2. Debit and Credit
• Debit represents
• Outflow of resources.
• All those who owe money to business. E.g. : Debtors.
• Outflow of resources represent such as
a) Expenses such as Rent, salaries etc.
b) Assets – Land, Building, Machinery, Inventory.
• Credit represents
• Inflow of resources.
• All those to whom business owes money. E.g. Creditors, Bank
overdraft, Partners Capital.
• Inflow of resources represent
3. Types of Accounts
a) Income such as Sales, Income from Investment, Dividend
received, Rent received.
b) Liabilities E.g. liabilities for outstanding expenses, taxes etc.
• TYPES of ACCOUNTS
The accounts maintained by a business organization are
classified in 3 types
a) Personal Accounts. E.g. Individuals, Firms, Banks, Companies
etc.
b) Real Accounts (Impersonal Accounts). E.g. Assets like Land,
Building, Goodwill, Inventory, Cash, Patents.
c) Nominal Accounts (Impersonal Accounts). E.g. Expenses or
losses, Income and Gains.
4. Rules of Debit & credit
• Personal Accounts
Debit : The receiver.
Credit : The Giver.
. Real Accounts
Debit : What Comes in.
Credit : What Goes out.
• Nominal Accounts
Debit : All expenses and losses.
Credit: All incomes and gains.
5. Conceptual Framework of Financial
Accounting
• All Income and expenditures are taken into Profit and Loss Account.
• All Assets and Liabilities are taken into the Balance Sheet.
• The net result of Profit and Loss Account namely Profit or Loss is
taken to Balance Sheet.
• The Profit and Loss Account is prepared for a particular period and
represents the Profit earned or Loss incurred during the particular
period.
• The Balance Sheet is drawn on a particular date reflecting the
value of Assets and Liabilities on that date.
6. Conceptual Framework of Financial
Accounting
• The subject of Financial Accounting is based on Double Entry
system of accounting using Debit & Credit.
• Cash Transactions are entered into Cash Book.
• Credit Transactions (non cash transaction) are entered into the
Journal.
• The transactions of Cash Book and Journal are posted into Ledger
which is a summary of all transactions.
• All the Ledger accounts are presented I a tabular form which is
known as Trial Balance.
• Trial Balance represents the arithmetical accuracy of the accounting
records.
• After the Trial Balance two separate accounting documents Profit
and Loss Account, Balance Sheet are prepared
7. Journal
• Journal
• The daily business transaction are recorded in a book called
Journal. Recording of entries in the Journal is known as
Journalizing.
• STEPS IN JOURNALISING
1. Analyze the transaction and identify the dual aspects of the
transaction that is Debit and Credit.
2. Decide the nature of Accounts involved in the transaction that is
Personal, Real or Nominal.
3. Decide the rule applicable for Debit and Credit.
4. Decide what account to be debited and which to be credited.
8. The Process of Journalizing
5. Write the name of the Account to be debited with the abbreviation
“Dr” on the same line against the name of the Account in particular
column and the amount to be debited in the debit column against the
name of the Account.
6. Write the name of the Account to be credited with the abbreviation
“Cr” on the same line against the name of the Account in particular
column and the amount to be credited in the credit column against
the name of the Account.
7. Write narration which is the brief description about the transactions
within brackets below to the transactions.
9. Ledger Posting
• Ledger contains a classifies summary of all the transaction
entered in to the Journal and Cash Book.
• The process of transferring entries from journal from the journal
to the Ledger is called Ledger Posting.
• STEPS IN LEDGER POSTING
1. Enter the date of the transaction on the debit side of the relevant
account.
2. The title of the account to be credited preceded by the word “To”
in entered in the particular column.
3. In Journal Folio (J.F) column the page number of the Journal on
which the journal entry is passed is written.
4. Amount column records the amount mentioned in the journal
against title of the account under consideration.
