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An accounting equation is a statement of equality between the resources and the sources which finance the resources and is expressed as under





Internal Equity

External Equity


Illustration 1: Show accounting equation for following transactions

Anil commenced business with Rs 50,000 Purchased a typewriter for Rs 7,000 Bought furniture from M/s Mukesh on credit Rs 3,000 Purchased goods for cash Rs 35,000 Sold goods for cash Rs 40,000 (costing Rs 30,000) Withdrew goods for personal use (cost Rs 500, sale price Rs 600) Commission received Rs 1000 in cash.

Sachin commenced business with Rs 100,000 Paid rent in advance Rs 3,000 Purchased a computer for Rs 15,000 Bought furniture from M/s Vinod on credit Rs 10,000 Purchased goods for cash from Yuvraj Rs 55,000 Purchased goods on credit from Virendra Rs 50,000 Sold goods for cash Rs 60,000 (costing Rs 55,000) Withdrew goods for personal use (cost Rs 1,000, sale price Rs 1,100) Goods destroyed by fire (cost Rs 500, sale price Rs 600) Sold goods to Anil on credit Rs 50,000 (cost Rs 45,000) Commission received Rs 1,500 in cash Paid cash Rs 5,000 to M/s Vinod Received cash Rs 49,500 from Anil in full settlement Paid salary Rs 1,000 and outstanding salary Rs 1,500

Illustration 2: Show accounting equation for following transactions


Meaning of Account Account is a book-keeping device to record increases and decreases in each expenditure/income/asset/liability item In its simplest form, an account has two equal sides divided by a vertical line in between (hence commonly called as 'T' account) On its one side are recorded increases and on its other side are recorded decreases. Following is an illustrative format of an "Account"
Cash Account of XYZ for the month of January 2008 Dr. Cr. Date Particulars Amount Rs Date Particulars Amount Rs 01-01-2008 To opening balance 01-01-2008 To capital account 10,00,000 03-01-2008 By Bank Deposit Account 7,00,000 30-01-2008 To Sales Account 3,00,000 15-01-2008 By Purchases Account 2,00,000 18-01-2008 By Expenses account 32,000 31-01-2008 By Closing Balance 13,00,000Cont. 3,68,000 13,00,000

Types of Accounts
Traditional classification of accounts

Types of Accounts

Personal Accounts

Real Accounts

Nominal Accounts


Relate to natural /artificial/represen tative

Relate to tangible / intangible Assets

Relate to exp/ losses/profits & gains


Nishas A/c Nisha & Co A/c

Land A/c Goodwill A/c

Purchases A/c Sales A/c

Types of Accounts
Traditional Classification of Accounts
Personal Accounts -having debit balances (other than owners a/c) -having credit balances (other than owners a/c) -those relating to owner Real Accounts Nominal Accounts -relating to revenue -relating to expenses
Capital brought in Drawings A/c Building Purchased Purchases A/c Sales A/c Carriage inwards Carriage outwards Cash Received

Accounts equation
Asset s Accounts Liabilities Accounts Capital Accounts Assets Account Revenue Accounts Expenses Accounts

Illustration 1: Classify the following Accounts

Cash Interest paid Interest Received Commission paid Discount allowed Conveyance charges Sales promotion Entertainment exp. Subscription paid Light Power Bad debts recovered Furniture & Fixtures Wages & Salaries Outstanding salary Prepaid Rent Int. rec. in advance


For Personal Accounts

Debit the Receiver & Credit the Giver Debit what comes in & Credit what goes out Debit all expenses & losses & Credit all gains & profits

For Real Accounts

For Nominal Accounts

Interpretation of the three Golden Rules

Type of Accounts For Assets A/cs For Liability A/cs For Capital A/cs For Revenue A/cs For Expense A/cs Rules for Debit Debit the increase Rules for Credit Credit the decrease Closing Balance Debit Credit Credit Credit Debit

Debit the decrease Credit the increase Debit the decrease Credit the increase Debit the decrease Credit the increase Debit the increase Credit the decrease

Meaning and Format of Journal

Meaning : A Journal is a book in which transactions are recorded in the order in which they occur. A journal is called as book of prime entry or original entry because all business transactions are entered first in this book The process of recording a transaction in the journal is called Journalising An entry made in the journal is called a Journal Entry

Format :Date Particulars Journal LF Debit Rs Credit Rs

Date column the date on which the transaction is entered is recorded

Particular column first the names of the accounts to be debited, then the names of the accounts to be credited and lastly the narration (i.e. a brief explanation of the transaction) are entered
LF the ledger page number containing the relevant account is entered at the time of posting. Debit amount the amount to be debited is entered Credit Amount the amount to be credited is entered

Steps in journalising
Step 1 Ascertain what accounts are involved in a transaction Step 2 Ascertain what is the nature of the accounts involved Step 3 Ascertain which rule of debit and credit is applicable for each of the accounts involved Step 4 Ascertain which account is to be debited and which is to be credited Step 5 Record the date of the transaction in the Date column Step 6 Write the name of the account to be debited, very close to the left hand side in the Particulars column along with abbreviation Dr and the amount to be debited in the Debit Rs column against the name of the account. Step 7 Write the name of the account to be credited in the next line preceded by the word To at a few spaces towards right in the Particulars column and the amount to be credited in the Credit Rs column against name of the account Step 8 Write Narration in the next line in the Particulars column Step 9 Draw a line across the entire Particulars column to separate one journal entry from the other

Illustration 3: Analyse the following transactions

1. Federer started his business with cash 2. Borrowed cash from Andy 3. Purchased furniture with cash 4. Purchased furniture from Paes on credit 5. Purchased goods from Nadal on credit 6. Returned goods to Nadal 7. Sold goods for cash 8. Sold goods to Sampras 9. Sampras returned goods 10. Received cash from Sampras 11. Paid cash to Paes 12. Deposited cash in Bank 13. Withdrew cash for personal use 14. Withdrew from bank for office use 15. Withdrew from bank for personal use 16. Paid Nadal by cheque 17. Paid salary 18. Paid rent by cheque 19. Goods withdrawn for personal use 20. Paid an advance to suppliers of goods 21. Received an advance from customers 22. Paid interest on loan 23. Paid installment of loan 24. Interest allowed by bank 25. Purchased computer from Bill on cr

Following is the illustrative analysis of transactions

Sr. No 1 2 3 4 Accounts involved Nature of the A/cs involved Real Personal Real Personal Real Real Real Personal How Affected To be debited / Credited Debit Credit Debit Credit Debit Credit Debit Credit

Cash A/c Capital A/c Cash A/c Loan from Andy A/c Furniture A/c Cash A/c Furniture A/c Paes A/c

Cash is coming in Federer is the giver Cash is coming in Andy is the giver Furniture is coming in Cash is going out Furniture is coming in Paes is the giver

Purchases A/c Cash A/c

Real Real

Goods coming in Cash is going out

Debit Credit

Advantages of Journal
1. Chronological Record : Journal is a chronological record in the sense that it records the transactions in the order in which they occur 2. Explanation of Transaction : Each journal entry in the journal carries narration which gives a brief explanation of the transaction 3. Recording of both aspects : Since both the aspects (i.e. debit & credit of a transaction are recorded, the possibility of committing error is reduced and detection of errors if any becomes easier.

Limitations of Journal
1. Repetative in nature and therefore requires more time to record e.g. for every sales transaction one has to write down the sales account and the narration 2. Does not provide information on prompt basis 3. The journal becomes bulky and voluminous

Illustration 4 Journalise the following transactions in the books of Tom Cruise

Date 01.04.2009 02.04.2009 03.04.2009 04.04.2009 07.04.2009 08.04.2009 Transaction Tom Cruise started his business with cash Purchased goods Purchases goods for cash Purchased goods from Mr. John Travolta on credit Sold goods to Mr. Matt on cash Purchased goods from Mr. Ben Rs. 150,000 50,000 40,000 30,000 20,000 30,000

11.04.2009 13.04.2009 14.04.2009 15.04.2009 16.04.2009 17.04.2009

Purchases goods from Mr. Harrison on credit

Sold goods to Mr. Bruce Mr. Bruce returned the goods Received from Mr. Bruce (Allowed discount to him Rs 1,000) Returned goods to Mr. John Travolta Paid to Mr. Ben (Discount allowed by him Rs 500) Paid rent to Shyamlan

35,000 10,000 24,000 2,000 29,500 2,000


Withdrew goods for personal use(cost Rs 2000, Selling price Rs 3,000)

Paid salary to Ed 5,000

Compound Journal Entries

Sometimes there are a number of transactions on the same date relating to one particular account or of the one particular nature Such transactions may be recorded by means of a single journal entry instead of passing several journal entries. Illustration: A running business was purchased by Mohan with following assets and liabilities Cash Rs 2,000, Land Rs 4,000, Furniture Rs 1,000, Stock Rs 2,000, Creditors Rs 1,000, Bank overdraft Rs 2,000
Date xxxx Particulars Cash A/c Land A/c Furniture A/c Stock A/c To Creditors A/c To Bank Overdraft A/c To Capital A/c (Being commencement of business by Mohan by taking over a running business) LF Dr. Amt 2,000 4,000 1,000 2,000 1,000 2,000 6,000 Cr. Amt

Illustration 5: Journalise the following transactions Dec 1: Ajay started business with cash Rs 400,000 Dec 3: Paid into the bank 200,000 Dec 5: Purchased goods for cash Rs. 55,000 Dec 8: Sold goods for cash Rs 40,000 Dec 9: Purchased furniture on credit from Vikas for Rs 40,000 Dec 12: Sold goods to Arvind for Rs 20,000 Dec 14: Purchased goods from Nisha Rs 70,000 Dec 15: Returned goods to Nisha Rs 15,000 Dec 16: Received Rs 19,000 from Arvind in full settlement Dec 18: Withdrew goods for personal use

Dec 20: Withdrew cash for personal use Rs 5,000 Dec 21: Paid telephone charges Rs 1,500 Dec 22: Paid rent by cheque Rs 1,000 Dec 23: Paid Rs 53,000 to Nisha in full settlement Dec 24: Paid for stationery Rs 1,200, electricity Rs. 1,700 Dec 25: Goods distributed as free sample Rs 2,000 Dec 26: Salaries paid to staff Rs 5,000 Dec 27: Received from Arvind Rs 19,000 in full settlement Dec 31: Interest allowed by bank Rs 2,000 Dec 31: Bank charges debited by bank Rs 300

Illustration 6: Journalise the following transactions in the books of Yuvraj Debit balance on April 1, 2009: Cash in hand Rs 70,000, Cash at bank Rs 125,000, Stock of goods Rs 60,000, Furniture Rs 12,000, Building Rs 10,000, Sundry Debtors: Wasim Rs 22,000, Anil Rs 15,000, and Ponting Rs 10,000 Credit balance on April 1, 2009: Sundry creditors: Clark Rs 20,000, Dhoni Rs 12,000, Loan from Kim Rs 30,000 Following are further transactions in the month of April 2009 April 1: Purchased goods from Clark of Rs 45,000 April 3: Received Rs 20,000 from Wasim and allowed him Rs. 2,000 as discount Cont.

April 6: Purchased goods from Dhoni Rs 80,000 April 8: Purchased furniture from Tendulkar Rs 40,000 April 9: Sold goods to Anil Rs 50,000 April 10: Sold goods to Kaif on cash Rs 20,000 April 12: Paid salary Rs 12,000, stationery Rs 3,500 April 15: Paid to Clark Rs 63,000 in full settlement April 17: Withdrew goods for personal use Rs 2,000 April 19: Interest allowed by bank Rs 4,000 April 25: Sold goods for cash Rs 50,000 April 28: Purchased goods by cheque Rs 40,000 April 29: Received Rs 64,000 from Anil in full settlement