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Concept of Double Entry

Traditionally, the two effects of an accounting entry are


known as Debit (Dr) and Credit (Cr). Accounting system
is based on the principal that for every Debit entry,
there will always be an equal Credit entry. This is known
as the Duality Principal.
Debit entries are ones that account for the following
effects:
Increase in assets
Increase in expense
Decrease in liability
Decrease in equity
Decrease in income

Concept of Double Entry


Credit entries are ones that account for the
following effects:
Decrease in assets
Decrease in expense
Increase in liability
Increase in equity
Increase in income

Concept of Double Entry


Double Entry is recorded in a manner that the
Accounting Equation is always in balance.
Assets - Liabilities = Capital
Any increase in expense (Dr) will be offset by a
decrease in assets (Cr) or increase in liability
or equity (Cr) and vice-versa. Hence, the
accounting equation will still be in equilibrium.

Concept of Double Entry


1.Purchase of machine by cash
Debit
Machine (Increase in Asset)
Cash (Decrease in
Credit
Asset)

1.Payment of utility bills


Debit
Credit

Utility Expense (Increase in Expense)


Cash (Decrease in Asset)

Types of Books of Account


A business organization maintains
important books of accounts:

three

- Cash Book: To record cash receipt and


payments including receipts and payments
through a bank.
- Journal :
To record non-cash transactions
like credit sales, credit purchase, sales
returns,
purchase
returns,
year
end
adjustments if any. The journal is used as the
book of first entry for all transactions which
cannot be recorded in the cash book. These

Types of Books of Account


Ledger: A ledger is not an
independent records. It contains a
classified
summary
of
all
transactions recorded in cash book
and journal.

What is the journal?


Your personal diary
The textbook says:
The journal records all parts of a
transaction in one place. The date, the
debit, the credit and an explanation for
each transaction (narration) are
recorded together.

The JOURNAL
The accountant loves to get his/her
thoughts and feelings (transactions)
into his/her journal as soon as
something happens within the
business.

THE JOURNAL
ADVANTAGES
The complete transaction is recorded in
one place
Reduces Errors
Transactions are listed in chronological
order
Shows a picture of every day at the
business

THE ACCOUNTING CYCLE


The accounting cycle is the process
an accountant goes though during a
fiscal periods
Begins with a business transaction
Ends with the preparation of the
Financial Statements & Closing Entries

The journal in the cycle

Journal
Recording the dual aspects of a
transaction is known as journalizing. It is a
book containing a chronological record of
all daily transactions of a business. Thus,
journal is the book of original record.
L.F.
Debit below:
Credit
A proDate
formaParticul
of journal
is given
ars

(1)

(2)

(3)

Rs.

Rs.

(4)

(5)

The Journal
Dat
e

Particular L
s
.F
.

DR

CR

A journal entry:

The NARRATION
Summarize each transaction with
words and as short as possible
Example: Owner invested cash
Example: Made cash sale of goods
Example: Bought equipment on account

THIS IS A MUST FOR EACH AND


EVERY TRANSACTION!

Illustration
Ram starts a business with capital of Rs.10,000
on 1 January 2015
He purchased furniture for cash for Rs.4,000 on 5
January 2015
He purchased goods from Mohan on credit of Rs.
2,000 on 10 January 2015
He paid cash to Mohan Rs 1,000 on 20 January
2015

Date

Particulars

(1)

(2)

L.F.
(3)

Debit
Rs.

Credit
Rs.

(4)

(5)

Cash
account
To Capital
Account

10,000

Furniture
account
To Cash
Account

4,000

Purchase
Account
To Mohan

2,000

Mohan
To Cash
Account

1,000

10,000

4,000

2,000

1,000

Ledger Accounts
Ledger is a book which contains various accounts.
Transferring the debit and credit items from the journal to
their respective accounts in the ledger is called Posting.
The exact names of accounts used in the journal should be
carried to the ledger.
The page number of the ledger on which the posting has
been done is mentioned in the L.F. column of the journal.
Salaries Account
Dr.
Cr.
Particular
s

Rs.

Particular
s

Rs.

Rules regarding Posting


Separate accounts should be opened in the ledger
for posting transactions relating to different accounts
recorded in the journal. For example, separate
accounts may be opened for sales, purchases, sales
returns, purchases returns, salaries, rent, cash , etc.
The concerned account which has been debited in
the journal should also be debited in the ledger.
However, a reference should be made of the other
account which has been credited in the journal. For
example, for salaries paid, the salaries account
should be debited in the ledger, but reference should
be given of the Cash Account which has been
credited in the journal.

Rules regarding Posting


The concerned account which has been
credited in the journal should also be
credited in the ledger. However, a
reference should be made of the other
account which has been debited in the
journal. For example, for salaries paid, the
Cash Account has been credited in the
journal. It will be credited in the ledger
also, but reference will be given of the
Salaries Account which has been debited
in the journal.

Use of To and By
It is customary to use words To and By
while making posting in the ledger. To is
used with the accounts which appear on
the debit side of a ledger account.
Similarly, By is used with the accounts
which appear on the credit side of a ledger
account.

Balancing of an Account
The technique of finding out the net balance of an
account, after considering the totals of both debits and
credits appearing in the account is known as
balancing the account.

The balance is put on the side of the account which is


smaller and a reference is given that it has been
carried forward or carried down (c/f or c/d) to the next
period.

On the other hand, in the next period, a reference is


given that the opening has been brought forward or
brought down (b/f or b/d) from the previous period.

Calculating New Balances in


the Accounts
Cash
Rs.
2500
Rs. 200

Rs. 500
Rs. 45

Rs.
2700
BALANCE: Rs.
2155

Rs. 545

Illustration
Ram starts a business with capital of
Rs.10,000 on 1 January 2015
He purchased furniture for cash for
Rs.4,000 on 5 January 2015
He purchased goods from Mohan on credit
of Rs. 2,000 on 10 January 2015
He paid cash to Mohan Rs 1,000 on 20
January 2015

Illustrations

Trial Balance
Trial Balance is a list of closing balances of ledger accounts on a certain
date and is the first step towards the preparation of financial statements.
It is usually prepared at the end of an accounting period to assist in the
drafting of financial statements.
Ledger balances are segregated into debit balances and credit balances.
Asset and expense accounts appear on the debit side of the trial balance
whereas liabilities, capital and income accounts appear on the credit
side.
If all accounting entries are recorded correctly and all the ledger
balances are accurately extracted, the total of all debit balances
appearing in the trial balance must equal to the sum of all credit
balances.

Purpose of a Trial Balance


Trial Balance acts as the first step in the preparation of
financial statements. It is a working paper that
accountants use as a basis while preparing financial
statements.
Trial balance ensures that for every debit entry
recorded, a corresponding credit entry has been
recorded in the books in accordance with the double
entry concept of accounting.
If the totals of the trial balance do not agree, the
differences may be investigated and resolved before
financial statements are prepared.
Rectifying basic accounting errors can be a much
lengthy task after the financial statements have been
prepared because of the changes that would be
required to correct the financial statements.

Purpose of a Trial Balance


Trial balance ensures that the account
balances are accurately extracted from
accounting ledgers.
Trail balance assists in the identification
and rectification of errors.

Limitations of a Trial Balance

Trial Balance only confirms that the total of all


debit balances match the total of all credit
balances. Trial balance totals may agree in spite
of errors.
An example would be an incorrect debit entry
being offset by an equal credit entry.
Likewise, a trial balance gives no proof that
certain transactions have not been recorded at
all because in such case, both debit and credit
sides of a transaction would be omitted causing
the trial balance totals to still agree.

Steps involved in the


preparation of Trial Balance
All Ledger Accounts are closed at the end of an
accounting period.
Ledger balances are posted into the trial balance.
Trial Balance is cast and errors are identified.
Suspense account is created to agree the trial balance
totals temporarily until corrections are accounted for.
Errors identified earlier are rectified by posting corrective
entries
Any adjustments required at the period end not previously
accounted for are incorporated into the trial balance.

Trial Balance

Cash
$25000
$300
$3500
$2,100
BALANCE:
$26,300

BALANCED!!

Illustration
Ram starts a business with capital of
Rs.10,000 on 1 January 2015
He purchased furniture for cash for
Rs.4,000 on 5 January 2015
He purchased goods from Mohan on credit
of Rs. 2,000 on 10 January 2015
He paid cash to Mohan Rs 1,000 on 20
January 2015

Illustrations

Final Accounts
After having checked the accuracy of the
book of accounts through preparation of Trial
balance, businessman wants to ascertain the
profit earned or loss suffered during the year
and also the financial position of his business
at the end of the year. For this purpose he
prepares Final Accounts which are also
termed as Financial Statements. These
include the following:
Trading account
Profit & Loss account
Balance Sheet