MICKEY STARTS A TEXTILE BUSINESS

Lets help him with Accounting

MICKEY’S STORY• Mickey decides to start a business.

• He has Rs. 5 lakhs with him.

• He takes a loan for another Rs.5 Lakhs from the Bank.

MICKEY’S STORY• He procures the necessary permission from the

government and does the following:

buys a shop

buys the necessary furniture

gets electricity connection and

employs workers.

MICKEY’S STORY• His business involves the following

activities:buying clothes from Donald ,

a wholesaler,

packing it using a packing machine and

selling packed clothes to retailers like Goofy

THE ELEMENTS MICKEY WILL COME ACROSS WHILE DOING BUSINESS

• CASH

• loan from BANK

• BUILDING

• FURNITURE

• MACHINERY

• REPAIRS to building, furniture or machinery

• ELECTRICITY BILL

THE ELEMENTS MICKEY WILL COME ACROSS WHILE DOING BUSINESS

• SALARY TO WORKERS

• clothes in wholesale called PURCHASES

• packed clothes called SALES

• payment to DONALD

• DISCOUNT RECEIVED from Donald

• payment from GOOFY

• DISCOUNT ALLOWED to Goofy

THE ELEMENTS MICKEY WILL COME ACROSS WHILE DOING

BUSINESS• MICKEY HIMSELF (Although he is the owner, he is a separate person with regard to his business.)The cash he brings in will be called CAPITAL and the business has to pay this amount back to him.Any amount he takes from the cash

belonging to the business, for his personal use will be called DRAWINGS

CLASSIFICATION OF THE ELEMENTS

All the elements in the business can be classified into the following:1. Real and Artificial persons:

2. Non living things:

CLASSIFICATION OF THE ELEMENTS3. Expenses : > REPAIRS > BILL > SALARY TO 4. Losses : > DISCOUNT ALLOWED to 5. Incomes : > (Elements like ‘Interest Received’ from Bank on the amount deposited) (No items mentioned in the current scenario fall under this class)

6. Gains : > DISCOUNT RECEIVED from

THE DIFFERENT ACCOUNTS Once the elements are classified according to their nature, they can be classified into the following types of Accounts:

1. Real and Artificial persons PERSONAL ACCOUNT

2. Non living things REAL ACCOUNT

3. Expenses, Losses, Incomes and Gains NOMINAL ACCOUNT

THE DIFFERENT ACCOUNTS 1. PERSONAL ACCOUNT:

Personal A/c consists of the following:

These elements either RECEIVE MONEY &/or THINGS or GIVE MONEY &/or THINGS.They take the role of RECEIVER or GIVER

gives money to the business as loan.

THE DIFFERENT ACCOUNTS gives to the business in the beginning.

gives/sells to , for which he receives

If gives/sells the for credit, he will be paid later.

gives when receiving/buying from

If buys/receives the on credit, he will pay later.

THE DIFFERENT ACCOUNTS 2. REAL ACCOUNT: Real A/c consists of the following:

These elements either COME INTO THE BUSINESS or GO OUT OF THE BUSINESS.

, and are bought by for whereby they come into the business and goes out of the business.

THE DIFFERENT ACCOUNTS When are bought from for , come into the business

and

goes out of the business.

If the purchase is done for credit,

comes into the business

and

will go out of the business only at a later date.

THE DIFFERENT ACCOUNTS When are sold to for , goes out of business

and

comes into the business.

If the sales is done on credit,

goes out of the business and

will come into the business only at a later date.

THE DIFFERENT ACCOUNTS 3. NOMINAL ACCOUNT: Nominal A/c consists of the following: >Repairs to building, furniture and machinery > Bill >Salary to >Discount allowed to >Discount received from

THE DIFFERENT ACCOUNTS Repairs, Bill and Salary to are

expenses incurred by the business.

Discount allowed to is a loss for the business as it involves the business forgoing a part of the amount that is due from its debtor.

THE DIFFERENT ACCOUNTSDiscount received from is a gain for the

business because a creditor of the business is forgoing a part of the amount due to him.

Expenses and Losses are similar in nature and Incomes and Gains are similar in nature.

In nominal account, the elemsnts are either EXPENSES AND LOSSES or INCOMES AND GAINS

THE GOLDEN RULES OF ACCOUNTING Every transaction has a DEBIT aspect and a CREDITaspect. According to the Golden Rules of Accounting:

In PERSONAL A/c : DEBIT the RECEIVER & CREDIT the GIVER

In REAL A/c : DEBIT what COMES IN & CREDIT what GOES OUT

In NOMINAL A/c : DEBIT all EXPENSES AND LOSSES & CREDIT all INCOMES AND GAINS

TRANSACTIONS

(1) 0n 1/1/2015 Mickey invests Rs.5 lakhs in the business• Elements : Cash and Mickey (Since Mickey is the owner, the cash he contributes will be called Capital. It is treated as Personal A/c) Cash and Capital

• Cash A/c : Real A/c – Comes in – Debit Capital A/c : Personal A/c – Giver - Credit

• Journal entry: Date Particulars L.F. Dr. (Rs.) Cr. (Rs.) 1/1 Cash A/c Dr. 5,00,000 To Capital A/c 5,00,000 (Being cash brought in by the owner)

(2) On 4/1/2015 Mickey takes a loan of Rs.5 Lakhs from the bank• Elements: Cash and Bank

• Cash A/c : Real A/c – Comes in – Debit Bank A/c : Personal A/c – Giver - Credit

• Journal entry: Date Particulars L.F. Dr. (Rs.) Cr. (Rs.) 4/1 Cash A/c Dr. 5,00,000 To Bank A/c 5,00,000 (Being loan taken from bank )

(3) On 7/1/2015 Mickey buys a shop building worth Rs.2 Lakhs

• Elements: Building and Cash

• Building A/c : Real A/c – Comes in – Debit Cash A/c : Real A/c – Goes out – Credit

• Journal entry: Date Particulars L.F. Dr. (Rs.) Cr. (Rs.) 7/1 Building A/c Dr. 2,00,000 To Cash A/c 2,00,000 (Being building bought for Rs. 2 lakhs )

(4) On 10/1/2015 Mickey buys furniture worth Rs.10,000

• Elements: Furniture and Cash

• Furniture A/c: Real A/c – Comes in – Debit Cash A/c : Real A/c – Goes out –Credit

• Journal entry: Date Particulars L.F. Dr. (Rs.) Cr. (Rs.) 10/1 Furniture A/c Dr. 10,000 To Cash A/c 10,000 (Being furniture bought)

(5) On 13/1/2015 Mickey buys a packing machine worth

Rs.75,000• Elements: Machine and Cash

• Machine A/c : Real A/c – Comes in – Debit Cash A/c : Real A/c – Goes out – Credit

• Journal entry: Date Particulars L.F. Dr. (Rs.) Cr.(Rs.) 13/1 Machinery A/c Dr. 75,000 To Cash A/c 75,000 (Being Machinery bought)

(6) On 16/1/2015 Mickey buys cloth from Donald for Rs.7500 and pays in

cash• Elements: Cloth and Cash (‘Cloth’ here refers to the item which Mickey uses in his trade. Hence it is called Purchases.) Purchases and Cash

• Purchases A/c: Real A/c – Comes in – Debit Cash A/c : Real A/c – Goes out – Credit

• Journal entry: Date Particulars L.F. Dr. (Rs.) Cr.(Rs.) 16/1 Purchases A/c Dr. 7500 To Cash A/c 7500 (Being cash purchase )

(7) On 19/1/2015 Mickey incurs Rs.500 as repair charges for the

packing machinery• Elements: Repair for Machinery and Cash

• Repairs for Machinery A/c : Nominal A/c – Expense – Debit Cash A/c : Real A/c – Goes out – Credit

• Journal entry: Date Particulars L.F. Dr. (Rs.) Cr.(Rs.)19/1 Repairs for Machinery A/c Dr. 500 To Cash A/c 500 (Being repairs for Machinery)

(8) On 22/1/2015 Mickey sells packed cloth worth Rs.10,000 to Goofy for

cash • Elements: Packed cloth and Cash (‘Packed cloth’ here refers to the item in which Mickey trades. Hence it is called Sales.) Sales and Cash

• Cash A/c : Real A/c – Comes in – Debit Sales A/c : Real A/c – Goes out – Credit

• Journal entry: Date Particulars L.F. Dr. (Rs.) Cr. (Rs.) 22/1 Cash A/c Dr. 10,000 To Sales A/c 10,000 (Being cash sales)

(9) On 23/1/2015 Mickey buys cloth worth 10,000 from Donald

for credit • Elements: Purchases and Credit (Here the purchase is done for credit. No cash is paid. The Giver is credited for the amount due to him.) Purchases and Donald

• Purchases A/c: Real A/c – Comes in – Debit Donald A/c : Personal A/c – Giver – Credit

• Journal entry : Date Particulars L.F. Dr. (Rs.) Cr. (Rs.) 23/1 Purchases A/c Dr. 10,000 To Donald A/c 10,000 (Being credit purchases)

(10) On 25/1/2015 Mickey sells packed cloth worth Rs.15,000 to

Goofy on credit • Elements: Sales and Credit (Here the sales is done for credit. No cash is received. The Receiver is debited for the amount due from him.) Sales and Goofy

• Goofy A/c : Personal A/c – Receiver – Debit Sales A/c : Real A/c – Goes out - Credit

• Journal entry Date Particulars L.F. Dr. (Rs.) Cr. (Rs.) 25/1 Goofy A/c Dr. 15,000 To Sales A/c 15,000 (Being credit sales)

(11) On 28/1/2015 Mickey pays Donald Rs.8,000 and Donald allows Mickey a

Discount of Rs.2,000• Elements: Cash, Discount Received and Donald ( Here Mickey receives a discount from Donald. The amount Mickey need not pay is a gain for Mickey’s business.)

• Donald A/c : Personal A/c – Receiver – Debit Cash A/c : Real A/c – Goes out – Credit Discount Received A/c : Nominal A/c – Gain – Credit

• Journal entry: Date Particulars L.F. Dr. (Rs.) Cr. (Rs.) 28/1 Donald A/c Dr. 10,000 To Cash A/c 8,000 To Discount Received A/c 2,000 (Being payment to creditor made and discount received)

(12) On 31/1/2015 Mickey receives Rs.14,000 from Goofy in full settlement of the amount due

from him• Elements: Cash, Discount Allowed and Goofy (Here Mickeys allows Goofy a discount. The amount Goofy will not pay because of the discount is a loss to Mickey’s business.)

• Cash A/c : Real A/c – Comes in – Debit Discount Allowed A/c : Nominal A/c – Loss – Debit Goofy A/c : Personal A/c – Giver - Credit

• Journal entry: Date Particulars L.F. Dr. (Rs.) Cr. (Rs.) 31/1 Cash A/c Dr. 14,000 Discount Allowed A/c Dr. 1,000 To Goofy A/c 15,000 (Being payment received from debtor and discount allowed)

(13) On 2/2/2015 Mickey pays Rs.3,000 as salary to workers

• Elements: Salary to workers and Cash

• Salary A/c: Nominal A/c – Expense – Debit Cash A/c : Real A/c – Goes out - Credit

• Journal entry: Date Particulars L.F. Dr. (Rs.) Cr. (Rs.) 2/2 Salary A/c Dr. 3,000 To Cash A/c 3,000 (Being salary paid)

(14) On 2/2/2015 Mickey pays Rs.5000 as electricity bill charges for

the last month • Elements: Electricity Bill and Cash

• Electricity Charges A/c : Nominal A/c – Expenses – Debit Cash A/c : Real A/c – Goes out – Credit

• Journal entry: Date Particulars L.F. Dr. (Rs.) Cr. (Rs.) 2/2 Electricity charges A/c Dr. 5,000 To Cash A/c 5,000 (Being electricity charges paid)

(15) 0n 4/2/2015 Mickey takes Rs.3,000 to buy a cycle for his

personal use • Elements: Cash and Mickey (Here Mickey withdraws cash for his personal use. Such withdrawals are called Drawings. It is treated as Personal A/c ) Cash and Drawings

• Drawings A/c : Personal A/c – Receiver – Debit Cash A/c : Real A/c – Goes out – Credit

• Journal entry: Date Particulars L.F. Dr. (Rs.) Cr. (Rs.) 4/2 Drawings A/c Dr. 3,000 To Cash A/c 3,000 (Being drawings made by the owner )

Now that we’ve helped Mickey learn the basics of Accounting, and Journalizing, lets hope that he does well in his business…

ADIOS AMIGOS !!