Basics of Accounting & Bookkeeping

BASICS OF BUSINESS
MATHEMATICS
by :
DR. T.K. JAIN
AFTERSCHO☺OL
centre for social entrepreneurship
sivakamu veterinary hospital road
bikaner 334001 rajasthan, india
www.afterschoool.tk
mobile : 91+9414430763
5 DECEMBER 09 www.afterschoool.tk 1
What is debit and credit
Every transaction has two aspects – debit and

credit.
Basic accounting equation :
assets = liabilities + equity
debit denotes assets and credit denotes liability
every transaction has some impact on asset /
liability or on both.
How does it work?
If asset will increase, liability will also

increase, if assets will decrease, liability will
also decrease, thus the equation is always
balanced : A=L+E
analyse each transaction in terms of its impact
on A / L / E
this is the fundamental concept in double entry
system
Some examples of debit / credit
If you buy building, assets will increase, thus

when you make a journal entry, you have to
debit building account
if you borrow, liabilities will increase, thus you
have to credit loan account.
Three rules to make your task
easier
1. debit what comes in, credit what goes out
(real accounts – regarding assets)
2. debit receiver, credit the giver (personal
accounts – regarding debtors, creditors, and
other such accounts)
3. debit all expenses, credit all income
(nominal accounts – relating to income and
expenditures)
Journalising – the first step
When we prepare accounts, we start with

journalising. We prepare journal entry to
denote debit or credit entry and thus we are
able to understand the impact of each
transaction.
In journalising, we classify each transaction in
two parts – debit impact and credit impact
How to journalise?
Look at the transaction, find its two aspects

and analyse them.
If you buy a building, assets will increase
(building is an asset, so assets will increase),
but assets will decrease also (you buy building
against cash / bank balance)
thus for increase in assets, you have to debit,
for decrease in asset, you have to credit
Steps in accounting
Journalise & preparation of day books

posting to ledgers
preparation of trial balance
preparation of control accounts (if any)
preparation of final accounts
preparation of cash flow / funds flow statement
analysis of accounts (ratio analysis etc.)
Example of transactions :
Purchase of furniture : (increase in assets –

furniture, decrease in assets – cash)
purchase of goods on credit (increase of stock
– assets, increase in creditors)
sale of goods against cash (increase in income
and increase in assets – cash)
Some important facts
Equity / capital is a liability

loss is an assets and profit is a liability
expenditure contributes to loss, therefore it is
treated like an asset
revenue / income contributes to profit,
therefore it is treated like a liability
Remember the basic
classification..
Assets give real accounts

liability create personal accounts
debtors (assets) and creditors (liability) create
personal accounts
income and expenditure create nominal
accounts
Systems of accounting
Nominal accounts are closed every year and

their balance is transferred to P & L account
real account and personal accounts are not
closed and they continue year after year and
their balance is shown in balance sheet.
If balance sheet doesnot tally, prepare a
suspense account to ensure that balance tallies.
Trial balance
In trial balance, you have to show the balance

of every account on the date of preparation of
trial balance.
Thus it is collection of balance of all the
accounts that you have. By default, it will be
having equal totals of debit and credit side.
Thus it will balance, if it doesnt, it means there
is some error. Trace out the error and rectify it.
Examples of accounting entries
Purchase of raw material against cash :

purchase account debit, cash account credit
(purchase is a real account, as it denotes stock,
which is an asset and this account will never be
closed, cash is also an assets, when you buy
goods, assets increase and assets decrease thus
debit and credit both affect assets, no change in
liability)
example...
Payment of salary out of cash

salary account debit, cash account credit
(salary is a nominal account, it is an
expenditure, and all expenditures are treated
like assets, but it is nominal account so this
account will be closed at the end of the year
and transferred to P & L account, cash is also
an asset)
P & L account
It will contain only the balance / totals of nominal
accounts
it will not contain balance / total of any real account or of
any personal account.
It has two parts – debit and credit
debit part denotes only expenditure and credit denotes
only income / revenue.
If debit is more, we have loss, if credit is more, we have
profit, which will be shown in balance sheet
Balance sheet
It denotes only the balance / total of only real

accounts and personal accounts. It does not
show balance of nominal accounts.
Some nominal accounts continue for one more
year, they will be shown in balance sheet.
Example : outstanding expenditure, accrued
income will be shown in balance sheet
(although they are nominal accounts)
Adjustment entries...
At the end of the year, some adjustment entries

are made, and these adjustment entries are
necessary while account finalisation.
Exmaple : outstanding expenditure, acrued
income etc.
What is outstanding expenditure?
In accounting, we generally mercantile system, in which

all the income and expenditure related to this year will be
recorded in this year's accounts. Thus if some expenditure
has taken place, but we have not paid for it, it is
outstanding expenditure.
Suppose, rent of Feb. And March are outstanding, we
have not paid them, but we have to treat them in P & L
account and show them as outstanding expenditure.
What is accrued income ?
In accounting, we generally mercantile system, in which

all the income and expenditure related to this year will be
recorded in this year's accounts. Thus if some income has
taken place, but we have not received it it, it is accrued
income.
Suppose, interest receivable of Feb. And March are
outstanding, we havent received them, but we have to
treat them in P & L account and show them as accrued
income
WHAT IS CAPITAL RECEIPT?
Receipt which are of the nature of fixed capital

are called capital receipt
WHAT IS REVENUE RECEIPT?
Receipts which are of the nature of circulating

capital are called capital receipt
Circulating capital is that part of the capital
which is turned over in the business and which
ultimately results in profit or loss.
Machinery in the hands of a
manufacturer is ....
Fixed capital – it is fixed assets – it is shown in the balance
sheet as an asset.
When you buy it the entry is :
machinary account debit,
bank account credit
later on you have to show depreciation every year on this.
Suppose machine cost 1000, its life is 10 year, so you will
show 100 every year for 10 years as depreciation in P& L
account
What is trading account ?
Trading accout is prepared by manufacturing

companies to show their gross profit. It denotes all
the expenditure till manufacturing.
The debit side of trading account contains
expenditures like wages, raw material purchased,
carriage inward, etc. The credit side (right side) of
trading account contains items like revenue, sales etc.
The difference of debit and credit side is called gross
profit / loss.
example...
Prepare trading and profit and loss account and
balance sheet from the following itmes :
sales:200, purchase :50, wages :30, salary 50,
rent:10, postage :5, furniture : 20, building : 50
capital: 50, loan : 100, creditors : 30, debtors :
50, cash : 20, inventory opening stock : 20,
closing stock : 50, carriage outward : 20,
carriage inward : 10, interest recd. : 5, interest
paid : 10, Investments : 30
Solution – Trading account
• DEBIT SIDE • CREDIT SIDE
• Opening stock 20 • Sales 200
• Purchase 50 • Closing stock 50
• Carriage inward 10 • Total = 250
• Wages 30
• Gross profit 140
• Total = 250
Solution : Profit and loss account
• Rent : 10 • Gross profit 140
• Carriage outward 20 • Interest received 5
• Salaries 50 •
• Postage 5
•
• Interest paid : 10
•
• Net profit : 50
• Total 145 • Total 145
SOLUTION : BALANCE SHEET
• LIABILITIES • ASSETS
• Capital : 50 • Building 50
• Loan : 100 • Furniture 20
• Profit : 50 • Investments : 30
• Creditors : 30 • Inventory : 50
• TOTAL 230 • Cash : 30
• Debtors : 50
• TOTAL : 230
ADDITIONAL INFORMATION
We have not provided for depreciation, which

has to be provided
in the annual accounts of a company, we have
to follow the prescribed proforma of a
company as provided in the comapnies act and
we have to prepare it strictly as per that
proforma.
Example...
Prepare trading and profit and loss account and
balance sheet from the following itmes :
sales:200, purchase :50, wages 20, outstanding
wages :10, salary 50 outstanding salary 10, ,
rent:20, prepaid rent 10, building : 50 capital:
50, loan : 100, cash : 20, inventory opening
stock : 20, closing stock : 50, interest recd. : 5,
interest acrued but not yet received 5, interest
paid : 10, interest yet to be paid 10,
Investments
5 DECEMBER 09
: 30 rate of depceciation
www.afterschoool.tk
: 10% 30
Solution – Trading account
• Opening stock 20 • Sales 200
• Purchase 50 • Closing stock 50
• Carriage inward 10 • Total = 250
• Wages (20+10) 30
• Gross profit 140
• Total = 250
Solution : Profit and loss account
• Rent : (20-10) = 10 • Gross profit 140
• Carriage outward 20 • Interest received 5
• Salaries (50+10) 60 • Acrued Interest 5
• Depreciation 5
•
• Interest (10+10) 20
• Total 150
• Net profit 35
• Total 150
SOLUTION : BALANCE SHEET
• LIABILITIES • ASSETS
• Capital : 50 • Building (50-5)45
• Loan : 100 • Investments : 30
• Profit : 35 • Inventory : 50
• Outs. salary10 • Prepaid rent 10
• Outs. Wages 10 • Acrued Interest 5
• Interest due 10 • Cash : 30
• TOTAL : 215 • Suspense : 45
• TOTAL : 215
THANKS....
GIVE YOUR SUGGESTIONS AND JOIN

AFTERSCHOOOL NETWORK / START
AFTERSCHOOOL NETWORK IN YOUR
CITY
AFTERSCHOOOL@IN.COM
PGPSE – WORLD'S MOST
COMPREHENSIVE PROGRAMME IN
SOCIAL ENTREPRENEURSHIP

Basics of Accounting & Bookkeeping

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Basics of Accounting & Bookkeeping

Uploaded by

Copyright:

Available Formats

BASICS OF BUSINESS

Every transaction has two aspects – debit and

If asset will increase, liability will also

If you buy building, assets will increase, thus

When we prepare accounts, we start with

Look at the transaction, find its two aspects

Journalise & preparation of day books

Purchase of furniture : (increase in assets –

Equity / capital is a liability

Assets give real accounts

Nominal accounts are closed every year and

In trial balance, you have to show the balance

Purchase of raw material against cash :

Payment of salary out of cash

It denotes only the balance / total of only real

At the end of the year, some adjustment entries

In accounting, we generally mercantile system, in which

In accounting, we generally mercantile system, in which

Receipt which are of the nature of fixed capital

Receipts which are of the nature of circulating

Trading accout is prepared by manufacturing

We have not provided for depreciation, which

GIVE YOUR SUGGESTIONS AND JOIN

You might also like