RECORDING OF TRANSACTION-I PART-2�TOPIC-ACCOUNTING EQUATION

MEANING

ACCOUNTING EQUATION MEANS THAT THE ASSETS OF A BUSINESS ARE ALWAYS EQUAL TO THE TOTAL OF CAPITAL ANDLIABILITIES.

FORMULA

ASSETS = CAPITAL +LAIBILITIES

RESULT OF EFFECT OF TRASACTION ON ACCOUNTING EQUATION

ANY BUSINESS TRANSACTION WILL RESULT IN THE CHANGE IN EITHER OF ASSETS,CAPITAL AND LIABILITIES OF THE FIRM AND EVEN AFTER THE CHANGE THE ASSETS WILL BE AGAIN EQUAL TO THE CAPITAL AND LIABILITIES

EXAMPLES OF ACCOUNTING EQUATION

1)RAM STARTED BUSINESS WITH CASH RS.10000

ASSETS (CASH+)=LIABILITIES (CAPITAL+)

+10000 = +10000

ITS MEAN ASSETS INCREASE AND LIABILITIES ALSO INCREASE SAME AMOUNT SO REASULT WILL BE SAME

2)MOHAN PURCHASE GOOD WITH CASH RS.1000

ASSETS(STOCK+) ASSET(CASH-) =LIABILITIES

+1000 -1000 = -

3)GOODS SOLD TO SHYAM ON CREDIT FOR RS.5000

ASSETS(STOCK-) ASSETS(DEBTORS+)=LIA.(NO CHANGE)

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4)FURNITURE PURCHASE FOR CASH RS.25000

ASSETS(FURNITURE+)ASSETS(CASH)=LIA.(NO CHANGE)

5)PAID RENT RS.500

ASSETS(CASH-)= LIABILITIES(CAPITAL-)

6) RECEIVED COMMISSION RS.400

ASSETS(CASH+)=LIA.(CAPITAL+)

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MULTIPLE EFFECT ENTRIES

GOODS SOLD ON CREDIT(COST PRICE RS.30000) FOR RS.40000.

ASSETS(STOCK-)ASSETS(DEBTORS+) =LIA.(CAPITAL+)

-30000 +40000 =+10000

ACCOUNTING TREATMENT OF ACCOUNTING EQUATION

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TOPIC�DOUBLE ENTRY SYSTEM(RULES OF DEBIT AND CREDIT)

MEANING

ACCORDING TO THIS SYSTEM EVERY BUSINESS TRASACTION EFFECT AT LEAST TWO ACCOUNT IN OPPOSITE DIRECTIONS.ONE IS DEBITED AND OTHER IS CREDITED SAME AMOUNT.

TYPES OF ACCOUNTS AND RULES

1)PERSONALACCOUNTS –THE ACCOUNT WHICH RELETED TO AN INDIVIDUALS,FIRM,COMPANY, AND INSTITUTIONS .ITS CLASSIFIED THREE CATEGORIES:-

i)NATURAL PERSONAL- RAM’SA/C,SEETA’A/C,CAPITAL A/C, DRAWING A/C ETC.

ii)ARTIFICIALACCOUNT-FIRM’S,COMPANY AND INSTITUTION’S A/C

iii)REPRESENTATIVE PERSONAL ACCOUNT-PREPAID EXPENSES A/C,OUTSTANDING EXPENSES A/C,RIA A/C

RULES

DEBITED THE RECEIVER AND CREDIT TO GIVER

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EXAMPLE-PAID RS.20000 TO RAM

RAM(DEDIT THE RECEIVER) 20000

TO CASH A/C 20000

• 2) REAL ACCOUNT-THE ACCOUNT ALL THOSE THINGS WHOSE VALUE CAN BE MEASURE TERMS OF MONEY LIKE CASH ,FURNITURE, GOODWILL,BUILDING, GOODS ETC.

RULES

DEBIT WHAT COME IN AND CREDIT WHAT GOES OUT

EXAMPLE-FURNITURE PURCHASE WITH CASH RS.25000

FURNITURE (DEBIT WHAT IS COMES) 25000

TO CASH A/C(CREDIT WHAT GOES OUT) 25000

3)NOMINAL ACCOUNTS-THESE ACCOUNTS INCLUDE THE ACCOUNTS OF ALL EXPENSES AMD INCOME LIKE SALARY PAID, RENT PAID, COMMISSION RECEIVED,INTEREST RECEIVED, DISCOUNT ALLOWED ETC.

RULES

ALL EXPENSES /LOSSES ARE DEBITED AND ALL INCOME /PROFIT CREDITED

EXAMPLE-SALARY PAID RS. 1000

i)SALARY( DEBIT THE EXPENSES) 1000

TO CASH A/C(CREDIT GOSE OUT) 1000

ii)COMMISSION RECEIVED RS.500

CASH A/C 500

TO COMMISSION A/C(CREDIT THE INCOME)500

DEBIT AND CREDIT RULES(MORDEN APPROCH)

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