BY
S C MALHOTRA
ASSOCIATE PROFESSOR
SHRI RAM COLLEGE OF COMMERCE
UNIVE$ITY OF DELHI, DELHI-110007
Accounting Process
Various Steps in Accounting Process:
1.
2.
3.
4.
5.
6.
7.
8.
SC Malhotra
SC Malhotra
Owners equity =
Or
Assets
Illustration 1
Show how each of the following transactions of Rama Stores for the month of July, 2010 will be
analyzed under accounting equation approach:
1.
Mr. Ram invested $ 50,000 in cash to commence the business as owner of Rama Stores.
2.
3.
4.
5.
6.
7.
8.
9.
10.
SC Malhotra
Retained
Earnings
Liabili
-ties
= Cash
+50,000
+50,000
2
New Bal
-25,000
+50,000
+50,000
+8,000
+8,000
= +25,000
-10,000
+50,000
-10,000
5
New Bal
+25,000
+8,000
4
New Bal
+25000
= +25,000
3
New Bal
Goods
Assets
Machine Furni
-10,000
+8,000
= +15,000
+20,000
+50,000
-10,000
+25,000 +8,000
+28,000
+25,000 +8,000
+20,000
= +15,000
SC Malhotra
+20,000
+25,000
+8,000
Transaction Capital
No.
Retained
Earnings
Liabili
-ties
= Cash
Goods
Assets
Machine Furni
New Bal
-10,000
+28,000
= +15,000
+20,000
+25,000
+8,000
+35,000
-15,000
= +50,000
+5,000
+25,000
+8.000
+50,000
6
New Bal
+20,000
+50,000
New Bal
+28,000
-2,000
+50,000
8
New Bal
+10,000
+8,000
-2,000
+28,000
= +50,000
+5,000
+23,000
-500
+50,000
+7,500
-500
+28,000
= +50,000
-9,000
New Bal
+50,000
10
-7,000
New Bal
43,000
+7,500
+8,000
+19,000
+5,000
+23,000
+7,500
+5,000
23,000
+7,500
5,000
23,000
7,500
-9,000
= +41,000
-7,000
7,500
19,000
= 34,000
SC Malhotra
Solution 1
Analysis of transactions:
Sl. Capital
No
1
2
3
4
5
6
7
8
9
10
Retained
Earnings
Liabilities
+50,000
Cash
Goods
+50,000
-25,000
Assets
Machin
e
+25,000
+8,000
+8,000
-10,000
-10,000
+20,000
+20,000
-2,000
-500
+35,000
-500
-9,000
-7,000
-7,000
7,500
+20,000
-15,000
-2,000
-9,000
43,000
Furni
19,000
34,000
SC Malhotra
5,000
23,000
7,500
Assets
43,000 Machine
7,500 Furniture
19,000 Stock
Cash
--------69,500
---------
SC Malhotra
$
23,000
7,500
5,000
34,000
--------69,500
---------
The procedure just discussed appears to be quite suitable. But it is not so when it
comes to the record of large number of transactions that occur in actual business
operations.
Where the number of items under different heads is many, the record of transaction
through accounting equation becomes unmanageable. To overcome this problem, an
improvement is made to the above procedure on the following lines:
1.
Each element of accounting equation has plus and minus items. To have
convenience in finding the balance of an element, it is suggested that all plus
items of an element be shown on one side and all minus items on the other.
2.
Instead of showing all the elements of an equation on one page, show them on
different pages.
SC Malhotra
10
ACCOUNT
An account is a record of the transactions that affect a particular
type of asset, liability, or an element of owners equity.
The two sides of an account, usually, take the following form. As
this form resembles the English letter T, it is known as T
form account:
Title of the item
Dr.___________________________________________Cr.
Left side
(Debit)
Right side
(Credit)
SC Malhotra
11
One basic characteristic of account form is that entries recording increases (plus items)
and decreases (minus items) are separated. Conventionally, for showing increases
and decreases the following procedure is followed:
Symbols:
Assets
________________
(Debit)
(Credit)
SC Malhotra
12
= Assets
(Credit)
+
*
Assets + Expenses
Assets + Expenses
(Debit)
+
*
SC Malhotra
(Credit)
-
13
14
1.
Difficulty in recording.
2.
3.
SC Malhotra
15
Format of journal
Date
Particulars
January
L.F.
Dr.
Amount
Cash Account
Dr.
To Rams Capital
(Being a cash of $ 5,85,000 brought
in by Ram as his capital)
___________________________
Alternatively,
Debit Cash
Credit Rams Capital
5,85,000
Machine Account
Dr.
To Cash
(Being purchase of a machine of $
3,40,000 for Solid Machines for
cash vide .)
____________________________
Alternatively,
Debit Machine
SC Malhotra
Credit Cash
3,40,000
Cr.
Amount
5,85,000
5,85,000
5,85,000
3,40,000
3,40,000
3,40,000
16
$50,000
$50,000
SC Malhotra
17
$20,000
$20,000
18
Dr.
SC Malhotra
$12,000
$12,000
19
Dr.
$30,000
Alternatively,
Inventory Account
Dr.
To Z (Accounts payable) Account
$ 30,000
SC Malhotra
$30,000
$ 30,000
20
SC Malhotra
$25,000
$25,000
21
SC Malhotra
Dr.
Dr.
$200
$400
$600
22
SC Malhotra
$100
$100
23
Dr.
$700
$700
SC Malhotra
24
$120
$ 120
25
SC Malhotra
Dr.
$ 4,000
$ 4,000
26
Dr.
SC Malhotra
$2,200
$2,200
27
SC Malhotra
Dr.
$150
$150
28
SC Malhotra
$1,000
29
SC Malhotra
$210
$210
30
SC Malhotra
Dr.
$50
$50
31
$100
$100
32
Particulars
L.F.
SC Malhotra
Dr.
Amount
Cr.
Amount
33
Date
Jan.
Particulars
L.F.
Cash Account
Dr.
To Dharmas Capital Account
[Capital contributed by Dharma
In cash $ 50,000]
______________________________
Cash Account
Dr.
To Bank Loan
[Borrowed $ 20,000 from a bank as loan]
______________________________
Prepaid Rent Account
Dr.
To Cash Account
[To record prepayment of one years rent]
______________________________
Purchases Account
Dr.
To Z (Accounts Payable)
[To record the purchase of inventory on
account]
SC Malhotra
Dr.
Amount
Cr.
Amount
$50,000
$50, 000
$20,000
$20,000
$12,000
$12,000
$30,000
$30,000
34
Date
Jan.
Particulars
Equipment Account
To Cash Account
L.F.
Dr.
Dr.
Amount
Cr.
Amount
$25,000
$25,000
Cash Account
Dr.
Rahims A/c (Accounts Receivable)
Dr.
To Service Revenue
[Service revenue of $ 600 earned; received
$ 200 in cash and a promise to pay $ 400
in future]
_________________________________
Cash Account
Dr.
To Unearned revenue
or
To Revenue received in advance
[Received unearned revenue of $ 100 from
a customer in advance]
SC Malhotra
$200
$400
$600
$100
$100
35
Date
Jan.
Particulars
15
L.F.
Dr.
Dr.
Amount
Cr.
Amount
$700
$700
18
Dr.
$120
$ 120
20
25
SC Malhotra
$ 4,000
$ 4,000
$150
$150
36
Date
Jan.
Particulars
31
L.F.
Dr.
Dr.
Amount
Cr.
Amount
$1,000
$1,000
31
31
$210
$210
$50
$50
31
Dr.
$100
$100
37
SC Malhotra
38
Format of an Account
Dr.
Date
Cr.
Particulars
JF
Amount
Date
SC Malhotra
Particulars
JF
Amount
39
Debit balances
Cash
Prepaid rent
Equipment
Debtors:
Rahim
Khalifa
Purchases
Salary expense
Utility expense
Interest
Rent
Depreciation
Tax
Amount
Credit Balances
Amount
50,000
20,000
30,000
50
120
150
650
4,000
__________
1,04,970
__________
40
2.
3.
Reduce assets
Increase assets, or
Keep assets unchanged.
4.
Increase ,
Decrease, or
Remain unchanged
Increase
Decrease
Remain unchanged
SC Malhotra
41
SC Malhotra
42
2. Traditional Approach
Under this approach, the above accounts are first classified as
a) personal accounts,
b) real accounts and
c) nominal accounts,
and then rules of recording transactions therein are enumerated.
Rules of recording transactions:
a) Personal accounts: Debit the receiver and credit the giver
b) Real accounts: Debit what comes in and credit what goes
out
c) Nominal accounts: Debit all expenses and losses and credit
all incomes and gains
SC Malhotra
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SC Malhotra
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