Accountancy3

RULES OF ACCOUNTING

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All the debit entries are made in the left column of ledger and

All the credit entries are made in the in the right column of an account ledger.

The Debit Side of an account is the Left Side (Left Column) of an account and the Credit Side of an account is the Right Side (Right Column) of an account.

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Acquired an Asset

Disposed off an Asset

Lost an Asset

Added a liability

Liquidated a liability

Oops…!

Account holder driven changes.4

Rules of Accounting

All accounts are divided into five cat for the purpose of recording of the business transactions:

Assets,

Liability,

Capital,

Expenses/ Losses,

Revenues/ Gains.

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Two Fundamental Rules are followed to record the changes in these accounts using Debit and Credit.

1. For recording changes in Assets/ Expenses/ Losses

“Increase in Asset is debited, and decrease in Asset is credited.”

“Increase in Expenses/ Losses is debited, and decrease in Expenses/ Losses is credited.”

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2. For recording changes in Liabilities and Capital/ Revenue/ Gains

◦“Increase in Liabilities is credited and decrease in Liabilities is debited.”

◦“Increase in Capital is credited and decrease in Capital is debited.”

◦“Increase in revenue/ gains is credited and decrease in revenue/ gain is debited”.

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INCREASE DECREASE

ASSETS DEBIT CREDIT

LIABILITIES CREDIT DEBIT

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How To Use and Apply Our Debit and Credit Rules:

(1) Determine the types of accounts the transactions affect-

asset, liability, revenue, or expense account. 

(2) Determine if the transaction increases or decreases the

account's balance.

(3) Apply the debit and credit rules based on the type of

account and whether the balance of the account will increase

or decrease.

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Analysis of Transaction

In this transaction, the affected accounts are Cash account and Furniture account.

Cash account is an asset account and has decreased. As per rule if asset decreases the affected account is credited, so cash account is credited. (PV ON RHS)

Furniture is also an asset and it has increased. As per rule if asset increases the affected account is debited. Thus furniture account is debited. (ON LHS)

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Rohan Purchased Furniture for Rs.80,000

Increase in Asset is debited and decrease in Asset is credited

CASH

Decrease (Rs 80000)

[–] Credit

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FUR

Increase (80000)

[+] Debit

Increase in Liabilities is credited and decrease in Liabilities is debited Increase in Asset is debited, and decrease in Asset is credited

M/s Indian Machinery Mart [Liability]

IncreaseRs 60000

[+] Credit

Machinery {Assets}

Increase (60000)

[+] Debit

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(Purchased Machinery on Credit for Rs.60,000

Capital Account

Increase Rs 50000

[+] Credit

Cash (Assets)

Increase Rs 50000

[+] Debit

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Cash of Rs.50,000 introduced in business as Capital

Increase in Capital is credited and decrease in Capital is debited Increase in Asset is debited, and decrease in Asset is credited

Salary Account [Expenses]

Increase Rs 60000

[+] Debit

Cash (Assets)

Decrease Rs 60000

[+] Credit

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(Paid Rs.60000 to the employees as Salary)

Increase in Expenses/ Losses is debited and decrease in Expenses/ Losses is credited Increase in Asset is debited, and decrease in Asset is credited

Interest Account (Revenue)

Increase Rs 4000

[+] Credit

Cash (Assets)

Increase Rs 4000

[+] Debit

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(Received interest for the month Rs.4000)

Increase in revenue/ gains is credited and decrease in revenue/ gain is debited Increase in Asset is debited, and decrease in Asset is credited

DOUBLE ENTRY SYS

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ANY EVENT THAT EFFECTS ACCOUNTING RECORDS HAS TWO ASPECTS.

ACCOUNTING SYSTEMS MUST RECORD BOTH THESE ASPECTS.

ACCOUNTING IS THEREFORE RIGHTLY CALLED DOUBLE ENTRY SYS.

MOST DISTINCTIVE & FUNDAMENTAL PRINCIPLE.

PROVIDE CONCEPTUAL BASIS FOR ACCOUNTING MECHANICS

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THE LEFT-HAND SIDE OF EACH ACCOUNT IS UTILISED FOR THE RECORDING OF TRANSACTION IN RESPECT OF WHICH BENEFIT HAS BEEN RECEIVED BY THAT ACCOUNT.

THE RIGHT- HAND SIDE IS UTILISED FOR RECORDING TRANSACTIONS IN RESPECT OF WHICH BENEFIT HAS BEEN IMPARTED BY THAT ACCOUNT.

COMPLETE RECORD OF ANY TRANSACTION INCLUDES DEBITING OF ONE ACCOUNT AND CREDITING OF ANOTHER ACCOUNT.

THIS TWO FOLD RECORDING OF TRANSACTION HAS GIVEN RISE TO THE TERM “DOUBLE ENTRY”.

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FINANCIAL STATEMENTS ARE THE STATEMENTS THAT ARE PREPARED AT THE END OF THE ACCOUNTING PERIOD, WHICH IS GENERALLY ONE YEAR.

THEY PROVIDE FINANCIAL INFORMATION ABOUT AN ACCOUNTING ENTITY.

THEY INCL BALANCE SHEET, PROFIT & LOSS ACCOUNT, CASH FLOW STATEMENT , ETC.

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1. Ascertaining the results of business operations

2. Ascertaining the financial position e.g. Balance Sheet

3. Source of information

4. Helps in managerial decision making

5. An index of solvency (The ability of a company to meet its long-term financial obligations)

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THE PROFIT & LOSS ACCOUNT REFLECTS THE PERFORMANCE OF A FIRM OVER A PERIOD OF TIME

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(A) - Knowledge of the net profit or net loss

(B) - Net profit of one year can be compared with net profits of previous year or years.

(C) - Different expenses which are taken to Profit & Loss A/c in one year can be compared with the amounts incurred in previous year or years.

This helps in ascertaining the need of applying control over such expenses.

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In financial accounting, a balance sheet or statement of financial position is a summary of a person's or org's balances.

It shows the financial position of a firm at a given point of time.

Assets, liabilities and ownership equity are listed as of a specific date.

A balance sheet is often described as a snapshot of a company's financial condition.

A company balance sheet has three parts: assets, liabilities and ownership equity.

The assets are usually listed first and are followed by the liabilities.

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Assets

Current assets

Cash and cash equivalents

Inventories

Accounts receivable

Prepaid expenses

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AssetsLong-term assets

Property, plant and equipment

Investment property, such as real estate held for investment purposes

Intangible assets

Financial assets Investments accounted for using the equity method

Biological assets

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Liabilities

Accounts payable

Provisions for warranties or court decisions

Financial liabilities (excluding provisions and

accounts payable), such as promissory notes

and corporate bonds

Liabilities and assets for current tax 48

Liabilities

Deferred tax liabilities and deferred tax assets

Minority interest in equity

Issued capital and reserves attributable to

equity holders of the Parent company

Unearned revenue

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Cash flow Statement traces the various sources which bring in cash such as cash from operating activities, sale of current and fixed assets, issue of share capital and debentures etc.

Applications which cause outflow of cash such as loss from operations, purchase of current and fixed assets, redemption of debentures, preference shares and other long-term debt for cash.

In short, a cash flow statement shows the cash receipts and disbursements during a certain period.

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