TOPIC 13: BOOKKEEPING

13.1 Introduction
Book-keeping: - Definition
The word book or books means books of accounts and keeping implies maintaining in proper form
and order.
Thus, bookkeeping may be defined as the art of recording business transactions in books in a regular
and systematic manner. To be more specific

Bookkeeping is an art of recording day-to-day business transactions from the source documents to
books of original entry in a chronological manner. Later on, the transactions from the books of
prime entry are posted to the books of prime entry.

Learning Objectives
At the end of this lecture you will be able to:
 Classify business transactions
 Classify accounts
 Recording transactions using the double entry bookkeeping.
 Understand the effects of transactions on the accounting equation

13.2 Analyzing Business Transactions

Three Questions for analyzing business transactions

(i) Which two or more bookkeeping accounts are affected?
(ii) What are the account classifications of these bookkeeping accounts?
(iii) Is the balance of the bookkeeping account increased or decreased by this business
transaction?
13.3 Classification of Accounts
Every business deal with other “Person”, possesses “Assets”, pay “Expenses” and receive
“Income”, so from the above, we can say every business has to keep.
 An account for each person,
 An account for each asset and
 An account for each expense or income.
(i) Personal Accounts
Accounts in the name of persons are known as personal accounts.
Eg: Babu A/C,
Salehe & Co. A/C,
Outstanding Salaries A/C, etc.
(ii) Impersonal Accounts
These are accounts other than a personal account, being classified as either a real account, in which
property is recorded, or a nominal account, in which income, expenses and capital are recorded.
(iii) Real Accounts
These are accounts of assets or properties. Assets may be tangible or intangible. Real accounts are
impersonal which are tangible or intangible in nature.
Eg:- Cash a/c, Building a/c, etc are Real accounts related to things which you can feel, see and
touch. Goodwill a/c, Patent a/c, etc Real Accounts which are of intangible in nature.
(iv) Nominal Accounts
These accounts are impersonal, but invisible and intangible. Nominal accounts are related to those
things which we can feel but cannot see and touch. All “expenses and losses” and all “incomes and
gains” fall in this category.
Eg:- Salaries A/C, Rent A/C, Wages A/C, Interest received A/C, Commission received A/C,
Discount A/C, etc.
13.4 Rules for Debit and Credit
Each account has two sides – the left side and the right side. In accounting, the left side of an
account is called the “Debit Side” and the right side of an account is called the “Credit Side”. The
entries made on the left side of an account is called a “Debit Entry” and the entries made on the
right side of an account is called a “Credit Entry”

12.4.1 Rules For Debiting and Crediting an Account

Personal Accounts Debit the receiver
Credit the giver
Real Accounts Debit what comes in
Credit what goes out
Nominal Accounts Debit all Expenses and Losses
Credit all Incomes and Gains

13.4.2 Effects transactions on Debit and Credit sides of an Account

Account
Debit Side (Dr.) Credit Side (Cr.)
Increases Asset Decreases Asset
Decreases Liability Increase Liability
Decrease Equity Increase Equity
Increase Expenses Decrease Expenses
Decrease sales Increase Sales
13.5 Steps for Finding the Debit and Credit Aspects of a Transaction
• Find out the two accounts involved in the transaction.
• Check whether it belongs to Personal, Real or Nominal account.
• Apply the debit and credit rules for the two accounts.
Example:

Mr. Kihedu started his business on 1st March with Tsh 10,000,000.
In analyzing this transaction, the following is observed;
(i) This is a money worth transaction so it is worth recorded in books of accounts
(ii) To find out the debit and credit aspects of a transaction
Three Questions for analyzing business transactions
 Which two or more bookkeeping accounts are affected? Answer: In this transaction two
accounts are affected, the first is Cash account and the second is Capital account.
 What are the account classifications of these bookkeeping accounts? Answer: Cash account
belongs to Real account classification and Capital account belongs to Nominal account
classification.
 Is the balance of the bookkeeping account increased or decreased by this business
transaction? Answer: The cash account will be increased by debiting it as it is an asset
account i.e. Debiting an asset account the account is increased. Capital account will also
increase by crediting the capital account.

13.6 Double Entry System of Book-keeping (DES)

Every transaction involves two-fold aspects e.g., an aspect of receiving (Dr) and an aspect of giving
(Cr)
Under the double entry system, both the aspects of giving and receiving are recorded in terms of
accounts
The account which receives the benefit is debited and the account which gives the benefit is credited
It is the ultimate result of this system that every debit must have corresponding credit and vice versa
and on any particular day the total of the debit entries and the credit entries on the various accounts
must be equal.
13.7 The Accounting Equation
The properties of the business are called "assets". The rights to the properties are called "equities".
Equities may be sub-divided into two principle types: The rights of the creditors and the rights of
the owners.
The equity of the creditors represents debts of the business and are called liabilities.
The equity of the owner is called capital, or owner's equity.
13.7.1 The Accounting Equation Formula
The following formula is known as the accounting equation and is arrived at is as follows
Assets = Equities
OR
Assets = Liabilities +Owners Equity
So the modification of above equation can also be represented as follows
Owners Equity = Assets - Liabilities

13.7.2 Effect of Transaction on Accounting Equation

The following is ABC Company Ltd Financial Transactions for the year Ending December, 2016
illustrating the effect of transactions on the accounting equation:
1. Mr. Hajj started business by contributing 600,000 in the bank
2. He bought office equipment by cheque worth 200,000
3. He contributed cash 400,000 to his business
4. He bought office furniture on credit from Supreme Furniture worth 700,000
5. He bought equipment by cash 50,000
6. He drew cash from bank for own use 80,000
7. He arranged a loan with NBC and received 800,000 for his business
8. He paid by cheque Supreme Furniture 40,000
9. He bought goods for his business on credit from Joan Stores 400,000
10. All goods were sold for cash 650,000
S.No. Assets Liabilities Capital
1 Bank 600,000 Capital 600,000
Bank (600,000 - 200,000) +Equip.
2 200,000 Capital 600,000
Bank 400,000 + Equip. 200,000 Capital (600,000 +400,000)
3 +Cash 400,000

Bank (600,000 – 200,000) +Equip. Capital (600,000 + 400,000)

200,000 + Cash 400,000
4 + Furniture 700,000 Supreme 700,000
Bank 400,000+Equip (200,000 + Supreme 700,000
50,000)
5 +Cash (400,000 – 50,000) +Furn. Capital 1,000,000
700,000
 Bank (400,000 – 80,000) +Equip Supreme 700,000 Capital (1,000,000 – 80,000)
200,000 + 50,000)
6 +Cash (400,000-50,000) +Furn 700,000

Bank (400,000 – 80,000+800,000) Supreme 700,000 Capital (1,000,000 – 80,000)

+Equip (200,000 + 50,000) +Loan (NBC) 800,000
7 +Cash (400,000-50,000) +Furn 700,000

Bank (400,000 – 80,000+800,000- Supreme (700,000 - Capital (1,000,000 – 80,000)

40,000) +Equip 200,000 + 50,000) 40,000) +Loan (NBC)
8 +Cash (400,000-50,000) +Furn 700,000 800,000

Bank (400,000 – 80,000+800,000- Supreme (700,000- Capital (1,000,000 – 80,000)

40,000) +Equip (200,000+50,000) 40,000) +Loan (NBC)
9 +Furn. 700,000 +Cash (400,000- 800,000
50,000) +Joan 400,000
+ Stock(goods) 400,000
Bank (400,000 – 80,000+800,000- Supreme (700,000- Capital (1,000,000 – 80,000
40,000) + Equip (200,000+50,000) 40,000) +Loan (NBC) +250,000)
+Furn. 700,000 +Cash (400,000-50,000 800,000
10 +650,000) +Joan 400,000
+ Stock/goods (400,000-400,000)
Bank 1,080,000 + Supreme (700,000- Capital 920,00 + Profit
Equipment 250,000 + 40,000) +Loan (NBC) 250,000
Furniture 700,000 + 800,000
Cash 1,000,000 +Joan 400,000

3,030,000 1,860,000 1,170,000

 Summary
Bookkeeping is defined as the art of recording day-to-day business transactions in the books of accounts in a
prescribed manner. The basic accounting equation is given as Assets = Liabilities + owner’s equity. Assets are
valuables owned by the business and liabilities are claims from the business by creditors. Owner’s equity is
what remains after liabilities are deducted from the assets. Balance sheet is the financial statement usually
prepared at the end of the year. It is a list of all balances arranged according to whether they are assets, capital
or liabilities to depict the financial situation on the specific date. Double entry bookkeeping is a system where
each transaction is entered twice: one on the debit (Dr) side and another on the credit (Cr) side hence
showing increase or decrease of one item and the increase or decrease of the other item.

Exercise
1. Distinguish from the following list the items that are liabilities from those that are assets:
(i) Amount owing to a supplier
(ii) Goods in stock for resale
(iii) Amount owing by customer
(iv) Typewriter for use in office
(v) Loan owed to Musa
(vi) Cash at bank
(vii) Shop fixtures
(viii) Bank overdraft
(ix) Business premises
2. During the month of October 2011. Mr. Karegero has performed the following transactions
(1) Mr. Karegero commences his business with cash TSH 100,000
(2) Purchased furniture on cash TSH20,000
(3) Purchased merchandise for cash TSH20,000
(4) Purchased merchandise on account (on credit) TSH10,000
(5) Sold merchandise for cash TSH4,000 cost of these merchandise was TSH3,000
(6) Sold merchandise on credit for TSH8,000 costing TSH6,000
(7) Paid TSH2,000 to creditors for merchandise purchased.
(8) Received cash from a debtor TSH 2,000 whom a sale on credit was made earlier
(9) Paid salaries TSH2,000 in cash.
Required,
 For Each transaction above name the elements of the account equation which will be
affected
State the effect to each element of the accounting equation as a result of the transaction
(Indicate the amounts Involved)

3. Complete the following table showing which accounts are to be debited and which are to be credited:
S. No. Transaction Account to be Account to be
debited credited

1 Purchased equipment from Mr. Ouma on credit

2 A customer Ms Jane paid in cash

3 Borrowed money by cheque from Mr. Waziri
4 Paid a creditor, Ms. Asha, by cheque
5 Returned to Mr. Ouma some of the equipment bought
from him

References

Books
Maheshwari, S.N. (2012), An Introduction to Accountancy (10th Edition), Vikas publication.
Gupta, C.B. (2011), Business studies, Tata McGraw-Hill.
Shashi, K & Sharma, RK. (2003), Cost & Management Accounting, Kalyani Publishers.
Harvey, Jack. (2008), Modern Economics. 7th Edition, Jack Harvey books in India.

Weblinks
http://en.wikisource.org/wiki/Bookkeeping/Single-Entry_Bookkeeping/Principles_of_ Bookkeeping
www.iibf.org.in/uploads/jaiibmodule_b.ppt
wiki.answers.com/Q/What_is_5_basic_bookkeeping_principles
www.accountingcoach.com/online-accounting.../09Xpg01.html
archive.org/details/principlesofbook025233mbp
www.amazon.co.uk/ICB-Practical-Bookkeeping.../dp/1847107141 -
tilz.tearfund.org/.../Basic+bookkeeping+-+a+practical+example.htm
chestofbooks.com/Practical-Bookkeeping-The-Science-Of-Accounts.html
books.google.com/books/.../A_complete_system_of_practical_book_keep.html