Basic Accounting-Rachana Singh

1. Review

2. What is Accounting?

3. What is accounting?
 The language of business.
 A means to communicate financial
information.
 A way to convey information about a
business to users.

4. Who uses accounting information?
 Owners
 Managers
 Employee
 Investors (including potential)
 Analysts on their behalf
 Creditors (including potential)
 Government (tax assessment)
 Regulators
 Customers
 Public
 Research Scholars

5. Branches/Types of Accounting
 Financial accounting
 Primarily prepared for users external to the company.
 Balance sheet, Revenues, earnings, assets, etc.
 Management accounting
 Primarily for internal purposes
 Planning, control, Evaluation of Performance and decision
making etc.
 Cost accounting
 Primarily for internal purposes
 Ascertaining Cost, Cost Sheet etc.

6. Definition Financial
Accounting
It is the art of recording, classifying and
summarizing in a significant manner and in
terms of money, transaction and events which
are ,in part at least ,of financial character and
interpreting the results thereof.

7. 3 Golden rules of accounting
 Personal Account:-Debit “receiver” and
credit “giver”
 Real account:-Debit what comes in
and credit what goes out
 Nominal account:- Debit all expenses
(and losses) and credit all incomes
and gains

8. Classify the following Accounts into a)
Personal Account, b) Real Account and c)
Nominal Account
1. Bad Debt
2. Bangalore Corporation
3. Bank Account
4. Bank Overdraft
5. Bills Receivables
6. Bills Payable
7. Debtor
8. Building

9. Classify the following Accounts into a)
personal Account, b) Real Account and c)
Nominal Account
1. Bad Debt
2. Bangalore Corporation
3. Bank Account
4. Bank Overdraft
5. Bills Receivables
6. Bills Payable
7. Debtor
8. Building
Nominal
Personal
Personal
Personal
Real
Real
Personal
Real

10. Classify the following Accounts into a)
personal Account, b) Real Account and c)
Nominal Account
1. Capital
2. Carriage inward
3. Cash
4. Charity
5. Rent Received
6. Rent Received in Advance
7. Depreciation
8. Dhaka Sports club account

11. Classify the following Accounts into a)
personal Account, b) Real Account and c)
Nominal Account
1. Capital
2. Carriage inward
3. Cash
4. Charity
5. Rent Received
6. Rent Received in Advance
7. Depreciation
8. Dhaka Sports club account
Personal
Nominal
Real
Nominal
Nominal
Personal
Nominal
Personal

12. Classify the following Accounts into a)
personal Account, b) Real Account and c)
Nominal Account
Drawings
Loss of goods by fire
Goodwill a/c
Postage
Salary
Ipca Pvt.Ltd. Co
Insurance
Prepaid Insurance

13. Classify the following Accounts into a)
personal Account, b) Real Account and c)
Nominal Account
Drawings
Loss of goods by fire
Goodwill a/c
Postage
Salary
Ipca Pvt.Ltd. Co
Insurance
Prepaid Insurance
Personal
Nominal
Real
Nominal
Nominal
Personal
Nominal
Personal

14. Transaction Analysis
 Owner started business with
Cash
 Paid into Bank
 Goods Purchased for cash
 Purchase of Furniture and
paid through Cheque

15. Transaction Analysis
 Owner started business with
Cash
 Paid into Bank
 Goods Purchased for cash
 Purchase of Furniture and
paid through Cheque
• Debit Cash
• Credit Capital.
• Debit Bank
• Credit Cash
• Debit Purchase
• Credit Cash
• Debit Furniture
• Credit Bank

16. Accounting Equation

17. Accounting Equation
 American Accountants have derived the rules of debit and
credit through Accounting Equation . Also known as English
method/American Method.
 The accounting equation: Equities=Assets The financial
statement called the balance sheet is based on the
"accounting equation."
 Equity: Equity is claim against the assets. In other words ,the
rights to properties are called Equities. Equity may be divided
into equities of creditors and the Equities of owners. The
Equities of creditors represents debts of the business and are
called liabilities. The Equity of the owner is called capital /
proprietorship or owner’s equity.

18. Accounting Equation
 Keeping in view the two types of
equities the equation given above can
be stated as below
Capital + Liabilities = Assets
or Capital = Assets - Liabilities
or Liabilities = Assets - Capital

19. Debits & Credits
 Debits are the left of the T account.
 Debits do not mean increase.
 Debits are not “good” or “bad”.
 Credits are the right of the T account.
 Credits do not mean decrease.
 Credits are not “good” or “bad”.

20. Debit and Credit
 Every single transaction recorded in
the accounting process falls into one of
two categories: it is either a debit or a
credit.
 Debit is left side of an account
 Credit is the Right side of an account

21. Rules of Journalising
Based on Accounting Equation Method
 To increase an Asset or Expense:
Debit
 To increase a Liability, Revenue, or
Owners’ Equity: Credit
 To decrease an Asset or Expense:
Credit
 To decrease a Liability, Revenue, or
Owners’ Equity: Debit

22. Debits & Credits
Debit = Credit
Assets & Expenses = Liabilities, Equity
& Revenues
DR CR DR CR
Incr. Decr. Decr. Incr.
+ - - +

23. Accounting Equation Method
To do a journal entry, you need to know
1. What accounts are moving/impacted
2. How to classify those accounts
 Asset
 Liability
 Capital
 Revenue
 Expense
3. Where the accounts are going up or down
4. NOW you are ready to declare debit or credit!

24. Impact on accounts
 Sold Goods For Cash
 Sold Goods to Arvind
 Goods Purchased from
Amrit Lal
 Goods Return to Amrit
Lal

25. Impact on accounts
 Sold Goods For Cash
 Sold Goods to Arvind
 Goods Purchased from
Amrit Lal
 Goods Return to Amrit
Lal
• Debit Cash
• Credit Sales.
• Debit Arvind
• Credit sales
• Debit Purchase
• Credit Amrit Lal
• Debit Amrit Lal
• Credit Purchase
return

26. What you should do –
debit or credit?
 Make patents go up?
 Make Creditor go down?
 Make Revenue go up?
 Make Expenses go up?
 Make Mortgage Loan go up?
 Make Salaries payable go down?
 Make Cash go down?

27. What you should do –
debit or credit?
 Make patents go up?
 Make Creditor go down?
 Make Revenue go up?
 Make Expenses go up?
 Make Mortgage Loan go up?
 Make Salaries payable go down?
 Make Cash go down?
• Debit
• Debit
• Credit
• Debit
• Credit
• Debit
• Credit

28. Problem on Accounting Equation
1.Mohan commenced Business with cash 70000
2.Withdrew for private use 1700
3.Purchased goods on credit 14000
4.Purchased goods for Cash 10000
5.Paid Wages 300
6.Paid to Creditors 10000
7.Sold goods on credit 15000
8.Sold goods for Cash (cost price was Rs. 3,000) 4,000
9.Purchase furniture for cash 500

29. Accounting Equation
Sl. No Equities Assets
Creditors Capital Cash Stock Debtors Furniture's
1
2
3
4
5
6
7

30. Accounting Equation
Sl. No Equities Assets
Creditors Capital Cash Stock Debtors Furniture's
1 70000 70000
2 -1700 -1700
68300 68300
3 14000 14000
14000 68300 68300 14000
4 -10000 10000
14000 68300 58300 24000
5 -300 -300
14000 68000 58000 24000
6 -10000 -10000
4000 68000 48000 24000
7 -15000 15000
4000 68000 48000 9000 15000
1000 4000 -3000
4000 69000 52000 6000 15000
-500 500
4000 69000 51500 6000 15000 500
73000 73000

31. ILLUSTRATION
Show the Accounting Equation for the following transaction
for Hitesh for the year 2010 and make Balance sheet after
that.
 Started business with cash Rs. 18,000.
 Paid rent in advance Rs. 400.
 Purchased goods for cash Rs 5,000 and on credit Rs 2,000.
 Sold Goods for cash Rs 4,000 (costing Rs 2,400).
 Rent paid Rs 1,000 and rent outstanding Rs 200.
 Bought motor-cycle for personal use Rs 8,000.
 Purchased equipment for cash Rs 500.
 Paid to creditor Rs 600.
 Depreciation on equipment Rs 25.
 Business expense Rs. 400.

32. Accounting Equation
Sl. No Equities Assets
Creditors Rent Outstanding Capital Cash Stock Rent in Advance Equipments
1 18000 18000
2 -400 400
18000 17600 400
3 2000 -5000 7000
2000 18000 12600 7000 400
4 1600 4000 -2400
2000 19600 16600 4600 400
5 200 -1200 -1000
2000 200 18400 15600 4600 400
6 -8000 -8000
2000 200 10400 7600 4600 400
7 -500 500
2000 200 10400 7100 4600 400 500
8 -600 -600
1400 200 10400 6500 4600 400 500
9 -25 -25
1400 200 10375 6500 4600 400 475
10 -400 -400
1400 200 9975 6100 4600 400 475
11575 11575

33. Terminology
 Business Transactions :- Any exchange of money or
money’s worth as goods and services between two parties is
called a business transactions
 Debtor :-A Debtor is a person who owes money. The amount
due from him is called Debt. The amount due from a person
as per the books of account is called a book debt.
 Creditor :-A person to whom money is owing or payable is
called a creditor.
 Capital :- Amount contributed by the owner in the business is
known as capital. It is represented by the value of the net
assets( i.e. total assets less liabilities).Capital is also known as
owners equity.

34. Terminology
 Goods :- This includes all articles, commodities or merchandise in
which the business deals and are for sale purpose. Thus cloth would
be goods for a dealer in cloth and furniture would be the goods for a
dealer in furniture and so on.
 Assets :- any physical thing or right owned that has a money value is
an asset. These are purchased for use in business. Examples of
assets are cash, accounts receivable, and furniture and fixtures ,
Advance given, prepaid expenses, accrued income, stock etc.
 Liabilities: What your business owes to creditors. Liabilities is
nothing but obligation to pay. Examples are accounts payable, payroll
taxes payable, and loans payable, bank overdraft, outstanding
expenses, Advance taken, Income received in advance etc

35. Terminology
 Equity: Equity is claim against the assets. In other words ,the rights
to properties are called Equities. Equity are of two types: the right of
creditors and the rights of owners. The equities of creditors
represents debts of the business and are called liabilities. The equity
of the owner is called capital / proprietorship or owner’s equity.
Equity accounts are balance sheet accounts.
 The accounting equation: Assets = liabilities + owner's equity. The
financial statement called the balance sheet is based on the
"accounting equation." Note that assets are on the left-hand side of
the equation, and liabilities and equities are on the right-hand side of
the equation. Similarly, some balance sheets are presented so that
assets are on the left, liabilities and owner's equity are on the right.

36. Terminology
 Balance sheet: Also called a statement of
financial position, a balance sheet is a financial
"snapshot" of your business at a given date in
time. It lists your assets, your liabilities, and the
difference between the two, which is your
equity, or net worth. The balance sheet is a real-
life example of the accounting equation because
it shows that assets = liabilities + owner's
equity.

37. Terminology
 Debits: At least one component of every accounting
transaction (journal entry) is a debit amount. Debits increase
assets and decrease liabilities and equity. For this reason, you
will sometimes see debits entered on the left-hand side (the
asset side of the accounting equation) of a two-column journal
or ledger.
 Credits: At least one component of every accounting
transaction (journal entry) is a credit amount. Credits increase
liabilities and equity and decrease assets. For this reason, you
will sometimes see credits entered on the right-hand side (the
liability and equity side of the accounting equation) of a two-
column journal or ledger.