BASIC FINANCIAL

ACCOUNTING

UNIT - 2
 CLASSIFICATION OF ACCOUNTS

• Traditional • Modern
1. Personal accounts 1. Assets accounts
2. Real accounts 2. Liabilities account
3. Nominal accounts 3. Capital accounts
4. Valuation accounts. 4. Revenue accounts
5. Expenditure accounts
6. Withdrawal accounts.
 TRADITIONAL CLASSIFICATION OF ACCOUNTS

1. Personal accounts. These accounts show the transaction with

the customers, suppliers, money lenders, the bank and the
owner.
2. Real accounts. These accounts are accounts of assets and
properties such as land, building, plant, machinery, patent,
cash, investment, inventory, etc.
3. Nominal accounts. Theses are the accounts of incomes,
expenses, gains and losses. These accounts generally
accumulate the data required for the preparation of income
statement.
4. Valuation accounts. These are the accounts of provisions for
depreciation and provision for doubtful debts.
 TRANSACTION

In accounting, only business transaction are recorded. A

transaction is a particular type of external event, which can be
expressed in terms of money and brings change in the
financial position of a business unit. A transaction involves
transfer of something of value between two or more entities.
A transaction may be an exchange in which each party
receives as well as sacrifices value. For example, when goods
are purchased for cash, there is a movement of goods from
the seller to the buyer and a movement of cash from the
buyer to the seller.
 PREPARATION OF BUSINESS DOCUMENTS

The common documents are generally used are: -

1. Payment voucher, usually on a printed standard form, is a
record of payment. It is a document providing evidence of a
transaction.
2. Money receipt, is a document which is issued against cash/
cheque receipts. It may also be on a printed standard form.
3. Journal voucher, is used to record the residuary
transactions. An internal transaction or a transaction not
involving any cash payment or cash receipt, is recorded in
journal voucher.
RECORDING OF TRANSACTION IN JOURNAL

Double Entry System

Every business affects two or more accounts. Under double
entry system, equal debit and credit entries are made for
every transaction. If only two accounts are affected(as in the
purchase of building for cash, one account, Building is debited
and the other account, cash is credited for the same amount).
If more than two accounts are affected by a transaction, the
sum of the debit entries must be equal to the sum of the
credit entries.
 RULES FOR JOURNALISING

• Traditional rule

Types of account Accounts to be debited Accounts to be credited

Personal account Receiver Giver

Real account What comes in What goes out

Nominal account Expense and loss Income and gain

Valuation account When account to be When account to be

decreased increased
• Modern rule

Sl. No Types of account Account to be Account to be

debited credited
1 Assets account Increase Decrease

2 Liabilities account Decrease Increase

3 Capital account Decrease Increase

4 Revenue account Decrease Increase

5 Expenditure account Increase Decrease

6 Withdrawal account Increase Decrease

 JOURNAL POSTING

• The journal and its nature

The first book in which the transaction of the business unit
are recorded is called a journal. Here business transaction are
arranged in chronological order. Each record of the journal is
called as entry. As journal is the first book in which entries are
recorded, a journal is also known as a book of original entry.
Therefore, a journal is a tool for analysing and describing the
impact of various transaction upon a business unit.
 RULING OF A JOURNAL

JOURNAL Dr. Cr.

Date Particulars L.f. Amount Amount

(a) (b) (c) (d) (e)

The date: - The year is written in the top of the date

column of each page of the journal. On the next line
the month and day of the first entry are written unless
the month or year changes it should not be repeated
on the page.
Particulars: - It is the column for account titles and description.
The name of the accounts to be debited is entered at the
extreme left of the column next to the date column. The
amount of account debited is entered in the left hand money
column. The name of the account to be credited is entered on
the next line with a prefix ‘To’ and is intended to the right of
the date column. The amount of the account credited is
entered in the right hand money column. The narration begins
o the line immediately below the account credited which
explain the transaction and include data needed to identify the
transaction. Narration always appears within parentheses and
is begun with the word ‘Being’. Finally, a thin line is drawn all
through the particulars column to indicate that the entry of the
transaction has been completed.
 Ledger Folio: - It is laying to the right of the particular
column when the debits and the credits are posted in
the ledger accounts, the page number of the ledger in
which these accounts are appearing are listed in this
column.
Amount (Debit): - The debit amount is recorded in the
amount (dr.) column opposite the title of the account
debited. The unit of measurement (Rs.) is recorded at
the top of this column on each page and this is not
repeated.
Amount (Credit): - The credit amount is recorded in the
amount (cr.) column opposite the title of the account
credited. The unit of measurement (Rs.) is recorded at
the top of this column on each page.
 THE LEDGER

The ledger is the principal book of accounts where similar

transactions relating to a particular person or thing are
recorded. The journal is used to record the transactions in
chronological order. The owner of the business is not
interested to know the effect of individual transaction on the
financial statements, what he wants is the accumulated effect
of each ‘Chart of Accounts’. Chart of accounts is an index to all
accounts contained in a double entry system. It allocates to
each accounts a number and arranges accounts in logical
subdivisions.
 SUBDIVISIONS OF LEDGER

1. Debtors Ledger: - It may contain the accounts of all the

customers to whom good have been sold on credit. Entries in
this ledger are made mostly from sales day book, sales returns
book and cash book.
2. Creditors Ledger: - It may contain the accounts of all the
suppliers from whom goods have been purchased on credit.
Entries in the ledger are made mostly from purchase day
books, purchase return books and cash book.
3. General Ledger: - It may contains all residual accounts,
mainly real and nominal accounts.
STANDARD FORM OF LEDGER ACCOUNT
‘T’ accounts are simplified representation of ledger
accounts and are widely used. The left hand side of ‘T’
account represents the debit side and the right hand side
represents the credit side. Each side of a ledger has
column of varied sizes.

Dr. Title of account Cr.

Date Particulars Folio Rs. Date Particulars Folio Rs.

 POSTING OF LEDGER ACCOUNTS

The process of transferring of the debits and credits from the

journal to ledger accounts is called posting. Each amount
entered in the debit column of the journal is posted by
entering it in the debit side/column of an account in the
ledger, and each amount entered of the credit column of the
journal is posted by entering it on the credit side/column of
an account in the ledger.
 THE MECHANICS OF POSTING
1. Locate in the ledger the 1st account named in the journal.
2. Enter on the debit side of the ledger in particulars column, the
name of the account credited with a prefix ‘To’.
3. Enter the date of the transaction in the date column.
4. Enter the debit column of the ledger account, the amount of
debit as shown in the journal.
5. Enter the folio column of the ledger, the number of the journal
page from which the entry is being posted.
6. Enter the folio column of the journal, the number of ledger
page in which the posting has been done.
7. Locate in the ledger the second account named in the journal.
8. Enter in the credit side of the ledger in particular
column, the name of the account debited with a prefix
‘By’.

9. Enter the date of the transaction in the date column

10. Enter in the credit column of the ledger account
the amount of credit as shown in the journal.
11. Enter in the folio column of the ledger, the number
of the journal page from which the entry is been
posted.
12. Enter in the folio column of the journal, the
number of the ledger page in which posting has been
done.
 BALANCING LEDGER ACCOUNTS

• On a rough sheet of paper take the total of two sides of the aunts
concerned.
• Compute the difference of the total of the two sides.
• If the debit side total is more, put the difference on the credit side
amount column, by writing the words in particular column ‘By
Balance c/d’. If credit side total is more, put the difference in debit
side and write ‘To Balance c/d’ in the particular column.
• After putting the difference in the appropriate side add both sides
of the account. Draw thin line above and below the total.
• Bring down the debit balance on the debit side by writing ‘To
Balance b/d’. Similarly on credit side by writing ‘By Balance b/d’.