Analyzing and Recording Process

Accounting process:
-Identifies business transactions and events,
-Analyzes and records their effects, and
-Summarizes and presents information in reports
and financial statements.

Steps in accounts process that focus on
analyzing and recording transactions and events
are:
(1)Record relevant transactions and events in a journal,
(2) Post journal information to ledger accounts, and
(3) Prepare a trial balance.

Accounting records are informally referred as the
accounting books, or simply the books.
External Transactions
occur between the
organization and an
outside party.
Internal Transactions
occur within the
organization.
Analyzing and Recording Process
Exchanges of economic consideration between two parties.
C 1
2-2
Sales
Tickets
Bank
Statements
Purchase
Orders
Checks
Source Documents
Bills from
Suppliers
Employee
Earnings
Records
C 2
2-3
Analyze each transaction and
event from source documents
Analyzing and Recording Process
Record relevant transactions
and events in a journal
Post journal
information to
ledger (T)
accounts
Prepare and analyze
the trial balance
C 1
2-4
An account is a
record of
increases and
decreases in a
specific asset,
liability, equity,
revenue, or
expense item.
The Account and its Analysis
The general
ledger is a record
containing all
accounts used by
the company.
C 3
2-5
BASICS OF ACCOUNTING
DOUBLE ENTRY SYSTEM

3 TYPES OF ACCOUNTS:

REAL: ASSETS OF BUSINESS, TANGIBLE AND
IDENTIFIABLE, INTANGIBLE AS WELL

PERSONAL: THEY ARE HEADED WITH THE NAME OF
PERSON/BUSINESS/FIRM. DEBTORS OR CREDITORS.

NOMINAL: THEY RECORD TRANSACTIONS
PERTAINING TO INCOME AND EXPENSES
.
BASIC RULES OF ACCOUNTING
RULES:
-- REAL : DEBIT THE ACCOUNT WHEN WE PURCHASE
AN ASSET & CREDIT WHEN WE SELL OR
DEPRECIATE.

-- PERSONAL : DEBIT THE RECEIVER OF GOODS &
CREDIT THE GIVER OF GOODS.

-- NOMINAL : DEBIT LOSSES & EXPENSES, CREDIT
INCOMES & GAINS.

-- IN A LEDGER, ASSETS OR LOSSES HAVE DEBIT
BALANCE WHILE LIABILITIES OR GAINS HAVE
CREDIT BALANCE.
Land
Equipment
Buildings
Cash
Notes
Receivable
Supplies
Prepaid
Accounts
Accounts
Receivable
Asset
Accounts
Asset Accounts
C 3
2-8
Accrued
Liabilities
Unearned
Revenue
Notes
Payable
Accounts
Payable
Liability
Accounts
Liability Accounts C 3
2-9
Dividends
Payable
Journalizing


Points to be Noted Before Journalising:




Nominal Accounts:-
Debit all Expenses
Credit all gains
Personal Accounts:-
Debit the receiver
Credit the giver
Real Accounts:-
Debit what comes in
Credit what goes out
Date Particulars L.F Dr.
Amount
Cr.
Amount

June 1
st

2011
Cash Account Dr.
To Capital Account
(Being cash brought into
start business)
45000
45000
Capital Account.
If the proprietor has
introduced cash or goods
or property in business, it
is known as capital. It
should be debited to
Cash/Stock of
Goods/Property Account
and credited to the
Proprietors Capital
Account. It must be
clearly understood that
the entity of the
proprietor is totally
different from the
business
June 1, 2011 Started business with cash Rs.
45000
According to Real Account rules cash is being
provided by the owner so cash comes into the
business so we debited Cash account
According to Personal Account rules Capital
account represents Owner so we credited the
giver

Nominal Accounts:-
Debit all Expenses
Credit all gains
Personal Accounts:-
Debit the receiver
Credit the giver
Real Accounts:-
Debit what comes in
Credit what goes out
Date Particulars L.F Dr.
Amount
Cr.
Amount

June
2nd2011
Drawings Account Dr.
To Bank Account
(Being Cash withdrawn from
bank personal use.)
1000
1000
Drawings Account
It should be debited to
Drawings Account and
credited to the
Cash/Purchases Account.
June2, 2011 Withdrew from bank for private
use Rs. 1000
According to Nominal Account rules cash
withdrew by owner is expense to the business
so we debited drawings
According to Personal Account rules bank is a
person and here it is giving money so we
credited the giver

Nominal Accounts:-
Debit all Expenses
Credit all gains
Personal Accounts:-
Debit the receiver
Credit the giver
Real Accounts:-
Debit what comes in
Credit what goes out
Cash/Credit Transactions.
When goods are sold or
purchased for cash, it is
known as a cash
transaction. If the goods
are purchased or sold on
credit it will be a credit
transaction.
If nothing is mentioned
whether it is credit or
cash transaction then it
should be treated as a
credit transaction.
If it is sales It should be
debited to Cash Account
and credited to the Sales
Account.
If it is purchases It should
be debited to Purchases
Account and credited to
Cash/Persons Account.

Date Particulars L.F Dr.
Amount
Cr.
Amount

June 3
rd

2011
Cash Account Dr.
To Sales Account
(Being goods sold for cash.)
8500
8500
June 3
rd

2011

Purchases Account Dr.
To Amrit lal Account
(Being goods purchased
from Amrit lal)
7000
7000
June3, 2011 Sold goods for cash Rs. 8500
June 3, 2011 Goods purchased from Amrit lal
Rs. 7000
Case-I: According to Real Account rules cash comes into business
by selling goods so we debited cash account
According to Real Account rules goods is going out in the form of
sales so we credited the Sales account.
Case-II: According to Real Account rules goods is coming into
business so we debited the Purchases account
According to Personal Account rules Amrit lal is giving goods so
we credited the Giver (Amrit lal account)



Nominal Accounts:-
Debit all Expenses
Credit all gains
Personal Accounts:-
Debit the receiver
Credit the giver
Real Accounts:-
Debit what comes in
Credit what goes out
4. Casts and Carry Forwards. When journal entries extend to several
pages of the journal, the totals are cast (done) at the end of each page.
At the end of each page the words Total C/f (C/f stand of carried
forward) are written in the particulars column against the debit and
credit and credit totals. On the next page, in the beginning the words,
Total b/f (B/f stands for brought forward) are written in the
particulars column against the debit and credit totals. At the end of a
specified period or on the last age, the grand total is cast.

Nominal Accounts:-
Debit all Expenses
Credit all gains
Personal Accounts:-
Debit the receiver
Credit the giver
Real Accounts:-
Debit what comes in
Credit what goes out
5. Goods given Away as
Charity. If some goods
from the business are
given away as charity to a
particular person or
institution, it should be
debited to Chartiy
account and credited to
Purchases Account.
Date Particulars L.F Dr.
Amount
Cr.
Amount

June 4
th

2011
Charity Account Dr.
To purchases Account
(Being goods donated to
charitable trust.)
10000
10000
According to Personal Account rules charity is
receiving goods from business so we debited
charity account
According to Real Account rules goods are
going out from business so we credited
PURCHASES account.
June 4, 2011 Donated goods of Rs. 10000 to
Amma charitable trust

Nominal Accounts:-
Debit all Expenses
Credit all gains
Personal Accounts:-
Debit the receiver
Credit the giver
Real Accounts:-
Debit what comes in
Credit what goes out
6. Compound Journal
Entry. If there are two are
more transactions of a
similar nature occurring
on the same day and
either Dr. or Cr. Account is
common, such
transactions can be
conveniently recorded in
the form of one journal
entry instead of making a
separate entry for each
transaction. Such entry is
known as compound
Journal Entry
Date Particulars L.F Dr.
Amount
Cr.
Amount

June 5
th

2011
Drawings Account Dr.
Cash Account Dr.
To Bank Account
(Being cash withdrawn from
bank for personal use and
for use in the business.)
1000
5000


6000
June 5
th
, 2011 Withdrew from bank for private
use 1000
Withdrew from bank for use in the business
5000
Case-I:According to Nominal Account rules cash withdrew by owner is
expense to the business so we debited drawings
Case-II:According to Real Account rules cash is being provided by the
owner that means cash comes into business so we debited the Cash
Account
According to Personal Account rules bank is a person and here it is
giving money so we credited the giver

Nominal Accounts:-
Debit all Expenses
Credit all gains
Personal Accounts:-
Debit the receiver
Credit the giver
Real Accounts:-
Debit what comes in
Credit what goes out
9. Trade Dicscount. It is a discount on the gross value or list price of goods allowed by
the manufacturer to the wholesaler or a wholesaler to a retailer in order to enable
them to sell the goods further at list price to the consumer and yet earn a profit.

Suppose, a manufacturer produced an article for Rs. 40 may fix Rs. 100 as list price and
allows 35% discount to the wholesaler. The wholesaler will thus get it at Rs. 65 and may
sell to the retailer at 20% trade discount. The retailer would thus get it for Rs. 15 and the
retailer Rs. 20.
The journal entry will be passed with the net value of goods.
E.g.,
June 6th, 2011 bought goods worth Rs. 6000 from Ram less 20% trade discount

Date Particulars L.F Dr.
Amount
Cr.
Amount

June 7th
2011
Purchases Account Dr.
To Rams Account
(For goods purchased from
Ram.)
4800

4800

Some times the purchaser may get the benefit of both discounts. In such case, firstly
trade discount is calculated on the gross value of goods sold and then cash discount is
calculated on the net value of goods (i.e. gross value of goods trade discount).
June 7th, 2011 Purchased goods worth Rs. 5000 less 20% trade discount and 5% cash
discount
Date Particulars L.F Dr.
Amount
Cr.
Amount

June 7th
2011
Purchases Account Dr.
To Cash Account
To Discount Account
(Being goods worth Rs. 5000 bought for
cash less 20% trade discount and 5% cash
discount. Trade discount is not shown in
the books but cash discount is shown in
the books)
4000

3800
200

Nominal Accounts:-
Debit all Expenses
Credit all gains
Personal Accounts:-
Debit the receiver
Credit the giver
Real Accounts:-
Debit what comes in
Credit what goes out



According to Real account rules , debit what comes in goods are coming into the business so we
debit Purchases account. Cash is going out in the form of purchases so according to Real
Account rules we credited Cash account. According to nominal account rules discount is gain to a
business so we credited Discount account.

Nominal Accounts:-
Debit all Expenses
Credit all gains
Personal Accounts:-
Debit the receiver
Credit the giver
Real Accounts:-
Debit what comes in
Credit what goes out
10. Purchase of Shares. When shares or securities are purchased, the entry is made at
market value and not at face value. Brokerage paid on the purchase of such investment
is also added in the amount of investment.
June 8th, 2011 Shares of Rs. 50000 are purchased at Rs 90 and Rs.200 is paid as
brokerage.

The purchase price would be Rs. 45,200 (i.e., Rs. 50000 X 90/100 + Rs. 200).

It is debited to Investment Account and credited to Cash Account
Date Particulars L.F Dr.
Amount
Cr.
Amount

June 7th
2011
Investment Account Dr.
To Cash Account
(For shares purchased)
45200

45200
According to Personal Account rules, as an investor we are receiving investment so we
are receiver here so investment account is being debited.
According to Real Account rules cash is going out in the form of investment so we
credited cash account.




Nominal Accounts:-
Debit all Expenses
Credit all gains
Personal Accounts:-
Debit the receiver
Credit the giver
Real Accounts:-
Debit what comes in
Credit what goes out
11. Sale of Shares. If shares or securities are sold, the entry should be passed at market
value less brokerage, if any, paid on such shares.
June 8th, 2011 Sold Rs. 50000 shares at Rs.95 at 2% brokerage

It is debited to cash account and credited to investment
Date Particulars L.F Dr.
Amount
Cr.
Amount

June 7th
2011
Cash Account Dr.
To Investment Account
(For shares purchased)
46500

46500
According to Real Account rules cash comes into business by selling
shares so we debited cash account.
According to Personal Account rules investment account represents
investors and they are investing money into the business so we credited
Investment Account (credited the givers account).




Nominal Accounts:-
Debit all Expenses
Credit all gains
Personal Accounts:-
Debit the receiver
Credit the giver
Real Accounts:-
Debit what comes in
Credit what goes out
12. Expenses Incidental to the Purchase of Fixed Assets. If some expenses are incurred
on the purchases of a fixed asset, these should be added to the cost of the asset to the
buyer. Such expenses should be debited the asset account and not to any expense
account.
June 9
th
, 2011 Repairs made to Building Rs. 20000
June 9
th
2011 paid Rs 500 in cash as wages on installation of machine

Date Particulars L.F Dr.
Amount
Cr.
Amount

June 9th
2011
Building Account Dr.
To Cash Account
(Being repairs made to
Building)
20000

20000
June 9th
2011

Machinery Account Dr.
To Cash Account
(Wages paid on installation
of machine)
500
500
Case I: Repairs to building is an
expense. According to Nominal
Account rules we debited building
account.
Cash is going out in the form of
repairs so, according to Real
Account rules we credited Cash
Account.
Case II: Wages paid on machinery
is also an expense so, as per
Nominal account rules we debited
machinery account.
As stated above cash is going out
in the form of wages so we
credited cash account.

Nominal Accounts:-
Debit all Expenses
Credit all gains
Personal Accounts:-
Debit the receiver
Credit the giver
Real Accounts:-
Debit what comes in
Credit what goes out
13. Insurance of Life Policy. Premium paid on the proprietors life insurance policy is
debited to the Drawings Account and not to insurance premium account. It is a personal
expense and not relating to the operation of the business.
June 10th, 2011 Paid Life Insurance Rs. 10000

Date Particulars L.F Dr.
Amount
Cr.
Amount

June 9th
2011
Drawings Account Dr.
To Cash Account
(Being Life Insurance
premium paid)
10000

10000
Proprietors life insurance premium is his personal expenditure. Drawings
account represents owner, so as per Personal account rules we debited
Drawings account.
According to Real account rules, we credited Cash account due to cash is
going out.




Nominal Accounts:-
Debit all Expenses
Credit all gains
Personal Accounts:-
Debit the receiver
Credit the giver
Real Accounts:-
Debit what comes in
Credit what goes out
14. Carriage Paid on Buyers Account . When goods are sold sand carriage/freight etc.
is paid on buyers behalf, it should be debited to buyers personal account and not to
carriage/freight account.
June 11th, 2011 Paid Rs. 100 as carriage to Ram on sale of goods.

Date Particulars L.F Dr.
Amount
Cr.
Amount

June 11th
2011
Ram Account Dr.
To Cash Account
(Being carriage paid)
100

100
Paying carriage on account of buyer is an expense to business so, as per
Nominal account rules we debited Ram account
According to Real account rules, we credited Cash account due to cash is
going out.



Date Particulars L.F Dr.
Amount
Cr.
Amount

June 11th
2011
Advertisement Account Dr.
To Purchases Account
(Goods distributes as free
samples)
20000

20000

Nominal Accounts:-
Debit all Expenses
Credit all gains
Personal Accounts:-
Debit the receiver
Credit the giver
Real Accounts:-
Debit what comes in
Credit what goes out
15. Goods distributed as Free Samples. If goods are distributed as free samples to
promote the sale of business. It should be debited to Advertisement Account and
credited to Purchases account
Distributing samples means business is promoting its product. So, it comes under
advertisement and it is an expense. As per Nominal account rules we debited
Advertisement account.
Goods distributed as sample, goods lost, goods taken for personal use and distributed for
charity are always recorded at cost. So it is better to credit Trading a/c or purchases
account instead of Sales account. Entry is made at cost.

This is so because these transactions are not made with any intention to earn profit.
June 12th, 2011 Goods worth Rs. 20000 distributes as free samples

Date Particulars L.F Dr.
Amount
Cr.
Amount

June 13th
2011
Bad debts Account Dr.
To Mr. Rams Account
(Mr. Ram is being declared
as insolvent )
15000

15000

Nominal Accounts:-
Debit all Expenses
Credit all gains
Personal Accounts:-
Debit the receiver
Credit the giver
Real Accounts:-
Debit what comes in
Credit what goes out
16. Bad Debts. When an amount is irrecoverable from a customer because of his
insolvency or otherwise, it is a loss for the business. It should be debited to Bad Debts
Account and credited to Customers Account.
Bad debts are loss to business. So we debited Bad Debts account as per Nominal Accounts
rules.
Though, a person is an insolvent we must consider her/him as giver because he would have
paid the money if he isnt become insolvent by any reason. So, we credited Rams Account.
June 13th, 2011 Mr. Ram has taken loan worth Rs.15000 and is declared as insolvent


Nominal Accounts:-
Debit all Expenses
Credit all gains
Personal Accounts:-
Debit the receiver
Credit the giver
Real Accounts:-
Debit what comes in
Credit what goes out
17. Interest Due on Loans. When a loan is taken from a person and interest is yet to be
paid, it should be debited to interest account and credited to loan account.

Nominal Accounts:-
Debit all Expenses
Credit all gains
Personal Accounts:-
Debit the receiver
Credit the giver
Real Accounts:-
Debit what comes in
Credit what goes out
18. Loss of Stock . If some stock is lost by fire, it should be debited to loss of stock by
fire and credited to purchase account. If any part of such loss is recoverable from
insurance company, it should be debited to Insurance Claim Account and credited to
Loss of Stock by Fire account.
June 14
th
2011, goods destroyed by fire costing Rs. 300.
June 14
th
2011, goods destroyed by fire costing Rs. 300. but insurance company settled
claim for Rs.280

Date Particulars L.F Dr.
Amount
Cr.
Amount

June 14
th

2011
Loss of Stock Account Dr.
To Purchases Account
(loss of stock in fire accident)
300

300
June 14
th

2011
Insurance Co. Account Dr.
Loss of Stock Account Dr.
To Loss of stock Account

280
20


300
Case I: According to Nominal
Account rules we debited Loss of
stock account as it is Loss.
Goods distributed as sample,
goods lost, goods taken for
personal use and distributed for
charity are always recorded at
cost.

Nominal Accounts:-
Debit all Expenses
Credit all gains
19. Commission. When a business firm receives any amount from any person in respect
of any services rendered to help them for increasing the sale or helping in purchase of
goods or relating to other matters, then this receipt will be treated as commission
received.
It should be debited to Cash Account and Credited to Commission received Account
Date Particulars L.F Dr.
Amount
Cr.
Amount

June 14
th

2011
Cash Account Dr.
To Commission received
Account
(commission received)
200

200
Real Accounts:-
Debit what comes in
Credit what goes out
Personal Accounts:-
Debit the receiver
Credit the giver
June 15
th
2011, Commission received 200.

Money is coming into business in the form of commission so we debited Cash account as
per Real Account rules.
Commission received is gain or income to any business so we credited Commission
received account as per Nominal Account rules.
Ledger and Chart of Accounts
The ledger is a collection of all accounts for an
information system.
A companys size and diversity of operations affect
the number of accounts needed.
The chart of accounts is a list of all accounts and
includes an identifying number for each account.
101 Cash 319 Dividends
106 Accounts receivable 403 Consulting Revenues
126 Supplies 406 Rental revenue
128 Prepaid insurance 622 Salaries expense
167 Equipment 637 Insurance expense
201 Accounts payable 640 Rent expense
236 Unearned revenue 652 Supplies expense
307 Common stock 690 Utilities expense
318 Retained Earnings
C 4
2-29
Debits and Credits
A T-account represents a ledger account and is a tool used to understand
the effects of one or more transactions.
(Left side) (Right side)
Debit Credit
T- Account
C 5
2-30
EXAMPLE
JOURNALIZING DONE!!
LEDGER DONE!!
TRIAL BALANCE
DEFINITION

IT IS A STATEMENT SHOWING CREDIT AND DEBIT
BALANCES FROM THE LEDGER.

HELPS ARITHMETICAL ACCURACY AND FACILITATES
FINAL ACCOUNTS.

TRIAL BALANCE
BASIC PRINCIPLE :

SINCE IT IS DOUBLE ENTRY BOOK-KEEPING, HENCE,

ASSETS AND EXPENSES ARE DEBIT BALANCES( A+E=DR)

LIABILITIES AND INCOMES ARE CREDIT BALANCES(L+I = CR)

. WHEN THE DEBIT AND CREDIT SIDES OF YOUR TRIAL
BALANCE TALLY IT MEANS YOUR TRIAL BALANCE IS CORRECT.
(To an extent)


TRIAL BALANCE
TYPICAL TRIAL BALANCE
N A M E DEBIT CREDIT
CAPITAL X
DRAWINGS X
PURCHASES X
SALES X
EXPENSES X
DEBTORS(CUSTOMERS) X
CREDITORS(SUPPLIERS) X
CASH X
SALES RETURN X


LEDGER BALANCES PROVIDED

Direct Expenses