0This covers a portion from the second chapter of Accounting Module 1 of CA Foundation- Accounting Process. This is equally applicable for students who are beginners in accountancy.
In this, we will learn – what is books of accounts, Accounting Equation and Basic Accounting Procedure, that is “Journal Entries.”
Double Entry System.
Dual Entry System for bookkeeping was first advocated by Luca Pashioli, an Italian mathematician about 500 years ago in 1494.
It says, every transaction has two aspects, DEBIT & CREDIT, wherein both aspects have the same value. That is, one is a debit entry, and the other is credit entry.
- Debit to denote an entry on the left side of an account. It is written as Dr.
- Credit to denote an entry on the right side of an account. It is written as Cr.
You should Give proper attention while learning debit and credit aspects as it is the basics of accounting.
Under debit aspect, you have, expenses, losses and assets.
Under Credit aspect, you have income, gain, Liability & Capital.
Accounting Equation.
The fundamental accounting equation is Assets=Liabilities+ Capital.
Let us analyse this equation.
- Assets-Assets are things of value owned by the business. Assets are classified as fixed assets and current assets. Fixed assets are purchased for operating the business and not for resale like land, building etc. Current assets are those which are kept for a short term for converting into cash or for resale. Example, stock, cash, debtors etc.
- Capital means the Amount invested in a firm. It is also known as owner’s equity or net worth. As per the entity concept, the owner of the business is considered as a separate person. That means, for the firm, capital is liability towards the owner.
- Liability means the amount which the firm owes to outsiders. Generally which are payable within one year are treated as a short-term like creditors, bank overdrafts etc.
If the term exceeds one year like debentures, they are treated as a long-term liability.
Basic Accounting Procedure - “ Journal Entries”.
Under the traditional approach, accounts can be classified as personal accounts, real accounts and nominal accounts. Personal accounts relate to persons such as debtors, creditors etc.
Real accounts represent both tangible and intangible assets of a business. Nominal accounts relate to income, expenses, gains and losses such as interest paid. The commission received etc.
Golden Rule to Traditional Approach are:
- In case of Personal Accounts,
Debit the receiver, credit the giver,
- Real Accounts,
Debit what comes in, credit what goes out,
- Nominal Accounts,
Debit all expenses and losses and credit all incomes and gains.
Now we are not using the traditional approach. As per Modern Approach of accounting, a transaction is recorded as:
- Assets, Losses or expenses are debited for an increase in value and credited for the decrease.
- Income, gain, Liabilities and capital are credited for the increase in value and debited for the decrease.
We saw the rules of Modern Approach to Accounting. You are also required to give proper care while drawing the journal format also. It should contain the columns for Date, Particulars, Debit and Credit and a proper narration to explain the nature of the transaction. If the date is not available in the question, you may use serial numbers.
Now, Let us see how to draft Journal Entries.
- Commenced business with rupees fifty thousand.- We have to decode this transaction as what is debit and what is credit. The first aspect is Cash which is coming into business (or bank if it a deposit in the bank account) and the second aspect is the capital. Cash is an asset. To show an increase in value, cash is debited. On the other hand, capital is shown in credit side to indicate an increase in value.
- Purchase of computer for rupees twenty thousand- Computer is an asset. There is an increase in the value of computer. Hence it needs to be debited. Likewise, cash is reducing, or your bank balance is reducing when you are making a purchase. To show the reduction in value of an asset, it needs to be credited.
- Goods purchased for rupees five thousand or in other words, Cash purchases for rupees five thousand- When there is the purchase of goods, we use the term “Purchases” instead of goods. This is a regular expense for a business. To show the increase in expenses, the “Purchases account” is debited. To show the decrease in cash or bank balance it is credited.
Hope this write up is useful in understanding the basic concepts of accounting. This will be effective if you perform the practical questions also.
