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Accounting Mechanism

Accounting Mechanism
ACCOUNTING EQUATION Relationship between the ECONOMIC RESOURCES of a business and the CLAIMS against those resources BASIS FOR ALL THE BUSINESS TRANSACTIONS ASSETS = LIABILITIES + EQUITY (OWNERS CAPITAL)

Accounting Mechanism

BASIC RULES TO REMEMBER If ASSET increases an ASSET decreases OR a LIABILITY increases If ASSET decreases an ASSET increases OR a LIABILITY decreases If LIABILTIY increases a LIABILITY decreases OR an ASSET increases If LIABILITY decreases a LIABILITY increases OR an ASSET decreases

Accounting Mechanism
Illustration 1 On March 1, 2009 Mr. Sun started a business of producing Solar Equipments. The transactions are: i. ii. iii. iv. v. vi. vii. Mr. Sun invests Rs.50,000 in cash. Takes a loan of Rs.20,000 from bank. Purchases computer of Rs.58,000 for cash. Purchases computer accessories for Rs.6,000 on credit. Sells its first solar equipment for Rs.12,000. Pays Rs.2,000 to its creditor. Pays salary of Rs.4,000 to his employees.

Accounting Mechanism
DEBIT CREDIT

Accounting Mechanism
CLASSIFICATION OF ACCOUNTS
PERSONAL ACCOUNTS
IMPERSONAL REAL

NOMINAL

Accounting Mechanism
3 GOLDEN RULES RULE 1: PERSONAL Debit the receiver Credit the giver

RULE 2: REAL

Debit what comes in Credit what goes out


Debit all expenses & losses Credit all incomes & gains

RULE 3: NOMINAL

Accounting Mechanism
JOURNAL Chronological record of all business transactions

Also called as book of original entry

Accounting Mechanism
Format of a Journal

Date

Particulars

L/F

Debit Rs.

Credit Rs.

Accounting Mechanism
STEPS IN JOURNALIZING
1. Analyze the transactions and identify accounts that are being affected 2. Ascertain the nature of accounts, viz. real, personal or nominal 3. Determine which rule of debit and credit will apply 4. Ascertain the name of the account that will be debited and credited

Accounting Mechanism
STEPS IN JOURNALIZING 5. Write the name of the account to be debited along with the abbreviation Dr. under the particulars column and the amount to be debited in the debit amount column against the name of the account 6. Write the name of the account to be credited in the next line preceded by the word To under the particulars column and the amount to be credited in the credit amount column against the name of the account 7. Write a brief narration, describing the transaction, within brackets in the next line in the particulars column

Accounting Mechanism
Illustration 2 Journalize the following transactions in the books of XYZ Enterprises. Started business with capital of Rs.7,50,000 Opened a bank account with State Bank of India for Rs.2,00,000 Purchased goods from Mr. A for cash Rs.1,00,000 Purchased goods from Mr. C for Rs.2,00,000 Goods returned to Mr. C Rs.50,000 Paid Rs.1,40,000 to Mr. C in full settlement of his dues Paid Mr. D, the landlord Rs.50,000 towards rent Withdrew cash for household expenses Rs.60,000 Sold goods to Mr. K for cash Rs.2,50,000 Sold goods to Mr. E on credit Rs.1,00,000 Goods returned by Mr. E for Rs.25,000 Received cash from Mr. E Rs.70,000 in full settlement Paid cartage on goods purchased Rs.35,000 Paid cartage on goods sold Rs.80,000 Purchased furniture for office purpose Rs.1,00,000 Purchased furniture for re-sale Rs.1,00,000 Sold furniture out of those meant for re-sale Rs.1,50,000 Paid rent out of personal cash Rs.40,000

Accounting Mechanism
LEDGER Classified summary of all transactions

Also called the Principal Book

Accounting Mechanism
FORMAT OF A LEDGER

Dr.
Date Particulars

Account Title
J/F Amount Date Particulars

Cr.
J/F Amount

Accounting Mechanism

SPECIAL TRANSACTIONS
Illustration 3 Journalize the following transactions in the books of Mr. R for the month of January, 2001. Date 2.1.2008 8.1.2008 9.1.2008 10.1.2008 11.1.2008 12.1.2008 12.1.2008 25.1.2008 Transactions Withdrew cash for personal use Rs.2,500 Withdrew goods for personal use (sale price Rs.1,500, cost Rs.1,250) Goods distributed to children in an orphanage (sale price Rs.2,000, cost Rs.1,700) Goods distributed as free samples (sale price Rs.1,200, cost Rs.1,000) Goods stolen (sale price Rs.1,000, cost Rs.1,250) Goods destroyed by fire (sale price Rs.1,500, cost Rs.1,250) Goods used in furnishing the office (sale price Rs.2,000, cost price Rs.1,750) Recovered from Pramod half the amount which was written off as bad Rs.300 was written off as bad earlier

Accounting Mechanism
CASHBOOK A special journal in which all cash transactions are recorded Shows the cash receipts and the cash payments It looks like a journal but it is known as a SPECIAL JOURNAL .

Accounting Mechanism
KINDS OF CASHBOOK
Single Column Cashbook

Date

Receipts

L/F

Amount

Date

Payments

L/F

Amount

Double Column Cashbook

Dat e

Receipts

L/F

Discount

Cash

Date

Payments

L/F

Discount

Cash

Three Column Cashbook

D at e

Receipts

L/F

Discount

Cash

Bank

Date

Payments

L/F

Discount

Cash

Bank

Accounting Mechanism
Illustration 4 Prepare a three column cashbook from the following transactions of STAR Enterprises for the month of March, 2001 1.3.2008 Cash in hand 2,500 Cash at bank 10,000 2.3.2008 Paid into bank 1,000 5.3.2008 Bought furniture and issued cheque 2,000 8.3.2008 Purchased goods for cash 500 12.3.2008 Received cash from Moon 980 Discount allowed to him 20 14.3.2008 Cash sales 4,000 16.3.2008 Paid to A by cheque 1,450 Discount received 50 19.3.2008 Paid into bank 400 23.3.2008 Withdrew from bank for private expenses 600 24.3.2008 Received cheque from P 1,430 Allowed him discount 20 28.3.2008 Withdrew cash from bank for office use 2,000 30.3.2008 Paid rent by cheque 800

Accounting Mechanism

SUBSIDIARY BOOKS Purchase Book

Date

Particulars (Name of Supplier)

L/F

Inward Invoice No.

Amount

Accounting Mechanism
SUBSIDIARY BOOKS Purchase Return Book

Date

Particulars (Name of Supplier)

L/F

Debit Note No.

Amount

Accounting Mechanism SUBSIDIARY BOOKS

Sales Book

Date

Particulars (Name of Customer)

L/F

Outward Invoice No.

Amount

Accounting Mechanism
SUBSIDIARY BOOKS Sales Return Book

Date

Particulars (Name of Customer)

L/F

Credit Note No.

Amount

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