Accounting : Basics

Session 2: An introduction to Double Entry Book Keeping

TOPICS TO BE COVERED:
1. Accounting Equation
2. Types of Accounts
3. Golden Rules of Accounts
4. Accounting Process Cycle

DATE: 17TH JUNE, 2021 TO BE PRESENTED BY:

STARTING TIME: 9PM VAIBHAV GUPTA
VENUE: ZOOM TARUNJOT SINGH
DIVYAM BANSAL
Accounting : Basics
Session 2: An introduction to Double Entry Book Keeping
A brief recap of ‘Accounting Entity
Concept’
Who are we keeping accounting records for?
A brief recap of ‘Accounting Entity
Concept’
Is a business same as:

Employees Customers Vendors

But what about owners?

Accounting Equation

There are no free lunches in business.

EVERYTHING OWNERS
THAT THE Comes
from
OR
BUSINESS
OTHERS
OWNS
 Accounting Equation

BASIS OWNERS OTHERS

• Don’t have any claim over
Form of returns • In it for the profit
profits from business operations

Risk Profile • Bear the maximum risk • Have varying degrees of risk but
always lower than owners

Time Frame • Always have a long term • May have long or short term
perspective perspective
Accounting Equation

OWNERS OTHERS
FINANCIERS VENDORS

EMPLOYEES
Accounting Equation

There are no free lunches in business.

ASSETS CAPITAL
HELD BY
Equals
to +
BUSINESS LIABILITIES
You might find literature that uses terms like equity, owners’ interest and
shareholders’ funds for capital.
Accounting Equation

Let’s take an example to understand this better.

TJ started a business with Rs. 2,00,000 cash

What is the business thinking?

So, business has assets of Rs.

TJ Ltd. 2,00,000 which at some point it
needs to pay back to TJ.

But, is TJ’s contribution a liability?

I got Rs. TJ can ask for Or is it capital?
2,00,000 cash that cash back
Accounting Equation

Let’s write this down before we forget.

TJ started a business with Rs. 2,00,000 cash

Assets Capital Liabilities

Cash TJ
2,00,000 2,00,000

Note how Assets = Liabilities + Capital.

Accounting Equation

Let’s take another example to understand this better.

TJ needs to buy a table and chair for his office.

So, he buys furniture for Rs. 50,000.

What is the business thinking?

So, the business has transformed Rs.

TJ Ltd. 50,000 cash into furniture.

Who does the furniture belong to? Is

I have to pay it business’ or TJ’s?
I get furniture
Rs. 50,000
Accounting Equation

Let’s write this down as well.

TJ needs to buy a table and chair for his office.

So, he buys furniture for Rs. 50,000.

Assets Capital Liabilities

Cash Furniture TJ
2,00,000 2,00,000
(50,000) +50,000
1,50,000 50,000 2,00,000

Note how Assets = Liabilities + Capital.

Accounting Equation

Let’s take an example to understand this better.

TJ feels that he needs more funds for business

expansion. So, he calls Divyam to lend to his
business Rs. 50,000.

What is the business thinking?

So, the business has taken a loan of

TJ Ltd. Rs.50,000.

Is Divyam’s contribution capital or

I get Rs. I owe Divyam liability?
50,000 cash Rs. 50,000
Accounting Equation

Let’s see what we have now.

TJ feels that he needs more funds for business

expansion. So, he calls Divyam lend to his business
Rs. 50,000.

Assets Capital Liabilities

Cash Furniture TJ Divyam’s loan
1,50,000 50,000 2,00,000
+50,000 +50,000
2,00,000 50,000 2,00,000 50,000

Note how Assets = Liabilities + Capital.

Accounting Equation

Let’s take an example to understand this better.

Let’s start doing business! TJ buys some goods for

Rs. 50,000

What is the business thinking?

TJ Ltd.
So, the business has translated cash
into stock for sale.

I pay Rs. 50,000 I get goods worth

cash Rs. 50,000
Accounting Equation

Let’s take an example to understand this better.

Let’s start doing business! TJ buys some goods for

Rs. 50,000

Assets Capital Liabilities

Cash Furniture Stock in trade TJ Divyam’s loan
2,00,000 50,000 2,00,000 50,000
(50,000) +50,000
1,50,000 50,000 50,000 2,00,000 50,000

Note how Assets = Liabilities + Capital.

Accounting Equation

Let’s take an example to understand this better.

Being the cunning businessman, TJ buys some

goods for Rs. 50,000 from Vaibhav and tells him
that he’ll pay 2 months later

What is the business thinking?

So, the business has bought stock for

TJ Ltd.
sale and has managed to get respite
from paying up for 2 months.

Is Divyam’s loan and Vaibhav’s credit

I get goods worth Rs.
I have to pay Rs. at par?
50,000 to Vaibhav 2
50,000
months later
Accounting Equation

Let’s see where are we at.

Being the cunning businessman he is, TJ buys

some goods for Rs. 50,000 from Vaibhav and tells
him that he’ll pay 2 months later

Assets Capital Liabilities

Cash Furniture Stock in trade TJ Divyam’s loan Payable to
Vaibhav
1,50,000 50,000 50,000 2,00,000 50,000
+50,000 +50,000
1,50,000 50,000 1,00,000 2,00,000 50,000 50,000

Note how Assets = Liabilities + Capital.

Accounting Equation

Let’s take an example to understand this better.

Using his charisma, TJ sells goods worth Rs. 20,000

for Rs. 35,000.

What is the business thinking?

So, the business has exchanged goods

it bought for Rs. 20,000 for Rs.
TJ Ltd.
35,000 cash.

Is the profit all TJ’s or do Divyam and

I get Rs. 35,000 I part with goods I make a profit
cash worth Rs. 20,000 of Rs. 15,000 Vaibhav get a share?
Accounting Equation

Let’s take an example to understand this better.

Using his charisma, TJ sells goods worth Rs. 20,000

for Rs. 35,000.

Assets Capital Liabilities

Cash Furniture Stock in trade TJ Divyam’s loan Payable to
Vaibhav
1,50,000 50,000 1,00,000 2,00,000 50,000 50,000
+35,000 (20,000) +15,000
1,85,000 50,000 80,000 2,15,000 50,000 50,000

Note how Assets = Liabilities + Capital.

Limitation of Accounting Equation
 The main limitation of the accounting equation is that it
doesn’t provide an analysis of how well the business is
operating, even though both sides are balanced.
 Also, it is feasible only in case of smaller number of entries.
 So, now we will be setting our base for a system that
addresses these drawbacks and provide a better analysis to
all the stakeholders.
What is an Account?

 An account is a summarized record of transactions at one place

relating to a particular head. For instance, Building A/C, Cash A/C,
etc.
 This is just a basic format of how a T-Shape account looks like.
Modern Classification of Accounts

Types of
accounts

Assets Liabilities Capital Expenses Income

Assets
Dr. Asset A/C Cr.
Debit Increase (+) Credit Decrease (-)

Tangible Assets Intangible Assets

Purchased Furniture for रु 50,000 in cash

Accounts Nature of How Affected Debit Credit

Involved Account रु रु

Furniture Asset Furniture is coming in 50,000

Cash Asset Cash is going out 50,000

Asset increasing Asset decreasing

 Liabilities
A liability is something a person or company owes, usually a sum of
money. For example: loan, creditor, etc.

Dr. Liability A/C Cr.

Debit Decrease (-) Credit Increase (+)
Borrowed from Divyam रु 50,000 cash.

Accounts Nature of How Affected Debit Credit

Involved Account रु रु

Cash Asset Cash is coming in 50,000

Divyam Liability Divyam is the giver of 50,000

loan

Asset increasing Liability Increasing

Capital

Dr. Capital A/C Cr.

Debit Decrease (-) Credit Increase (+)
TJ infused fresh capital in the business रु 2,00,000

Accounts Nature of How Affected Debit Credit

Involved Account रु रु

Cash Asset Cash is coming in 2,00,000

Capital Capital Capital is increasing 2,00,000

Asset increasing

Business

Capital Increasing
Expenses (Losses)
Dr. Expense (Loss) A/C Cr.
Debit Increase (+) Credit Decrease (-)
Rent paid in cash रु 50,000

Accounts Nature of How Affected Debit Credit

Involved Account रु रु

Rent Expense Rent paid 50,000

Cash Asset Cash is going out 50,000

Expense Increasing Asset decreasing

Purchased goods from Vaibhav (credit purchases) रु 50,000
Accounts Nature of How Affected Debit Credit
Involved Account रु रु

Purchases Expense Goods are coming in 50,000

Vaibhav Liability Vaibhav is giver 50,000

(Creditor)

Expense increasing Liability Increasing

GOODS
PURCHASED VAIBHAV
Incomes (Gains)

Dr. Incomes (Gains) Cr.

A/C
Debit Decrease (-) Credit Increase (+)

Interest Commission
Received Received
Sold goods for cash रु 35,000
Accounts Nature of How Affected Debit Credit
Involved Account रु रु

Cash Asset Cash is coming in 35,000

Sales Income Sales is an income 35,000

GOODS
SOLD

Asset increasing Income increasing

Summary of the Modern Classification
Types of Accounts Debit (Always on the Credit (Always on the
left) right)

Assets Increase Decrease

Expenses Increase Decrease

Capital Decrease Increase

Liabilities Decrease Increase

Income Decrease Increase

Traditional classification of Accounts
Types of
accounts

Personal Accounts Real Accounts Nominal Accounts

Accounts which relate to individuals Accounts which relate to tangible Accounts which relate to expenses,
and institutions or intangible assets of the entity losses, incomes or gains. For example:
1. Natural Personal Accounts Purchases, Sales, Salary, Rent, etc.
(Creation of God)

Virat
Kohli
2. Artificial Personal Accounts
(Corporate bodies and institutions)
Rule: Debit all expenses and losses.
Rule: Debit what comes in. Credit all incomes and gains.
Credit what goes out.
Example : Rent paid in cash
Example : Divyam is selling
Rule: Debit the receiver.
his car to Vaibhav for cash
Credit the giver.
Example: Purchased goods from
Vaibhav
 Summary
Types of Accounts Rule No. Debit (Always on Credit (Always on
Applicable the left) the right)

Assets (Real Accounts) 2 Increase Decrease

Expenses (Nominal Accounts) 3 Increase Decrease

Capital (Personal Accounts) 1 Decrease Increase

Liabilities (Personal 1 Decrease Increase

Accounts)
Revenue (Nominal Accounts) 3 Decrease Increase

1 2 3
Debit the receiver. Debit what comes in. Debit all expenses and losses.
Credit the giver. Credit what goes out. Credit all incomes and gains.
ACCOUNTING PROCESS
 Trading A/c
Money Summarisation of
Chronological Grouping similar Statement of Profit & Losses
measurement balances
order transactions Balance Sheet
concept Debit=Credit
Statement of Cash Flow
Journal
 Journal can be defined as a book in which all day-to-day monetary
transactions of business are recorded first as and when they take place in
chronological order (i.e. date wise), in debit and credit form and in a
systematic manner.

 Journal is also known as “Prime Entry” or “Original Entry” book because

transactions are first entered in this book and then they are posted in the
Ledger.

 It is essential in a business to record each and every transaction immediately

after it takes place.
Layout of Journal
Dr. Cr.
Date Particulars Vouche LF Amt Amt
r No.
(Rs.) (Rs.)

XXX
XXX
Ledger

 A ledger is a book containing accounts in which the classified and

summarized information from the journal is posted as debits and credits. It
is also called the second book of entry.

 The ledger book contains all the three types of accounts, i.e., Personal,
Real and Nominal Accounts.

 Main function is to sort out all items from journal.

Format of a Ledger

Dr Ledger Name Cr
.Date Particulars J.F. Amount Date Particulars J.F. Amount.
Posting

 Every transaction is first recorded in book of original entry and then

it is posted in to ledger.

Posting is made on the debit side of the account which is debited and
to credit side of the account which is credited.

 Entry on debit side starts with ‘To’ whereas on credit side its starts
with “By”.
Trial Balance
• The fundament principle of double entry book keeping is that debit must
be equal to credit. In other words, debit aspect of any transaction is
always equal to its credit aspect.

• A trial balance is a summary of all the ledger balances outstanding as

on particular date.

• A Trial Balance has to tally, i.e, the debit side should always be equal to
the credit side

• When trial balance tallies it establishes the arithmetical accuracy of

record.

• It is a statement prepared before preparing the final accounts.

• It is a link between books of account and final accounts i.e. the

Trading & Profit & Loss A/c and Balance Sheet.
Format of Trial Balance
S.No Name of the Debit (Rs.) Credit (Rs.)
Account
1 Opening Stock XXX
2 Capital XXX
3 Purchases XXX
4 Sales XXX
5 Expenses XXX
6 Plant & Machinery XXX
7 Customers XXX
8 Suppliers XXX
9 Cash XXX
10 Bank Balance XXX
Total XXX XXX
 Trading A/c
Money Summarisation of
Chronological Grouping similar Statement of Profit & Losses
measurement balances
order transactions Balance Sheet
concept Debit=Credit
Statement of Cash Flow
EXAMPLE
Example

Company Background
Fast rewind to April 2020. So Vaibhav, TJ and I
(Divyam) ,being Delhites, naturally were missing Momos a
lot and so we decided to bring that taste to Bangalore.
We planned to start a momo shop in the campus which
would serve a variety of momos .

Here goes our journey..!!!

Transaction #1
We guys would be investing Rs. 1 Lacs in the business, entirely out of savings. This investment is
purely in cash.

Jou rn al Entry:

Date Account Dr/Cr Amount

Apr 01,2020 Cash A/c Dr 1,00,000
To Capital A/c Cr 1,00,000
(Being Capital brought into business)
Transaction #1
 Ledger:

Debit Cash Account Credit

Particulars Amount Particulars Amount
To Capital A/c 1,00,000
Total 1,00,000 Total

Debit Capital Account Credit

Particulars Amount Particulars Amount
By Cash A/c 1,00,000
Total Total 1,00,000
Transaction #1

Trial Balance:
Particulars Debit Credit
Amount Amount
Cash A/c 1,00,000 -
Capital A/c - 1,00,000
Total 1,00,000 1,00,000
Transaction #1

Balance Sheet
Equity & Liabilities Amount Assets Amount
Capital A/c 1,00,000 Cash A/c 1,00,000

Total 1,00,000 Total 1,00,000

Transaction #2
We guys would need vegetables and some other basic raw materials for
making momos. We have placed an order with M/s Fresh Ltd for supply of
these raw materials worth Rs.26,000/-. The payment is to be done after
25 days

Journal Entry:

Date Account Dr/Cr Amount

Apr 02, 2020 Purchases A/c Dr 26,000
To M/s Fresh Ltd Cr 26,000
A/c
(Being raw materials purchased on credit)
Transaction #2
 Ledger:
Debit Purchases Account Credit
Particulars Amount Particulars Amount
To M/s Fresh Ltd A/c 26,000
Total 26,000 Total

Debit M/s Fresh Ltd Account Credit

Particulars Amount Particulars Amount
By Purchases A/c 26,000
Total Total 26,000
Transaction #2

Trial Balance:
Particulars Debit Credit
Amount Amount
Purchases A/c 26,000 -
M/s Fresh Ltd A/c - 26,000
Total 26,000 26,000
Transaction #2

Profit & Loss Account

Particulars Amount Particulars Amount
To Purchases 26,000

Total 26,000 Total

Balance Sheet
Equity & Liabilities Amount Assets Amount
M/s Fresh Ltd 26,000

Total 26,000 Total

Transaction #3
We were finally able to make our first sale on April 03. From the raw
materials procured, we prepared some delicious momos and the entire
college just loved it. We made a total sales of Rs 30,500/- entirely in
cash….!!!

Journal Entry:

Date Account Dr/Cr Amount

Apr 03 , 2020 Cash A/c Dr 30,500
To Sales Cr 30,500
(Being product sold for cash)
Transaction #3
 Ledger:
Debit Cash Account Credit
Particulars Amount Particulars Amount
To Sales A/c 30,500
Total 30,500 Total

Debit Sales Account Credit

Particulars Amount Particulars Amount
By Cash A/c 30,500
Total Total 30,500
Transaction #3

Trial Balance:
Particulars Debit Credit
Amount Amount
Cash A/c 30,500 -
Sales A/c - 30,500
Total 30,500 30,500
Transaction #3

Profit & Loss Account

Particulars Amount Particulars Amount
By Sales 30,500

Total Total 30,500

Balance Sheet
Equity & Liabilities Amount Assets Amount
Cash 30,500

Total Total 30,500

But Alas…..!!
This Idiot virus devastated all our plans and we had to
shut down our business since the entire nation went into
a Lockdown..!!

So the three of us decided to wind up and to prepare

the final accounts..!!
Final accounts

Profit & Loss Account

Particulars Amount Particulars Amount
To Purchases 26,000 By Sales 30,500
To Net Profit 4,500
Total 30,500 Total 30,500

Balance Sheet
Equity & Liabilities Amount Assets Amount
Capital 1,04,500 Cash 1,30,500
M/s Fresh Ltd 26,000
Total 1,30,500 Total 1,30,500
 THANK YOU

In case of any doubts, please feel free to reach out:

 Vaibhav Gupta (Ph – 8851398388)
 Tarunjot Singh (Ph – 9811201747)
 Divyam Bansal (Ph – 7042638867)