FINANCIAL ACCOUNTING:

By, S.K.Gupta
HEAD, DEPT. OF COMMERCE
S.D.JAIN GIRLS’ COLLEGE
DIMAPUR: NAGALAND

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Different systems of Accounting for
recording Business Transaction.

There are two types:

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1. Cash System of Accounting:
Under this system, only actual
cash received and paid are recorded. No
entry is made that is merely due. Govt
accounting is based on the cash system
only. Professional people like lawyers,
CAs, Doctors, etc. maintained accounts
under this system only.

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2. Mercantile or Accrual System of
accounting.
Under this system of accounting, entries
are made not only for actual receipt or
payment of cash but also for amounts having
become due for payment or receipt.
All commercial establishments and even
non-trading concerns follow this systems
only.

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Accounting records can be prepared
under any one of the following systems:

1.Single entry system:

Under this system only personal and
cash aspects of the transactions are recorded
in the books.
Normally the impersonal aspects are ignored.
Hence, it is incomplete, inaccurate, and
unscientific.

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2. Double-entry system:
-most common system of book keeping
-two aspects of every transaction ie the receiving

aspect(debit) and the giving aspect(credit) are

recorded in the books of accounts.
-based on the ‘dual aspect concept’
-most accurate, complete and scientific.

This method of writing every transaction in two

different accounts on the opposite sides for equal
value is known as the double entry system of
book keeping. 6
Book keeping:

It means recording of business transaction in the

books of accounts in accordance with the principles
of accounting.

In short, it means the recording of business

transactions in a set of account books in a
systematic or proper manner.

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Various types of Accounts:
1.Personal Accounts:
-Accounts relating to persons
i. Natural Person’s A/ eg;Priya’s A/c
ii.Artificial person’s/body of person’s A/c
eg;Bank A/c, any firm/company’s A/c
iii.Representative personal A/c.
eg; prepaid exp, O/s wages A/c.

2.Real Accounts or Property Accounts:

-A/cs relating to a property/an Asset or a possession
eg;Plant A/c, Cash A/c, Furniture A/c.

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3.Nominal Accounts:
-A/cs relating to a business expenses or losses
and income or gain
eg; Wages A/c, interest A/c, Discount received A/c.

Rules of Double entry:

Receiving/Incoming/expenditure aspect: Debit Aspect
Giving/Outgoing/Income aspect: Credit Aspect

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Rules of Double entry:

1.Personal Accounts:
(a) Debit the Receiver
(b) Credit the Giver
2.Real or Property Accounts:
(a) Debit what comes in
(b) Credit what goes out
3.Nominal Accounts:
(a) Debit all expenses and losses
(b) Credit all incomes & Gains

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Difference between Book-keeping and Accounting

Book keeping refers to the maintaining of various sets of

account books and deals with recording routine and repetitive
business transactions in a significant and orderly manner.
Usually an assistant do this job.

On the other hand, Accounting is more analytical and deals

with the designing of accounting system, forecasting,
preparation of financial statements and reports for decision-
making etc.
Normally senior accountants do this job.

While book keeping ends, accounting starts.

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BOOKS OF ACCOUNTS:
Books of Accounts means a set of suitably
ruled account books used for recording business
transactions. The various books of Accounts
maintained by a business concern depend upon
the method of Accounting followed by it.

Two method ie
1.Traditional or conventional method
2.Modern or practical method

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Under traditional method:
Books of Accounts maintained are-
-a single journal for recording all business transactions maintain
-a ledger for maintaining all accounts are kept.

Under modern/practical method:

Book of Accounts maintained are-
-several subsidiary books or special journals maintained.
-one journal proper book to record transaction which cannot be
recorded in subsidiary books.
-a ledger is also maintained.

Big business concerns, which have a large volume of

transactions follow practical/modern method.

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JOURNAL: Book of Original/first entry.
A journal may be defined as the book of original
entry containing a chronological record of
transactions from which posting is done to the
ledger.
The transactions are recorded first in the journal in
the order in which they occur.

The process of recording the transactions in a

journal is called journalising.

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Journal format:
Date Particulars L.F Debit(Dr) Credit(Cr)
Amount(Rs Amount(Rs
) )
25-7-08 Furniture A/c 20 10000.00
Dr
To Cash 5 10000.00
A/c

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Types of Journal:
In actual practice, journalisation
does not mean recording of transactions in
only in one format of Journal.
The transactions are categorised as per their
nature, and for each type of transaction, a
separate journal is available where the same
has to be recorded.
These journals can be the following types:

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1.Purchase Day Book: records credit purchase of
goods.
2.Sales Day Book: It records credit sales of Goods.
3. Purchases Returns Books/Return Outward Book:
-It records goods returned to the supplier.
4.Sales Return Book/Return Inward Book:
-records goods returned by customers.
5.Bills Receivable Book: records bills accepted by
customers
6.Bills Payable Book: records bills raised by suppliers
7.Cash Book: records cash/bank receipts & payments.
8.Journal Proper: records all residual(remaining)
transactions.
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LEDGER: Book of Final Entry
-a ledger is a book of main entry and it contains various
accounts such personal accounts, real accounts and
nominal accounts.
-It is a set of Accounts
-Principal book of accounts
-a summary statement of all transactions relating to
persons, assets or liabilities, expenses, incomes.

Transactions entered in the journal are transferred to the

Ledger Accounts. The transferring process from journal
to ledger is known as posting.

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Procedure for Journalising:

Nature of Account Rule for debiting an a/c Rule for crediting an a/c
1 Personal Account Debit the Receiver a/c Credit the Giver a/c
2 Real Account Debit what comes in Credit what goes out
3 Nominal Account Debit all expenses & loses Credit all incomes & gains

These rules may be used either jointly or

seperately for journalising each and every
transaction.

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Transactions:
1. On 1st Jan’2008, John started a business withRs.50,000.
In this transaction, the receiving aspect is that ‘cash’ is
received by the business, which is distinct from John’s
private or personal property.
And the giving aspect is that John is the giver.
Proprietor’s personal account is represented by Capital a/c.

Journal entry in the business books is as follows:

Date Particulars L.F Debit(Rs.) Credit(Rs.
)
1-1-2008 Cash a/c Dr. 50,000
To John’s Capital a/c 50,000
(Being capital brought in by John)

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Debit what comes in:
Here cash comes in, hence cash a/c is debited.
-Real a/c rule is applied

Credit the giver:

Proprietor is the giver, hence capital a/c is
credited
-personal a/c rule is applied here.

A short explanation to explain the entry is given

within brackets by way of narration.

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Transaction:
2. On 2nd Jan’2008,Purchase furniture for cash Rs.20,000

Date Particulars L.F Debit(Rs.) Credit(Rs.

)
2-1-2008 Furniture a/c Dr. 20,000
To cash a/c 20,000
(Being furniture purchased for cash)

The receiving and giving aspect affects the real account. Hence real
a/c rule is applied, ie debit what comes in and credit what goes out.
Furniture comes in and cash goes out

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Transaction:
3. On 3rd Jan’2008,bought goods from Raj for Rs.30,000.

In this transaction goods are received and Raj is the giver

of goods on credit.

Date Particulars L.F Debit(Rs.) Credit(Rs.

)
3-1-2008 Purchases(of goods) a/c Dr. 30,000
To Raj a/c 30,000
(Being goods purchased on credit)

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Transaction:
4. On 5th Jan’2008,sold goods for cash Rs.25,000.

In this transaction cash comes in and goods goes out.

Date Particulars L.F Debit(Rs.) Credit(Rs.

)
5-1-2008 Cash a/c Dr. 25,000
To sales a/c 25,000
(Being goods sold for cash)

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Transaction:
5. On 12th Jan’2008, paid wages Rs.6000.

In this transaction wages being an expenses a/c, it is

debited as per the third rule ie debit all expenses & loses,
And cash is paid for wages, hence cash a/c is credited.

Date Particulars L.F Debit(Rs.) Credit(Rs.

)
12-1-2008 Wages a/c Dr. 6,000
To Cash a/c 6,000
(Being wages paid)

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Transactions:
6. On 15th Jan’2008, Interest received Rs.1500.

In this transaction, interest being an income, it is credited

as per the third rule ie credit all incomes and gains.
Interest is received in the form of cash, hence cash a/c is
debited.

Date Particulars L.F Debit(Rs.) Credit(Rs.

)
15-1-2008 Cash a/c Dr. 1500
To interest a/c 1500
(Being interest received)

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 Date Particulars L.F Debit(Rs.) Credit(Rs.)
1-1-2008 Cash a/c Dr. 50,000
To John’s Capital a/c 50,000
(Being capital brought in by John)
2-1-2008 Furniture a/c Dr. 20,000
To cash a/c 20,000
(Being furniture purchased for
cash)
3-1-2008 Purchases(of goods) a/c Dr. 30,000
To Raj a/c 30,000
(Being goods purchased on credit)
5-1-2008 Cash a/c Dr. 25,000
To sales a/c 25,000
(Being goods sold for cash)
12-1-2008 Wages a/c Dr. 6,000
To Cash a/c 6,000
(Being wages paid)
15-1-2008 Cash a/c Dr. 1500
To interest a/c 1500
(Being interest received)
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So, from this, we can conclude that
journalising is a chronological recording of a
transaction as and when it occurs applying
the golden rules fulfilling the double entry
aspects of accounts.

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State the accounts involved in the following transactions
and which a/c is to be debited and which a/c is to be
credited:

1.Akavi commenced business with Rs.1,00,000.

2.Purchased furniture for Rs.5,000.
3.Sold goods for cash Rs.5,000.
4.Sold goods to Joyti for Rs.20,000.
5.Paid salaries Rs. 10,000.
6.Purchased goods from Vesalu for cash Rs.9,000.
7.Commission received Rs.800.
8.Paid outstanding expenses Rs.900.

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 Books of Akavi:

Sl Accounts involved A/c to be debited A/c to be credited

1 Cash a/c and Capital a/c Cash a/c Capital a/c

(asset comes in )-Real a/c (credit the giver)-Personal a/c

2 Furniture a/c and Cash a/c Furniture a/c Cash a/c

(asset comes in)-Real a/c (assets goes out)-Real a/c

3 Cash a/c and Sales a/c Cash a/c Sales a/c

(asset comes in )-Real a/c (income)-Nominal a/c

4 Jyoti a/c and Sales a/c Jyoti a/c Sales a/c

(the receiver)-Personal a/c (income)-Nominal a/c

5 Salaries a/c and Cash a/c Salaries a/c Cash a/c

(expenses)-Nominal a/c (asset goes out)- Real a/c

6 Purchases a/c and Cash a/c Purchases a/c Cash a/c

(expenses)-Nominal a/c (asset goes)-Real a/c

7 Cash a/c and Commission a/c Cash a/c Commission a/c

(asset comes in)-Real a/c (income)-Nominal a/c

8 Outstanding expenses a/c O/s expenses a/c Cash a/c

And Cash a/c (the receiver)-representative personal a/c (asset goes out)-Real a/c

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