DOUBLE ENTRY ACCOUNTING

Accounting is defined as : Art of recording, classifying and summarizing In a significant manner And in terms of money Transactions and events Which are, in part at least, of a financial character And interpreting the results thereof.

Double entry book keeping

Art enables one to attain objectives Recording of transaction in orderly manner Classifying refers to grouping of accounts Summarizing thro Trial Balance, Trading, Profit and Loss Account and Balance Sheet. Terms of money : common language that is through the help of money example :

Double entry
If business has 6 machines, 10 tons of raw materials, 10 fans etc, impossible to know which is more value unless they are expressed in a common language. Financial character : recording is based on financial events. Poor lighting and ventilation, relationship between workers and management, though affect the earning capacity cannot be recorded due to constraints to express in monetary terms.

Double entry
Starts with recording and ends with presentation of financial information. Each transaction or event has two aspects or sides : DEBIT and CREDIT Accounting trail : its a sequence of activities in an accounting process

Accounting trail
Transaction / event Preparation of vouchers Recording in the primary books Posting in the secondary books Preparation of trial balance Preparation and presentation of financial statements

MEANING
Transaction : a monetary deal made between two parties. Transfer of money or moneys worth from one person to another Event : a happening of consequence to an entity Voucher : its a written document. Receipt, Payment voucher and Journal voucher. Financial statements : end products of the accounting process.

ACCOUNTING TERMS
Capital : investments by owner either in cash or in kind. Its a claim on business Drawings : withdrawal from business either in cash or in kind or both Debtor : owing from persons to business. Collectively known as Sundry Debtors. Creditor : owing from business to persons. Collectively known as Sundry creditors Revenue : its the income. Includes both.

Terms
Expenditure : its the expenses incurred for earning revenue. Cost of manufacture, cost of sales, cost of service. Expense : expenditure whose benefit is enjoyed and exhausted immediately example salary, rent, wages, premium Goods : commodities or merchandise held by businessmen for sale.

CLASSIFICATION OF GOODS
Purchases : goods bought for cash and credit Sales : Goods sold for cash and credit Sales Returns : Received from customer Purchase Returns : Returned to suppliers Opening Stock : Beginning unsold goods Closing Stock : End unsold goods

Classification
Customer : Person who purchased goods Supplier : Person who sold goods Casting : Totaling of books of accounts Invoice : Statement prepared for sale Assets : Resources of the business Liabilities : Dues of the business Equity : Claims against assets by owner

CLASSIFICATION OF ACCOUNTS
Personal and Impersonal Personal Accounts include Customers (Debtors) and Suppliers (Creditors) Impersonal Accounts consists of Real and Nominal Accounts. Real Account deals with Assets Nominal Account deals with income and expenses

TYPES OF PERSONAL ACCOUNTS

Natural Personal Accounts : Relate to individuals or natural persons made of flesh and bones. Artificial : Relate to artificial persons recognized by Law as persons Manipal Learning Ltd, SBI, RBI, BEL. BHEL etc. Representative : Groups or representative such as Debtors, Creditors, outstanding expenses and prepaid insurance.

REAL ACCOUNTS
Tangible Real Account such as cash, building , goods, furniture, machinery, investments. Intangible Real Account such as Goodwill, Patent, Trade Marks, Preliminary expenses.

NOMINAL ACCOUNTS
Deals with expenses or losses and gains and income Known as fictitious accounts They do not represent any tangible assets They are not in existence and cannot be seen They are Ghost in nature

ACCOUNTING EQUATION
Its known as Accounting Equivalence concept Basic Accounting Equation is : ASSETS (A) = LIABILITIES (L) + EQUITY (E) or A = L+E Each transaction will lead to a combination of other. Its unique

EFFECT OF EQUATION
FIRST EFFECT Increase in Assets IDENTICAL EFFECT Decrease in Assets Increase in Liabilities Increase in Equity Increase in Assets Decrease in Liabilities Decrease in Equity Decrease in Liabilities increase in Assets Decrease in Equity

Decrease in Assets

Increase in Liabilities

Effect of equation
Decrease in Liabilities Increase in Liabilities Decrease in Assets Increase in Equity Decrease in Liabilities Increase in Assets Increase in Liabilities Decrease in Assets

Increase in Equity Decrease in Equity

RULES OF DEBIT AND CREDIT

Debit signifies Increase in Asset accounts Decrease in Liability accounts Decrease in Equity Credit signifies Decrease in Asset accounts Increase in Liability accounts Increase in Equity