Journal

All the business transactions are to be recorded in the journal in the form of debit and credit. This is the second stage in accounting cycle.

A Journal is a book in which transactions are recorded in the order in which they occur i.e. chronological order. A journal is called a book. The process of recording a transaction in journal is called ‘journalizing’. The entry made in the journal is called journal entry.

Format of a Journal

Date	Particulars	L.F.	Debit Amount	Credit Amount
1	2	3	4	5

1. Date Column:

In this column the date on which the transaction took place is entered. The transactions must be recorded in chronological order, i.e. transactions are to be entered date wise. The year and month is written once, till they change.

2. Particulars Column

In this column the names of the accounts to be debited is written in the first line and then the names of the account to be credited is recorded in the second line. They are followed by Narration given in the brackets. Narration is a brief explanation of the transaction entered.

3. L.F. Column

This is called ledger folio column. In this column the page number of the ledger will be entered when it is posted into its relevant account in the ledger. This helps in verification of books of account in case of any error.

4. Debit Amount Column

In this column the amount to be debited is written.

5. Credit Amount Column

In this column the amount to be credited is written. The amount is in Rupees in INDIA, in Dollars in AMERICA etc.

Note: Except, the ledger folio column, all other columns are recorded at the time of journal entry.

Principles of Double Entry System

For every transaction there are two aspects. One is called Debit and the other is called Credit. The debit and credit aspects of a transaction are to be identified based on the principles of double entry system of accounting.

Debit refers to entering an amount on the left side of an account and Credit means to enter an amount on the right side of an account. The abbreviated form of Dr. Stands for Debit and Cr. Stands for Credit. Rules of debit and credit is based on dual aspect concept i.e. every transaction has Debit effect and an equivalent credit effect.

Before deciding which account is to be debited or credited, it is necessary to decide the nature of accounts which are influenced by the business transactions.

The rules of Debit and Credit are given below

Personal Accounts: (Natural Persons and Artificial Person)

Rule    : Debit the Receiver

              Credit the Giver

According to the above principle, the benefit receiver’s account is to be debited and and the benefit giver’s account is to be credited.  

For Examples:

1. Goods purchased from Ramesh on credit for 2,000

The two accounts involved in this transaction are goods purchased A/c and Ramesh A/c. so, Ramesh is the Giver of the goods. Hence Ramesh account is be credit (i.e. credit the giver rule applies) goods purchased is expenditure, so nominal account, hence is to be debited.

2. Goods sold on credit to Mahesh Rs. 5,000/-

In this transaction Mahesh is receiving the benefit from the business. Hence, Mahesh account is to be debited and goods sold is an income, so nominal account hence to be credited.

3. Cash paid to Mohan Rs. 500

In this transaction cash ( asset – real account) is going out and Mohan (personal – personal A/c) is receiving cash. Hence Mohan account is to be debited and cash account is to be credit.

4. Cash received from Sathish Rs. 800

In this transaction Sathish (person) giving cash and cash (real A/c) is coming into business. Here Sathish is the giver. Hence, his account is to be credited.

Real Accounts:(Assets)

Rule    : Debit What comes in

              Credit what goes out

According to real accounts principle, when an assets is received by the business, the asset account is to be debited, when any asset goes out of the business, the asset account is to be credited. 

For example:

1. Purchased office furniture for Rs. 10,000.

In this transaction office furniture (asset – Real A/c) is coming in and cash (asset – Real A/c) is going out. Hence, office furniture account is to be debited and cash account is to be credited.

2. Received cash from Shankar Rs. 2,000.

In this transaction cash (asset – Real account) is coming in and Shankar (personal A/c) is the giver. Hence, cash A/c is to be debited.

3. Cash paid to Manoj Rs. 1,000.

In this transaction cash (asset) is going out and Manoj (personal A/c) is receiving cash. Hence, cash A/c is to be credited and Manoh account is to be debited.

4. Old Machine (asset) sold for Rs. 600.

In this transaction cash (asset) is coming in and Machine (asset) is going out. Hence, cash A/c is to be debited and Machine account is to be credited.

Nominal Accounts: (Expenses, Losses, Incomes, Gains)

Rule    : Debit all Expenses and Losses.

              Credit all Incomes and Gains.

According to normal account principle, expenses and losses are to be debited and all incomes and gains of the business are to be credited. 

For example.

1. Salaries paid Rs. 5000

In this transaction salaries (expenditure-nominal A/c) is an item of expenditure and cash (real A/c) is going out.

Hence, Salaries A/c is to be debited and cash A/c is to be credited.

2. Rent Received Rs. 200

In this transaction, cash (Real A/c) received is asset and rent received is income. Hence rent A/c being income to be credited and cash A/c is to be debited.

3. Goods purchased for Rs.8000

In this transaction goods purchased is expenditure (nominal A/c) and cash (asset) paid is real A/c. Hence, Goods purchased account is to be debited and cash A/c is to be credited.

4. Goods sold for Rs. 10,000

In this transaction cash (asset) received is real A/c and goods sold (income) is nominal A/c. Hence, goods sold account is to be credited and cash A/c is to be debited.

Double Entry System

The business transactions are recorded in two ways. They are:

1. Single entry system and
2. Double entry system.

Single Entry System

This method of recording transaction is unscientific and incomplete. Some experts consider that it is not at all a system of accounting. Under this system, only one aspect of the transaction (either debit or credit) is to be recorded instead to two aspects. Hence this system is called single entry system. In this method, the accountant maintains only personal accounts and cash book. Alternatively, the accountant maintain personal accounts, real accounts and leaves normal accounts. That is why, this method is known as incomplete double entry system. Since this system records only one aspect of the transaction, it is unscientific and incomplete. Total information is not available for preparing trail balance. Therefore, it is not possible to prepare final account at the end of the financial year to ascertain accurate financial position. Sole trading organizations and partnership firms may follow this method. But corporate bodies shall follow double country book keeping system only. Small business units are using this system even now. It suffers from the following defects Limitations.

1. All transactions are not recorded.
2. Only a few accounts are maintained.
3. Trail balance cannot be prepared at the end of the year to know the arithmetical accuracy.
4. Final accounts cannot be prepared to find out operational results and financial position of the business accurately.

Double Entry System

The double entry system was invented by a trader called LUCA PACIOLI of Italy. He wrote about this system in his book titled “DECOMPUTISET SCRIPTURIS in the year 1734. According to him, every transaction takes place between two persons or two firms / enterprises. When such transaction takes place one person receives the benefit and the other person gives the benefit. These two benefits are inseparable. Hence, we can not think of one transaction leaving the other. If one person is receiving the benefit means that some other person is giving the befit. In accountancy the receiving the benefit is referred as debit aspect and giving benefit is called credit aspect. Thus the procedure of recording both the receiving and giving aspects related to business transaction is called Double Entry System. For example, a firm purchases Machine for 80,000. the firm receives machine hence, Machine is Debit and the firm is giving cash hence cash is going out, so credit. In this way for every transaction one account is debited and other account is credited. This principle is known as Principle of double entry. This means for every Debit or Credit, there will be corresponding Credit or Debit respectively. This is the main feature of Double Entry System.

Advantage of Double Entry System

The following are the advantages of Double entry system of accounting.

Ø      It records all transaction of the business.

Ø      It gives correct and accurate information.

Ø      It helps to check the arithmetical accuracy by preparing trail balance.

Ø      It helps in ascertainment of profit or loss of the business concern.

Ø      It help in ascertainment of financial position of the business concern.

Ø      It provides accounting information readily.

Ø      It help in preventing frauds and errors as the recording of the transactions are based on vouchers.

Disadvantage of double Entry System

Ø      Many number of accounts are to be maintained.

Ø      It is too expensive.

Ø      Its accuracy always can not be relied upon.

Classification of Accounts

In double entry bookkeeping system all the transactions are divided into two types of accounts. Personal accounts and impersonal accounts. The impersonal accounts are further sub-divided into Real Accounts and normal accounts. Thus there are three types of accounts in all. They are: Personal Accounts, Real Accounts and Nominal Accounts.

They are explained as under.

Personal Accounts:

Personal accounts related natural persons, artificial persons and representative personal accounts.

• Venkatesh’s A/c Sri Sai’s A/c             (Natural Persons)
• Deepika & co. A/c, Swarna Bank A/c            (Artificial Persons)
• Out standing salaries A/c and rent receivable A/c      (Representative Person.)

Real Accounts:

Real accounts related to both tangible and intangible assets.

Tangible assets – Building A/c, Machinery A/c, Furniture A/c, Cash A/c etc.

Intangible assets – Goodwill A/c, Copy Rights A/c, Patents A/c etc.

Nominal Accounts:

Nominal accounts related to expenses, losses, incomes and gains.

Expenses         : Salary A/c, Wages A/c, Purchases A/c

Losses             : Depreciation, Bad debts Stock lost by fire, abnormal loss etc.,

Income            : Sales A/c, Commission Received A/c etc.,

Gains               : Bad debts recovered, increase in the value of assets etc.

SL No.	Personal Accounts (Natural Persons/Artificial Persons)	Real Accounts (Assets)	Nominal Accounts (expresses incomes, losses gain)
1	Tulasi Das’s A/c (Natural)	Building A/c (Tangible)	Salaries A/c (Expenses)
2	Narayana’s A/c (Natural)	Machinery A/c (Tangible)	Wages A/c (Expense)
3	Canara Bank A/c (Artifical)	Furniture A/c (Tangible)	Interest Paid A/c (Expense)
4	Hero Honda Company A/c (Artifical)	Goodwill A/c (Intangible)	Commission Received A/c (Income)
5	Life Insurance company A/c (Aritifical)	Patents A/c (Intangible)	Insurance Premium A/c (Expenses)
6	Capital A/c (Owner, natural)	Investments A/c	Discount allowed A/c (Loss)
7	Drawings A/c (Owner, Natural)	Loose Tools A/c	Discount Received A/c (Gain)
8	Salary Payable A/c (*)	Land A/c	Loss by fire/Abnormal loss A/c (loss)
9	Commission receivable A/c (*)	Cash A/c	Bad debts recovered A/c (gain)
10	Rent Received in Advance A/c (*)	Premises A/c	Sales A/c (Income)
11	Insurance paid in Advance (*)	Live stock A/c	Purchases A/c (Expense)

(*) These account come under personal account, as these are to be paid to various persons or to be received from various persons. Hence, these accounts are known as representative personal accounts.

Accounting Concepts

Introduction:

Accounting is language of business hence to convey the same meaning to all people world wide, accounts have developed certain rules, procedures and conventions, which are known as “Generally Accepted Accounting Principles” (GAAP). These are known are concept and conventions of accounting. Accounting concepts are considered as the basic assumptions or conditions on which the science of accounting is based. Whereas the accounting conventions are known as the circumstances or traditions, which guide the accountants while preparing the accounts.

Concepts:

It is used to denote accounting assumptions and notions which are widely accepted and fundamental to the science of accounting. The important accounting concepts are

Business Entity Concept:

While recording the transactions in the books of accounts, it should be noted that business and owners are separate distinct entities in the eyes of accounting all transactions of the business are recorded in the books of accounts from the point of view of the business and not from the point of view of the owner. In case of sole proprietary concern and partnership firm, though legal entity of business and owner is the same (legally) they are treated as separate entities. Therefore, capital and drawings accounts are to make a distinction between personal transactions and business transactions. The owners are treated as creditors for the amount invested in the business, and debtor to the extent of cash or goods taken (drawings) for their personal use. For example, college fees of proprietor’s child paid by the business is treated as drawings not as expenditure of the business.

Money Measurement Concept:

According to this concept, only those monetary transactions, which are capable of being expressed in terms of money, are included in the accounting records. In other words, the information which can not be expressed in terms of money is not included in accounting records. For example, dedicated employees, dead lock in the management may be important for the enterprise, but these facts are not recorded in the books of accounts as they can not be expressed in monetary value. All incomes, expenses/costs, assets and liabilities of the business, are expressed in terms of monetary value i.e. rupees/dollars/pounds etc.

Cost Concept:

According to this concept, the transactions are recorded ‘at cost’ in the books of accounts. For example, if building is purchased for Rs. 8,00,000/- but its market value is Rs. 10,00,000/-. It is to be recorded at Rs. 8,00,000/- only because the actual expenditure incurred is Rs. 8,00,000/- not to be recorded at market value of Rs. 10,00,000/-.

Going Concern Concept:

This concept assumes that business will continue to exist for a fairly long period of time. It presumes the life of the business to be perpetual and there is no intention to liquidate business in the foreseeable future. Because of these assets are divided into current assets (convertible into cash with in one year) and fixed assets (used in the business for a long period, or for a period more than one year) and liabilities as current liabilities and long term liabilities.

Accounting Period Concept:

The life of the business is considered to be indefinite, but the measurement of income can not be postponed for a very long period of time. Therefore, it is necessary to have a period for which the operational results are assessed for external reporting. Hence a period of one year i.e. twelve months is considered as accounting period. It may be a Calendar year (January to December. Or any period of one year. In India, the accounting period begins on 1^st April every year and ends on 31^st  March every year. This concept implies that at the end of each accounting period, financial statements i.e. profit & loss account and balance sheets are to be prepared. It is mandatory under Income
Tax Act to assess profit of the business every year and determine tax liability.

Dual Aspect Concept:

This is one of the most fundamental concept of accounting. It may be stated that every debit there is a corresponding credit. Every business transactions has a dual effect. One is receiving aspect and the other is giving aspect. Therefore, for every debit there is an equal corresponding credit. For example, Machine purchased for Rs.25,000. In this transaction, business is receiving Machine and that increase the balance of Machine account by Rs. 25,000 and at the same time it reduces the balance of cash by Rs. 25,000. Hence, the value received is equal to the value given.

Accrual Concept:

This concept implies that revenue is recognized in the period in which it is earned irrespective of the fact whether it is received or not during that period. For example, commission Rs. 2,000 earned in the year 2008, but received in cash in the year 2009, then the commission is to be taken as income for the year 2008 only, not as income of the year 2009.

Realization Concept:

According to this concept, the revenue should be considered only when it is realized. Any business transaction should be recorded only after it actually taken place. Production of goods does not mean that the total production is sold, it should be recorded only when they are sold and cash realized or obligation created.

Matching Concept:

This concept is based on accounting period concept which requires that they should be a periodic matching of cost incurred and revenues earned during the accounting period. The purpose is to ascertain profit periodically. For example, the total cost of goods purchased during the accounting year. The unsold stock of goods are Rs. 50,000. Goods costing Rs. 1,00,000 sold for Rs. 1,25,000 during the year. The unsold stock of goods are Rs. 50,000which may be sold in the following year. Therefore the profit for the year is Rs.25,000. That is to produce the income (sales) of Rs. 1, 25,000; the cost of goods sold (expenditure incurred) was Rs. 1, 00,000. Hence it is essential to match the incomes with their corresponding expenses incurred during the accounting year. Matching does not mean that expenses must be identified with revenues. While ascertaining profit, other appropriate cost which are not directly related to cost of goods sold are to be taken into consideration e.g. Rent paid, Interest paid, and Depreciation etc., thus appropriate costs have to be matched against the appropriate revenues for the accounting period.

Basic Accounting Terms

The following are the different terms that are used in accounting language some of them are presented below.

Entity:

An entity is an economic unit which performs economic activates e.g. Reliance Industries, Deepika Technologies Ltd.

Event:

It is transaction or happening which effects an entity.

Business Transaction:

A transaction is an exchange of goods or services for cash or credit. It involves transfer of money or money’s worth that brings about change in the financial position of a business.

Trade debtors:

The term ‘Trade debtor’ refers to the persons from whom the amounts are due for good sold or services rendered on credit.

Trade Creditors:

It refers to the persons to whom the amounts are due for goods purchased or services rendered on credit basis.

Capital:

This is the amount invested by the owner in the business. Capital can be invested in the form of cash or kind.

Drawings:

This is the cash or goods or any other asset withdrawn by owner from the business for his personal use.

Goods:

Goods are those which the business concern trades with. They are meant for resale not for use in the business. There is a difference between goods and asset. A cement dealer purchases goods means purchase of cement which are meant for resale, that is the purpose of the business. If he purchases a truck to deliver cement to the customers’ place, the truck is known as asset. It is not meant for sale.

Asset:

It refers to tangible or intangible or intangible objects, which carry future benefits. Assets are expected to yield future economic benefits. Assets are of to two types.

            1. Current Assets:

Current Assets are those assets which are held in cash or it is likely to be converted into cash during the accounting year. For example, cash, cash at bank, stock of raw materials, work in process, furnished goods, trade debtors, bills receivable etc.,

            2. Fixed Assets:

Fixed Assets are those assets which are not held for resale in Normal course of business, but are used for the purpose of production of goods or services. Fixed assets may be classified into two types there are Tangible Fixed Assets and Intangible Fixed Assets.

I. Tangible Fixed Assets:

These assets can be seen and touched. Example, buildings, machinery, furniture etc.

II. Intangible Fixed Assets:

These Assets are invisible, can not be seen or touched. It can only be felt. Example: Goodwill, patents, trade marks, copy rights etc.

Liabilities:

Liabilities refer to the financial obligation of an enterprise other than owner’s investment. It may be current liability or long term liability. Current liabilities refer to the liabilities which fall due in a short period i.e. payable during the accounting year. Example, Trade creditors, bills payable, outstanding expenses etc, Long term liabilities refers to those liabilities which do not fall due for payment in a relatively short period. Normally payable beyond one year. Example: Debentures, Long term loans usually on interest basis.

Purchases:

The term purchases refers to the total amount of goods obtained by an enterprise for resale or for use in the production of goods or rendering services in the normal course of business.

Sales:

The term ‘sales’ refers to the amount for which goods are sold or services are rendered. The sales may be for cash or credit.

Expenditure:

The term expenditure refers to the amount incurred in the process of acquiring goods, assets or services may be paid immediately or to be paid in future. The expenditure may be capital expenditure or revenue expenditure.

Income:

It is the amount earned by business due to its business transaction/operations.

Debit and Credit:

These are the two different aspects of business transactions.

Journal:

This is a book of original entry/first entry in which transactions are recorded in chronological order and the transaction recorded in journal called journal entry.

Account:

It is the statement (T-shape) in which the transactions relating to a person, entity, asset, liability, income, expenditure are recorded in terms of debit and credit.

Ledger:

This is a book of secondary entry. This is also called book of final entry. All transactions from journal are recorded in ledger by opening a separate account and their balances are found.

Revenue:

The term revenue refers to the amount charged for the goods sold or services rendered by an enterprise of permitting others to use enterprise’s resources yielding interest, royalty and divided. Example, sales, commission earned, interest earned, divided earned on investments.

Entry:

Entry is the record made in the books of accounts in respect of transaction or even an entry is passed on the basis of vouchers.

Voucher:

Voucher is a document which serves as an evidence of a transaction. The vouchers act as source document on the basis of which transactions are entered in the books of account. Example: For cash purchases, cash memo, and in case of credit purchases, purchase invoice serves as vouchers.

Net Profit:

It means excess of Revenue over expenditure.

Net Loss:

It means excess of expenses and losses over revenues.

Users of Accounting Information

Accounting provides useful information relating to business. Such information is used directly or indirectly by the following interested parties.

Owners:

The owners are interested to know the operational results of the business (profit or loss) and also to know the financial status of the business, because they are ultimate risk takers.

Creditors:

Creditors are the persons who owe money to the business. Both short term and long term creditors need information. Short term creditors need the information to determine whether the amount owing to them will be paid when falls due. Long term creditors are interested in both solvency and liquidity of the business. They are interested to determine whether the enterprise will be in a position to meet its commitment both payment of interest and principal on time.

Investors:

Both present and potential investors need the information to judge the prospects of present and potential investment in the business. Present investors need the information to decide whether they should continue in the present investment or not. Prospective investors need the information to decide whether to invest in the business or not.

Employees:

The interest of the employees in accounting information is related to that they want more salary and other monetary incentives like, bonus, overtime payment etc. They are interested in financial statements on account of various profit sharing and bonus schemes under which they get a share in the profits of the business.

Government:

Government is interest in account statements and reports in order to see the performance of a particular enterprise, its cost structure and income in order to impose income tax, excise duty, commercial taxes etc., The business firms have to pay a part of profit to the Government as tax.

Public:

The Public as consumers is interested in accounting statements in order to know whether the control is exercised on controlling the expenses of the business and the price fixed is reasonable. They can also judge whether the economic resources of the country are being utilized for the benefit of common man or not.

Researchers:

Researchers are interested in accounting statements and reports in order to get data for proving their thesis on which they are working and hence to complete their research project and draw conclusions which may help in formulating future policies in their respect areas.

Management:

The management of an enterprise needs accounting information for planning controlling, evaluation of performance and decision making.