Accounting Mechanics

P. GURU PRASADFINANCE AND ACCOUNTS

FACULTY

Double Entry system

• All the business transactions have two fold effect. Recording of both aspects of a transaction is called Double Entry system of Bookkeeping.

• Under the duality concept that sources of funds must always equal to uses of funds and from this fundamental accounting equation is formed

• Owner’s Equity+ Outside Liability = Assets

Duality concept

• The assets refer to resources which are owned by business enterprises,

• liabilities are debts payable to parties external to business and

• capital means the amount payable to owner of the business enterprises.

The sources of funds

• Incurring liability• Earning revenue• Making profits• Decrease in assets• Decrease in expenses• Decrease in losses

Use of funds

• Acquiring assets• Incurring expenses• Incurring losses.• Thus , no matter what event transpires

in the business, it must be possible to capture that events in the balance sheet in such a way that the liabilities (sources) and assets (uses) remain equal

Symbol for sources and uses• In accounting the terms credit and debit

are merely two different sounds and do not have the same implications as they have in English language.

• Thus increase in liabilities, revenues or profits being sources of funds are all called ‘Cr’ items.

• Similarly , increase in assets, expenses and losses being uses of funds are all called ‘Dr’ items

DEBIT

• Debit – represents- out flow of resources like rent, salaries, purchase of assets like land , building, machinery etc.,

• And all those who owe money to business like debtors, accounts receivables etc.,

CREDIT

• Credit - represents – inflow of resources – like income from sales, rent received , dividend received, commission received.

• And all those to whom business owes money like creditors to the business, bank overdraft, partners capital.

Types of Accounts

• Personal accounts:- it deals with accounts of individuals like creditors, debtors, bank, etc. It shows the balance due to these individuals or due from them on a particular date.

• Real account :- it represents assets like plant and machinery, land and buildings, goodwill, etc. as on a particular date, this account shows the worth of the assets

Types of Accounts

• Nominal accounts:- it consists of different types of expenses or incomes or loss or profit. These accounts show tha amount of income earned or expenses incurred for a particular period say a month or year etc.

• Whether an account has to be debited or credited is decided by using the rules of accounting.

Books of accounts

• Cash book:-it is a special journal in which all cash transactions are recorded directly.

• The cashbook resembles a ledger with debit and credit sides. Cash account is not opened separately , when a Cash book is maintained because cashbook serves the purpose of the ledger also.

Petty cash book

• A separate cash book is kept to record petty expenses. The petty cash book is recorded by imprest system. To avoid recording too many small value and frequent transactions in the main cashbook.

Books of accounts

• Journal :- to record non cash transactions like credit sales, credit purchases, sales return, purchase returns , year end adjustments, if any. These books are also called as subsidiary books.

• Ledger:- it contains a classified summary of all transactions recorded in cash book and journal. A ledger is not an independent record. The transactions recorded in a ledger are derived from either cash book or journal.

Multi column Cashbook• With the development of banking

sector, and frequent use of banking instruments, cashbook with additional columns for bank transactions came into existence.

• Thus the multicolumn cashbook is nothing but ledger accounts for cash and bank with additional information about discount allowed and discount received.

Contra entries

• If a transaction affects both cash account and bank account in the opposite sides, the entry for recording the transaction is called a contra entry. For contra entries no posting is required because the double entry is completed in the cash book itself. For example, cash deposited into bank and cash withdrawn from bank affect cash and bank account only..

Contra entries

• Both aspects of these transactions are recorded in cash column and bank column of the cash book respectively. No ledger posting is required because both aspects of the transaction are recorded in the cash book it self. This fact is indicated in the cash book by writing ‘c’ in L.F. column.

A conceptual framework of financial accounting• The subject of financial accounting

is based on the double entry system of accounting using debits and credits

• Cash transactions are entered in cash book

• Credit transactions are entered in the journal

A conceptual framework of financial accounting• The transactions of cashbook and

journal are integrated into the ledger, which is a summary of all cash and credit entries

• When all the ledger accounts are tabulated as a summary statement it is known as ‘Trial Balance’

A conceptual framework of financial accounting

• Trail balance establishes the arithmetical accuracy of the accounting records.

• From the trial balance two separate accounting documents are prepared namely profit and loss account and balance sheet

A conceptual framework of financial accounting• All income and expenditure

accounts are taken to profit and loss account

• All assets and liabilities accounts are taken to Balance sheet.

• The net result of profit and loss account namely profit or loss is taken to Balance sheet . Thus the balance sheet tallies

THANK YOU

• It is better to wear out than to rust out. •Bishop Richard Cumberland

• The most wasted of all days is one without laughter. •E.E. Cummings