as discount.
It is concession allowed by seller to buyer.
Discount is of two types viz. Trade discount and Cash discount
 Trade Discount (T.D.) Vs Cash Discount (C.D.)
Trade Discount (T. D.) Cash Discount (C. D.)
T.D. is allowed at the time of Purchase/Sale of goods C.D. is allowed for prompt payment
in bulk/large quantities
T.D. is allowed for cash as well as credit transaction C.D. is allowed only for Cash transactions
of buying/selling of goods
T.D. calculated on Gross Price C.D. is calculated on Ne Price (N.P.) after deducting
Original Prices of goods is G.P., List Price, Catalogue T.D.
Price
List Price Net Price
Less: T.D. Less: C.D.
Net Price Cash received /paid
T.D. is never recorded in the books of accounts C.D. is recorded in the books of accounts
Entry is be passed only at Net Price For Purchase-
Goods/Purchase A/c Dr.
Goods/Purchase A/c Dr. To Cash A/c
To Cash/Party A/c To Discount earned A/c
For Sale-
Cash A/c Dr.
Discount Allowed A/c Dr.
To Goods/Sales A/c
Ledger

Ledger is a book containing various accounts.

It is a book of account in which businessmen keeps individual records of business
transactions.
This account book is maintained by businessmen for keeping individual records of
Persons, Properties, Expenses, Incomes, Gains and Losses
Account : An account is divided into two parts. The left-hand side is also known as the
Debit side and the right-hand side is known as the Credit side.
Dr. Account Cr.
Left Hand Side Right Hand Side
(Debit) Dr. (Credit) Cr.

Head of an Account: Head of an account means the name of the account. Name of the
account is written at the top, followed by the word "Account" For Example – An account
relating to Shamal will bear the head 'Shamal Account"
Dr. Shamal Account Cr.

Left Hand Side Right Hand Side

(Debit) Dr. (Credit) Cr.
To Debit an Account: It means to record the transaction on the left-hand side I.e. the
debit side of an account
Dr. Goods A/c Cr.
Left Hand Side Right Hand Side
(Debit) Dr.

To Credit an Account: It means to record the transaction on the right-hand

side I.e. the Credit side of an account

Dr. Goods A/c Cr.

Left Hand Side Right Hand Side
(Credit) Cr.
Journal Folio: The page number of the Journal is called the Journal folio. BY writing the
page numbers it becomes easy to find out on which page the entry is made in the
Journal

Posting: The act of recording the transaction in the ledger on the basis of the entries
made in Journal is known as posting.
Format of a Ledger
In the Ledger of M/s ….........
Cash A/c
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs) (Rs)
YY/MM "To" Name of the YY/MM/ "By" Name
/DD Account DD of the Account
Total Total(Rs) Total (Rs)
Points to be noted
▪ A separate account should be opened for every account entered in the Journal
▪ All the transactions relating to a particular account should be recorded in the account
already opened. No new account of the same name should be opened in the ledger.
▪ The name of the account should be recorded in bold letters at the centre of each account.
▪ The word Dr. Should be written at the left-hand top corner and the word Cr. Should be
written at the right-hand top corner of each account.
▪ Entries should be posted from Journal to Ledger in chronological order.
▪ Every entry on the debit side of an account should begin with the word "To".
▪ Every entry on the credit side of an account should begin with the word "By".
▪ The Personal and Real account should be balanced periodically as required by the
business concern and the Nominal accounts should be closed at the end of the year.
Ledger Balancing

▪ Personal accounts are balanced to know the amounts recoverable from or payable to
a person or a party.
▪ The Real accounts are balanced to know the exact value of the properties or assets on
a particular day.
▪ The Nominal accounts are totalled to know the expenses incurred or the income
earned during a particular period.
Procedure for balancing the accounts
▪ Observe the amounts of the two sides to decide on which side the total is more.
▪ Take the total of the side which appears to be greater.
▪ Write the same total in the opposite side. E.g., if the debit side total of the account is more
than the credit side, take the debit side total and write the same total on the credit side.
▪ Find the difference between the totals of the two sides and that is the balance in the
account.
▪ If the total of debit side total is more than that of the credit side, then the account is said to
have a debit balance and such a balance should be written in the credit side of the account
as "By Balance c/d".
▪ If the total of credit side total is more than that of the debit side, then the account is said to
have a credit balance and such a balance should be written in the debit side of the account
as "By Balance c/d".
▪ These debit or credit balances should be brought forward on the next date in the
respective sides I.e., the opening debit balance is written in the debit side and opening
credit balance is written in the credit side.
Trial Balance: A trial balance is a
statement showing the balances of
all the ledger accounts as on one
particular date.
Utility of a Trial Balance
▪ It ensures arithmetical accuracy of books of accounts.
▪ Balance of any ledger account can be easily known by referring to the trial balance.
▪ It proves the fact that double entry system of recording transactions is followed.
▪ It facilitates to take important decisions by comparing trial balance of two different
periods.
▪ Trial Balance is also useful in preparing the important financial statements of Account
I.e. Trading A/c, Profit & Loss A/c and Balance Sheet.
▪ It enables to locate an accounting error committed in writing accounts. If the trial
balance does not tally then mistakes can be found and rectified.
Format of a Trial Balance

VERTICAL OR JOURNAL HORIZONTAL OR LEDGER

FORM OF TRIAL BALANCE FORM OF TRIAL BALANCE

Trial Balance as on........ Trial Balance as on............

Heads of Heads of Heads of
S. No. Accounts L.F. Dr. Amount Cr. Amount S. No. Accounts L.F. Amount S. No. Accounts L.F. Amount
Kinds of Trial
Balance
▪ Gross Trial Balance: It is a trial balance
in which the debit and credit totals of
each ledger account are shown in the
two columns against the name of the
account.
▪ Net Trial Balance: It is the
trial balance in which only the net
balance of each ledger account is
shown against its name.
Summary of Trial Balance
Head of the Account Debit Balance Credit Balance
Personal Accounts
Debtors **
Creditors **
Bank A/c **
Bank Overdraft **
Loan given **
Loan Taken **
Bills Receivable **
Bills Payable **
Outstanding Liability **
Prepaid Expenses **
Outstanding Income **
Pre-received Income **
Capital A/c **
Drawings A/c **
Summary of Trial Balance
Head of the Account Debit Balance Credit Balance
Real Accounts
All Assets, Properties
or belongings **
Cash A/c **
Opening Stock **

Closing Stock does not appear in trial balance

Head of the Account Debit Balance Credit Balance

Nominal Accounts
Accounts of Expenses/ Losses **
Accounts of Incomes/ Gains **
Purchase A/c **
Sales A/c **
Purchase Return / Return Outward **
Sales Return / Return Inward **