2. Acc And Journals

Classification of Accounts On the basis of business transaction relating to persons, properties and assets, income and expenses the accounts are classified as:

   

Real A/c Nominal A/c Personal A/c Valuation A/c



Personal A/c- These are accounts of

individuals, firms, companies, bankers, associations with whom businessman deals



Real A/c- These are the accounts of

properties, assets or possessions of the businessman



Nominal A/c- These are accounts of

expenses or losses & gains or incomes



Valuation A/c- These are accounts which

are concerned with valuation of assets viz. provision for depreciation, provision for doubtful debts etc.

Classification of Accounts – 

Personal A/c

Types of personal A/c

Natural Personal A/c

Artificial Personal A/c

Groups/ Representative Personal A/c

Rule of Personal Account DEBIT THE RECEIVER CREDIT THE GIVER

For ex: if cash is paid to Ram, Ram a/c ……………………………………Dr To, Cash a/c

Classification of Accounts – 

Real A/c

Types of Real A/c

Tangible Real A/c

Intangible Real A/c

Rule of Real Account DEBIT WHAT COMES IN CREDIT WHAT GOES OUT

For ex: If building is purchased for cash, Building a/c …………………….. Dr Cash a/c

Classification of Accounts – 

Nominal A/c

Types of Nominal A/c

Expenses and Losses A/c

Incomes and Gains A/c

Rule of Nominal Account DEBIT ALL EXPENSES AND LOSSES CREDIT ALL INCOME AND GAINS

For ex: Rent paid by cash, Rent a/c…………………………………….Dr To, cash a/c

Golden rules of Accounting 

Real A/c : Dr what comes in & Cr what goes out

 Personal A/c : Dr the receiver & Cr the giver

 Nominal A/c : Dr all expenses & losses & Cr all Incomes & Gains

 Valuation A/c : Dr the A/c when it is

Both real a/c as well as Nominal a/c are impersonal a/cs. However when some prefix or suffix is added to a Nominal a/c it becomes a Personal a/c. Nominal Account Rent account Interest account Salary account

Personal account Rent prepaid a/c, Outstanding rent a/c, Prepaid interest a/c, Outstanding interest a/c, Interest received in advance a/c Prepaid salaries a/c, Outstanding salaries a/c

Insurance account

Prepaid Insurance a/c, Outstanding Insurance a/c

Commission account

Prepaid Commission a/c, Outstanding Commission a/c



Accounting Equation :

Assets = Liabilities + Owners Equity



The rules of Dr & Cr :

viii)Dr increase in assets, Cr decrease in

assets ix) Dr decrease in liabilities, Cr increase in liabilities x) Dr decrease in Owners equity, Cr increase in Owners equity

Transaction Rent paid Salaries paid Interest received Furniture purchased Machinery sold

Accounts involved

Nature of a/c

Debit/ Credit

Rent a/c

Nominal a/c

Debit

Cash a/c

Real a/c

Credit

Salaries a/c

Nominal a/c

Debit

Cash a/c

Real a/c

Credit

Cash a/c

Real a/c

Debit

Interest a/c

Nominal a/c

Credit

Furniture a/c

Real a/c

Debit

Cash a/c

Real a/c

Credit

Cash a/c

Real a/c

Debit

Machinery a/c

Real a/c

Credit

Salaries outstanding

Salaries a/c

Nominal a/c

Debit

O/S Salaries a/c

Personal a/c

Credit

Telephone charges paid

Telephone charges a/ca/c Cash

Nominal a/c

Debit

Real a/c

Credit

Suresh a/c

Personal a/c

Debit

Cash a/c

Real a/c

Credit

Cash a/c

Real a/c

Debit

Capital a/c

Personal a/c

Credit

Paid to Suresh Received from Mohan (owner)

Journalising Transaction: 

A journal is a book of primary entry. First all the transactions are recorded in the journal & subsequently they are posted in ledger. Date

Particulars

L .F.

Debit (Rs)

Credit (Rs)

Steps in converting Transactions into Journal Entries  Identify the transactions from the source documents such as receipt, voucher.  Determine the nature of a transaction i.e.

its effect on business  Determine the two aspects of the transaction. Find out the two accounts involved

Steps in converting Transactions into Journal Entries Determine the type of each account.  Determine how the accounts are

affected. See who is the receiver or giver or whether there is an expense or loss & income or gain

 Apply the rule of journalising. Decide

which account is debited and which account is credited.

Compound Journal entries Some transactions may be recorded by means of a

single journal entries instead of passing several journal entries. Such entry (single) regarding recording a number of transactions is termed as a ‘Compound Journal entry’. Such entry may be recorded in any of the following

ways:  One particular a/c may be debited while several others

may be credited.  One particular a/c may be credited while several others may be debited.  Several a/cs may be debited and several other a/cs may be credited.

Compound Journal entries Illustration: Pass a compound journal entry in the following cases:  Payment made to Ram Rs.

discount of Rs

1000. He allowed a cash

50

 Cash received from Suresh Rs.

800 and allowed him

a cash discount of Rs. 50.  A running business was purchased by Mohan with following assets and liabilities: Cash Rs. 2000, Land Rs 4000, Furniture Rs 1000, Stock Rs 2000, Creditors Rs 1000, Bank overdraft Rs 2000

Opening Entry In case of running business, the assets and

liabilities appearing in the previous year’s balance sheet are brought forward to the current year with the help of a journal entry known as ‘opening entry’. All assets accounts are debited and all liabilities

accounts are credited. The excess of assets over liabilities is the proprietor’s capital and is credited to his capital account.

Pass the Opening Entry on January 1, 2008 on the basis of the following information taken from the business of Mr. Sunil Cash in hand 2000 6000 Stock of goods 4000 5000 Land and building 10000 10000 Date Particulars 2008 Sol. Jan. 1

JOURNAL Cash A/c Dr. Sundry Debtors A/c Dr. Stock A/c Dr. Plant A/c Dr. Land and Building A/c Dr. To, sundry creditors

Sundry debtors Plant Sundry creditors L. F

Rs.

Rs.

2000 6000 4000 5000 10000 10000 17000

27000

27000

LEDGER A ledger is the principal book of accounts. It is a group of accounts; it contains an

account for each asset, liability, revenue & expense A/c It contains all accounts of the business enterprise whether Real, Nominal or Personal. Particulars

JF

Dr.

Amt.

Particular

Account Cr.

JF

Amt.

Posting process : 

The term ‘Posting’ means transferring the debit and credit items from the Journal to their respective accounts in the Ledger.



While transferring the transaction from journal to ledger, the transactions are classified. For each person, head of expenditure, income, asset etc. separate accounts are opened in the ledger.



On debit side : Write the name of the credited a/c in the journal after the word “To”. On the credit side : Write the name of the debited a/c in the journal after the word “By”.



Posting process : 

All the transactions relating to a particular a/c should be recorded in the a/c already opened. No new a/c of the same name should be opened in the ledger



The concerned a/c which has been debited (credited) in the journal should also be debited (credited) in the Ledger. However, a reference should be made of the other a/c which has been credited (debited) in the Journal.



At the end of the accounting period, the a/cs are balanced



If the debit side is heavier the difference will appear on the credit side as, “By balance c/d” in the particulars column. If the credit side is heavier, the difference will appear on the debit side as , “To balance c/d”

Journalise the following transactions and post them into the Ledger: Ram started business with a capital of Rs 10000 He purchased furniture for cash Rs 4000 He purchased goods from Mohan on credit Rs 2000 He paid cash to Mohan Rs 1000  Sol:

Journal

Date

Particulars Cash A/c Dr. To, Capital A/c Furniture A/c

LF

Debit (Rs) 10000

Credit (Rs) 10000

4000

Dr.

4000

To, Cash Purchases A/c A/c Dr. Mohan To, A/c Mohan Dr.

2000 2000 1000 1000

To, Cash A/c

Purpose of balancing ledger a/cs: 

The technique of finding out the net balance of an account after considering the totals of both debit and credit appearing in the account is known as ‘Balancing the account’.



Personal a/cs are balanced to know whether a person is a debtor or a creditor. A debit balance indicates that the person is our debtor & a credit balance indicates that the person is our creditor .



A debit balance of a real a/c means an asset & a credit balance means liability



Debit balance of a nominal a/c means expense & a credit balance represents income

Relationship between Journal and a Ledger  The transactions are first recorded in the Journal and

then they are posted in the Ledger. Thus, the Journal is the book of original or primary entry, while Ledger is the book of second or principal entry.  Journal records transaction in a chronological order,

whereas the Ledger records transaction in an analytical order.  Journal is more reliable as compared to the Ledger

since it is the in which the entry is passed first of all.  The process of recording transactions is termed as

‘Journalising’, while the process of recording transaction in a Ledger is known as ‘Posting’.