Basics of financial accounting

Name of the subject: Basic accounting & financial reporting

List of financial transactions using double-entry book-keeping principles

Nature of transaction

Buying goods in cash

Buying goods on credit

Buying goods through bank (cheque)

Selling goods in cash

Selling goods on credit

Selling goods through bank (cheque)

Buying assets in cash

Buying asset on credit

Buying asset through bank (cheque)

Selling asset in cash

Selling asset on credit

Selling asset through bank (cheque)

Pay telephone bill (expense) in cash

Pay telephone bill (expense) on credit

Pay telephone bill (expense) through bank

Receive rent in cash

Receive rent on credit
Receive rent through bank

Pay loan installement through bank account

Bill sent for collection credited to bank account

Interest on fixed deposit credited to bank account

Purchase machinery out of bank loan

Debtor received through bank

Creditor paid through bank

Capital received from owners through bank

Salary paid through bank

Advance paid in cash for goods

Goods received against advance as above

Advance received through bank for sale

Goods supplied against advance as above

inancial reporting

-entry book-keeping principles

Which account to be debited Which account to be credited

purchases account (real account cash account (real account and goes
& goods coming in) out)

purchases account (real account supplier's account as creditor

& goods coming in) (personal account - credit the giver)
purchases account (real account bank account (personal account -
& goods coming in) credit the giver )
cash account (real account - debit
what comes in)
purchaser's account as debtor
(personal account - debit the
receiver)
bank account (personal account -
debit the receiver)
asset account (real account &
coming in)
asset account (real account &
coming in)
asset account (real account &
coming in)
cash account (real account - debit
what comes in)
purchaser's account as debtor
(personal account - debit the
receiver)
bank account (personal account -
debit the receiver)
Telephones (nominal account -
debit expense)
Telephones (nominal account -
debit expense)
Telephones (nominal account -
debit expense)
cash account (real account - debit
what comes in)
Outstanding income - receivable
sales account (real account &
goods go out)
sales account (real account &
goods go out)
sales account (real account &
goods go out)
cash account (real account - credit
what goes out)
supplier's account (real account -
credit the giver)
bank account (personal account -
credit the giver)
asset account (real account -
credit what goes out)
asset account (real account -
credit what goes out)
asset account (real account -
credit what goes out)
cash account (real account - credit
what goes out)
Outstanding expenses - payable
bank account (personal account -
credit the giver )
Rent account (Income - nominal -
Rent account (Income - nominal -
bank account (personal account -
debit the receiver) Rent account (Income - nominal -

loan account (personal account - Current account (personal

debit the receiver) account - credit the giver)
bank account (personal account debtors (personal account -
- debit the receiver) credit thegiver)
bank account (personal account Interest account (income -
- debit the receiver) nominal - credit)
asset account (real account & bank loan account (personal
coming in) account - credit the giver)
bank account (receiver) debtors (giver)
bank account (personal account -
creditors (receiver) credit the giver)
owners' capital account
bank account (personal account (personal account - credit the
- debit the receiver) giver)
Salary (nominal account - debit bank account (personal account -
expense) credit the giver)
cash account (real account -
supplier's account (receiver) credit what goes out)

supplier's account (personal account

purchases account (expense) - reversing previous debit entry )
bank account (personal account purchaser's account (personal
- debit the receiver) account - credit the giver)
purchaser's account (personal
account - reversing previous Sales income (real account -
credit entry) credit what goes out)
Examples of real, nominal and personal accounts & accounting rules and regulations

Real accounts Nominal accounts

Recorded for the purpose of details; does
not have any life of its own
Has to be either in real account form or
Any Asset account that is tangible personal account form

Purchases & purchase returns Income

Sales & sales returns Expense
Goods Net income = profit
Fixed assets Loss
Cash
Raw materials
Semi-finished goods
Finished goods

Rule: Debit what comes in & Rule: Debit expense and loss
credit what goes out Credit income and profit
ules and regulations

Personal accounts
Usually the persons with whom trading
is done or cash transactions/cheque
transactions are regularly made like a
bank

Trade creditors
Trade debtors
Banks

Rule: Debit the receiver and credit the

giver
Accounting system

Cash accounting Accrual system of accounting

Only cash transactions are Cash and credit transactions are

accounted for accounted

Cash has to come in for Cash has to go out for

sale/income purchase/expense

Profits can be manipulated & Profits are more reliable as all the
hence less reliable transactions are accounted

Mandatory for limited companies

in India in terms of The
Suitable for small firms and Companies' Act; lenders insist on
proprietary concerns this for partnership firms
Impact of 'Accrual system' on accounts

Description of the account Name of the account

Income receivable Outstanding income (current asset)

Expense payable Outstanding expenses (current liability)

Amount paid in advance for

an expense (partially or fully) Prepaid expenses (current asset)

Amount received in advance

for an income (partially or Income received in advance (current
fully) liability)
Examples Double-entry

Rent, interest, Outstanding income debit & income

consultancy etc. credit

Rent, interest,
consultancy charges,
salary, wages & a host of Expense debit & outsstanding expense
administrative expenses credit

Prepaid expense debit and expense

credit (reducing the expense amount
for the accounting period); usually this
Usually insurance; can be is done at the end of the accounting
rent or consultancy year
charges or AMC on At the time of payment, full amount
annual basis would be booked as expense

Income received in advance credit

(reducing the amount for the
accounting period) & income debit;
usually this is done at the end of the
accounting year
Usually rent or At the time of receipt, entire amount
consultancy charges would have been credited to 'Income'
When it is reversed the next
accounting year

When the amount is received

When the amount is paid

Can be reversed any time and is

not linked to any payment

Can be reversed any time and is

not linked to any receipt