Professional Documents
Culture Documents
Structure:
3.1 Introduction
3.2 Meaning of double entry accounting
3.3 Cash and mercantile system of double entry system
3.4 Accounting trail
3.5 Transactions and events
3.6 Preparation of vouchers
3.7 Financial statements and their nature
3.8 Accounting equation
3.9 Effect of transactions on accounting equation
3.10 Meaning and rules of debit and credit
3.1 Introduction
The dual aspect concept of accounting is a full-proof system of recording,
having the advantage of internal checking. The very fact that every
transaction is recorded of its debit and credit aspects indicates that the final
accounts of an organization takes into consideration every small or big
transaction and the impact is every account is absorbed in the preparation
of final financial statements. Double entry book keeping is definitely an
improvement and more systematically designed than single entry system,
where only a few personal and real accounts are considered. In this unit, the
process of accounting – recording, journalizing, posting, ledger balancing,
preparation of trial balance, preparation of final statements of accounts – is
described along with the effect of every transaction on accounting equation.
The rules of debit and credit as applicable to various types of accounts are
also discussed.
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Financial and Management Accounting Unit 3
Learning Objectives:
After studying this unit, you should be able to understand the following:
1. To know what double entry book keeping means.
2. To understand the process of accounting, known as accounting trail.
3. To know the nature of financial statements.
4. To formulate an Accounting equation basing on debits and credits.
5. To know practically the impact of each transaction on the Accounting
Equation.
6. To summarize the rules of debit and credit as applicable to different
types of accounts.
The students should be able to appreciate the double entry system and
know the accounting process.
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Financial and Management Accounting Unit 3
In the first transaction, the business receives capital in cash and so capital
account and cash account are affected. Capital is a liability and cash is an
asset to the business.
100000 100000
The third transaction is buying goods for cash, which means that stock of
goods are received and cash balance is reduced and this can be reflected in
the statement as under.
Capital Rs.100000 Cash Rs (90000 – 50000) 40000
Furniture 10000
Stock of goods 50000
100000 100000
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Financial and Management Accounting Unit 3
110000 110000
The fifth transaction is payment of wages, which means that cash account is
affected and profit is reduced as a result of the expenditure(wages account).
This changes the statement as shown below:
Capital Rs. 100000 Cash (40000 – 1000) 39000
Profit (10000-1000) Furniture 10000
9000 Stock of goods 20000
Arjun 40000
109000 109000
From the above illustration, it is clear that every transaction has dual effect
and recording these two aspects which are known as debit and credit
aspects is the fundamental idea behind double entry system of book
keeping. So the meaning of double entry system is that every transaction is
recorded by identifying the two or more accounts affected therein and
suitably reflect them in the financial statements. This is a system where
internal cross checking is ensured.
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Financial and Management Accounting Unit 3
2. Show the dual aspect effect of the following transactions on the assets
and liabilities of business.
a. Purchased goods for cash Rs.80000
b. Purchased delivery van on credit for Rs.400000
c. Paid Rs.5000 to a supplier of goods on credit
d. The proprietor withdrew Rs.20000 from the bank account of
business for Personal expenses.
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Financial and Management Accounting Unit 3
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Financial and Management Accounting Unit 3
Real accounts are those which may be tangible real accounts and intangible
real accounts. Tangible real accounts relate to things that can be touched,
felt, physically measurable. Building account, furniture account, stock
account, cash account etc are tangible real accounts. Intangible real
accounts are such that they can not be seen or touched. They can be
measured in terms of money such as goodwill, patent rights etc.
Nominal accounts are also known as impersonal accounts. They are in the
form of expenses or losses, incomes or gains. They do not really exist in
physical form, but behind every nominal account cash is involved. For
example, salary account is a nominal account and when salary is paid, the
reality is the cash goes out and there is nothing salary in physical form.
Therefore salary account is regarded as nominal account. Similarly all
expenses and losses and all incomes and gains accounts are regarded as
nominal accounts.
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Financial and Management Accounting Unit 3
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Financial and Management Accounting Unit 3
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Financial and Management Accounting Unit 3
expenses, cash in hand, cash at bank etc., Trading account or profit and
loss account and balance sheet are prepared at the end of a particular
accounting period, say one year. In Unit 7, details about balance sheet
preparation are given.
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Financial and Management Accounting Unit 3
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Financial and Management Accounting Unit 3
CASH ACCOUNT
Debit Side Credit Side
Date particulars Ledger Amount Date Particulars Ledger Amount
Folio (Rs) Folio (Rs)
2005 2005
Jan. 1 To Balance brought down 20000 Jan 05 By salaries 10900
Jan15 To Joseph 35 10900 Jan 25 By Furniture 123 6000
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Financial and Management Accounting Unit 3
CASH ACCOUNT
2005 LF Rs Rs Rs
Jan 1 Opening balance b /d 20000 20000
Jan 5 Salaries 10900 9100
Jan 15 Joseph 35 10900 20000
Jan 25 Furniture 123 6000 14000
Jan 28 Sales 18 108900 122900
Jan 30 Purchases 19 58800 64100
Jan 31 Rent 298 7500 56600
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Financial and Management Accounting Unit 3
The rules of debit and credit for different classes of accounts are the
following
1. In respect of personal accounts : Debit the receiver and credit the giver
2. In respect of real accounts : Debit what comes in and credit what
goes out
3. In respect of nominal accounts : Debit all expenses and losses and
credit all incomes and gains.
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Financial and Management Accounting Unit 3
Solution:
Transaction Accounts affected Account to be debited and account to be
No in the books of the credited
business
01 Capital account Cash account being real account is debited
and cash account and Capital account being personal account
is credited
02 Goods account and Goods account being real account is
creditors account debited and creditor’s account being
personal account is credited
03 Personal drawings Drawings account being personal account is
account and cash debited and cash account being real
account account is credited
04 Goods account and Goods account being real account is
cash account debited and cash account being real
account is credited
05 Wages account Wages account being nominal account is
and cash account debited and cash account being real
account is credited
06 Cash account and Creditor’s account being personal account
creditors account is debited and cash account being real
account is credited
07 Goods account, Debtor’s account being personal account is
Debtor’s account debited, profit transferred to capital account
and profit account being personal account is credited and
goods account being real account is also
credited
09 Furniture account Furniture account being real account is
and Cash account debited and cash account being real
account is credited
10 Cash account and Cash account being real account is debited
debtor’s account and debtor’s account being personal
account is credited.
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Financial and Management Accounting Unit 3
01 70000 70000
02 14000 14000
03 - 3000 -3000
04 - 12000 +12000
05 - 5000 -5000
06 -10000 -10000
07 -18000 22000 +4000
08 +6000 - 3000 +3000
09 -5000 5000
10 +11000 - 11000
End 52000+ 5000 + 11000 + 5000 + 4000 + 69000
equation
73000 73000
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Financial and Management Accounting Unit 3
Terminal Questions
1. The accounting equation is Assets = _______________ +
_______________.
2. State the meaning of double entry book keeping.
3. State the remarkable difference between cash system and mercantile
system of double entry.
4. State the important accounting trail.
5. Classify the following accounts as personal, real and nominal
a. Land account b. outstanding expenses account
c. capital account
d. ABC co Ltd., account e. Discount received account
f. salaries account
6. A voucher is a document which _______________ cash
disbursement.
7. What is a trading account?
8. The result of a trading account is ____________ or
_______________.
9. Net profit or net loss is the result of ____________________account.
10. Give a list of any four items of assets.
11. Name any four items that appear on the liabilities side of balance
sheet.
12. Balance sheet is a ________________________ of affairs of a
business.
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3. True
4. i) Event ii) Event iii) Transaction iv) Transaction v) Event
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