Session 2 Ma (9th May 2012)

MANAGEMENT
ACCOUNTING
Accounting: The Language
of Business
• Accounting - a process of identifying,
recording, summarizing, and reporting
economic information to decision makers in
the form of financial statements
• Financial accounting - focuses on the specific

needs of decision makers external to the
organization, such as stockholders, suppliers,
banks, and government agencies
The Nature of Accounting
• The accounting system is a series of steps
performed to analyze, record, quantify,
accumulate, summarize, classify, report, and
interpret economic events and their effects on
an organization and to prepare the financial
statements.
The Nature of Accounting
• Accounting systems are designed to meet the
needs of the decisions makers who use the
financial information.
• Every business has some sort of accounting
system.
– These accounting systems may be very complex or
very simple, but the real value of any accounting
system lies in the information that the system
provides.
Accounting as an Aid to
Decision Making
Fundamental relationships in the decision-

making process:
Accountant’s
Financial
Event analysis & Users
Statements
recording
Financial vs. Managerial Accounting
Financial Accounting rules are set by users who agree among themselves on
the regulations for (GAAP). This is hard data, objectively verifiable, that must
meet audit criteria to be acceptable. It is therefore considered reliable.
Managerial Accounting rules are set within the company to accomplish

management objectives related to adding value to the company. This is data that
could be soft, or estimates, that must only improve the value of decisions more
than the cost of information. Managerial accounting data must only be relevant
for management decisions.
The major distinction between financial and management accounting is the users of the
information.
Financial accounting serves external users.
Management accounting serves internal users, such as top executives, management,
and administrators within
organizations.
Users of Accounting Information
Management Accounting Financial Accounting
External Users
Internal managers
Investors: Stockholders
Creditors:
Day-to-day operating decisions Suppliers
Long-range strategic decisions Bankers
Government Authorities
The Three Management Functions
Questions asked: • Management functions:
What do I want to do? – Planning for the future

(Strategic)
How can I do it? – Planning for the future
(Operational)
Am I getting it done? – Monitoring and controlling
the present
How well did I do it? – Evaluating the past
Financial and Management Accounting
The primary questions about an organization’s

success that decision makers want to know
are:
• What is the financial picture of the

organization on a given day?
• How well did the organization do during a

given period?
Decision Making
Scorekeeping: Attention Directing:

Evaluate Compare Actual Results
Organizational to Expected
Performance
Problem Solving:
Assess Possible
Courses of Action
Decision Making
Decision making: the purposeful choice

from among a set of alternative courses
of action designed to achieve some objective.
Planning: Setting Control: Implementing

objectives and outlining plans and using feedback
how the objectives will to evaluate the attainment
be obtained. of objectives.
Financial and Management Accounting
• Annual report - a document prepared by

management and distributed to current and
potential investors to inform them about the
company’s past performance and future
prospects.
– The annual report is one of the most common
sources of financial information used by investors
and managers.
ASSUMPTIONS PRINCIPLES CONSTRAINTS
1. Economic entity 1. Historical cost 1. Cost-benefit
2. Going concern 2. Revenue recognition 2. Materiality Third
3. Monetary unit 3. Matching 3. Industry practice level
4. Periodicity 4. Full disclosure 4. Conservatism
QUALITATIVE
CHARACTERISTICS ELEMENTS
Relevance Assets, Liabilities, and Equity
Investments by owners
Reliability Distribution to owners Second level
Comparability Comprehensive income
Revenues and Expenses
Consistency Gains and Losses
OBJECTIVES
1. Useful in investment
and credit decisions
2. Useful in assessing
future cash flows First level
3. About enterprise
resources, claims to
resources, and
changes in them
The Accounting Equation
Assets = Liabilities + Owner’s Equity
The resources
owned by a
business
The rights of the

creditors, which
represent debts
of the business
The rights of the

owners
The effect of Accounting Equation
1 When an asset is brought into the business (Dr), it affects the assets positively
(+ or increases the number of assets) and when it is reduced or removed from
the business it affects the Assets Account negatively (Cr)(-).
2 When a Liability is brought into the business (Cr), it affects the Liabilities
positively (+ or increases the number of Liabilities) and when it is reduced or
removed it affects the Liabilities negatively (Dr)(-).
3 Owners Equity is affected by drawings (taking cash or goods for personal use)
negatively (-) because money or goods are withdrawn for personal. Incomes and
expenses also affect Owners equity. Incomes and additional investment into the
business increase owners’ equity (+) (Cr) and losses/expenses and drawings
decreases owners’ equity (-) (Dr).
What is a business
transaction?
A business transaction is an economic event or

condition that directly changes an entity’s financial
condition or directly affects its results of operations.
Some Basic Terms of Accounting
What is an Asset : Include everything a corporation owns or everything that is due to

it.
What is a liability : What your business owes creditors.
What is an expense : an expense is an outflow of money to another person or group

to pay for an item or service, or for a category of costs.
What is an income : refers to consumption opportunity gained by an entity within a

specified time frame, which is generally expressed in monetary terms.
What is owners equity: The amount of money the shareholders have invested in the
business.
Some Basic Terms of Accounting –
Related Examples
The following are examples of items classified as assets:
Cash, Stock / Inventory, Investments , Accounts Receivable / Debtors
Prepaid Expenses, Vehicles, Land, Buildings, Equipment, Furniture and Fixtures,
Intangible assets are goodwill, copyrights, trademark, patents and computer programs.
The following are examples of items classified as liabilities:
Bank overdraft, Accounts Payable / Creditors , Accrued expenses, e.g. insurance
accrued. Prepaid income, e.g. rent (received) prepaid, Bank loans, Long-term
liabilities (mortgage bonds), Debentures
The following are examples of items classified as expenses:
Insurance paid, Rent paid, Water and lights paid, Discount allowed, Stationary
paid, Petrol and oil paid, Purchases, Telephone paid, Interest paid, Income tax
VAT
The following are examples of items classified as incomes:
Rent received, Discount received, Sales , Interest received, Retained income / Net
profit
On November 1,
2005, Chris
Clark begins a
business that will
be known as
NetSolutions.
a. Chris Clark deposits $25,000 in a bank
account in the name of NetSolutions.
Assets = Owner’s Equity

Cash Chris Clark, Capital
= 25,000 Investment
a. 25,000
by Chris
Clark
b. NetSolutions exchanged $20,000 for land.
Assets = Owner’s Equity

Cash + Land Chris Clark, Capital
Bal. 25,000 = 25,000
b. –20,000 +20,000
Bal. 5,000 20,000 25,000
c. During the month, NetSolutions purchased
supplies for $1,350 and agreed to pay the
supplier in the near future (on account).
Owner’s
Assets = Liabilities + Equity
Accounts Chris Clark,
Cash + Supplies + Land Payable Capital
=
Bal. 5,000 20,000 25,000
c. + 1,350 + 1,350
Bal. 5,000 1,350 20,000 1,350 25,000
d. NetSolutions provided services to
customers, earning fees of $7,500 and
received the amount in cash.
Owner’s
Bal. 5,000 1,350 20,000 = 1,350 25,000
d. + 7,500 + 7,500 Fees
earned
Bal. 12,500 1,350 20,000 1,350 32,500
e. NetSolutions paid the following
expenses: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.
Owner’s
Bal. 12,500 1,350 20,000 1,350 32,500
e. – 3,650 = –2,125 Wages
– 800 Rent
– 450 Util.
– 275 Misc.
Bal.8,850 1,350 20,000 1,350 28,850
f. NetSolutions paid $950 to
creditors during the month.
Owner’s
Bal. 8,850 1,350 20,000 = 1,350 28,850
f. – 950 – 950
Bal. 7,900 1,350 20,000 400 28,850
g. At the end of the month, the cost
of supplies on hand is $550, so
$800 of supplies were used.
Owner’s
Bal. 7,900 1,350 20,000 = 400 28,850
g. – 800 – 800 Supplies
expense
Bal. 7,900 550 20,000 400 28,050
h. At the end of the month, Chris
withdrew $2,000 in cash from the
business for personal use.
Owner’s
Bal. 7,900 550 20,000 = 400 28,050
h. –2,000 –2,000 With-
drawal
Bal. 5,900 550 20,000 400 26,050
Example of the effect of Accounting Equation
Transaction / Scenario Owners’ / Shareholder's
Equity
No. Assets Liabilities
Issue shares for cash or other assets R6 000

1 + R6, 000 + R6, 000
Buying assets by borrowing money (taking
2 a loan from a bank or simply buying on + R10, 000 + R10, 000
credit)
Selling assets for cash to pay off liabilities:
3 both assets and liabilities are reduced - R900 - R900
Buying assets by paying cash: Shareholder's

4 money (R600) and borrowed money (R400) + R1, 000 + R400 + R600
Earning revenues
5 + R700 + R700
Paying expenses (e.g. rent or professional

6
fees) or dividends - R200 - R200
Recording expenses, but not paying them at
7
the moment + R100 - R100
8 Paying a debt that you owe - R500 - R500

Accounting Cycle
Journal Entries In Accounting
A business entity enters into a lot of transactions daily in the course of its
business
e.g. Purchase of raw materials; sale of goods; payments of expenses like
salaries, wages, commissions, fees, rent taxes; receipt of many non operating
incomes like rent; interest on investments; royalty; apprenticeship premium;
commissions etc.
Each transaction influences the profits of the business.In business you have
to take into account all these transactions if you want to find out the results of
the business.
And hence you should record all the transactions properly on regular basis.
This purpose is achieved by the book called JOURNAL.

The word "Journal" means "Daily".
 Thus as is clear from the name itself,
Journal is a book in which you keep a record of all the transactions on a daily
basis.
All rthe transactions are entered into this book in a chronological order i.e. in
the order of time. For example the transaction taking place on 2nd march is
recorded before the transaction which took place on 5th march.
The process of recording the transaction in the Journal or making entry in the
journal is called Journalizing.
Since transactions are first of all recorded in this book,
Journal is also called "The Book Of Original Entry'. Entries in the Journal are
recorded on the basis of source Documents like Cash Memos, Vouchers etc
which serve as an evidence of a transaction. Entries in the Journal are made on
the basis of ' Rules Of Journalizing'.
As in accounting there are some specified formats for all types of accounting
statements or accounts etc ,
Journal also has a format of its own which is given as under.

Explanation of all the columns of Journal
1. Date --------------- Under this column we write the date on which the
transaction occurred.
2. Particulars---------- Under this column some brief explanation of the

accounts to be debited and credited is given.
3. L.F.------------------- L.F. means Ledger Folio. Ledger is book in which

we keep an account under a separate name for all types of accounts.
Folio means page number. So L.F. means the page
number in Ledger on which that particular account exists.
4. Debit Amount----- In this column we record the amount against the

account which has been debited.
5. Credit Amount---- In this column we record the amount against the

account which has been credited.
To record transactions, accounting system uses double-entry accounting.
Double-entry implies that transactions are always recorded using two sides,
debit and credit.
Debit refers to the left-hand side and credit refers to the right-hand side of the
journal entry or account.
The sum of debit side amounts should equal to the sum of credit side
amounts.
A journal entry is called "balanced" when the sum of debit side amounts
equals to the sum of credit side amounts.
All journal entries have two “sides”:
• Debit and Credit
– For every journal entry, the total debits must equal
the total credits
– This ensures that the fundamental accounting equation (A = L
+ OE) is always in balance.
The basic journal entry:

Debit Account name1 $amount
Credit Account name2 $amount
To record…
• The Basic Accounting Elements:
Asset Expense
Owners’
Liability Revenue
Equity
Balance
Sheet/
Balance Income
Sheet Statement Stmt of
Retained
Earnings
Debit Asset Expense
Owners’
Credit Liability Revenue
Equity
• To increase an Asset or Expense: Debit

• To increase a Liability, Revenue, or Owners’ Equity:
Credit
• To decrease an Asset or Expense: Credit
• To decrease a Liability, Revenue, or Owners’ Equity:
Debit
• Going back to the Fundamental Accounting

Equation:
Assets = Liabilities + Owners’ Equity
Debit Credit Credit
• Going back to the Fundamental Accounting Equation:
Assets = Liabilities + Owners’ Equity
Debit Credit Credit

Assets Liabilities Direct investment
Current assets Current liabilities Capital stock
Long-term assets Long-term liabilities Indirect investment
Dividends (debit)
Retained earnings
Revenue (credit)
Expense (debit)
Journal Entries
• Usually one side (the Debit or the Credit) will be
obvious from the transaction (e.g. when cash is
received, cash (an asset) increases. The Debit
has to be to cash).
• It is the determination of the other side of the
entry that requires thought and judgment.
• It is best to reason logically:
1. Which financial statement should be impacted?
• Balance sheet, Income statement, or Stmt of Retained Earnings?
2. Which element on that statement should be impacted?
3. Which specific account should be impacted?
Assets Liabilities Owners’ Equity

Current assets Current liabilities Direct investment
• Cash • Accts payable Capital stock
• Accts Long-term liabilities Indirect investment
receivable • Bank loan Dividends (debit)
Long-term assets Retained earnings
• Building Revenue (credit)
• Land Expense (debit)
Account Element
Accounts
Personal Impersonal
Natural Artificial Representative Real Nominal
Tangible Intangible
Classification of Accounts:-
• Personal Account:- when a transaction involved with a person known as
personal account such as Mr. Roy, Bose& sons ABC Ltd. co. etc.
• Nominal Account:- All recurring expenses/incomes are known as Nominal

Account, such as salary, Rent, Interest etc.
• Real Account:- Other than above two accounts all are fall under this
category, such as Machinery, Furniture etc
Golden Rule of Debit and Credit

· In case of Personal Account - Debit the receiver and Credit the giver.
· In case of Nominal Account- Debit all expenses and losses and Credit all
Income and liabilities.
· In case of Real Accounts - Debit what comes in and credit what goes out
Accounting Journal Entry Examples 01
* Cash payment transactions

1. Purchase of assets in cash
2. Repayment of liabilities in cash
3. Payment of expenses in cash
* Cash receipt transactions

4. Sale of assets in cash
5. Borrowing money
6. Issuance of stock
* Cash payment transactions

1. Purchase of assets in cash
1a. Purchased merchandise and paid $2,000 in cash
1b. Purchased an equipment and paid $15,000 in cash
2. Repayment of liabilities in cash

2a. Repaid $7,000 of bank loans
2b. Paid $3,000 accounts payable
3. Payment of expenses in cash

3a. Paid $3,500 rent expense
3b. Paid $6,000 salaries expense
* Cash receipt transactions

4. Sale of assets in cash
4a. Sold merchandise and received $6,500 in cash
The cost of merchandise sold was 5,100
4b. Sold an equipment and received $8,600 in cash
The book value of the equipment was $8,000
5. Borrowing money
5a. Borrowed $9,000 in cash
5b. Issued a promissory note and received $11,000 in cash
6. Issuance of stock
6a. Issued 500 shares of common stock, at $50 per share
6b. Issued 200 shares of preferred stock, at $80 per share
FINAL
ACCOUNTS
•WITH
ADJUSTMENTs
Final accounts are prepared to achieve the objectives of accountancy. A
businessman is Interested to know the final result of the business– Whether
he has earned profit or suffered loss in that particular amounting period.The
businessman prepares certain financial statements at the end of accounting
period.
In order to know profit or loss income statement or trading and profit and loss
account is prepared.
Balance sheet or position statement will portray the financial condition of a

firm on particular date.
These two statements i.e. trading and profit and loss Account and balance
sheet are prepared to give final results of the business, that is why both these
are collectively called Final Accounts.
Thus, final accounts include the preparation of
Trading and profit & loss account; and Balance
sheet.
POINT TO REMEMBER:
The basis of preparation of final

accounts is the trial balance containing debit
and credit balances.
The primary learning objectives of preparing final accounts
are :
(i) To find out the profit or loss (financial performance)

of a business during one accounting
(ii) To know the financial position (health) of a business

i.e., the position of assets ,liabilities and Capital at the end
of the accounting period.
Those transactions which relate to the accounting period for which
financial statements are being prepared but are not included in the
trial balance because these transaction have not yet been recorded
in the books of accounts are called “ADJUSTMENTS”.
In addition to it, those transactions which have been recoded in the

books of accounts but they do not relate to the accounting period for
which accounts are being prepared are also called
“ADJUSTMENTS”.
1. Outstanding Expenses
2. Prepaid Expenses
3. Accrued Income
4. Income received in advance
5. Closing Stock
6. Depreciation
7. Interest on Capital
8. Interest on Drawings
9. Bad Debts to be written off
10. Provision for Bad Debts
11. Provision for discount on Debtors
12. Goods withdrawn for domestic use
13. Opening Stock
14. Goods used in Business (free samples, charity or Gifts)
Treatment of Adjustments
in Final Accounts
Some Important and Common Adjustments
are listed below:
• Closing Stock:-
Adjustment Entry:
Closing Stock A/c--------Dr
To Trading A/c
• The Closing Stock is treated in the Final Accounts as follows:-

 On the Credit Side of “Trading A/c”, shown as separate item.
 On the Assets Side of the Balance Sheet, shown as a separate item under
“Current Assets”.
Dr. Cr. Liabilities Amount Assets Amount in

in Rs. Rs.
Particulars Amount Particulars Amount in
in Rs. Rs. Current Assets:
Closing Stock xxxxxxxxxx
By Closing Stock xxxxxxxxxx
Adjusted Purchases and Closing Stock
• Sometimes the Closing Stock may be given in the Trial Balance itself.
This would mean that both the Opening and the Closing Stocks have
been adjusted in the Purchases.
• In such a situation, the Opening Stock will not appear in Trial
Balance.
• The Trial Balance will show only the figures of Adjusted Purchases
and Closing Stock.
• The Adjusted Purchases are in fact the Cost of Goods Sold.
• They have been worked out by adding the Opening Stock + Net
Purchases + Direct Expenses – Closing Stock.
• The Adjusted Purchases are shown on the debit side of “Trading
Account”.
• In such a situation there is no need to show “Closing Stock in the
Trading Account” as it already stands adjusted in Purchases.
• It will be shown only on the “Assets side of Balance Sheet”.
• Outstanding Salaries:-
Adjustment Entry:
Concerned Expense A/c--------Dr
To Outstanding Expenses A/c
• The Outstanding Expenses is treated in Final Accounts as follows:-

 Added to the concerned expenses in the “Trading and Profit and Loss
A/c”.
 Shown on the Liabilities side of the Balance Sheet as a separate item
under “Current Liabilities”.
Dr. Cr. Liabilities Amount in Assets Amount in

Rs. Rs.
Particulars Amount in Particulars Amount in
Rs. Rs. Current
Liabilities:
To Expenses Xxxxxx
Outstanding Exp. Xxxxxx
Add: Xxxxxx
Outstanding
Expenses
Outstanding Expenses:-
• Outstanding Expenses are those expenses which have been

incurred during Current accounting year but have not been
paid till the end of the year.
• The Common examples of such expenses are the Salaries,
Wages and Rent for the last month of the Accounting year
paid in the first month of the Next year.
• Since they remained unpaid as at the end of Accounting year,
no entry might have been passed in the books of account.
• So, they must be taken into account while preparing the
Trading and Profit and Loss A/c, otherwise it will not reveal
the correct amount of Profit or Loss.
• Prepaid Expenses:-
Adjustment Entry:
Prepaid Expenses A/c--------Dr
To Concerned Expense A/c
• The Prepaid Expenses will be treated in Final Accounts as follows:-

 Subtracted from the Concerned Expense in the “Trading and Profit and Loss
A/c”.
 Shown on the Assets side of the Balance Sheet as a separate item under

Rs. Rs.
Particulars Amount in Particulars Amount in Current Assets:
Rs. Rs.
Prepaid Xxxxxx
Expenses
To Expense A/c Xxxxxx
Less: Prepaid Exp. Xxxxxx
Prepaid Expenses:-
• Sometimes, the benefit of some Expenses will be

available not only in the Current Accounting year but
also in the Next year.
• That Portion of expense the benefit of which yet to be
received is called “Prepaid Expense” (or) “Unexpired
Expense”.
• Examples of such expenses are Unexpired Insurance,
Interest paid in Advance, etc.
• In such situations it is necessary to find out the
Unexpired Portion and adjust it in the concerned
expense.
• Accrued Income:-
Adjustment Entry:
Accrued Income A/c---------Dr
To Concerned Income A/c
• The Accrued Income is treated in final accounts as follows:-

 Added to the concerned income in the Profit and Loss Account and
 Shown on the Asset Side of the Balance Sheet as a separate item under

Rs. Rs.
Rs. Rs.
Current Assets:
By Income Xxxxxx Accrued Income Xxxxxx
Add: Accrued Xxxxxx
Income
Accrued Income:-
• Accrued Incomes are those incomes which have been

earned during the Current Accounting year but have not
been received till the end of the year.
• Accrued Income is also called as “Outstanding
Incomes” (or) “Incomes earned but not yet received”.
• Examples of such incomes are Commission Receivable,
Income on Investments due but not yet received, etc.
• Income Received in Advance:-
Adjustment Entry:
Concerned Income A/c---------Dr
To Income received in advance A/c
• The Unearned Income is treated in the Final Accounts as follows:-

 Deducted from the Concerned Income in the Profit and Loss Account,
and
 Shown on the Liabilities side of the Balance Sheet as a separate item
under Current Liabilities.
Dr. Cr. Liabilities Amount Assets Amount in

in Rs. Rs.

Rs. Rs. Current Liabilities:
Income received in Xxxxxx
By Income Xxxxxx advance
A/c Xxxxxx
Less:
Income
received in
Advance
Income Received in Advance:-
• Any Income which belongs to the next accounting year

but has been received during the current accounting
year is called “Income Received in Advance” (or)
“Unearned Income”.
• It is the income in respect of which the service is yet to
be provided.
• Examples of such incomes are Rent received in
advance, Interest received in advance, etc.
• In such a situation, the unearned portion of the income
will have to be adjusted while preparing the Final
Accounts.
Illustration 1:-
Show how you will record the following items in the Profit and Loss Account and the
Balance Sheet.
The Trial Balance showed the following balances as on December 31, 1987:
Particulars Amount in Rs.
Salaries 10000=00
Wages 20000=00
Rent Received 6600=00
Commission Received 2000=00
Interest on 6000=00
Investments
Additional Information:
1. Salaries amounting to Rs.2,000 are Outstanding.
2. Wages include Rs.1,500 paid in Advance.
3. Interest on Investment include Rs.1,200 for the months of January, February and March,
1988
4. Rent for the month of December amounting to Rs.600 is not yet received.
Gross Profit for the year is Rs.40,000 and other expenses amounted to Rs.10,000.
Profit and Loss Account for the year ended December 31, 1987
Dr. Cr.
Particulars Amount in Amount in Rs. Particulars Amount in Amount in Rs.

Rs. Rs.
To Salaries 10,000 By Gross Profit 40,000

Add: Outstanding 2,000 b/d
------------- 12,000
To Wages 20,000 By Rent Received 6,600
Less: Prepaid 1,500 Add: Outstanding 600
------------- 18,500 ------------ 7,200
By Commission
To Other 10,000 Received 2,000
Expenses
By Interest on 6,000
To Net Profit Investments
13,500
(Transferred to Less: Received in
Advance 1,200
Capital A/c) ------------ 4,800
___________ ___________
54,000 54,000
___________ ___________
5/21/2012 70
Balance Sheet as on December 31, 1987
Liabilities Amount in Rs. Assets Amount in Rs.

Current Liabilities: Current Assets:
Salaries Outstanding 2,000 Wages Prepaid 1,500
Interest Received in 1,200 Rent Outstanding 600
Advance
Presented by:
BHAVYA TANEJA
Corporate Professional, Freelancer Business

Educationist, Trainer & Consultant

Session 2 Ma (9th May 2012)

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MANAGEMENT

• Financial accounting - focuses on the specific

Fundamental relationships in the decision-

Managerial Accounting rules are set within the company to accomplish

Management Accounting Financial Accounting

Questions asked: • Management functions:

What do I want to do? – Planning for the future

The primary questions about an organization’s

• What is the financial picture of the

• How well did the organization do during a

Scorekeeping: Attention Directing:

Decision making: the purposeful choice

Planning: Setting Control: Implementing

• Annual report - a document prepared by

Assets = Liabilities + Owner’s Equity

Assets = Liabilities + Owner’s Equity

The rights of the

Assets = Liabilities + Owner’s Equity

The rights of the

A business transaction is an economic event or

What is an Asset : Include everything a corporation owns or everything that is due to

What is a liability : What your business owes creditors.

What is an expense : an expense is an outflow of money to another person or group

What is an income : refers to consumption opportunity gained by an entity within a

Assets = Owner’s Equity

Assets = Owner’s Equity

Issue shares for cash or other assets R6 000

Buying assets by paying cash: Shareholder's

Paying expenses (e.g. rent or professional

8 Paying a debt that you owe - R500 - R500

This purpose is achieved by the book called JOURNAL.

Since transactions are first of all recorded in this book,

Journal also has a format of its own which is given as under.

2. Particulars---------- Under this column some brief explanation of the

3. L.F.------------------- L.F. means Ledger Folio. Ledger is book in which

4. Debit Amount----- In this column we record the amount against the

5. Credit Amount---- In this column we record the amount against the

The basic journal entry:

Debit Asset Expense

• To increase an Asset or Expense: Debit

• Going back to the Fundamental Accounting

• Going back to the Fundamental Accounting Equation:

Assets = Liabilities + Owners’ Equity

Debit Credit Credit

Assets Liabilities Owners’ Equity

• Nominal Account:- All recurring expenses/incomes are known as Nominal

Golden Rule of Debit and Credit

Accounting Journal Entry Examples 01

* Cash payment transactions

* Cash receipt transactions

* Cash payment transactions

2. Repayment of liabilities in cash

3. Payment of expenses in cash

* Cash receipt transactions

Balance sheet or position statement will portray the financial condition of a

The basis of preparation of final

(i) To find out the profit or loss (financial performance)

(ii) To know the financial position (health) of a business

In addition to it, those transactions which have been recoded in the

• The Closing Stock is treated in the Final Accounts as follows:-

Dr. Cr. Liabilities Amount Assets Amount in

• The Outstanding Expenses is treated in Final Accounts as follows:-

Dr. Cr. Liabilities Amount in Assets Amount in