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Basics of Accounting
In this section, we will familiarize ourselves with the basics of Accounting. The main topics covered in this
section include—Need for Accounting, Accounting Principles, Basic Terms used in Accounting and finally
preparation of the various books of accounts viz. Journal, Ledger, Trial Balance, Trading and Profit and Loss
Account and Balance Sheet.
Accounting Concepts
Every business organisation whether big or small carries out a number of transactions, such as sale of its
products, purchase of raw materials etc. in its daily routine. One cannot memorize each and every
transaction taking place in business. These have to be recorded somewhere. The books which almost every
business organisation maintains for recording transactions are the Books of Accounts.
Dr. Cr.
Particulars Amount Particulars Amount
.
Left Side, is called as Debit Side, Right side, called as Credit Side,
Thus, a simple Cash Account showing inflow and outflow of cash will be as shown below:
. .
When you record a transaction on the Debit side, it is said that you have `debited` the account. Similarly,
when you record a transaction on the Credit side, it is said that you have `credited` the account.
Let us suppose you have a small book store. You have sold some books to your customer, say, X, who has
given you the full amount in return. This is a transaction that took place between you and X. Now, suppose
you deposit all the money received from X in the bank. This is another transaction, between you and the
bank. You can very easily remember these transactions and need not write them anywhere.
But, what if there were a large number of customers, say 100 or even more and most of them have not
given you the full amount due ? This is what really happens in a business. In such a case, you will have to
memorize all the details regarding each and every customer i.e. details of the amount received from them,
the amount due from them etc. which is nearly impossible for anybody.
So, what you can do is to prepare an account of each and every customer in order to record the details of
the transactions with them. This means you have to prepare a large number of accounts i.e one account for
each customer.
For example, suppose you have sold books worth Rs.100 to X and books worth Rs.1000 to Y. X has given
you only Rs.50 and Y has given you Rs.750. To remember the balance due from X and Y, you can record
these transactions by preparing X's Account, Y's Account as well as your own Cash Account. The 3
accounts will be as follows:
2) Show journal entries in respect of the following transactions in the books of Murali.
a. Started business with cash Rs. 15,000, goods worth Rs. 8,000, office equipment worth Rs.
7,000 and his private car worth Rs. 12,000 which will henceforth be used solely for business
purposes
b. Bought furniture worth Rs. 4,000 of which those worth Rs. 1,000 are for office purpose and
balance for stock
c. Purchased 3 motor cars worth Rs. 15,000 each from SV associates for stock
d. Purchased 2 motor cars worth Rs. 8,000 each from Sherif for stock.
e. Purchased for cash 1 motor car worth Rs. 7,000 for private use
f. Returned motor cars worth Rs. 15,000 from stock and that worth Rs. 8,000 from business
use to SV and Sherif
g. Sold old office equipments for Rs. 4,000 (Cost Rs. 7,000; Book value Rs. 5,000)
h. Sold household furniture for Rs. 2,000 and paid in to Business Bank A/C
i. Paid Landlord Rs. 1,200 for rent. ( ½ of the premises used for Murali’s residence)
j. Sold some office equipments for Rs. 1,300 (Proceeds being received as Rs. 700 by cheque
and balance in cash) and the cheque was paid into private bank A/C