2. Meaning of Account
Understand the rules of debit and credit applicable
to different type of business transactions
Identify the stages of accounting cycle
Appreciate the role of journal in recording
business transactions
Pass appropriate entries for recording
transactions in the journal
2
3. It is a summarized record of relevant transactions
at one place relating to a particular head. It
records amount as well as direction of
transactions
4. Conventionally, the left side of an account is
known as the debit (abbreviated Dr.) side and the
right side as the credit (abbreviated Cr.) side. The
account balance is always of the higher side.
4
5. Assets: tangible and intangible items that the company owns that
have value. Tangible assets are physical entities such as land,
buildings, vehicles, equipment, cash, computer systems and
inventory. Intangible assets include Accounts Receivables, patents,
and contracts etc.
Liabilities: money that the company owes to others (e.g. mortgages,
vehicle loans)
Equity: that portion of the total assets that the owners or
stockholders of the company fully own
Revenue or Income: money the company earns from its sales of
products or services, and interest and dividends earned from
marketable securities
Expenses: money the company spends to produce the goods or
services that it sells (e.g. office supplies, utilities, advertising, rent,
entertainment, travel etc.)
5
6. These are simply additions to or subtraction from
an account
Increase in assets and expenses are debits,
decreases are credits
Increase in Liability, Owner’s Capital and
Revenue/ Income are credits, decreases are
debits
7. 7
Debit for increase (+)Debit for increase (+)
Credit for decrease (-)Credit for decrease (-)
Debit for increase (+)Debit for increase (+)
Credit for decrease (-)Credit for decrease (-)
Any Expense AccountAny Expense AccountAny Asset AccountAny Asset Account
Debit for decrease (-)Debit for decrease (-)
Credit for increase (+)Credit for increase (+)
Debit for decrease (-)Debit for decrease (-)
Credit for increase (+)Credit for increase (+)
Any Revenue AccountAny Revenue AccountAny Liability AccountAny Liability Account
8. All the business transactions are categorized into
three types:
◦ Transactions related to persons
◦ Transactions related to properties and assets
◦ Transactions related to income and expenses
Depending upon the types of transactions, the
accounts under which the transactions are
recorded are classified into personal, real and
nominal accounts.
8
9. Personal account includes accounts of persons and organizations
with whom the business deals.
Types of personal accounts:
◦ Natural personal accounts: It includes accounts of persons
such as John’s Account.
◦ Artificial personal accounts: It includes accounts of
organizations such as accounts of company, club and
Government.
◦ Representative personal accounts: It includes accounts that
represent a group of persons such as outstanding salaries
account for employees.
Rule of debit and credit
◦ Debit the receiver
◦ Credit the giver
9
10. Real accounts represent accounts of properties and
assets.
Types of real accounts:
◦ Tangible real accounts: It represents accounts of things that
can be touched or measured, such as cash account, furniture
account and stock account.
◦ Intangible real accounts: It represents accounts of things that
cannot be touched, such as patent account and goodwill
account.
Rule of debit and credit:
◦ Debit what comes in
◦ Credit what goes out
10
11. Nominal accounts represent accounts for incomes,
gains, expenses and losses.
Example: rent account, rates account , insurance
account, loss by fire account, discount, legal expenses,
postage, stationary, advertisement, bad debts,
depreciation etc.
Rule of debit and credit:
◦ Debit all expenses and losses
◦ Credit all incomes and gains
11
12. All the entries are to be recorded with the business point of view
In case of goods purchased, Purchases A/C is debited not the
goods A/C
In case of sale of goods, Sales A/C is credited because goods are
sold to generate an income during the year
If owner withdraws cash or goods, Drawing A/C is to be debited
If cash is paid to a specific person for benefits received or cash is
received from a particular person for providing benefits, then the
particular expenses or income accounts need to be debited or
credited and not the personal accounts of these persons
If an mount is due to be paid for any benefit received, then it is
transferred to “outstanding expenses a/c till the time payment is
made
12
13. The mount is due to be received for the services rendered, then
its transferred to “accrued income a/c” till the time amount is
received
In case of purchase and sales transactions: if nothing is
mentioned (name), then consider it as a cash transaction
Unless instructed to the contrary, assume that all transactions
for the purchase or sale of goods are on credit.
Name of the buyer or seller in the case of cash sale or cash
purchase need not be given as money is simply exchanged for
goods
Where word paid is used are cash transactions
Purchase A/C for purchase of goods and Sales A/C for sales of
goods
13
14. The amount of trade discount is deducted from the gross value
of goods purchased or sold but not specifically shown in the
transaction
Cash discount is always calculated on the amount of cash
transactions and not on credit transactions after deducting
trade discount (if any)
Purchase returns is recorded in Purchase return A/C or
Returns Outward
Sales return is recorded in Sales Return A/C or Returns
Inward
Any expenditure incurred on purchase of fixed assets should
be capitalized and debited to the particular asset account
If a debtor becomes insolvent, it is treated as a business loss
and transferred to an account called Bad Debts A/c
14
15.
16. Journal is a book that records all daily
transactions in the chronological order of date.
It is also known as book of original entry.
The process of recording a transaction in Journal
is known as Journalising.
16
DateDate ParticularsParticulars L.F.L.F.
DebitDebit
Rs.Rs.
CreditCredit
Rs.Rs.
17. Illustration: John starts a business with capital of Rs.
20,000 on Jan 1, 2000. He purchased furniture for cash
of Rs. 5,000 on Jan 5, 2000. He paid rent for business
premises of Rs. 2,000 on Jan 10, 2000.
17
18. The stages involved in accounting cycle are:
◦ Creating Journal for recording transactions
◦ Creating Ledger for classifying the transactions recorded
in Journal
◦ Preparing Trial Balance, Trading Account, Profit and
Loss Account and Balance Sheet for summarising the
results of transactions
◦ Computing accounting ratios for determining the liquidity,
solvency and profitability of business
18
19. Practice the exercise questions of
Chapter 3
From A Text Book of Accounting for Management
by Maheshwari
