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Types of Account and rules of Debit & Credit

An account is a summary of the relevant transactions at one place relating to a particular head. It records a group of similar transactions relating to one person, one kind of property or any class of expenses or incomes. In accounting, the left hand side is known as Debit side of an account and the right hand side is known as Credit side of an account. Debit & Credit simply additions to or subtraction from an account.

Types of Accounting
Personal Account Real Account Nominal Account

Types of Accounting
Personal Account : It includes an accounts of customers/debtors or suppliers/creditor, moneylender, banks & owner. Real Account : This includes accounts of Assets & Properties such as Land, Building, Plant, Machinery, Cash, Investment, Stock, Inventory, etc. Nominal Accounts : This includes accounts of incomes & expenses and gains & losses.

Types of Account
Personal Natural Artificial or Legal Representative

Impersonal Real Tangible Intangible Nominal Expenses & Losses Revenue Income & Gain

Rules of Debit & Credit


Personal A/C Debit the Receiver Credit the Giver Real A/C Debit what comes in Credit what goes out Nominal A/C Debit all Expenses and losses Credit all incomes and gains

Rules of Debit & Credit


Debit Signifies Increase in assets accounts Decrease in liability accounts Decrease in Owners equity accounts Credit Signifies Decrease in assets accounts Increase in liability accounts Increase in owners equity accounts

Balance Sheet
Liabilities Account For decreases For increases Assets account For increases For decreases

Owners Equity Accounting For decreases For increases

What is a journal entry in Accounting?


Journal entry is an entry to the journal. Journal is a record that keeps accounting transactions in chronological order, i.e. as they occur. Ledger is a record that keeps accounting transactions by accounts. Account is a unit to record and summarize accounting transactions.
All accounting transactions are recorded through journal entries that show account names, amounts, and whether those accounts are recorded in debit or credit side of accounts.
1.

T-Account
This form looks like a letter "T", so it is called a T-account. T-account is a convenient form to analyze accounts, because it shows both debit and credit sides of the account.
Account Debit Dr. Credit Cr.

Transaction 1: Company A sold its products at Rs.1200 and received the full amount in cash. Steps 1 2 Self-Questions What did Company A receive? If Company A received cash, how would this affect the cash balance? Which side of cash account represents the increase in cash? What is the account name to record the sales of products. Which side of sales account represents the increase in sales? Cash. Receiving cash increases the cash balance of the company. Debit side (Left side). Sales. Credit side (Right side). Answers

3 4 5

Does the sum of debit side amounts equal to the sum of credit side amounts? In other words, does this journal entry balance?

Yes. 1200 = 1200

Journal entry to record transaction 1


Transaction 1: Company A sold its products at 1200 and received the full amount in cash.
Cash A/C To Sales A/C Dr. Rs.1200 Rs.1200

Transaction 2: Company A purchased supplies and paid Rs.5000 in cash.


Steps 1 Self-Questions What did Company A receive? Supplies. Answers

If Company A received supplies, how It increases supplies would this affect the supplies balance. balance?
Which side of supplies account represents the increase in cash? What did Company A pay? Which side of cash account represents the decrease in cash? Debit side (Left side). Cash. Credit side (Right side).

3 4 5

Does the sum of debit side amounts equal to the sum of credit side amounts? In other words, does this journal entry balance?

Yes. Rs.5000 = Rs. 5000

[Journal entry to record transaction 2]

Supplies A/C To Cash A/C

Dr. Rs.5000 Rs.5000

Transaction 3
Owner invested Rs.10,000 in the company. Analysis of Transaction Step 1. Debit or Credit? Increase in Assets (Cash) by Rs.10,000 Debit To Increase in Owner's Equity by Rs.10,000 Credit Journal Entry Debit Credit Cash A/C Dr. 10,000 To Capital A/C 10,000 Description of Journal Entry Owner invested Rs.10,000 in the company.

Results of Journal Entry


Cash balance increases by Rs.10,000. --> Increase in Assets Owner's Equity balance increases by Rs.10,000. --> Increase in Owner's Equity

Transaction 4. The company borrowed Rs.20,000 from a bank.


Analysis of Transaction Steps Debit or Credit? 1.Increase in Assets (Cash) by Rs.20,000 Debit 2.Increase in Liabilities (Borrowings) by Rs.20,000 Credit Journal Entry Debit Credit Cash A/C 20,000 To Borrowings A/C 20,000

Description of Journal Entry Borrowed Rs.20,000. Results of Journal Entry Cash balance increases by Rs.20,000. --> Increase in Assets Borrowings balance increases by Rs.10,000. --> Increase in Liabilities

Proforma of Journal
Date Particulars L.F. Debit (Rs.) Credit (Rs.)

DATE: The date on which the transaction was entered is recorded here. PARTICULARS: The two aspects of transaction are recorded in this column L.F.: It means Ledger Folio. The transactions entered in the journal are later on posted to the ledger. DEBIT: The amount to be debited is entered. CREDIT : The amount to be credited is shown.

Journalize the following transactions. Also state the nature of each account involved in the journal entry 1st Dec 2011, Ajit started business with cash Rs.40,000. Dec.3, he paid into the bank Rs.20,000. Dec.5, he purchased goods for Rs.15,000. Dec.8, he sold goods for cash Rs.6000. Dec.10, he purchased furniture and paid by cheque Rs.5000. Dec.12, he sold goods to Arvind Rs.4000. Dec.14, he purchased goods from Amrit Rs.10000. Dec.15, he returned goods to Amrit Rs.5000.

Contd.
Date Dec.1 Particulars Cash A/C Dr. To Capital A/C (Being commencement of business with 40000) Nature of Account Real A/C Personal A/C L.F Debit (Rs.) 40000 Credit (Rs.) 40000

Dec.3

Bank A/C Dr. Personal A/C To Cash A/C Real A/C (Being cash deposited in the bank) Purchase A/C Dr. To Cash A/C (Being purchase of goods for cash) Cash A/C Dr. To Sales A/C (Being goods sold for cash) Real A/C Real A/C

20000

20000

Dec.5

15000

15000

Dec.8

Real A/C Real A/C

5000

5000

Contd.
Date Particulars Nature of Account Real A/C Personal A/C L.F. Debit (Rs.) 5000 Credit (Rs.) 5000

Dec. 10 Furniture A/C Dr. To Bank A/C (Being purchase of furniture)

Dec. 12 Arvind A/C Dr. To Sales A/C (Being sales of goods)

Personal A/C Real A/C

4000

4000

Dec. 14 Purchase A/C Dr. Real A/C To Amrit A/C Personal A/c (Being purchase of goods from Amrit) Dec. 15 Amrit A/C Dr. To Purchase returns A/C (Being goods returned to Amrit) Personal A/C Real A/C

10000

10000

5000

5000

Journalize the following Transactions in the books of ABC ltd.


1.Started business with a capital of Rs.7500. 2.Opened a bank account with state bank of India for Rs.2000. 3.Paid commission to X for Rs.300. 4.Purchased goods from K &co. for cash Rs.1000. 5.Purchased goods from Mr.Z for Rs.2000. 6.Goods returned to Mr.Z. for Rs.500. 7.Paid to Mr.Z in full settlement of Rs.1400.

Journal Entries in the books of ABC Ltd.


Date 1. Particulars Cash A/C Dr. To Capital A/C (Being Cash taken to start business.) Effects of Transaction Increase in Assets(Cash) Increase in Capital L.F. Debit (Rs.) 7500 Credit (Rs.) 7500

2.

Bank A/C Dr. Increase in Assets(Bank) To Cash A/C Decrease in Assets(Cash) (Being Cash deposited into Bank.) Commission A/C Dr. Increase in expenses To Cash A/C Decrease in Assets(Cash) (Being Commission paid in cash) Purchase A/C Dr. To Cash A/C (Being Goods purchased from K & Co. for cash) Increase in Assets(Stock) Decrease in Assets(Cash)

2000

2000

3.

300

300

4.

1000

1000

Contd.
Date Particulars Effects of Transaction L.F. Debit (Rs.) Credit (Rs.)

5.

Purchase A/C Dr. To Mr.Z A/C (Being Goods purchased from Mr.Z on credit)

Increase in Assets(Stock) Increase in Liability

2000

2000

6.

Mr.Z A/C Dr. Decrease in Liability To Returns Decrease in Assets(Stock) outward A/c (Being Goods returned to Mr.Z) Mr.Z A/C Dr. To Cash A/C To Discount Received A/C (Being cash paid to Mr.Z and received Decrease in Liability Decrease in Assets(Cash)

500

500

7.

1500

1400 100

Contd.
8. Received interest on investments for Rs. 400. 9. Paid rent to landlord Mr.Y for Rs.500. 10. Withdrew cash for household expenses amounted to Rs.600. 11. Sold goods to Mr.L for cash Rs. 2500. 12. Sold goods to Mr.D on credit for Rs.1000. 13. Goods returned by Mr.D for Rs.250. 14. Received cash from Mr.D in full settlement for Rs.700. 15. Paid carriage on goods purchased for Rs.350. 16. Paid carriage on goods sold for Rs.800.

Contd.
Date 8. Particulars Cash A/C Dr. To Interest on investment A/C (Being Interest received in cash) Rent A/C To Cash A/C (Being rent paid in cash) Dr. L.F. Debit (Rs.) 400 Credit (Rs.) 400

9.

500

500

10.

Drawings A/C Dr. To Cash A/C (Being cash withdrawn for household expenses.) Cash A/C To Sales A/C (Being goods sold for cash) Dr.

600

600

11.

2500

2500

Contd.
Date 12. Particulars D A/C Dr. To Sales (Being Goods sold to D on credit) Returns Inward A/C Dr. To D A/C (Being Goods returned by D) Cash A/C Dr. Discount Allowed A/C Dr. To D A/C (Being cash received from D and allowed him discount) Carriage Inward A/C Dr. To Cash A/C (Being carriage paid for goods purchased) Carriage Outward A/C Dr. To Cash A/C (Being Carriage paid for goods sold) L.F. Debit (Rs.) 1000 Credit (Rs.) 1000

13.

250

250

14.

700 50

750

15.

350

350

16.

800

800

Compound Journal Entry


Sometimes there are number of transactions on the same date relating to one particular account or one particular nature. Such entries can be passed by one single journal entry instead of passing an individual journal entry. It may be recorded in any of the following three ways: One particular account may be debited while several accounts may be credited. One particular account may be credited while several accounts may be debited. Several accounts may be debited and several accounts may be credited.

A compound entry:
Pass the opening entry on 01.01.2009 on the basis of the following information taken from business of Mr.Shubham. Amt.(Rs.) 1. Cash in hand 20,000 2. Sundry Debtors 60,000 3. Stock in Trade 40,000 4. Plant and Machinery 50,000 5. Land and Building 1,00,000 6. Sundry Creditors 1,00,000

Contd.
Date Particulars L.F. Debit (Rs.) Credit (Rs.)

01.01.09

Cash A/C Dr. Sundry Debtors A/C Dr. Stock in trade A/C Dr. Plant and Machinery A/C Dr. Land and Building A/C Dr. To Sundry Creditors A/C To Capital A/C (Being the balance brought forward from the last year)

20,000 60,000 40,000 50,000 1,00,000

1,00,000 1,70,000

Journal Entries in the books of Roy ltd.


Date 1. January 1 Particulars Mr. Roy started his business with Rs.50000 which he brought as his capital in cash. He purchased goods worth Rs.30000 in cash and Rs.20000 on credit. He paid Rs.500 as wages for sorting and packing the goods.

2. January 10

3. January 12

Contd.
Date Jan. 01 Particulars Cash A/C Dr. To Capital A/C (Being cash taken to start business.) Purchase A/C Dr. To Cash A/C To Creditors A/C (Being goods purchased on cash & credit both.) Wages A/C Dr. To Cash A/C (Being wages paid for sorting and packaging of goods.) L.F. Debit (Rs.) 50,000 Credit (Rs.)

50,000

Jan. 10

50,000

30,000 20,000

Jan. 12

500

500

4. January 15

He sold goods originally purchased at Rs.35000 for Rs.20000 in cash and Rs.25000 on credit to several customers. He paid Rs.8000 in cash to his suppliers for goods purchased earlier on credit. He received Rs.15000 from his debtors for goods sold.

5. January 16 6.January 20 7. January 31

He paid Rs.1000 in cash towards rent.

Contd.
Date Jan. 15(a) Particulars Cash A/C Dr. Debtors A/C Dr. To Sales A/C (Being Goods sold, partly for cash and partly on credit) Sales A/C Dr. To Purchase A/C To Profit & Loss A/C (Being profit earned by selling goods) Creditors A/C To Cash A/C (Being Rs.8000 paid cash to suppliers) Dr. L.F. Debit (Rs.) 20000 25000 Credit (Rs.)

45000

Jan 15(b)

45000

35000 10000

Jan.16

8000

8000

Contd.
Date Jan.20 Particulars Cash A/C Dr. To Debtors A/C (Being cash payment received from customers.) Rent A/C Dr. To Cash A/C (Being rent for the month paid in cash.) L.F. Debit (Rs.) 15000 Credit (Rs.) 15000

Jan. 31

1000

1000

Ledger
A Ledger is a book which contains all the accounts whether personal, real or nominal, which are first entered in Journal. According to L.C.Cropper, The book which contains a classified and permanent record of all the transactions of a business is called the Ledger.

Proforma of Ledger
Date Particulars J.F. Amount (Rs.) Date Particulars J.F. Amount (Rs.)

Utility of Ledger
1) It provides complete information about all accounts in one book. 2) It enables to ascertain what the main items of revenues are. 3) It enables to ascertain what the main items of expenses are. 4) It enables to ascertain which are the assets and its values. 5) It enables to ascertain which are the liabilities and its values. 6) It facilitates the preparation of Final Accounts.

Dr. Particulars 1. To capital A/c 4. To Sales A/C 6. To Debtors A/C J.F.

Ledger A/C of Cash A/C


Amount (Rs.) 50,000 20,000 15,000 Particulars 2. By Purchase A/C 3. By wages A/C 5. By Creditors A/C 7. By Rent A/C Balance Carried Down 85,000 J.F.

Cr. Amount (Rs.) 30,000 500 8000 1000 39,500 45,500 85,000

Balance Carried Forward

45,500

Dr

Capital A/C
Particulars J.F. Amount (Rs.) Particulars 1 By Cash A/C J.F.

Cr.

Amount (Rs.) 50,000

Balance Carried down

50,000
Balance brought forward 50,000

Dr. Particulars (2)To Cash A/C

Purchase A/C
J.F. Amount (Rs.) 30,000 20,000 Balance carried down 50,000 Particulars (4b) By Sales A/C J.F.

Cr. Amount (Rs.) 35,000 15,000 50,000

(2)To Creditors A/C

Balance brought forward

15,000

Dr. Particulars (4b) To Purchase A/C (4b) To Profit & loss A/C

Sales A/C
J.F. Amount (Rs.) 35,000 10,000 Particulars (4a) By Cash A/C (4a) By Debtors A/C

Cr. J.F. Amount (Rs.) 20,000 25,000

45,000

45,000

Dr. Particulars (4) To Sales A/C

Debtors A/C
J.F. Amount (Rs.) 25,000 25000 Particulars (6) By Cash A/C Balance carried down J.F.

Cr. Amount (Rs.) 15,000 10,000 25000

Balance brought forward

10,000

Dr. Particulars (5) To Cash A/C

Creditors A/C
J.F. Amount. (Rs.) 8000 12,000 20,000 Balance brought forward Particulars (2) By Purchase A/C

Cr. J.F. Amount (Rs.) 20,000

Balance carried down

20,000 12,000

Dr.

Profit & Loss A/c


J.F. Amount . (Rs.) Particulars J.F . By Sales A/C

Cr. Amoun t (Rs.) 10,000

Particulars

Balance Carried down

10,000

Balance brought forward

10,000

Dr. Particulars To Cash A/C

Wages A/C
J.F. Amount (Rs.) 500 Balance carried down Particulars J.F .

Cr. Amount (Rs.)

500

Balance brought forward

500

Dr. Particulars

Rent A/C
J.F. Amount (Rs.) 1000 Particulars J.F .

Cr. Amount (Rs.)

To Cash A/C

Balance carried down

1000

Balance brought forward

1000

Trial Balance
Trial Balance is a statement, prepared with the debit and credit balances of ledger accounts to test the arithmetical of the books. If the totals of the debit and credit amount columns of the trial balance are equal, it is presumed that the posting to the ledger in terms of debit and credit amounts is accurate.

Dr.

Trial Balance
Particulars Amount (Rs.) 15,000 Sales 10,000 Creditors 500 Profit & Loss A/c 1,000 72,000 Particulars 45,500 Capital

Cr. Amount (Rs.) 50,000 12,000 10,000 72,000

Cash Purchases Debtors Wages Rent

Journalize the following transactions in the books of Ramesh Ltd. and post them into Ledgers.
1) Started business with a capital of Rs.5,000. 2) Sold goods to Mr. X for Rs.500. 3) Received cash from Mr.X Rs.450 in full settlement 4) Purchased goods from Mr.T for Rs.1,500. 5) Paid to Mr.T in full in cash Rs.1,450. 6) Paid Salary to Mr.Z Rs.300. 7) Purchased a plant for Rs.1,000. 8) Sold goods for cash Rs.1,300. 9) Received interest Rs.50 10) Deposited cash into bank Rs.1,000 11) Paid Wages Rs.100. 12) Withdrew cash from bank for personal use Rs.200.

Journal Entries in the books of Ramesh Ltd.


Date 1. Particulars Cash A/C Dr. To Capital A/c (Being business started with a capital) X A/c To Sales A/c (Being goods sold to Mr.X ) Dr. L.F . Debit (Rs.) 5,000 5,000 500 Credit (Rs.)

2.

500

3.

Cash A/c Dr. Discount Allowed A/c Dr. To X A/c (Being cash received from Mr.X in full settlement )

450 50

500

Date 4.

Particulars Purchase A/c Dr. To T A/c (Being goods purchased from T)

L.F .

Debit (Rs.) 1,500

Credit (Rs.)

1,500

5.

T A/c Dr. To Cash A/c To Discount Received A/c (Being cash paid to T in full settlement) Salary A/c To cash A/c (Being salary paid in cash ) Dr.

1,500

1,450 50

6.

300

300

Date 7.

Particulars Plant A/c Dr. To Cash A/c (Being plant purchased for cash) Cash A/c To Sales A/c (Being goods sold for cash) Dr.

L.F .

Debit (Rs.) 1,000

Credit (Rs.)

1,000 1,300 1,300

8.

9.

Cash A/c Dr. To Interest A/c (Being interest received in cash)


Bank A/c Dr. To cash A/c (Being cash deposited into bank )

50

50

10.

1,000

1,000

Date 4.

Particulars Wages A/c To Cash A/c (Being wages paid in cash) Dr.

L.F .

Debit (Rs.) 100

Credit (Rs.)

100 200 200

5.

Drawings A/c Dr. To Bank A/c (Being cash withdrawn from bank for personal use)

12,950 12,950