DOUBLE ENTRY ACCOUNTING

Accounting is defined as :
Art of recording, classifying and summarizing
In a significant manner
And in terms of money
Transactions and events
Which are, in part at least, of a financial
character
And interpreting the results thereof.
 Double entry book keeping
Art enables one to attain objectives
Recording of transaction in orderly
manner
Classifying refers to grouping of accounts
Summarizing thro’ Trial Balance,
Trading, Profit and Loss Account and
Balance Sheet.
Terms of money : common language that
is through the help of money example :
 Double entry
If business has 6 machines, 10 tons of raw
materials, 10 fans etc, impossible to know which
is more value unless they are expressed in a
common language.
Financial character : recording is based on
financial events. Poor lighting and ventilation,
relationship between workers and management,
though affect the earning capacity cannot be
recorded due to constraints to express in
monetary terms.
 Double entry
Starts with recording and ends with
presentation of financial information.
Each transaction or event has two
aspects or sides : DEBIT and CREDIT
Accounting trail : it’s a sequence of
activities in an accounting process
 Accounting trail

Transaction / event
Preparation of vouchers
Recording in the primary books
Posting in the secondary books
Preparation of trial balance
Preparation and presentation of financial statements
 MEANING
Transaction : a monetary deal made
between two parties. Transfer of money or
money’s worth from one person to another
Event : a happening of consequence to an
entity
Voucher : it’s a written document. Receipt,
Payment voucher and Journal voucher.
Financial statements : end products of the
accounting process.
 ACCOUNTING TERMS

Capital : investments by owner either in

cash or in kind. It’s a claim on business
Drawings : withdrawal from business
either in cash or in kind or both
Debtor : owing from persons to business.
Collectively known as Sundry Debtors.
Creditor : owing from business to persons.
Collectively known as Sundry creditors
Revenue : it’s the income. Includes both.
 Terms
Expenditure : it’s the expenses incurred
for earning revenue. Cost of manufacture,
cost of sales, cost of service.
Expense : expenditure whose benefit is
enjoyed and exhausted immediately
example salary, rent, wages, premium
Goods : commodities or merchandise held
by businessmen for sale.
CLASSIFICATION OF GOODS
Purchases : goods bought for cash and
credit
Sales : Goods sold for cash and credit
Sales Returns : Received from customer
Purchase Returns : Returned to suppliers
Opening Stock : Beginning unsold goods
Closing Stock : End unsold goods
 Classification

Customer : Person who purchased goods

Supplier : Person who sold goods
Casting : Totaling of books of accounts
Invoice : Statement prepared for sale
Assets : Resources of the business
Liabilities : Dues of the business
Equity : Claims against assets by
owner
CLASSIFICATION OF ACCOUNTS
Personal and Impersonal
Personal Accounts include Customers
(Debtors) and Suppliers (Creditors)
Impersonal Accounts consists of Real and
Nominal Accounts.
Real Account deals with Assets
Nominal Account deals with income and
expenses
 TYPES OF PERSONAL
ACCOUNTS
Natural Personal Accounts : Relate to
individuals or natural persons made of
flesh and bones.
Artificial : Relate to artificial persons
recognized by Law as persons – Manipal
Learning Ltd, SBI, RBI, BEL. BHEL etc.
Representative : Groups or representative
such as Debtors, Creditors, outstanding
expenses and prepaid insurance.
 REAL ACCOUNTS
Tangible Real Account such as cash,
building , goods, furniture, machinery,
investments.
Intangible Real Account such as Goodwill,
Patent, Trade Marks, Preliminary
expenses.
 NOMINAL ACCOUNTS
Deals with expenses or losses and gains
and income
Known as fictitious accounts
They do not represent any tangible assets
They are not in existence and cannot be
seen
They are “Ghost” in nature
 ACCOUNTING EQUATION
Its known as Accounting Equivalence
concept
Basic Accounting Equation is :
ASSETS (A) = LIABILITIES (L) +
EQUITY (E) or A = L+E
Each transaction will lead to a
combination of other.
Its unique
 EFFECT OF EQUATION
FIRST EFFECT IDENTICAL EFFECT
Increase in Assets Decrease in Assets
Increase in Liabilities
Increase in Equity
Increase in Assets
Decrease in Assets Decrease in Liabilities
Decrease in Equity
Decrease in Liabilities
increase in Assets
Increase in Liabilities
Decrease in Equity
 Effect of equation
Decrease in Liabilities Increase in Liabilities
Decrease in Assets
Increase in Equity
Increase in Equity Decrease in Liabilities
Increase in Assets
Decrease in Equity Increase in Liabilities
Decrease in Assets
 NOTE ON EQUITY
Increase in Equity means introduction of capital.
Injection of funds will not occur frequently
Owner introduces funds through cash
contribution + available surplus returned by
business : excess of income over expenses.
Revised Equation is :
A = L + Eo + (Y – X) where Eo is Equity at the
beginning , Y is the Income and X is the
Expenses; hence Y – X results in surplus which
is invested in the business by the owner without
being withdrawn the surplus from the business.
UNIT 2 : PRIMARY BOOKS
Transactions are entered first here.
If it is omitted, it escapes the process
Its known as “Journal” that is daily record
Recording the transactions in the books is
known as “journalizing”
Steps involved : identifying a transaction,
identifying the elements of the transaction,
applying the ground rule and recording.
 GROUND RULES OF
JOURNALISATION
Increase in Assets and decrease in
Liabilities + Equity = DEBIT
Decrease in Assets and increase in
Liabilities + Equity = CREDIT
Expenses and Losses = DEBIT
Income and Gains = CREDIT
RULES OF DEBIT AND CREDIT
Debit signifies Credit signifies
Increase in Asset Decrease in Asset
accounts accounts
Decrease in Liability Increase in Liability
accounts accounts
Decrease in Equity Increase in Equity
What is difference between credits
and debits ?
When you deposit money in a Bank, the
cashier will tell you “I’ll credit your
account”. You assume that cash is a credit
and so credits are good. This view is
further strengthened when reductions in
the accounts are referred to as “debits”.
Besides, if you remove the “i” from debit,
you get the word “debt”. So, you think,
“debits” are bad.
 Credits and debits
Unfortunately, this conditioning that we
receive at the Bank causes real confusion
in the accounting class. Why ? Because,
in accounting, we understand that our
Bank Account is a debit account, and
debts are credit accounts – just the
opposite of what most people would
expect.
 Credits and debits
In fact, debits and credits are neither good nor
bad. Each transaction that is made whether it
be a good transaction (deposits) or bad
transaction (bills) has both a debit and an
equal credit. That’s why it is called “double
entry” accounting. When the cashier tells you
that he or she will “credit your account”, they
are also entering a debit for the same account
that they do not
 Credits and debits
tell you about. The same is true for the
debits to your Bank Account – there is
also a credit being generated the same
time. For example when you deposit
money with your Bank Account, their
liability to you increases. Since liabilities
are credit accounts, they are crediting to
your account. When you withdraw cash
from the Bank, their liability to you
decreases, hence your account is debited.
 Credit and debits
I think the best way to understand debits
and credits is to identify two components
of each transaction :
What did you receive ?
Where did come from ?
Debit is what you receive and the credit is
the source of the item or service you
received.
 POINTS TO BE NOTED FOR
JOURNALISING
Read the transaction and identify the two accounts involved.
Identify the two elements
Find the type of transaction :cash or credit
Categorize the accounts, personal, real, nominal
Apply the Golden Rule
Enter the date of transaction
Enter the amounts in respective columns
Watch the wordings “received “ “paid”
Identify the Returns, either sales or purchases
Provide a narration
 TYPES OF JOURNAL
Purchases Day Book to record credit purchases
Sales Day Book to record credit sales
Return Outward : Returns to suppliers
Return Inward : Returns from customers
Bills Receivable : Acceptance by customers
Bills Payables : Bill raised by suppliers
Cash Book to record cash and bank receipts and
payments.
Journal Proper to record all residual transactions
 ASSIGNMENTS
Purchase and sale of goods for cash
Purchase and sale of goods for credit
Return of goods : Sales and Purchases
Purchase and sale of Assets
Transactions on income and expenses
Receipts and payments in cash and cheque
Transactions with owner : capital and drawing
Opening entry
 CASH BOOK
Records daily cash receipts and payments
Refers to both cash and bank transactions
Its both book of prime and secondary which
means it is both a Journal and a Ledger
Types : Simple, Double and Three column
Debit indicates receipts and credit payments
Maintenance of cash book avoids manipulation
and enables reconciliation.
Discount columns are not balanced.
Debit side discount is loss and credit gain.