AccountingBasics

PreparedforFirstYearMBA

Overview
SNo

Particulars

01

Introduction toAccounting

02

AccountingEquation

03

TypesofTransactions

04

Purchase andSales

05

TypesofAccounts

06

GoldenRulesofAccounting

07

Journal; StepbyStepProcedureofWritingaJournal

08

Ledger;ProcedureforPostingaLedger

09

TrailBalancealong withillustration

10

Introduction toTradingaccount,P&LA/CandBalanceSheets

11

References

1.IntroductiontoAccounting
1.1Definition
The process of identifying, measuring and communicating economic information to
permit informed judgment and decision by users of the information.
American Accounting Association

1.2ObjectivesofAccounting
i.tomaintainaccountingrecords.
ii.tocalculatetheresultofoperations.
iii.toascertainthefinancialposition.
iv.tocommunicatetheinformationtousers.

1.IntroductiontoAccounting
1.3Debtors Definition
A company or individual who owes money. If the debt is in the form of a loan from a
financial institution, the debtor is referred to as a borrower. If the debt is in the form of
securities, such as bonds, the debtor is referred to as an issuer.
Debtors can be entities, companies or people of a legal nature that owe money to
someone else such as your business for example.

1.IntroductiontoAccounting
Whoarecreditors?
1.4Creditors Definition
A creditor is an individual or institution that lends money or services to another entity
under are payment agreement.
Understanding
Let's look at a scenario with a real creditor, XYZ Bank, to whom
you go to for a loan. If you are approved and they lend you
money, XYZ Bank becomes your creditor.

Relationshipbetween
DebtorsandCreditors

2.AccountingEquation
Thefinancialpositionofacompanyismeasuredbythefollowingitems:
1. Assets(whatitowns)
2. Liabilities(whatitowestoothers)
3. OwnersEquity(thedifferencebetweenassetsandliabilities)
The accounting equation (or basic accounting equation) offers us a simple way to
understand how these three amounts relate to each other. The accounting equation for
a sole proprietorship is:
Assets=Liabilities+OwnersEquity

Assets

Liabilities

Owners
Equity

2.AccountingEquation
2.1Assets:Assets areacompanysresourcesthingsthecompanyowns.Examplesof
assetsincludecash,accountsreceivable,inventory,prepaidinsurance,investments,
land,buildings,equipment,andgoodwill.Fromtheaccountingequation,weseethat
theamountofassetsmustequalthecombinedamountofliabilitiesplusowners(or
stockholders)equity.
2.2 Liability : Liabilities are a companys obligationsamounts the company owes.
Examples of liabilities include notes or loans payable, accounts payable, salaries and
wages payable, interest payable, and income taxes payable (if the company is a regular
corporation). Liabilities can be viewed in two ways:
(1)asclaimsbycreditorsagainstthecompanysassets,and
(2)asourcealongwithownerorstockholderequityofthecompanysassets.
2.3OwnersEquity:Ownersequity or stockholdersequity istheamountleftoverafter
liabilitiesaredeductedfromassets:
Assets Liabilities=Owners(orStockholders)Equity.
Owners or stockholders equity also reports the amounts invested into the company by
the owners plus the cumulative net income of the company that has not been
withdrawn or distributed to the owners.

2.AccountingEquation Cntd.,
AssetsandLiabilities

2.AccountingEquation Cntd.,
Terms
2.4DoubleentryBookKeepingSystem
A doubleentry bookkeeping system is a set of rules for recording financial information in
a financial accounting system in which every transaction or event changes at least two
different nominal ledger accounts.
2.5Credit
An accounting notation that increases liability, equity, and expense accounts. Credits
decrease asset and expense accounts.

2.6Debit
In bookkeeping, an entry in the left hand column of an account to record a debt. Debits
increase asset and expense accounts. Debits decrease liability, income, and equity
accounts.

2.AccountingEquation Cntd.,
Assets = Liability + Owners Equity

2.AccountingEquation Cntd.,
Example1
1)
2)
3)
4)
5)
6)
7)
8)

Rampurchasedfurnitureforcash
Outstandingwages
Cashinhand
Bankloan
Purchasedlandandequipment
Expenses
Cashreceived
Loanpayable
Asset

=
=
=
=
=
=
=
=

Rs2,000
Rs8,000
Rs12,000
Rs15,000
Rs14,000
Rs5,000
Rs7,000
Rs12,000
Liabilities

Transaction

Value

Transaction

Value

Rampurchasedfurniturefor
cash

2,000

Outstanding wages

8,000

Cashinhand

12000

Bank Loan

15,000

Purchasedlandand
equipment

14000

Expenses

5000

CashReceived

7000

Loans Payable

7000

Total

35000

Total

35,000

2.AccountingEquation Cntd.,
Example

3.TypesofTransactions
Typesof
Transactions

Cash
Transactions

Credit
Transactions

CashTransactions:Atransactionthatissettledwithcashonthesamedayasthetrade.
Example :Ramboughtafridgeforacashof3000INR
Credit Transactions : Credit transactions are dealings which you could pay later.
e.g.. pay for the goods or services at the end of the month or 30 days later. The credit
terms are the time you are allowed to delay payment, eg. 30 days, 7 days.

4.1Purchases
Purchases Account : A temporary account used in the periodic inventory system to
record the purchases of merchandise for resale. (Purchases of equipment or supplies
are not recorded in the purchases account.) This account reports the gross amount of
purchases of merchandise. Net purchases is the amount of purchases minus purchases
returns, purchases allowances, and purchases discounts.

4.2Sales
SalesrepresentsincomeorrevenuefortheOrganization
Sales refers to the amount of goods sold that are already bought or manufactured by
the business. When goods are sold for cash, they are cash sales but if goods are sold
and payment is not received at the time of sale, it is credit sales. Total sales includes
both cash and credit sales.

5.TypesofAccounts

Real Account: Real accounts are related to asset account which can be touched felt,
e.g. building account, machinery account , stock, furniture etc
Personal Account: Personal accounts are related to persons , institutions companies.
examples : bank account, creditors a/c etc
Nominal Account: Nominal accounts are related to income and expenses or losses and
gains
examples are rent, commission, salary etc

6.GoldenRulesofAccounting
DebitTheReceiver,CreditTheGiver
This principle is used in the case of personal accounts. When a person gives something to the
organization, it becomes an inflow and therefore the person must be credit in the books of
accounts. The converse of this is also true, which is why the receiver needs to be debited.
DebitWhatComesIn,CreditWhatGoesOut
This principle is applied in case of real accounts. Real accounts involve machinery, land and
building etc. They have a debit balance by default. Thus when you debit what comes in, you are
adding to the existing account balance. This is exactly what needs to be done. Similarly when you
credit what goes out, you are reducing the account balance when a tangible asset goes out of the
organization.
DebitAllExpensesAndLosses,CreditAllIncomesAndGains
This rule is applied when the account in question is a nominal account. The capital of the
company is a liability. Therefore it has a default credit balance. When you credit all incomes and
gains, you increase the capital and by debiting expenses and losses, you decrease the capital. This
is exactly what needs to be done for the system to stay in balance.

SNO

Debit

Credit

TheReceiver

TheGiver

Whatcomesin

Whatcomesout

Allexpensesandlosses

Allincomesandgains

7.IntroductionofJournal
Journal isadatewiserecordofallthetransactionswithdetailsoftheaccountsdebited
andcreditedandtheamountofeachtransaction.

8.1FORMAT

7.IntroductionofJournal Cntd.,
StepNo.

Process

Determine the two accounts which are involved in the transaction

Classify the above two accounts under Personal, Real or Nominal

Find out the rules of debit and credit for the above two accounts

Identify which account is to be debited and which account is to be credited

Record the date of transaction in the date column. The year and month is written once,
till they change. The sequence of the dates and months should be strictly maintained

Enter the name of the account to be debited in the particulars column very close to the
left hand side of the particulars column followed by the abbreviation Dr. in the same
line. Against this, the amount to be debited is written in the debit amount column in the
same line

Write the name of the account to be credited in the second line starts with the word
To a few space away from the margin in the particulars column. Against this, the
amount to be credited is written in the credit amount column in the same line.

Write the narration within brackets in the next line in the particulars column.

Draw a line across the entire particulars column to separate one journal entry from the
other.

7.IntroductionofJournal Cntd.,
Illustration
January1,2004 SaravananstartedbusinesswithRs.1,00,000
8.1AnalysisofTransaction

8.1AnalysisofTransaction

8.IntroductionofLedger
Thebookwhichcontainsaclassifiedandpermanentrecordofallthetransactionsofa
businessiscalledtheLedger.
L.C.Cropper
9.1FORMAT

8 .PostinginLedger
ProcedureofpostingforanAccountwhichhasbeendebitedinthejournalentry.
SNo.

Particulars

Locate in the ledger, the account to be debited and enter the date of the transaction in
the date column on the debit side.

Record the name of the account credited in the Journal in the particular columns of the
debit side as To..... (name of the account credited).

Record the page number of the Journal in the J.F column on the debit side and in the
Journal, write the page number of the ledger on which a particular account appears in the
L.F. column.

Enter the relevant amount in the amount column on the debit side
ProcedureofpostingforanAccountwhichhasbeencreditedinthejournalentry

Locate in the ledger the account to be credited and enter the date of the transaction in
the date column on the credit side.

Record the name of the account debited in the Journal in the particulars column on the
credit side as By...... (name of the account debited)

Record the page number of the Journal in the J.F column on the credit side and in the
Journal, write the page number of the ledger on which a particular account appears in the
L.F. column

Enter the relevant amount in the amount column on the credit side.

8.IntroductionofLedger Cntd.,
Illustration
Mr.RamstartedbusinesswithcashRs.5,00,000on1stJune2003.
Solution:TheabovetransactionwillappearinJournalandLedgerasunder

9.TrailBalance
Trialbalanceisastatement,preparedwiththedebitandcreditbalancesofledger
accountstotestthearithmeticalaccuracyofthebooks
J.R.Batliboi
10.1FORMAT

i.
ii.
iii.
iv.
v.
vi.

Pointstobenoted:
Dateonwhichtrialbalanceispreparedshouldbementionedatthetop.
NameofAccountcolumncontainsthelistofallledgeraccounts.
Ledgerfoliooftherespectiveaccountisenteredinthenextcolumn.
Inthedebitcolumn,debitbalanceoftherespectiveaccountisentered.
Creditbalanceoftherespectiveaccountiswritteninthecreditcolumn.
Thelasttwocolumnsaretotaledattheend.

9TrailBalance Illustration
The following balances were extracted from the ledger of Rahul on 31st March, 2003.
You are requested to prepare a trial balance as on that date in the proper form.

9.TrailBalance Illustration
Solution

10.FinalAccounts
Final
Accounts

Trading,
Profitand
LossAccount

Balance
Sheet

PartsofFinalAccounts
The first part is Trading and Profit and Loss Account. This is prepared to find out the net
result of the business. The second part is Balance Sheet which is prepared to know the
financial position of the business.

10.1TradingAccount
Trading means buying and selling. The trading account shows the result of buying and
selling of goods.
9.1FORMAT

9.2ILLUSTRATION
Prepare a Trading Account from the following
information of a trader.
Total purchases made during the year 2003
Rs.2,00,000.

10.2ProfitandLossA/C
After calculating the gross profit or gross
loss the next step is to prepare the profit
and loss account. To earn net profit a trader
has to incur many expenses apart from
those
spent
for
purchases
and
manufacturing of goods. If such expenses
are less than gross profit, the result will be
net profit. When total of all these expenses
are more than gross profit the result will be
net loss.
Need
The aim of profit and loss account is to
ascertain the net profit earned or net loss
suffered during a particular period

Format

10.2ProfitandLossA/C
Illustration
Prepare Profit and Loss Account, from the following balances of Mr. Kandan for the year
ending 31.12.2003.

10.2ProfitandLossA/C
Illustration Solution

10.3BalanceSheet
Definition
Astatementwhichsetsouttheassetsandliabilitiesofabusinessfirmandwhichserves
toascertainthefinancialpositionofthesameonanyparticulardate
Format

10.3BalanceSheet
Illustration
Question
From the following Trial Balance of M/s. Ram & Sons, prepare trading and profit and
loss account for the year ending on 31st March 2002 and the balance sheet as on the
date

10.3BalanceSheet
Illustration Solution

11.References
1. HigherSecondaryAccountancybookpublishedbyTamilNaduTextBook
Corporation
2. T.S.Grewal DoubleEntryBookKeeping.
3. R.L.Gupta,RadhaSwamy FinancialAccounting.
4. InstituteofCompanySecretariesofIndia PrincipleofAccountancy.
5. P.C.Tulsian,S.D.Tulsian ISCAccountancyforClassXI
6. AccountingTextandCases RobertAnthony,TataMcGrawHillPublications
7. www.icai.org
8. Education.svtution.org
9. www.investpedia.com
10. www.lapasserelle.com