Accounting Mechanics

P. GURU PRASAD
FINANCE AND ACCOUNTS
FACULTY
Double Entry system
• All the business transactions have two fold
effect. Recording of both aspects of a
transaction is called Double Entry system
of Bookkeeping.
• Under the duality concept that sources of
funds must always equal to uses of funds
and from this fundamental accounting
equation is formed
• Owner’s Equity+ Outside Liability = Assets
Duality concept

• The assets refer to resources

which are owned by business
enterprises,
• liabilities are debts payable to
parties external to business and
• capital means the amount
payable to owner of the
business enterprises.
The sources of funds

• Incurring liability
• Earning revenue
• Making profits
• Decrease in assets
• Decrease in expenses
• Decrease in losses
Use of funds
• Acquiring assets
• Incurring expenses
• Incurring losses.
• Thus , no matter what event
transpires in the business, it must be
possible to capture that events in
the balance sheet in such a way that
the liabilities (sources) and assets
(uses) remain equal
Symbol for sources and
uses
• In accounting the terms credit and
debit are merely two different
sounds and do not have the same
implications as they have in English
language.
• Thus increase in liabilities, revenues
or profits being sources of funds are
all called ‘Cr’ items.
• Similarly , increase in assets,
expenses and losses being uses of
funds are all called ‘Dr’ items
DEBIT

• Debit – represents- out flow of

resources like rent, salaries,
purchase of assets like land ,
building, machinery etc.,
• And all those who owe money to
business like debtors, accounts
receivables etc.,
CREDIT

• Credit - represents – inflow of

resources – like income from
sales, rent received , dividend
received, commission received.
• And all those to whom business
owes money like creditors to
the business, bank overdraft,
partners capital.
Types of Accounts
• Personal accounts:- it deals with
accounts of individuals like
creditors, debtors, bank, etc. It
shows the balance due to these
individuals or due from them on a
particular date.
• Real account :- it represents assets
like plant and machinery, land and
buildings, goodwill, etc. as on a
particular date, this account shows
the worth of the assets
Types of Accounts
• Nominal accounts:- it consists of
different types of expenses or
incomes or loss or profit. These
accounts show tha amount of
income earned or expenses incurred
for a particular period say a month or
year etc.
• Whether an account has to be
debited or credited is decided by
using the rules of accounting.
Books of accounts

• Cash book:-it is a special journal in

which all cash transactions are
recorded directly.
• The cashbook resembles a ledger
with debit and credit sides. Cash
account is not opened separately ,
when a Cash book is maintained
because cashbook serves the
purpose of the ledger also.
 Petty cash book

• A separate cash book is kept to

record petty expenses. The
petty cash book is recorded by
imprest system. To avoid
recording too many small value
and frequent transactions in the
main cashbook.
Books of accounts
• Journal :- to record non cash transactions
like credit sales, credit purchases, sales
return, purchase returns , year end
adjustments, if any. These books are also
called as subsidiary books.
• Ledger:- it contains a classified summary
of all transactions recorded in cash book
and journal. A ledger is not an independent
record. The transactions recorded in a
ledger are derived from either cash book or
journal.
Multi column Cashbook
• With the development of banking
sector, and frequent use of banking
instruments, cashbook with
additional columns for bank
transactions came into existence.
• Thus the multicolumn cashbook is
nothing but ledger accounts for cash
and bank with additional information
about discount allowed and discount
received.
Contra entries
• If a transaction affects both cash
account and bank account in the
opposite sides, the entry for
recording the transaction is called a
contra entry. For contra entries no
posting is required because the
double entry is completed in the
cash book itself. For example, cash
deposited into bank and cash
withdrawn from bank affect cash
and bank account only..
Contra entries

• Both aspects of these transactions

are recorded in cash column and
bank column of the cash book
respectively. No ledger posting is
required because both aspects of the
transaction are recorded in the cash
book it self. This fact is indicated in
the cash book by writing ‘c’ in L.F.
column.
A conceptual framework of
financial accounting
• The subject of financial
accounting is based on the
double entry system of
accounting using debits and
credits
• Cash transactions are entered
in cash book
• Credit transactions are entered
in the journal
A conceptual framework of
financial accounting
• The transactions of cashbook
and journal are integrated into
the ledger, which is a summary
of all cash and credit entries
• When all the ledger accounts
are tabulated as a summary
statement it is known as ‘Trial
Balance’
A conceptual framework of
financial accounting
• Trail balance establishes the
arithmetical accuracy of the
accounting records.
• From the trial balance two
separate accounting documents
are prepared namely profit and
loss account and balance sheet
A conceptual framework of
financial accounting
• All income and expenditure
accounts are taken to profit and
loss account
• All assets and liabilities
accounts are taken to Balance
sheet.
• The net result of profit and loss
account namely profit or loss is
taken to Balance sheet . Thus
the balance sheet tallies
 THANK YOU

• It is better to wear out than

to rust out.
• Bi shop Ri chard Cum be rl and

• The most wasted of all days

is one without laughter.
• E. E. Cummi ngs