Double Entry System of Book

Keeping
 It recognizes that every transaction has a twofold
effect.
 The method of writing every transaction into two
accounts, of these two accounts, one A/c is given
‘Debit’ while other one is given ‘Credit’ with an
equal amount so that the Accounting Equation is
always in balance.
 On any date

Total Debits = Total Credits

Concept of Accounts
An account is a summarized record of all
business transactions relating to a particular
type of property , person , expenses or
income .Generally an account is prepared
in ‘T’ form .Following is the proforma of
an account .
Form of Account
Date Particular L.F Amount Date Particular L. Amount
Dr. F Cr.
 Classification of Accounts As
per Double Entry System
C la s s ific a tio n o f A c c o u n ts

A c c o u n ts

P e rs o n a l A /c s Im p e rs o n a l A /c s

P h y s ic a l A r t if i c ic a l R e p r e s e n t a t iv e R e a l A /c s N o m in a l A / c s

I n d iv id u a ls F ir m s , O /s E x p A s s e t s l ik e E xp s o r L osse s,
C o m p a n ie s , O / s s a la r ie s C a s h , la n d , O r In c o m e s
B a n ks P r e p a id E x p B u il d in g , P la n t , o r P r o f it s
P a te n ts , e tc ..
 Rules of Double Entry
System
Personal A/c Real A/c Nominal A/c
Debit: The Receiver What comes All expenses
in and Losses
Credit: The giver What goes out All incomes
and gains
Examples Bank a/c, bank These are only Sale,Purchase,Advertise
deposits ,Bills assets a/c ment expense, Interest
receivable , debtors eg.Building on drawing, Interest on
,capital, drawings ,furniture, capital ,income tax, bad
etc, Prepaid a/c, cash,Stock,Petty debt , Rent, Salaries.
Outstanding a/c cash , loose tools
 Types of Accounts

Assets Liabilities Owner’ Equity/capital

Income Expense
Elements of Debit and Credit

To increase an Asset or Expense: Debit

To decrease an Asset or Expense:
Credit
To increase a Liability, Revenue, or
Owners’ Equity: Credit
To decrease a Liability, Revenue, or
Owners’ Equity: Debit
Types of Accounts- Examples
Transaction Two Fold Accounts Debit and Credit
Effect Effected
Investment of 1)Money in 1)Assets (cash) 1) Increase in Assets a/c
Rs 100000 Bank 2)Owner’s Equity Dr.
2)Capital 2) Decrease in Capital
introduced by a/c Cr.
owner
Purchase new 1)Acquisition 1)Assets 1) Increase in Asset Dr
laptop for Rs of Laptop 2)Assets 2) Decrease in Asset Cr.
20000 2)Money in
bank reduced
Advance 1)Money in 1)Asset 1)Increase in Asset Dr.
Received for bank 2)Liability 2) Increase in Liability
Rs 20000 2)Unearned Cr.
Income
Rent due Rs 1)Added to the 1)Expense 1)Expense A/c Dr
10000 expense rent 2)Liability 2) Liability increased
2)O/s rent Cr
Journalizing

Debits are always recorded first.

Indent, then record the credit below the
debit.
A short explanation is included on the
second line.
Leave a space between journal entries.
Debits must always equal credits.
Format of Journal
Date Particular L.F. Dr.(Rs) Cr.(Rs.)
Example of Journal Entries
Journalize the following transactions :
1)Started Business with a capital of Rs 5000.
2)Sold goods to Mr.X on credit for Rs 500
3)Received Cash from Mr.X Rs 450 in full settlement
4)Purchased Goods from Mr.T on credit for Rs 1500
5)Paid to Mr.T in full in cash Rs 1450
6)Paid salary to Mr.Z Rs 300
7)Purchased a plant for Rs 1000
8)Sold goods for cash Rs 1300
9)Received interest Rs 50
10)Deposited cash into bank Rs 1000
11)Paid wages Rs 100
12) Withdrew cash from Bank for personal use Rs 200.
 LEDGER

It is set of all accounts.

It contains a classified summary of all
transactions recorded in journal.
The concerned account debited in
journal should also be debited in the
ledger with a reference to the a/c
which has been credited in journal and
vice versa.
Balancing of Ledger
Accounts
The difference between the total debit and
total credit sides of an account is called
balancing.
The difference is entered in the amount
column of the side showing less total .
An account is said to have a debit balance
if its debit side is greater than credit .
 TRIAL BALANCE

A statement of Debit and Credit totals or

balances extracted from the various
accounts in the Ledger.
Objectives:
– To facilitate the preparation of Final Accounts.
– To check the arithmetical accuracy of the
books.
Techniques of preparing Trial
Balance
All assets accounts have debit balance.
All liabilities accounts including capital account
have credit balance.
Drawing Account is just opposite to the capital
account. Drawing means withdrawal of
capital ,so it has debit balance.
All expense accounts have debit balance
All revenue/income accounts have credit
balance.
Illustration

 Capital invested in the business Rs 2crores.

 Building purchased for cash Rs 50 lakhs
 Furniture purchased for cash Rs 20 lakhs
 Machinery purchased for cash Rs 20 lakhs
 Computer purchased for cash Rs 50,000
 Purchased gold biscuits for cash for Rs 50lakhs
 Purchased goods on credit from Mr.Madan for Rs 1.5
crores
 Advertising expenses paid Rs 25 lakhs.
 Jewellery sod for cash for Rs 2 crores.
 Jewellery sold on credit to Dinesh Rs 10 lakhs .
Illustration

 Cash deposited into bank for Rs 1.5 crores.

 Wages paid for cash Rs 50000
 Salaries paid for cash Rs 40000.
 Electricity Expenses paid Rs 10000
 Stationary purchased for cash Rs 5000
 Cash received from Dinesh Rs 2 lakhs
 Paid Rs 50 lakhs to Mr.Madan
 Cash withdrawn from bank Rs 40 lakhs.
 Telephone bills paid in cheque for Rs 6000.
 FINANCIAL STATEMENTS

Include preparation of:

Income Statement
– To know the operating performance of the
business i.e. profitability or results of the
business
Balance Sheet
– To know the financial position of the firm on a
particular date.
Income Statement

Summarizes the financial results of a

company during a particular period of
time.
It ascertains the net profit or loss for a
particular period .
It contains all the items of revenue , gains,
losses and expenses pertaining to the
accounting period .
 What are three things to keep in mind
when looking at an income
statement?
When analyzing an income statement, the
financial manager should keep in mind the
followings:-
1- GAAP
2- Noncash items
3- Time and Costs
Structure of Profit and loss
account
Profit and loss a/c for the period ending…
Items Schedule Current Previous
no. year year
1.Income

 Sales
Dividend
Interest
Other Income

2.Expenditure
a) Cost of Goods sold
Opening Stock
Add: purchase during the
year
Less: Closing stock
Structure of Profit and loss
account
b) Manufacturing Expenses
c)Administrative expenses
d) Selling & distribution Expenses
e)Salaries and employees benefits
f)Managerial Remuneration
g)Depreciation
h)Auditors Remuneration
i)Provisions for doubtful debts
j)Interest Expenses
k) Other Expenses

3.Profit and loss before tax and

extraordinary items.(1-2)

4.Extraordinary items

5.Profit after extraordinary items &

before tax (3-4)
 Structure of Profit and loss
account
6.Provision tax
7.Profit /loss after tax (5-6)

8.Proposed Dividend
a) Preference Dividend
b) Equity Dividend

9.Transfer to reserves
10.Surplus
Balance Sheet

It is a snapshot of a company’s financial

standing at an instant in time.
Balance sheet is an item wise list of
assets ,liabilities and proprietorship of a
business at a certain date.
It helps:
 To ascertain the financial position of a business.
 It gives protection against uncertainty
 Helps ascertain proprietary ratio
What three things should be kept in
mind when looking at a balance
sheet?
When analyzing a balance sheet, the
financial manager should be aware of three
concerns:-
1- Accounting liquidity
2- Debt versus equity
3- Value versus cost
 Balance Sheet

A summary of the assets, liabilities, and equity of a business

at a particular point in time, usually at the end of the firm’s
fiscal year.

Assets = Liabilities +Equity

(Resources of the (Obligations of (ownership left
business enterprise) the business) over Residual)
Key Elements on Assets Side
Current Assets are the assets that can be converted into
cash in the near future, usually less than one year.
 Cash and Cash-equivalents – The first kind of current assets
are the most liquid – cash or cash equivalents. Next are marketable
securities, which are short-term investments that can easily be
transitioned to cash.
 Accounts receivable – This refers to money due to the company
from sales to customers.
 Inventory – This is an investment that the company has made in
the manufacture and production of goods.
 Prepaid expenses – These are expenses the company has paid
ahead of time. This could include rent, payment on leases, or other
expenses paid ahead of time.
Key Elements on Assets Side

 Tangible Assets-Assets that have a physical form.

Tangible assets include both fixed assets, such as
machinery, buildings and land.

 Intangible Assets-The opposite of a tangible asset is an

intangible asset. Nonphysical assets, such as patents,
trademarks, copyrights, goodwill and brand recognition,
are all examples of intangible assets.
Key Elements of Liabilities Side

Current Liabilities
 Accounts payable – These are the bills for which the
company owes money to vendors or suppliers. This
includes operating expenses and inventory. The company
has bought these services on credit. The money is
generally due within 30 to 60 days.
 Short Term Debt- This account is comprised of any debt
incurred by a company that is due within one year. The
debt in this account is usually made up of short-term bank
loans taken out by a company.
Key Elements of Liabilities Side

Current Liabilities
 Provision - An amount set aside from profits in the
accounts of an enterprise for a known liability, though the
specific amount of the liability may not be known.
 Outstanding Expenses: At the end of the accounting
period, there may be expenses which have become due
but have not yet been paid. Expenses yet to be paid or
outstanding expenses for the current period should be
charged against the current period’s income.
Key Elements of Liabilities Side

Long-term debt
 This refers to money the company borrowed. The loan
matures anywhere from just over a year to thirty years.
There are a variety of ways to fund this debt – debentures,
mortgage bonds and convertible bonds. It can also include
tax liabilities.
Shareholder’s Equity
 This is the amount of money owners have invested in the
business. It is divided into preferred share, equity share,
and retained earnings. Shareholders receive dividends
when there is a profit, or they can reinvest earnings,
which are called retained earnings
 Vertical Format of Balance
sheet
Name of the company
Balance sheet as on …..
Items Schedule Current Previous year
no. year

1 Equity and Liabilities

1.Shareholder’s Funds
Share capital 1
Reserves and surplus 2
2.Non Current Liabilities
Long term Borrowings
Deferred Tax Liabilities(Net) 3
Other Long term Liabilities
Long Term Provisions 4
5
 Vertical Format of Balance
sheet
3.Current Liabilities :
Short term Borrowings 6
Trade payables 7
Other Current Liabilities 8
Short term provisions 9
TOTAL
ii ASSETS
4.Non –current Assets
Fixed Assets
Tangible assets 10
Intangible Assets 11
Capital work in progress
Intangible assets under development
Non Current Investments 12
Long term loans and advances 13
Other Non current Assets 14
Vertical Format of Balance
sheet
5.Current Assets:
Current Investments 15
Inventories 16
Trade receivables 17
Cash and cash equivalents 18
Short term loans and advances 19
Other current Assets
TOTAL
Adjustments

Adjusting journal entries are required to be

passed for errors,ommissions not yet
recorded in the books .The main
adjustments are
Relating to expenses
Relating to income
Relating to provisions
Other adjustments.
Adjustments
Adjustments Journal Entry Adjustment in Balance Sheet
trading p/l a/c
Closing Stock Closing stock Credit Side of Asset Side
To Trading a/c Trading
Depreciation Depreciation Dr of P&l a/c Deducted from
To Asset concerned
asset
Appreciation Asset Cr of P&l/ac Added to
To Appreciation concerned
asset
Outstanding Expenses Added to concerned Liabilities side
Expenses To O/s Expenses expense of debit
side of p& l a/c
Prepaid Expenses Prepaid Exp Ded from concerned Asset Side
To Expense expense of debit
side of p& l a/c
Adjustments

Adjustments Journal ENTRY Trading and P&l Balance Sheet

a/c
Accrued Income Accrued Income Added to Asset Side
To Income concerned income
of credit side of
p& l a/c
Unearned Income Income Deducted from Liabilities side
to Unearned concerned income
of credit side of
p& l a/c
Interest on capital Interest on capital Dr of p&l a/c Added to capital
To capital
Interest on Drawing Cr of P/l ac Deducted from
Drawings To interest on capital
drawing
Adjustments

Adjustments Journal ENTRY Trading and P&l Balance Sheet

a/c
Interest on Investment Cr side of p & l Added to
investments To interest a/c investment
Interest on Interest on loan Dr side of P&l Added to loan on
loans(borrow) To loan a/c liabilities
Interest on Loan Cr side of p&l a/c Added to loan to
loans(advance) To Interest asset side
Bad Debts Bad Debt Dr side of p& l a/c Deducted from
To Debtor debtors
Provision for Bad P/L A/C Dr side of p&l a/c Deducted from
debts To Provision for debtors
bad debts
Adjustments

Adjustments Journal ENTRY Trading and P&l a/c Balance

Sheet
Provision on P&l a/c Dr. side of P/L a/c Deducted
discount on To prov. for discount from debtors
debtors on debtors

Provision for Prov. for discount on Cr. Side of P/L A/C Deducted
discount on debtors from creditors
creditors To p&l a/c
Accidental loss Loss of stock Ded from purchases or No effect
of stock To trading a/c or posted at the cr side of
To Purchases a/c trading a/c and dr of
p/l a/c

Loss of assets Loss by fire a/c Dr to p/l a/c Ded from the
by fire(if not To assets a/c asset
insured)
Adjustments
Adjustments Journal ENTRY Trading and P&l Balance Sheet
a/c
Accidental loss of Insurance co.a/c Dr side of p/l a/c Insurance co.a/c
assets if insured or (loss by fire a/c) shown on asset
Loss by fire a/c side , loss by fire
to assets a/c deducted from
asset
Goods taken by Drawings a/c Amt of goods Deducted from
proprietor for To purchases a/c deducted from capital
personal use purchases
Goods given as Charity a/c Deducted from Deducted from
charity To Purchases a/c purchases capital

Goods distributed Advertising a/c Dr .side of p/l a/c No effect.

as free samples Or Free samples
a/c
To purchases a/c
Adjustments
Adjustments Journal ENTRY Trading and P&l Balance Sheet
a/c
Goods sent on 1) Sale price of Deducted from Deducted from
approval goods sales on cr side of debtors
Sale a/c trading a/c Added to closing
To debtors a/c Added to closing stock
2) Cost price of stock on the cr .
goods Side of trading a/c
Closing stock
To trading a/c
O/S manager’s p/l a/c Dr. side of p/l a/c Liabilities side
commission To o/c manager’s
commission
Such commission may be before charging and after charging such commission
1.Before charging such commission=Net profit * Percentage
100
2. After charging such commission= Net profit * Percentage
Percentage + 100