1. BASICS OF ACCOUNTING & BOOK KEEPINGby :DR. T.K. JAIN AFTERSCHO OLcentre for social entrepreneurshipsivakamu veterinary hospital road bikaner 334001 rajasthan, india www.afterschoool.tk mobile : 91+9414430763

2. What is debit and creditEvery transaction has two aspects debit and credit.Basic accounting equation :assets = liabilities + equitydebit denotes assets and credit denotes liability every transaction has some impact on asset / liability or on both. 3. How does it work?If asset will increase, liability will also increase, if assets will decrease, liability will also decrease, thus the equation is always balanced : A=L+E analyse each transaction in terms of its impact on A / L / Ethis is the fundamental concept in double entry system 4. Some examples of debit / credit If you buy building, assets will increase, thus when you make a journal entry, you have to debit building account if you borrow, liabilities will increase, thus you have to credit loan account. 5. Three rules to make your task easier 1. debit what comes in, credit what goes out (real accounts regarding assets) 2. debit receiver, credit the giver (personal accounts regarding debtors, creditors, and other such accounts)3. debit all expenses, credit all income (nominal accounts relating to income and expenditures) 6. Journalising the first stepWhen we prepare accounts, we start with journalising. We prepare journal entry to denote debit or credit entry and thus we are able to understand the impact of each transaction.In journalising, we classify each transaction in two parts debit impact and credit impact 7. How to journalise?Look at the transaction, find its two aspects and analyse them.If you buy a building, assets will increase (building is an asset, so assets will increase), but assets will decrease also (you buy building against cash / bank balance)thus for increase in assets, you have to debit, for decrease in asset, you have to credit 8. Steps in accounting Journalise & preparation of day books posting to ledgers preparation of trial balance preparation of control accounts (if any)preparation of final accountspreparation of cash flow / funds flow statement analysis of accounts (ratio analysis etc.) 9. Example of transactions :Purchase of furniture : (increase in assets furniture, decrease in assets cash) purchase of goods on credit (increase of stock assets, increase in creditors) sale of goods against cash (increase in income and increase in assets cash) 10. Some important facts Equity/ capital is a liability loss is an assets and profit is a liability expenditure contributes to loss, therefore it is treated like an asset revenue / income contributes to profit, therefore it is treated like a liability 11. Remember the basic classification.. Assets give real accounts liability create personal accountsdebtors (assets) and creditors (liability) create personal accountsincome and expenditure create nominal accounts 12. Systems of accountingNominal accounts are closed every year and their balance is transferred to P & L account real account and personal accounts are not closed and they continue year after year and their balance is shown in balance sheet.If balance sheet doesnot tally, prepare a suspense account to ensure that balance tallies. 13. Trial balanceIn trial balance, you have to show the balance of every account on the date of preparation of trial balance.Thus it is collection of balance of all the accounts that you have. By default, it will be having equal totals of debit and credit side. Thus it will balance, if it doesnt, it means there is some error. Trace out the error and rectify it. 14. Examples of accounting entries Purchase of raw material against cash :purchase account debit, cash account credit (purchase is a real account, as it denotes stock, which is an asset and this account will never be closed, cash is also an assets, when you buy goods, assets increase and assets decrease thus debit and credit both affect assets, no change in liability) 15. example... Payment of salary out of cash salary account debit, cash account credit (salary is a nominal account, it is an expenditure, and all expenditures are treated like assets, but it is nominal account so this account will be closed at the end of the year and transferred to P & L account, cash is also an asset) 16. P &L accountIt will contain only the balance / totals of nominal accountsit will not contain balance / total of any real account or of any personal account.It has two parts debit and credit debit part denotes only expenditure and credit denotes only income / revenue.If debit is more, we have loss, if credit is more, we have profit, which will be shown in balance sheet 17. Balance sheet It denotes only the balance / total of only real accounts and personal accounts. It does not show balance of nominal accounts.Some nominal accounts continue for one more year, they will be shown in balance sheet.Example : outstanding expenditure, accrued income will be shown in balance sheet (although they are nominal accounts) 18. Adjustment entries... At the end of the year, some adjustment entries are made, and these adjustment entries are necessary while account finalisation.Exmaple : outstanding expenditure, acrued income etc. 19. What is outstanding expenditure?In accounting, we generally mercantile system, in which all the income and expenditure relatedto this year will be recorded in this year's accounts. Thus if some expenditure has taken place, but we have not paid for it, it is outstanding expenditure.Suppose, rent of Feb. And March are outstanding, we have not paid them, but we have to treat them in P & L account and show them as outstanding expenditure. 20. What is accrued income ? In accounting, we generally mercantile system, in which all the income and expenditure relatedto this year will be recorded in this year's accounts. Thus if some incomehas taken place, but we have not received it it, it is accrued income.Suppose, interest receivable of Feb. And March are outstanding, we havent received them, but we have to treat them in P & L account and show them as accrued income 21. WHAT IS CAPITAL RECEIPT?Receipt which are of the nature of fixed capital are called capital receipt 22. WHAT IS REVENUE RECEIPT?Receipts which are of the nature of circulating capital are called capital receiptCirculatingcapital is that part of the capital which is turned over in the business and which ultimately results in profit or loss. 23. Machinery in the hands of a manufacturer is .... Fixed capital it is fixed assets it is shown in the balance sheet as an asset.When you buy it the entry is :machinary account debit, bank account credit later on you have to show depreciation every year on this. Suppose machine cost 1000, its life is 10 year, so you will show 100 every year for 10 years as depreciation in P& L account 24. What is trading account ?Trading accout is prepared by manufacturing companies to show their gross profit. It denotesall the expenditure till manufacturing.The debit side of trading account contains expenditures like wages, raw material purchased, carriage inward, etc. The credit side (right side) of trading account contains items like revenue, sales etc. The difference of debit and credit side is called gross profit / loss. 25. example... Prepare trading and profit and loss account and balance sheet from the following itmes :sales:200, purchase :50, wages :30, salary 50, rent:10, postage :5, furniture : 20, building : 50 capital: 50, loan : 100, creditors : 30, debtors : 50, cash : 20, inventory opening stock : 20, closing stock : 50, carriage outward : 20, carriage inward : 10, interest recd. : 5, interest paid : 10, Investments : 30 26. Solution Trading account

DEBIT SIDE

Opening stock 20

Purchase 50

Carriage inward 10

Wages 30

Gross profit 140

Total = 250

CREDIT SIDE

Sales 200

Closing stock 50

Total = 250

27. Solution : Profit and loss account

DEBIT SIDE

Rent : 10

Carriage outward 20

Salaries 50

Postage 5

Interest paid : 10

Net profit : 50

Total 145

CREDIT SIDE

Gross profit140

Interest received 5

Total 145

28. SOLUTION : BALANCE SHEET

LIABILITIES

Capital : 50

Loan : 100

Profit : 50

Creditors : 30

TOTAL 230

ASSETS

Building 50

Furniture 20

Investments : 30

Inventory : 50

Cash : 30

Debtors : 50

TOTAL : 230

29. ADDITIONAL INFORMATIONWe have not provided for depreciation, which has to be provided in the annual accounts of a company, we have to follow the prescribed proforma of a company as provided in the comapnies act and we have to prepare it strictly as per that proforma. 30. Example... Prepare trading and profit and loss account and balance sheet from the following itmes :sales:200, purchase :50, wages 20, outstanding wages :10, salary 50 outstanding salary 10, , rent:20, prepaid rent 10,building : 50 capital: 50, loan : 100,cash : 20, inventory opening stock : 20, closing stock : 50,interest recd. : 5, interest acrued but not yet received 5,interest paid : 10, interest yet to be paid 10, Investments : 30 rate of depceciation : 10% 31. Solution Trading account

DEBIT SIDE

Opening stock 20

Purchase 50

Carriage inward 10

Wages (20+10) 30

Gross profit 140

Total = 250

CREDIT SIDE

Sales 200

Closing stock 50

Total = 250

32. Solution : Profit and loss account

DEBIT SIDE

Rent : (20-10) = 10

Carriage outward 20

Salaries (50+10) 60

Depreciation5

Interest (10+10) 20

Net profit 35

Total 150

CREDIT SIDE

Gross profit140

Interest received 5

Acrued Interest 5

Total 150

33. SOLUTION :BALANCESHEET

LIABILITIES

Capital : 50

Loan : 100

Profit : 35

Outs. salary10

Outs. Wages 10

Interest due 10

TOTAL : 215

ASSETS

Building (50-5)45

Investments : 30

Inventory : 50

Prepaid rent 10

Acrued Interest 5

Cash : 30

Suspense : 45

TOTAL : 215

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