The Accounting Cycle refers to completed sequence of Accounting steps

and procedures which are required to be repeated in same order during each
accounting period or accounting year.
Identification of Transactions
Identification of Transactions is first step in accounting, only business
transaction or economic activities are recorded (except drawing in case of
non-corporate form of business). A transaction is a particular type of event,
which can be expressed in terms of money and brings changes in
the financial position of a business unit.
A transaction involves transfer of something of value between two or more
entities. A transaction may be an exchange in which each party receives as
well as sacrifices values; in other words, in every transaction, there is a
movement of value from one source to another. A transaction can also be
non-reciprocal transfer in which a business unit incurs a liability (penalty
imposed by government) or transfer an asset to another entity (payment of
income tax) or receives an asset (subsidy received from
government). Transaction may be external (between business and second
party) or internal (not involving second party like depreciation on
machinery).
Golden Rules of Accounting are used to record economic activity in books of
accounts. These rules are formulated on the basis of three basic accounts, personal,
real and nominal account. An account is a summarized record of the transactions
relating to one person or thing or one class of income and expense.
Debit is abbreviated Dr and credit is abbreviated Cr. The term debit means left, and credit
means right. They do not mean increase or decrease. The act of entering an amount of the
left side of an account is called debiting. Making an entry on the right side is called
crediting. Golden rules of accounting are based on blow mentioned accounts which
classified into three categories:
Three Golden Rules of Accounting
Accounting golden rules of debiting and crediting are designed according to
three basic accounts:

1. Personal Account
Personal accounts are recording transaction with persons or firms. Those
accounts recording transactions, which don’t affect particular person, but
effects business in general, are called impersonal accounts. Personal accounts
may be further classified into three categories:
 Natural Personal Account
 Artificial Personal Account
 Representative Personal Account

Natural Personal Account is an account associated to human like Amna

Tabbasum, Usman Khurshid, etc. Artificial personal account is account
related to any artificial person like XYZ Ltd, Ramin Trading, Asadullah
Industries, etc. on the other hand, representative personal account represents a
group of account. If there are a number of accounts of similar nature, it is
better to group them like, rent payable account, salary payable account, and
insurance prepaid account, etc.

In case of personal account debit the account of the receiver and credit the account of the giver.
2. Real Account
The Real Accounts are those accounts which show dealing in thing or of
property or possession ‘Assets’ which are owned by the business
organization. Such as cash, building, bank account, office furniture. Thus,
asset account is called a real account. There are two types of real account:
 Tangible Account
 Intangible Account
Tangible assets are touchable assets having physical substance, such as
machinery, stock, plant, furniture, cash, etc., and intangible assets are non-
touchable assets such as patent, goodwill, copyrights, etc.

In case of real account debit the account of assets that comes in the business and credit the
account of that which goes out the business.

3. Nominal Account
Since this account does not represent any personal or real account, it is called
nominal or fictitious account. They relate to income, expense and gains or
losses of a business concern. For example, salaries account, advertising
account, discount account, sales account, and commission received account
etc. These accounts do not have any existence, form or shape. All kinds of
expense account, loss account, gain account or income accounts come under
the category of nominal account.

All the business transactions are recorded on the basis of the following
golden rules of accounting.
 Journal Entry
Previous Lesson: Golden Rules of Accounting

The world Journal has been derived from French work “Jour”. Jour means
day. So Journal Entry means daily up to data record of economic transaction,
all transactions’ are recorder in order of their occurrences date wise
(Chronological order). Every Accounting Transaction affects two or more
accounts. Under Double Entry Accounting equal debit and credit entries are
made for every economic activity. Journal entry is made in the book of
original entry. It is first recording step. It records transactions in
chronological order. Every transaction is to be recorded in journal. Every
organization has to maintain one journal book at least, and general journal is
general purpose book of prime entry. Entering transaction data in the
journal is known as journalizing. The journal makes three significant
contributions to the recording process:
 The journal discloses in one place the complete effect of a transaction
 The journal entry provides a chronological record of transactions
 The journal helps prevent or locate errors because the debit and credit
amounts for each entry can be readily compared
Parts of Journal Entry
Single record of the business transaction is called entry. We use this term to describe record
transaction in Book of Accounts. There are three parts of journal entry. First write in first line
just after date line is debit, second must write in below line after indented ten spaces from data
line is credit and last part is narration which is brief description of transaction write within
parenthesis.
Types of Journal Entry
There are two types of journal entry. First is simple entry and second is compound entry.
Simple Entry has one Debit and one Credit while, Compound Entry has more than on Debit or
more than one Credit or more than one Debit and Credit.

Styles of Journal Entry

There are four styles of journal entry. Following figure describes:

Golden Rules of Accounting

Below Golden Rules of Accounting is based on Six Pillars of Accounts. If we divide six Types
of Accounts into two groups. First group contains Assets, Drawing and Expenses have ruled that
increase will be Debited and decrease will be Credited. The second group contains Liabilities,
Owner Equity and Revenue has ruled that decrease will be Debited and increase will be Credited.
Now we would like to apply these rules one by one:

Discount
Discount is reduction in listed price. There are two types i.e. Trade
Discount and Cash Discount (if not mention than also cash discount). Trade
Discount is not considering for entry while entries are passed for cash
discount.

Example # 1:
Following transactions are related to Saifullah Naseem business. You are
required to pass Journal Entries.

June 1, 2016. Mr. Saifullah started business with Cash Rs. 10,000 and
Furniture Rs. 2,000.
 June 7. Sold goods/ merchandise on credit Rs. 6,000 to Ahmed Brothers.

June 15. Payment of creditors in full settlement of account Rs. 4,900 of June
5th transaction.

Amount (Rs)
Account Title and
Date Ref
Explanations
Debit Credit

2016

Jun
1 Cash 10,000
e

Furniture 2,000

Owner’s Equity 12,000

(Started business with

cash and furniture)

June 5. Purchased merchandise/goods on credit Rs. 5,000 from Ali Store.

Amount (Rs)
Date Account Title and Explanations Ref
Debit Credit
2016

June 15 Account Payable_ Ali Store 5,000

Cash 4,900

Discount 100

(Reduced liability of Ali Store and

received discount)

Amount (Rs)
Date Account Title and Explanations Ref
Debit Credit

2016

June 20 Cash 5,800

Discount 200

Account Receivable _ Ahmed

6,000
Brothers

(Account receivable realized and

discount allowed recorded)

June 20. Received from debtors in full settlement of account Rs. 5,800 of
June 7th transaction.
June 25. Rs. 500 was privately used by Saifullah.
Date Account Title and Explanations Ref Amount (Rs)
 Debit Credit

2016

June 25 Drawing 500

Cash 500

(Cash withdrawal by owner)

June 27. Purchase furniture of worth Rs. 60,000, having 10% trade discount.

Amount (Rs)
Date Account Title and Explanations Ref
Debit Credit

2016

June 27 Purchase 54,000

Cash 54,000

(Cash purchases and trade

discount )

June 28. Paid Salaries Rs. 1,500.

 Amount (Rs)
Account Title and
Date Ref
Explanations
Debit Credit

2016

Account Receivable _
June 7 6,000
Ahmed Brothers

Sales 6,000

(Sales on account)

Amount (Rs)
Date Account Title and Explanations Ref
Debit Credit

2016

June 28 Salaries 1,500

Cash 1,500

(Expense paid)
Cases When Purchases are Credit?
Example # 2:
There are five cases when purchases are recorded as credited.

Case # 1 Goods Lost by Fire of Rs. 400.

Case # 2 Goods Lost by Theft of Rs. 500.
Case # 3 Goods distributed as Charity of Rs. 600.
Case # 4 Goods distributed as Free Sample of Rs. 700.
Case # 5 Goods withdrawal by Owner of Rs. 800.

Amount (Rs)
Date Account Title and Explanations Ref
Debit Credit

Lost by Fire 400

Purchases 400

Date Account Title and Explanations Ref Amount (Rs)

Debit Credit
 Free Sample 700

Purchases 700

Amount (Rs)
Account Title and
Date Ref
Explanations
Debit Credit

Drawing 800

Purchases 800

Amount (Rs)
Date Account Title and Explanations Ref
Debit Credit

Charity 600

Purchases 600

Amount (Rs)
Date Account Title and Explanations Ref
Debit Credit
 Lost by Theft 500

Purchases 500

Example # 3:
In the table below, indicate the accounts that would be debited and credited
for each of the transactions?
I. Provide services to customers on account.
II. Purchase land by paying cash.
III. Purchase an insurance policy that will provide coverage for a two-year
period.
IV. Acquire cash by issuing common stock.
V. Receive payment from a customer for services that will be provided
over the next six months.
 VI. Cash deposited into bank.
VII. Purchased goods by cheque.
VIII. Drew cash from bank for office use.
IX. Purchased goods from Miss Noreen.
X. Cash sales made.
XI. Paid cash to Miss Noreen.
XII. Recognize expense for amount of office supplies already in stock, that
had been used during the period.
XIII. Discount Received by cash.
XIV. Drew cash from bank for personal use of proprietor.
XV. Received cash from credit customer.
XVI. Paid rent by cash.
XVII. Furniture lost by fire.

S.no Account Debited Account Credited

I. Account Receivable Service Revenue

II. Land Cash

III. Prepaid Insurance Cash

IV. Cash Common stock

V. Cash Unearned Services

VI. Bank Cash

VII. Purchases Bank

VIII. Cash Bank

IX. Purchases Account Payable_ Miss

 Noreen

X. Cash Sales

Account Payable_ Miss

XI. Cash
Noreen

XII. Supplies Expense Supplies

XIII. Cash Discount

XIV. Drawing Bank

XV. Cash Account Receivable

XVI. Rent Cash

XVII. Lost by Fire Furniture

Journal entry is first step in accounting cycle. To understand accounting, you

need to practice journal entry problems and solutions. Following are
important journal entry problems and solutions.
Problem 1:
On April 01, 2016 Anees started business with Rs. 100,000 and other transactions
for the month are:
2. Purchase Furniture for Cash Rs. 7,000.
8. Purchase Goods for Cash Rs. 2,000 and for Credit Rs. 1,000 from Khalid Retail
Store.
14. Sold Goods to Khan Brothers Rs. 12,000 and Cash Sales Rs. 5,000.
18. Owner withdrew of worth Rs. 2,000 for personal use.
22. Paid Khalid Retail Store Rs. 500.
26. Received Rs. 10,000 from Khan Brothers.
30. Paid Salaries Expense Rs. 2,000
Click Here To Download Journal Entry Problems
Solution:

Journal Entry Format Download

>> Read explanation and examples of Journal Entry…
Problems 2:
Prepare general journal entries for the following transactions of a business called
Pose for Pics in 2016:
Aug. 1: Hashim Khan, the owner, invested Rs. 57,500 cash and Rs. 32,500 of
photography equipment in the business.
04: Paid Rs. 3,000 cash for an insurance policy covering the next 24 months.
07: Services are performed and clients are billed for Rs. 10,000.
13: Purchased office supplies for Rs. 1,400. Cash paid Rs. 400 and remaining
outstanding.
20: Received Rs. 2,000 cash in photography fees earned previously.
24: The client immediately pays Rs. 15,000 for services to be performed at a later
date.
29: In addition, the business acquires photography equipment. The purchase price
is Rs. 100,000, pays Rs. 25,000 cash and signs a note for the balance.
Click Here To Download Journal Entry Problems
Solution:

Problem 4
Shah Sauood Marine is a boat repair yard. During August 2016, its transactions
included the following:
03. Loan taken from Habib Bank Ltd. of Rs. 25,000. Rs. 20,000 withdrawn for
business and remaining in the bank a/c.
06. Paid rent for the month of August Rs. 4,400 and accrued rent expenses was Rs.
600.
12. At request of Kiwi Insurance, Inc, made repairs on boat of Jon Seaways. Sent
bill for Rs. 5,620 for services rendered to Kiwi Insurance Inc. (credit Repair
Service Revenue).
18. Made repairs to boat of Dennis Copper and collected in full the charge of Rs.
2,830.
20. After that, placed Advertisement in The Dawn of Rs. 165, payment to be made
within 30 days.
25. Received a check for 5,620 from Kiwi Insurance Inc representing collection of
the receivable of August 12.
30. Sent check to The Dawn in payment of the liability incurred on August 20.
Solution: