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Definition of Accounting “Is the language of business. Accounting is both art and science keeping
record of financial transactions, processing and analyzing financial information of governmental and non
governmental enterprises.
Book Keeping
Some people take “book keeping” and “accounting” as synonymous but they are different from each
other. Book keeping is mainly concerned with recording of financial data relating to the business
operations in a significant manner while Double entry book keeping is the system of recording financial
transaction. Where Debit (Dr.) and Credit (Cr.) is the main player of this system. (We will
follow in next chapter)
Before starting to learn the accounts we should know about few terminologies of accounts clearly. So,
there are some terminologies of account which are important for us.
• Asset : An Asset is something valuable which a business owns or has use of . assets can be divided into
current asset and non current asset.
• Bad debts : a bad debt is a specific debt which is not expected to be repaid .
• Capital : Capital is an investment of money and other assets with intention of earning a return.
A business of proprietor invest money with intention of earning profit
• Credit : not paid yet , need to pay in future
• Creditors : To whom we should pay
• Discount : Discount is the reduction in the price of goods below the amount at which
those goods would normally be sold to other customers of the supplier. There are two kinds of
discount
• Cash discount :
………………………………………………………………………………………………. ..........................
..................................................................................................................................................
• Trade Discount …………...................................................................................................................................
………………………………………………………………………………………………………………………
• Drawings : Drawings are the amount of money taken out of a business by it’s owner
• Doubtful debts : a doubtful debt is specific debt which may be expected to be repaid.
• Debtors : From whom we should receive the amount
• Goodwill :
• Liability : A liability is something which is owned to somebody else. There are two kinds
of liability
Short Term Liability : ………………………………………………………………………….
…………………………………………………………………………………………………………
• Long Term Liability : …………………………………………………………………………
……………………………………………………………………………………………………….
• Invoice : Invoice is demand for payment
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• Payables : an account payable results from the purchase by a business of items for later
payment. An account payable is a liability of the business.
• Prepayments : prepayments are payments which have been made in one accounting period,
but should not be wholly or partly charged against profit until a later period, because they relate
to that later period.
• Provision for doubtful debts : provision for doubtful debts is general estimate of the percentage
of debts which are not expected to be repaid.
• Receivables: An account receivable results from the sale by a business of items for later
payment. An account receivable is an asset of a business.
We should handle our accounting system in this way. The process of recording, posting and
summarizing accounting transaction is known as accounting cycle. It is same like the life cycle
of one human being.
Financial Transaction
Monetary Value (Example)
Journalize the
Transaction
Record in Ledger
This cycle repeats regularly in one accounting period. Under this process, we should follow some rules and
regulation as well as accounting concepts and convention.
There are few basic accounting concepts:
1. Business Entity Concept: a business, for accounting purposes, is a separate entity from its owners.
2. Money measurement Concept: accounts only deal with items to which a monetary value can be
attributed.
3. Realization Concepts
4. Matching concepts: expenses are recognized in the income statement on the basis of a direct association
between costs incurred and the earning of specific items from income.
Rules and Regulation of Journal entry: There are two kinds of rules of journal entry booking
keeping system or rules of Debit Credit
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Rules of Debit and Credit
According to classification of account
Increase /Decrease Rule, which is also
Accounting classified on the basis of
Known as modern rule
its nature
in this present accounting
Scenario
Personal Account: Account which is related with
person
Debit Credit
Assets Increase Decrease
Real account: Account which is related with Assets
Expenses Increase Decrease
Income Decrease Increase
Nominal Account : Account which is related with
Liability Decrease Increase
expenses , losses , income and gain
Capital Decrease Increase
Accounting Equation
As business is a separate entity from its owners and this is the basis of a fundamental rule of accounting, which is
that the assets and the liabilities must always be equal (the accounting equation).
Step1. Need to deal with effected site between assets, capital and liability
Step2. Then it should be decided whether it will increase or decrease
Step3. If increase need to add, if decreases should subtract
Note: If any expenses is incurred it should be deducted from capital .Similarly if any income is received it should be
added in capital
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Accounting Equation is also called the accounting equation.
+ +
Loan Taken
Expenses - -
Income + +
Purchase of Assets +
-
Sale of Assets +
-
Outstanding Expenses - +
Accrued Incomes + +
Prepaid Expenses +
-
Advance Income + +
+ Fur 5,000
2. Furniture Purchased - Cash 5,000 0 0
New Equation Rs. 20,0000 Rs. 20,0000 0
+ Goods 6,000
3.Goods Purchased On Cash - Cash 6,000 0 0
New Equation Rs. 20,0000 Rs. 20,0000 0
4.Goods Sold on credit to Hari and the profit made + Cash 5,000 + Profit 1,000
thereby - Goods 4,000
Ending Equation Rs. 21,000 Rs. 21,000.
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HSEB 2056
1. Commencement of business with Rs 15,000
2. Payment of rent Rs 1,500
3. Purchased goods from worth Rs 8,000
4. Sold goods to Miss Thapa worth Rs 6,000
SEB 2057
1. Capital introduced Rs 40,000
2. Assets purchased on credit Rs 10,000
3. Cash purchased made worth Rs 15,000
Transaction Assets = Capital + Liabilities
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HSEB 2058
1. Starting a business with Rs 80,000
2. Purchased of furniture worth Rs 12,000
3. Purchased of goods for Rs 32,000
4. Sold goods on credit for Rs 20,000 (at profit of Rs 4,000)
HSEB 2059
1. Started a business with Rs 25,000
2. Paid wages and salaries of Rs 400
3. Purchased goods for cash amount of 12,000
4. Sold goods to Mrs. Rama for Rs 8,000
Transaction Assets = Capital + Liabilities
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HSEB 2060
1. Roshan started a business with Rs 35,000
2. Goods purchased for RS 15,000
3. Paid Rs. 1,500 for rent including an advance rent of Rs 500
Transaction Assets = Capital + Liabilities
HSEB 2062
1. Started business with Rs 30,000
2. Salaries paid Rs 5,000
3. Purchased goods for cash Rs 8,000
4. Sold goods costing Rs 3,500 to Kiran for Rs 4,000
Transaction Assets = Capital + Liabilities
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HSEB2063
Started business with Rs 1,00,000
Goods purchased Rs 60,000
Salary paid Rs 10,000
Paid rent Rs 3,000 including advance of Rs 1,000
Transaction Assets = Capital + Liabilities
Journal Entry
Journal is the important book of under the double entry book keeping system, which is known as the one of prime
entry of our booking keeping system. Journal records all daily transaction of a business in the order in which they
occur. A journal may be defined as a book containing a chronological record of transaction. It is the book in which
the transaction are recorded first of all under double entry book keeping system.
Date : The date on which the transaction was entered is recorded here
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Particulars : Two aspects of the transaction are recorded in this column
LF : It is not important for us
Dr. Amount : In this Column the amount to be debited is entered
Cr. Amount : In this Column the amount to be credited is entered
Compound Journal Entry consists of two or more than two simple kind of journal entry. In simply saying it is
combination of two or more than two journal entry.
• Cash Paid RS. 2,500 to Sambhav on Asad 3,2063 in full settlement of his account Rs. 2,650 .
Individual Entry
Compound Entry
HSEB 2052
Journalize the following transaction in the books of B.K Bhandari
a) Cheque of Rs. 100 respectively received from SC puri in settlement of a debt now returned dishonored
b) Rs. 60 owing by SK prasad written off as bad debts
c) Anup is declared insolvent and a dividend of 50% received from him in full settlement of his debt of Rs.
1000.
d) Goods worth Rs. 500 were taken away by Mr. BK Bhandari for his domestic use
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e) Goods returned from JN Sharma Rs. 300
HSEB 2053
Journalize the following transaction
a. Purchased goods worth Rs. 2,000 in cash and received Rs. 200 as discount
b. Paid Rs. 300 for office rent in cash
c. Paid Rs. 1,000 by cheque for full settlement of his credit of Rs. 1,200
d. Received Rs. 1,500 through Bank from B for settlement of the account of Rs. 1,600.
e. Bought office furniture from Z for Rs. 5,000 on credit
HSEB 2058
Journalize the following transaction
a. Unused furniture were disposed off Rs. 2,000.
b. Gateway Limited debtor Rs. 3,000 settled it’s account receiving cash discount of Rs. 125
c. Hari started own business with Rs. 22,000.
d. Amount due from Bhattarai Rs. 5,000 has been witted off as bad debts.
Journalize the following transaction in the book of Mr. Smith
1. Business started with Cash Rs. 15,000 , stock 10,000 , Furniture Rs. 10,000 , Motor vehicle Rs,
1,00,000.
2. He purchased goods costing Rs. 75,000. and paid 65% on cash and remaining on credit from Hari.
3. Cheque paid to Syam Rs. 15,000.
4. Sold good to shyam Rs. 10000 and allowed him discount Rs. 500
5. Depreciation of Furniture Rs. 10,000.
6. Baddebt found Rs. 1,500.
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Ledger
Ledger is the book which contains various accounts. In other words , Ledger is a set of accounts . It contains all
accounts of the business enterprises. It helps to post the transaction.
Posting means transferring the debit and credit item from the Journal to their respective accounts in the ledger. It
should be noted that the exact names of accounts used in the Journal should be carried to the ledger.
Example
Ram a/c
Dr. Cr.
Cash a/c
Dr. Cr.
Capital a/c
Dr. Cr.
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Furniture a/c
Dr. Cr.
Goods a/c
Dr. Cr.
Transaction
Credit Cash
Transaction
Transaction
All the credit transactions are recorded in All the Cash Transaction are Subsidiary Books
recorded in Cash Book.
Purchase Books: If Purchased made on credit, there are three Kind of Cash Book
we will our credit purchase transaction 1. Single Column Cash Book
in purchase Book. 2. Double Column Cash Book
- Cash and Bank Column
Sales Books: If sales made on credit, - Cash and Discount Column
we will our credit purchase transaction - Discount and Bank Column
in purchase Book. 3. Triple Column Cash Book
- Column of Cash, Bank and
Discount
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Purchase Return Books: Purchase Returns are
recorded in Purchase return Book
Cash Book is statement of Cash balance , where all cash receipts and payments are recorded.