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TYPES OF ACCOUNTS
Personal Account
Real Account
Nominal Account
Valuation Account
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RULES FOR DEBIT AND CREDIT
Types of
Accounts
Debit Credit
Personal
Account
Receiver Giver
Real Account What comes in What goes out
Nominal
Account
Expenses and
Losses
Income and
Gains
Valuation
Account
When account
to be decreased
When account
to be increased
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ACCOUNTING EQUIVALENCE
Assets = Owner’s Equity +
Outside Liabilities
A = OE + OL
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DOUBLE ENTRY SYSTEM
A = OE + OL
In the double-entry accounting system,
every transaction is recorded by equal
amounts of debits and credits.
Debit = Credit
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ACCOUNTANT’S LIFE
A = OE + OL
ASSETS
Debit
for
Increase
Credit
for
Decrease
EQUITIES
Debit
for
Decrease
Credit
for
Increase
LIABILITIES
Debit
for
Decrease
Credit
for
Increase
Debit Credit
ASSETS
+ -
LIABILITIES
- +
Debit Credit
EQUITIES
- +
Debit Credit
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ACCOUNTING CYCLE
1. Business Transaction
2. Transaction is recorded in document (Voucher
/ Receipt)
3. Analyze the transaction – location ?
4. Journal Entry
5. Ledger Accounts (or ‘T’ account)
6. Trial Balance
7. Balance Sheet, P&L A/c, Cash Flow
Statement
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Balance Sheet
P & L A/c
Cash Flow
Prepare a trial
balance
Post to the
ledger
Journal Entry
Source
documents
Transaction Analyze
ACCOUNTANT’S ROUTINE
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TRANSACTION-1
Mr. Ram started business with cash Rs
5,00,000.
The accounts involved are:
(1) Cash (asset)
(2) Owner’s Equity (equity)
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TRANSACTION-1
JOURNAL ENTRY Page 1
Date Particulars LF Debit Credit
2001
Dec. 1 Cash 500,000
To Capital 500,000
Investment by owner
Debit Credit
EQUITIES
- +
Debit Credit
ASSETS
+ -
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TRANSACTION-1 - LEDGER
JOURNAL ENTRY Page 1
Date Particulars LF Debit Credit
2001
Dec. 1 Cash 5,00,000
To Capital 5,00,000
Investment by owner
Capital
(1) 5,00,000
Cash
(1) 5,00,000
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Transaction 2
Mr. Ram purchased goods worth Rs 80,000
on cash basis.
The accounts involved are:
(1) Goods/Purchase (asset)
(2) Cash (asset)
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Trial Balance
A trial balance is a list of all the accounts for
a period, to test that the Debits agree with
the Credits
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Why to Prepare Trial Balance
1. To check arithmetical accuracy
2. To detect and prevent fraud and errors
3. To assists preparation of Final Accounts.
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How To Prepare
1. All assets, expenses and losses to be
recorded on the debit side.
2. All liabilities, incomes and gains to be
recorded on the credit side.
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LIMITATIONS OF A TRIAL
BALANCE
A trial balance does not prove that all transactions
have been recorded or that the ledger is correct.
Numerous errors may exist even though the trial
balance columns agree.
The trial balance may balance even when:
1. a transaction is not journalized
2. a correct journal entry is not posted
3. a journal entry is posted twice
4. incorrect accounts are used in journalizing or
posting
5. offsetting errors are made in recording the
amount of the transaction.
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Types of Errors
1. Errors Disclosed By Trial Balance
2. Errors Not disclosed by Trial Balance
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Errors Disclosed By Trial Balance
Omission to post an amount into ledger.
Debit or credit entries are not posted at all or posted
twice.
Debits are wrongly posted as credits and vice versa.
Wrong totaling of Subsidiary Books.
Difference in amount between the entries.
Error in computation of an Account Balance.
Omission of Account balance.
Balance of an Account wrongly recorded in the Trial
Balance.
Errors in extraction of the Trial Balance.
25. ERRORS WHICH ARE NOT DISCLOSED
BY THE TRIAL BALANCE
Errors of Omission
Errors of Principle
Compensating Errors
Recording wrong amount in the books of
Original Entry
Recording both aspects of a transaction more
than once in the books of account
Errors in recording a transaction on the correct
side of a wrong account
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26. LOCATING ERRORS
STEP 1: Check the addition of the debit and credit
columns by adding these columns in opposite
directions, i.e., from bottom to top or from top to
bottom.
STEP 2: If the errors remain undetected, divide the
exact difference by 9. If it is totally divisible by 9, this
will mean that there is either a transposition error or a
slide error.
STEP 3: Divide the difference by 2 and scan the
columns for an identical amount. If a debit balance is
entered in the credit column, or credit balance is
entered in the debit column, it would cause a
difference of double of its amount in the trial balance.
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27. STEP 4: Check from the ledger if any account shows
a balance equal to the difference of the trial balance.
STEP 5: Re-check the opening balances of all the
accounts from the last previous Balance Sheet.
STEP 6: Re-check the amount in the Trial Balance
with the balances in the ledger. Make sure that all the
balances have been placed in the correct column of
the trial balance.
STEP 7: Re-compute the balances of each ledger
account.
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LOCATING ERRORS
28. STEP 8: If the errors remain undetected, check the
postings from the journal and other books of original
entry to the ledger accounts. Put tick (√) marks with a
colored pencil in the journal and in the ledger after
checking each figure. After completing the operation,
look through the journal and the ledger for any
unticked amounts.
STEP 9: If the errors still remain undetected, repeat
the above steps with the help of other members of the
staff, who are not in charge of maintaining the books
of account.
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LOCATING ERRORS
29. SUSPENSE ACCOUNT
If it is not possible to locate the errors in spite of
the above steps, the difference of the trial
balance is transferred temporarily to an account
known as “Suspense Account”.
After transferring the difference, the trial
balance can thus be totaled up and balanced.
Afterwards, when the errors have been located,
they can be rectified through the Suspense
Account.
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