Basics of Accounting

Double Entry Book Keeping

Dr. Rupali Gupta

 Basic Terms in Accounting

Transaction
In a business everything that is exchanged is recorded in its money value.
When a commodity or a service is exchanged for money or money’s worth
is known as a transaction. The transactions cause a change in the
ownership of the item, which is being exchanged.

Cash transaction:
It involves transfer of cash from one person to another so that cash
balance of the receiver increases and that of giver decreases.

Credit transaction:
In a credit transaction transfer of cash does not take place at the time
of occurrence of transaction but is expected to be transferred at some later
period usually agreed between two parties
• Debit – It denotes that the account has received a benefit in a
transaction for which it is debited.

• Credit – It denotes the account that has parted with the benefit in a
transaction for which it is credited.

• Account – It is a summarised and systematic record of transactions

relating to person, property, income or an expense.

• Goods – The term goods means articles, commodities or things in

which a trader is dealing.

• Expense – Is the cost of operations that a company incurs to

generate revenue.

• Expenditure – Money spent(cash or credit) on purchasing goods and

services is called an expenditure
• Income – An amount, which is received, in return of rendering a particular service
,commodity, is called an income.
• Revenue – Is the total amount of income generated from business operation.
• Profit- When income is more than current expenditure in a financial year .
• Loss - If business has more expenses than income during its financial year.
• Capital – It is an amount contributed by the proprietor for conducting business. It is
excess of assets over liabilities.
• Drawings – It is the amount of cash or goods withdrawn from the business by the
proprietor to meet personal or household expenses.
• Debtor – A debtor is a person who owes money to company . In other words, he is
a person from whom we have to recover money.
• Creditor – A creditor is a person to whom money is payable. In other words, he is a
person to whom we owe
Revenue Expenditure – eg. Salary paid ,rent paid ,interest paid.
• Expense incurred to meet day to day requirements .
• Benefit is received only for short period
• It recurring in nature
• Expenditure is not realizable

Capital Expenditure- Capital expenditure or capex is the amount spent for tangible
assets that will be used for more than one year in the operations of a business.
• Benefit for long period
• Non-recurring in nature
• Expenditure is not realizable
• Some examples include the purchase of machinery, equipment, furniture,
building.
• Goodwill- Name and fame of business which makes able to earn more profit and
to establish strong position in the market .

• Accounting Year- books of accounts are prepared for a period of twelve months.

• Net Worth – The excess of assets over liabilities represents net worth.
Proprietor’s capital plus retained profit.

• Purchases- Its’ an exchange of money for a particular good or service

• Sales- Refers to the revenues earned when a company sells its goods, products,
merchandise, etc.

• Stock-Inventory

• Proprietor –Owner of business.

Asset –All belonging of a business are called as assets. Anything, which is
convertible into cash or its equivalent, is termed as asset.
Fixed Asset – A fixed asset is a long-term tangible piece of property that a
firm owns and uses in its operations to generate income. Fixed assets are not
expected to be consumed or converted into cash within an year. Eg. Land,
Building, Equipment .

Current Asset - also known as liquid assets - are either cash or items which a
business expects to sell by the end of the financial year. e.g. Stock ,Debtors .

Intangible Asset - An intangible asset is a non-physical asset having a useful

life greater than one year. They are valuable because they represent potential
revenue. e.g. Goodwill ,trademark, patent.

Tangible Asset-Assets which can be touched ,seen and felt and have
existence are tangible assets, eg. Vehciles, building.

Fictitious Assets- They are not real assets but certain expenses which bring
about a long benefit to the business ,e.g. Preliminary
expenses.(advertisement expenses)These assets have no realizable value .
 Asset

Non-Current Assets Current Assets

Non- Long term Other non-

Fixed Deferred
current loans & Current
asset investme tax asset Advances Investments
nt

Cash & Short term Other

Current Trade
Inventories cash loans & current
Assets receivables advances
Equivalents assets

Intangible assets
Tangible Intangible
Capital WIP under
assets assets development
Liabilities – These are the debts for which a trader is responsible for payment.
The amount that a business owes is a liability .
• Long Term Liabilities – Liability not due within 12 months .e.g.Bank
Loan , debentures
• Current Liabilities- Liability due within 12 months e.g. Creditors ,
accounts payable, dividends ,tax .
 Liabilities

Non-Current
Current Liabilities
Liabilities

Long term Deferred tax Other long Long term

borrowing liabilities term liabilities provisions

Short term Trade Other current Short term

borrowings payables liabilities provisions
Invoice – It is a business document or statement sent by the seller of goods to
the purchaser of goods.

Voucher Folio – It is a technical word, normally used in accounts to denote a page

number.

Bad Debts- The term bad debts usually refers to accounts receivable (or trade
accounts receivable) that will not be collected.

Doubtful Debts-when there is a doubt on the ability or willingness of debtor they

are called as a doubtful debt.

Depreciation –The monetary value of an asset decreases over time due to use,
wear and tear or obsolescence. This decrease is measured as depreciation.
Appreciation-Appreciation is an increase in the value of an asset over time.
The increase can occur for a number of reasons, including increased demand
or weakening supply, or as a result of changes in inflation or interest rates.

Contingent Liability-liability which is not certain and may arise all of a sudden
out of some consequence .

Discount – When commodity is sold at less than its regular selling price ,the
amount charged less is called as discount.
Cash Discount –given for quick cash recovery .
Trade Discount – given for increasing sales .

Solvent –when the realizable total value of all assets is more than outside
liabilities of the business .

Insolvent –when a business is unable to pay off its debts and outside liabilities
even after selling all its assets is insolvency
Activity: Tick the Appropriate One
Current Assets Non-Current Assets Current Liabilities Non-Current
Liabilities
Machinery
Sundry Creditors
Cash at Bank
Goodwill
Bills Payable
Land & Building
Furniture
Computer Software
Motor Vehicles

Inventory
Investments
Loan from Bank
Air-Conditioners
Loose Tools
Sundry Debtors
Patents
 Double-Entry Book Keeping

Financial Accounting is based on ‘Principle of Duality’ which states that each

business transaction recorded in books of accounts has a two fold effect. In other
words, each transaction involves at least two accounts when recorded in the books
of accounts.

For instance, Kapoor Pvt. Ltd purchases 1,000 units of raw material worth Rs 1 Lakh
for its business. In this transaction, Kapoor Pvt. Ltd receives raw material in return of
cash worth Rs 1 Lakh. In other words, raw material is what comes into the business
and cash worth Rs 1 Lakh goes out of the business.

Thus, such a transaction impacts the stock of raw material, thereby increasing the
same by 1,000 units. On the other hand, it also impacts cash available with the
business, reducing it by Rs 1 Lakh.
 This is ‘Double Entry System’ of Accounting that is typically followed when

preparing books of accounts of a business. It is based on the ‘Dual

Accounting Concept’ as per which every business transaction has an equal

and opposite effect in minimum two different accounts

• The method assumes that every transaction has a two-fold effect and
therefore, in each transaction, there are two parties, or accounts.
• In a transaction one account receives benefit and other account gives the
benefit.
• In other words, if one account receives a benefit in the form of cash, goods or
service, there must be corresponding loss or benefit by other account.
Principles of Double Entry Book-keeping System:
1) In every business transaction there must be minimum two effects i.e. debit
and credit.
2) Two Accounts means one is the Receiver of the benefit and other is the
Giver of the benefit.
3) If one account is debited other account must be credited.
4) Every debit has a equal and corresponding credit of the same amount

Every debit has an equal and corresponding credit of the same

amount is the basic principle of Double Entry System.
Important Elements of Double Entry Book-Keeping System
 What is Account?

Definition of Account:

“An account is summarized record of transactions affecting one person, one

kind of property or one class of gain or loss.” – G. R. Batliboi

“An account is a ledger record in a summarized form of all the transactions that

have taken place with the particular person or thing specified.” – Carter
Dr. A/c Cr.

Debit and Credit

1) Debit (Dr.):
Left hand side of an Account is called Debit
(Dr.) side.
2) Credit (Cr):
Right hand side of an Account is called Credit
(Cr) side.
 Types of Account

Types of Accounts
Accounts are classified into following categories:

1. Personal Account
Natural Personal Account
Artificial Personal Account
Representative Personal Account

2. Real Account
Tangible Real Account
Intangible Real Account

3. Nominal Account
 Personal Account
As the name suggests, Personal Accounts are the ones that are related with individuals,
companies, firms, group of associations etc. These persons could include natural persons,
artificial persons or representative persons.

Type of Personal Accounts

a. Natural Persons
These accounts relate to natural persons such as Veer’s A/c, Ayan’s A/c, Karen’s A/c etc.

b. Artificial Accounts
These accounts relate to companies and institutions such as Kapoor Pvt Ltd A/c, Booker’s
Club A/c etc. Thus, companies and institutions are the entities that exist in the eyes of
law.

c. Representative Accounts
Accounts that are a representative of some person are called as representative accounts.
These include Outstanding Interest A/c, Outstanding Wages A/c, Prepaid Expense A/c etc.
 Real Account

Real Accounts are the ones that are related with properties, assets or possessions.
These properties can be both physically existing as well as non physical in nature.
Thus, Real Accounts can be of two types: Tangible Real Accounts and Intangible Real
accounts.

a. Tangible Real Accounts

Tangible Real Accounts are accounts which have physical existence. In other words,
such assets can be seen, felt or touched. For example Machinery A/c, Vehicle A/c,
Building A/c etc.

b. Intangible Real Accounts

These are the assets or possessions that do not have physical existence but can be
measured in terms of money. This means that such assets have some value attached
to them.
For example, trademarks, patents, goodwill, copyrights etc.
 Nominal Account

Nominal Accounts relate to income, expenses, losses or gains. These

include Wages A/c, Salary A/c, Rent A/c etc.

I) From the following transactions find out
1) Two aspects 2) Two accounts 3) Classify the accounts

a) Commenced business with Cash Rs 20,000.

b) Purchased goods on credit from Ajay Rs 10,000.
c) Cash Sales Rs 7,000.
d) Received commission Rs 500.
e) Paid Rent Rs 800.

1. Two Aspects
S. No. Aspect I Aspect II
1 Cash Comes in Proprietor is the giver
2 Purchase is an expenditure Ajay is Giver
3 Cash comes in Sale is an income
4 Cash comes in Commission received is an income
5 Rent paid is an expense Cash goes out
Two Aspects and Two Accounts

Two Aspects Account I Account II

1 Cash Comes in Cash A/c
Proprietor is the giver Capital A/c

2 Purchase is an expenditure Purchase A/c

Ajay is the Giver Ajay A/c

3 Cash Comes in Cash A/c

Sale is an Income Sales A/c

4 Cash Comes in Cash A/c

Commission received is an income Commission A/c

5 Rent Paid is an expense Rent A/c

Cash goes out Cash A/c
Two Aspects, Two Accounts and Classification of Accounts

Two Aspects Account I Classification of A/c

1 Cash Comes in Cash A/c Real
Proprietor is the giver Capital A/c Personal

2 Purchase is an expenditure Purchase A/c Nominal A/c

Ajay is the Giver Ajay A/c Personal A/c

3 Cash Comes in Cash A/c Real A/c

Sale is an Income Sales A/c Nominal A/c

4 Cash Comes in Cash A/c Real A/c

Commission received is an income Commission Nominal
A/c
5 Rent Paid is an expense Rent A/c Nominal
Cash goes out Cash A/c Real
From the following transactions find out:
1) Two Aspects 2) Two Accounts
3) Classify the Accounts and Fill the following Table

a) Started business with Cash Rs 50,000.

b) Purchased Machinery on credit from Avinash Rs
20,000.
c) Purchased goods Rs 5,000 from Rahul on cash.
d) Sold goods to Aniket Rs 6,000 on credit.
e) Paid Salary Rs 1,000.
f) Sold old Tables for Rs 3,000.
 Transaction Two Accounts Classificat Rules applied Account Account
Aspects Involved ion of Debited Credited
accounts

1 Commenced Cash Real Debit what come in Cash A/c

business with Cash Capital Personal Credit the giver Capital
Rs 90,000 A/c

2 Deposited cash into Bank Personal Debit the receiver Bank A/c
Dena Bank Cash Real Credit what goes out Cash A/c
Rs 9,000

3 Withdrew cash for Capital Personal Debit the receiver Capita

Personal use Rs Cash Real Credit what goes out A/c
1,500 Cash A/c

4 Purchased goods Purchase Nominal Debit all expenses Purchase

from Mandar Rs Mandar Personal Credit the giver A/c
12,000 Mandar
A/c
5 Paid salary Rs 2,900 Salary Nominal Debit all expenses Salary
Cash Real Credit what goes out A/c Cash a/c

6 Received Interest Cash Real Debit what comes in Cash A/c

Rs 4,000 interest Nominal Credit all incomes Rent A/c
 Classification of Accounts as per Modern Approach

Classification of Accounts

Revenues & Expenses &

Assets A/c Liabilities A/c Capital A/c
Gains A/c Losses A/c

Machinery
Creditors Aditya’s Capital Commission Commission
A/c Bank OD A/c received paid
Building A/c Bank Loan Rent received Rent paid
Outstanding Girish’s Capital Dividend Dividend paid
Goodwill A/c Expenses A/c received Interest paid
Furniture A/c Interest received
Harshita’s Capital
A/c
Two fundamental rules to be followed to record the changes in these
accounts:

1) For recording changes in Assets / Expenses / Losses.

I) Increase in asset is debited and decrease in asset is credited.
II) Increase in expenses/losses is debited and decrease in expenses/ losses is credited.

2) For recording changes in liabilities and capital / revenues / Gains.

I) Increase in liabilities is credited and decrease in liabilities is debited.
II) Increase in capital is credited and decrease in capital is debited.
III) Increase in revenues/gains is credited and decrease is revenue/gains is debited
Classify the following accounts Classify the following accounts under
into Personal, Real and Nominal Personal, Real and Nominal Accounts.
accounts. 1) Cash A/c
1) Stationery A/c 2) Outstanding Salary A/c
2) Mahesh's A/c 3) Rohit's A/c
3) Machinery A/c 4) Furniture A/c
4) Capital A/c 5) Life Insurance Corp. A/c
5) Loss by Fire A/c 6) Goodwill A/c
6) Pune Municipal Corp. A/c 7) Prepaid Insurance A/c
7) Building A/c 8) Trademark A/c
8) Bank of Maharashtra A/c 9) Commission A/c
9) Copyright A/c 10) Loan A/c
10) Repairs A/c 11) Drawings A/c 1
11) Laptop A/c 2) Interest A/c
12) Wages A/c
Classify the following accounts into Assets, Liabilities, Income, Expenditure and Capital.
1) Land and Building
2) Interest Received
3) Computer
4) Sundry Creditors
5) Bills Receivables
6) Discount Allowed
7) Sundry Debtors
8) Goodwill
9) Freight
10) Discount Received
11) Bills Payable
12) Amit`s Capital
13) Interest on Fixed deposit.
14) Bank Overdraft
15) Live Stock
16) Printing & Stationery
17) Cash at Bank
18) Rent Received
19) Repairs & Maintenance
20) Carriage
21) Outstanding Rent
22) Commission Received
23) Bank Loan
24) Electricity Bill
25) Copyright
 Journal

• The word “Journal” is derived from the French word “JOUR” which
means a “Day”.

• Therefore journal means a “daily record”.

• A journal contains a daily record of business transactions and hence it

has been named so, as soon as a transaction takes place its debit and
credit aspects are analyzed and first of all recorded chronologically i.e. In
the order of their occurrence(taking place).

• Journal is a book of original entry or primary entry.

Importance and utility of Journal:

1) This is the principal book of account. It includes all types of accounts of business
2) It shows all necessary information regarding transactions.
3) The Journal has date wise record of all the transactions with details about
accounts it
helps to understand the events when its took place.
4) The Journal is primary book in which all the day to day transactions are recorded
first in chronological order in debit and credit form and with the amount of each
transaction
5) Accounting procedure is followed on the basis of accounting documents.
6) The narration provides a brief explanation about the transactions .It helps to
increase the
clarity of every transactions.
7) It helps to find and prevent errors.
8) It helps to check arithmetical accuracy of the transactions.
9) It helps in preparation of Final Accounts.
 Specimen/ Format of Journal

Date Particulars L. Debit Credit

F. Amount Amount
₹ ₹
Year Name of the Account debited …. Dr.
Month/ To Name of the Account Credited
date (Being …………………………………………………………….)

Casting of Journal: At the end of each page of Journal, the total of debit amount and
credit amount column is taken to check arithmetical accuracy of the transaction. The
totals of both the columns must be equal.

After recording Journal Entries, at the end of each page the total of amount columns is
carried forward to the next page by writing the words Total c/f in particulars column. The
next page will begin with the total brought forward from previous page, by writing the
words Total b/f, on the last page of journal ‘Grand Total’ is casting.
 Journalising:
The process of entering or recording the transaction in a Journal is called
as journalising.

How Transactions Travel

A/c to be
Ascertain Classification
Source Ascertain debited and
Transactions two of two Journal
Documents two affects A/c to be
accounts accounts
credited
Enter the following transactions in the Journal of Bhagwat and Sons.

2006 Amount (Rs)

January 1 Tarun started business with cash 1,00,000
January 2 Goods purchased for cash 20,000
January 4 Machinery purchased from Vibhu 30,000
January 6 Rent Paid in Cash 10,000
January 8 Goods purchased on Credit from Anil 25,000
January 10 Goods sold for cash 40,000
January 15 Goods sold on credit to Gurmeet 30,000
January 18 Salaries Paid 12,000
January 20 Cash withdrawn for personal use 5,000
Date Particulars L Amount Amount
F (Dr) (Cr)
2006 Cash A/c ..Dr. 1,00,000
January To Tarun’s Capital 1,00,000
1 (Being capital brought in by Tarun)
January Purchase A/c ..Dr. 20,000
2 To Cash A/c 20,000
(Being Goods purchased for cash)
January Machinary A/c ..Dr. 30,000
4 To Vibhu A/c 30,000
(Being Machinary purchased from Vibhu on Credit)
January Rent A/c ..Dr. 10,000
6 To Cash A/c 10,000
(Being rent paid for cash)
January Purchase A/c ..Dr. 25,000
8 To Anil A/c 25,000
(Being goods purchased on credit)
January Cash A/c ..Dr. 40,000
10 To Sales A/c 40,000
(Being goods sold for cash)
Balance c/f 2,25,000 2,25,000
 Balance b/f 2,25,000 2,25,000
January Gurmeet’s A/c .Dr. 30,000
15 To Sales A/c 30,000
(Being goods sold on credit to Gurmeet)
January Salaries A/c . Dr. 12,000
18 To Cash A/c 12,000
(Being salaries paid for cash)
January Drawings A/c ..Dr. 5,000
20 To Cash A/c 5,000
(Being cash withdrawn by the owner for personal use)
Total 2,72,000 2,72,000
Journalise the following transactions of in the books of Vishal Electronics
2018

April 1- Vishal commenced business with Cash Rs 90,000,Furniture Rs 60,000 Building

Rs. 1,00,000.
April 4- Purchased Motor Car from Honda Company by Cheque Rs. 55,000 at 18%
GST.
April 5- Paid Insurance of the above Car Rs 3,000 to United India Insurance Company.
April 10- Paid into State Bank of India Rs 40,000.
April 12- Paid for Salary Rs 10,000 and Rent Rs 3,000
April 15- Bought goods from Rajesh Rs 80,000 and paid him ¼ amount in cash
immediately.
April 18- Cash sales Rs 60,000 @ 5% GST.
April 20 -Received Rent Rs 1,000 and Commission Rs 4,000.
April 25- Paid for Telephone Charges Rs 1,500.
April 27- Invoiced goods to Katrina for cash Rs 75,000 at 5% GST.
April 29- Sunita brought goods from us Rs 45,000 @ 5% GST .
April 30- Paid for Printing Rs 17,000 by Debit Card of SBI.
Date Particulars L.F Debit Credit
. Amount Amount
₹ ₹
2018 Cash A/c .. Dr. 90,000
April 1 Furniture A/c ..Dr. 60,000
Building A/c ..Dr. 1,00,000
To Capital A/c 2,50,000
(Being business started with cash, furniture and building)
April 4 Motor Car A/c Dr. 55,000
Input CGST A/c Dr. 4,950
Input SGST A/c Dr. 4,950
To Bank A/c 64,900
(Being Motor car purchased by cheque with 18% GST)
April 5 Insurance A/c ..Dr. 3,000
To cash A/c 3,000
(Being insurance premium paid through cash on motor car)
April State Bank of India ..Dr. 40,000
10 To Cash A/c 40,000
(Being Cash deposited into SBI)
April Salary A/c .Dr. 10,000
12 Rent A/c ..Dr. 3,000
To Cash A/c 13,000
(Being Salary and rent paid in cash)
Balance C/f 3,70,900 3,70,900
 Balance b/f 3,70,900 3,70,900
April 15 Purchase A/c Dr. 80,000
To Rajesh A/c 60,000
To Cash A/c 20,000
(Being Purchased goods from Rajesh on credit and ¼ amount
paid)
April 18 Cash A/c Dr. 63,000
To Sales A/c 60,000
To Output CGST A/c 1,500
To Output SGST A/c 1,500
(Being goods sold for cash at 5% GST)
April 20 Cash A/c Dr. 5,000
To Rent A/c 1,000
To Commission A/c 4,000
(Being received rent and commission)
April 25 Telephone Charges A/c Dr. 1,500
To cash A/c 1,500
(Being telephone charges paid)
April 27 Cash A/c ..Dr. 78,750
To Sales A/c 75,000
To Output CGST A/c 1,875
To Output SGST A/c 1,875
(Being sold good for cash at 5%
GST)
Balance c/f 5,99,150 5,99,150
 Balance b/f 5,99,150 5,99,150
April 29 Sunita A/c Dr. 47,250
To Sales A/c 45,000
To Output CGST A/c 1,125
1,125
To Output SGST A/c
(Being sold good for Sunita an credit at 5%
GST
April 30 Printing A/c Dr. 17,000
To State Bank of India A/c 17,000
(Being paid for stationery by Debit card)
Grand Total 6,63,400 6,63,400