BASICS OF ACCOUNTING &

BOOK KEEPING
by :
DR. T.K. JAIN
AFTERSCHOOL
centre for social entrepreneurship
sivakamu veterinary hospital road
bikaner 334001 rajasthan, india
www.afterschoool.tk
mobile : 91+9414430763
5 DECEMBER 09

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What is debit and credit

Every transaction has two aspects debit and
credit.
Basic accounting equation :
assets = liabilities + equity
debit denotes assets and credit denotes liability
every transaction has some impact on asset /
liability or on both.
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How does it work?

If asset will increase, liability will also
increase, if assets will decrease, liability will
also decrease, thus the equation is always
balanced : A=L+E
analyse each transaction in terms of its impact
on A / L / E
this is the fundamental concept in double entry
system
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Some examples of debit / credit

If you buy building, assets will increase, thus
when you make a journal entry, you have to
debit building account
if you borrow, liabilities will increase, thus you
have to credit loan account.

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Three rules to make your task

easier
1. debit what comes in, credit what goes out
(real accounts regarding assets)
2. debit receiver, credit the giver (personal
accounts regarding debtors, creditors, and
other such accounts)
3. debit all expenses, credit all income
(nominal accounts relating to income and
expenditures)
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Journalising the first step

When we prepare accounts, we start with
journalising. We prepare journal entry to
denote debit or credit entry and thus we are
able to understand the impact of each
transaction.
In journalising, we classify each transaction in
two parts debit impact and credit impact
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How to journalise?
Look at the transaction, find its two aspects
and analyse them.
If you buy a building, assets will increase
(building is an asset, so assets will increase),
but assets will decrease also (you buy building
against cash / bank balance)
thus for increase in assets, you have to debit,
for decrease in asset, you have to credit
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Steps in accounting
Journalise & preparation of day books
posting to ledgers
preparation of trial balance
preparation of control accounts (if any)
preparation of final accounts
preparation of cash flow / funds flow statement
analysis of accounts (ratio analysis etc.)
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Example of transactions :
Purchase of furniture : (increase in assets
furniture, decrease in assets cash)
purchase of goods on credit (increase of stock
assets, increase in creditors)
sale of goods against cash (increase in income
and increase in assets cash)

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Some important facts

Equity / capital is a liability
loss is an assets and profit is a liability
expenditure contributes to loss, therefore it is
treated like an asset
revenue / income contributes to profit,
therefore it is treated like a liability
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Remember the basic

classification..
Assets give real accounts
liability create personal accounts
debtors (assets) and creditors (liability) create
personal accounts
income and expenditure create nominal
accounts
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Systems of accounting
Nominal accounts are closed every year and
their balance is transferred to P & L account
real account and personal accounts are not
closed and they continue year after year and
their balance is shown in balance sheet.
If balance sheet doesnot tally, prepare a
suspense account to ensure that balance tallies.
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Trial balance
In trial balance, you have to show the balance
of every account on the date of preparation of
trial balance.
Thus it is collection of balance of all the
accounts that you have. By default, it will be
having equal totals of debit and credit side.
Thus it will balance, if it doesnt, it means there
is some error. Trace out the error and rectify it.
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Examples of accounting entries

Purchase of raw material against cash :
purchase account debit, cash account credit
(purchase is a real account, as it denotes stock,
which is an asset and this account will never be
closed, cash is also an assets, when you buy
goods, assets increase and assets decrease thus
debit and credit both affect assets, no change in
liability)
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example...
Payment of salary out of cash
salary account debit, cash account credit
(salary is a nominal account, it is an
expenditure, and all expenditures are treated
like assets, but it is nominal account so this
account will be closed at the end of the year
and transferred to P & L account, cash is also
an asset)
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P & L account
It will contain only the balance / totals of nominal
accounts
it will not contain balance / total of any real account or of
any personal account.
It has two parts debit and credit
debit part denotes only expenditure and credit denotes
only income / revenue.
If debit is more, we have loss, if credit is more, we have
profit, which will be shown in balance sheet
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Balance sheet
It denotes only the balance / total of only real
accounts and personal accounts. It does not
show balance of nominal accounts.
Some nominal accounts continue for one more
year, they will be shown in balance sheet.
Example : outstanding expenditure, accrued
income will be shown in balance sheet
(although they are nominal accounts)
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Adjustment entries...
At the end of the year, some adjustment entries
are made, and these adjustment entries are
necessary while account finalisation.
Exmaple : outstanding expenditure, acrued
income etc.

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What is outstanding expenditure?

In accounting, we generally mercantile system, in which
all the income and expenditure related to this year will be
recorded in this year's accounts. Thus if some expenditure
has taken place, but we have not paid for it, it is
outstanding expenditure.
Suppose, rent of Feb. And March are outstanding, we have
not paid them, but we have to treat them in P & L account
and show them as outstanding expenditure.
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What is accrued income ?

In accounting, we generally mercantile system, in which
all the income and expenditure related to this year will be
recorded in this year's accounts. Thus if some income has
taken place, but we have not received it it, it is accrued
income.
Suppose, interest receivable of Feb. And March are
outstanding, we havent received them, but we have to
treat them in P & L account and show them as accrued
income
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WHAT IS CAPITAL RECEIPT?

Receipt which are of the nature of fixed capital

are called capital receipt

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WHAT IS REVENUE RECEIPT?

Receipts which are of the nature of circulating
capital are called capital receipt
Circulating capital is that part of the capital
which is turned over in the business and which
ultimately results in profit or loss.

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Machinery in the hands of a

manufacturer is ....
Fixed capital it is fixed assets it is shown in the balance
sheet as an asset.
When you buy it the entry is :
machinary account debit,
bank account credit
later on you have to show depreciation every year on this.
Suppose machine cost 1000, its life is 10 year, so you will
show 100 every year for 10 years as depreciation in P& L
account
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