Concept and classification of Accounts, Transaction, Double

Keeping, Golden rules of Debit and Credit, Entry system of Book

ofJournalising,Ledger, Journal-Definition, advantages,Procedure
advantages, rules regarding Posting, Balancing
accounts, Trial Balance-Definition, objectives, procedure of of Ledger
preparation.
Definition of Accounting Definition by the American Institute of
Accountants (Year 1961): Certified Public
"Accounting is the art of recording, classifying and
in terms of money, transactions and events which are,summarizing in a significant manner and
in part at least, of a financial character,
and interpreting the result thereof".
The main objectives of
1) To know the completeaccounting
are:
and permanent record of each transaction of the business for future
reference.
2) To ascertain the number of debtors and creditors.
3) To ascertain the profit or loss of the any
4) To ascertain the financial position of the organization onany given period of time.
at
5) Toascertain the tax liability of the organization any particular date.
organization under the Income Tax Act 1961.
Concept of Book keeping:
Book-keeping is that branch of knowledge which tells us how to keep a record of business
transactions. It is often routine and clerical in nature. It is important to note that only those
transactions related to business which can be expressed in terms of money are
activities of book-keeping include recording in the journal, recorded. The
posting to
balancing of accounts. BookOKeping is a systematic manner of recording ledger and the
related to business in the books of accounts. transactions
In BookOKeeping, transactions are
recorded in the order of the dates. An Accountant is a
person who records the transactions in the books of the
financial results of a business for every financial year. Abusiness
and is expected to show the
from 1" April to 31" March. BookDKeeping is an art as financial year in India followed
well as a science. It is the art of
recording day to day business transactions in the bookS of accounts in a
systematic manner. scientific and

Basis Book keeping

Objective Record the business transaction Accounting
Classify summaries and interpret the
business transaction to find out the
accuracy of recorded data.
Scope Its scope is limited It has wider scope as compared to
Level of The clerical works relating to
book- keeping.
work
Accounting is related to reporting and
recording etc. is done at this interpretation of recorded data.
level
Usefulness It is useful for recording and It is useful for managerial decision
preservation of transactions. making purpose
Information It isa primary record of the Accounting is a source of financial
System business transactions. information,
 TRANSACTION
It means an event or abusiness activity which involves exchange of money or money's worth
between parties. The event can be measured in terms of money and changes the financial
position of a person e.g. purchase of goods would involve receiving material and making
payment or creating an obligation to pay to the supplier at a future date. Transaction could be
acash transaction or credit transaction. When the parties setle the transaction immediately by
making payment in cash or by cheque, it is called a cash transaction. In credit transaction, the
payment is settled at a future date as per agreement between the parties.
Features of Double Entry System
Every transaction has two-fold aspects, i.e., one party giving the benefit and the other
receiving the benefit.
Every transaction is divided into two aspects, Debit and Credit. One account is to be debited
and the other account is to be credited.
Every debit must have its corresponding and equal credit.
CONCEPT OF ACCOUNT
" An account is defined as a summarized record of transactions related to a person ora thing
e.g. when the business deals with customers and suppliers, each of the customers and supplier
will be a separate account.
" The account is also related to things - both tangible and intangible. e.g. land, building,
equipment, brand value, trademarks etc are some of the things. When a business transaction
happens, one has to identify the 'account that will be affected by it and then apply the rules
to decide the accounting treatment.
It is the record of money received and money paid.

TYPES OF ACCOUNTS

(1)Personal Account: As the name suggests these are accounts related to persons.
(a) These persons could be natural persons like Suresh's Alc, Anil's alc, Rani's Ac etc.
(b) The persons could also be artificial persons like companies, bodies corporate or
association of persons or partnerships etc. Accordingly, we could have Videocon Industries
Ale, Infosys Technologies Alc, Charitable Trust Alc, Ali and Sons trading A/c, etc.
(c) There could be representative pesonal accounts as well. Although the individual identity
of persons related to these is known, the convention is to reflect them as collective accounts.
e.g. when salary is payable to employees, we know how much is payable to each of them, but
collectively the account is called as Salary Payable A/c'. Similar examples are rent payable.
Insurance prepaid, commission pre-received etc. The students should be careful to have
clarity on this type and the chances of error are more here.
(2) Real Accounts: These are accounts related to assets or properties or possessions.
Depending on their physical existence or otherwise, they are further classified as follows: -
(a) Tangible Real Account - Assets that have physical existence and can be secen, and
touched, e.g. Machinery A/c. Stock Alc, Cash A/c, Vehicle A/c, and the like.
(b) Intangible Real Account - These represent possession of properties that have no
physical existence but can be measured in terms of money and have value attached to them.
 e.g. Goodwill A/c, Trade mark Alc,
Aleand the like. Patents & Copy Rights A/c, Intellectual Property Rights
(3) Nominal Account: These
accounts are
gains e.g. Salary and Wages Alc, Rent of Ratesrelated
A/c,
to expenses or losses and incomes or
received A/c, Loss by fire A/c etc. Travelling Expenses A/c, Commission

Meaning of Debit and Credit :

Debit and Credit, are key parts of any accounting entry, These are
of each financial transaction. For maintaining the fundamental -effectl
correct accounting records, you must have full
knowledge of what is Debit and what is Credit.
GOLDEN RULES OF DEBIT AND CREDIT

Typesofaccount Golden rules

1.Personalaccount Debit-thereceiver
Credit -the giver
2. Realaccount
Debit-whatcomesin
Credit- whatgoesout
3.Nominalaccount Debit -theexpensesorlosses
Credit-theincomesorgains
Cardinal Rules of Debit and Credit:
Assets Liabilities

Increase Decrease Increase Decrease

Debit Credit Credit Debit

Expenses/Loses Capital
Increase Decrease Increase Decrease
Debit Credit Credit Debit

Income/Gain

Increase Decrease
Credit Debit
Journal-Booksoforiginal
Itis book of
a
they take place. original ent
entry
ry
in which the are recorded first of all, as and when
Transactions are
transactions
Journal is originally
intorecorded
in a
a number of chronological (day-to-day) order.
books. sub-divided purpose subsidiary
Sub-Journals known as special
Featu resorchar acteristicsofajournal
Journalisabookinwhichthetransactionsarerecordedforthefirsttime.asand when theytakeplace
AjItmaintainstheidentityofeach
ournalisonladailyaccountingrecord.
Ajournalis yabookofprimartransactionand
yentry. providesacomplete
pictureofthesameinoneentry.
Eachent ryinthejournalisfol owedbyabr
thetransactionwhichiscalled Narration.ie,fexplanationof
Injournal.,transactionsarerecordedinachronologicalorder.
LEDGER

A ledger in accounting refers to a book that contains different accounts where records of
transactions pertaining to a specific account are stored. It also known as the book of final
entry or principal book of accounts. It is a book where all transactions either debited or
credited are stored.
Aledger account is a combination of all the ledgers and contains information related to all the
accounting activities of an organization. It is regarded as the most important book in
accounting as it helps in creating a trial balance that acts as a precursor to the preparation of
financial statements.
The information stored in a ledger account contains both starting and ending balances which
are adjusted during the course of the accounting period with respective debits and credits.
A ledger contains different components which include the various transaction elements such
as date, amount, particulars and 1.f (ledger folio). Individual transactions are contained within
a ledger account and are identified by a transaction number or any other type of notation.

Ledger Format
The ledger consists of two columns prepared in a T format. The two sides of debit and credit contain
date, particulars, folio number and amount columns. The ledger format is as follows.
Name of the Account

Dr. Cr.

Date Particulars J.F. AOunt Date Particulars JF. Amot

Ledger Account Example

Following are some examples of ledger accounts
1. Accounts receivable
2. Cash
 3. Depreciation
4. Accounts payable
5. Salaries and wages
6. Revenue
7. Debt
8. Inventory
9. Stockholders' equity
10. Office expenses
Trial balance:

Irial Balance may be defined as a statement which contains balances of all ledger accounts
on a particular date. Trial Balance consists of a debit column with all debit balances of
accounts and credit column with all credit balances of accounts. The totals of these columns
if tally it is presumed that ledger has been maintained correctly.

Objectives of Preparing a Trial Balance

Following are the objectives of preparing Trial Balance
(i) To Check Arithmetical Accuracy: Arithmetical accuracy in ledger posting means
writing correct amount, in the correct account and on its correct side while posting
transactions from various original books of accounts, such as Cash Book, Purchases Book,
Sales Book, etc. It also means not only the correct balance of ledger account but also the
totals of the special purpose Books. accounting is
(ii)To Help in Preparing Financial Statements: The ultimate objective of theBalance sheet
Account, and
to prepare financial statements i.e. Trading and Profit and Loss
contain balances
of a business enterprise at the end of an accounting year. These statements
ledger accounts, in
of various ledger accounts. As Trial Balance contains balances of allthe Trial balance for
carried from
financial statements the balances of ledger accounts are
proper analysis.
trial balance agrees it is a proof
(i) Helpsin Locating Errors: If total of two columns of the
if the totals of the two columns do
of arithmetical accuracy in the ledger posting. However,
the ledger accounts. This prompts the
not tally it indicates that there are some nistakes in
errors.
accountant to find out the

Comparison: Comparison of edger account balances of one year with the

(iv) Helps in management taking some important
corresponding balances with the previOus year helps the
This is possible by using the Trial Balances of the two years,
decisions.
Adjustments: While mak1ng financial statements adjustments
(v) Helps in Making outstanding expenses etc are to be made,
Trial
expenses,
regarding closing stock, prepaid requiring adjustments in preparing the financial
items
balance helps in identifying the
statements.