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The above account is often called “T” shape account. An account is abbreviated as A/c.
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Revenue or Income Accounts: Decrease in gains and incomes will be recorded on debit
side and increase in gains and incomes will be recorded on credit side.
Losses or Expenses Accounts: Increase in losses and expenses will be recorded on debit
side and Decrease in losses and expenses will be recorded on credit side.
This system of accounting was invented by ‘Lucas Pacioli’ of Italy in 1494 in Venice
but developed in England.
Classification of
Accounts
Tangible Intangible
In this case two accounts affected are Hari’s A/c and Cash A/c. Hari’s account will be
debited as he is the receiver of cash, the account of cash will be credited, as cash
has gone out and the entry will be:
In this case, cash account will be debited as cash has been received, and Mohan’s
account will be credited according to the rule of “Credit the Giver”. And the entry will
be:
Rule: “Debit the expenses and losses and Credit the incomes and gains”
Classification: In this stage, all the transactions recorded in the Journal or its
subsidiary books are transferred (posted) in a classified form to another book which is
called “Ledger”. This book contains, on different pages, individual account heads
under which all financial transactions of similar nature are collected at one place, so
that the combined effect of all the transactions relating to a particular account may be
ascertained. Posting in ledger is also known as Classification Stage.
Summary: In this stage, all the ledger are balanced off and are put in a list, debit
balances on one side and credit balances on other side. The list so prepared is called
a Trial Balance. With the help of Trial Balance a Trading and Profit & Loss A/c is
prepared to ascertain the profit earned of loss suffered during a particular period and
a Balance Sheet is prepared to show the financial position of the business.
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JOURNAL
Journal is a book of original entry in which the transactions are recorded first of all, as
and when they take place.
“The Journal as originally used, is a book of prime entry in which transactions are
copied in order of date from a memorandum or waste book. The entries as they
copied are classified into debits and credits, so as to facilitates their being correctly
posted, afterwards in the ledger”
- Prof. Carter
Thus Journal provides a date wise record of all the transactions with details of the
account debited and credited, and the amount of each transaction. Prior to recording
in Journal, the transactions may also be recorded in a rough book called ‘Waste book’
or ‘Memorandum book’. Maintenance of waste book is not necessary but where the
number of every day transaction is so large that it is not possible for a businessman
to remember all of them, the use of waste book may prove helpful. Later on with the
help of waste book recording is made in Journal.
Proforma of Journal
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Example 1:
Enter the following transactions in the Journal of Siya Ram:
On 1st April 1994, following were the balances:
Cash in hand Rs.900, Cash at bank Rs.21000,Soni(Cr.) Rs.3000, Zahir(Dr)
Rs.2400,Stock Rs.12000, Prasad(Cr.) Rs.6000, Sharma(Dr.) Rs.4500, Lall(Cr.)
Rs.4500
1994 Rs.
• June 1 Siya Ram started business with cash 50, 000
• 2 Purchased goods for cash 20, 000
• 4 Purchased goods from Subhash 12, 000
• 5 Purchased furniture for cash 6, 000
• 7 Sold goods for cash 13, 000
• 9 Sold goods to Mahesh 15, 000
• 10 Paid cash to Subhash 8, 000
• 12 Received cash from Mahesh 10, 000
• 16 Purchased goods from Ravi for cash 7, 500
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June 17 Purchased goods from Ravi for cash 5, 000
18 Sold goods to Suresh for Cash 12, 600
19 Sold goods to Suresh 7, 000
20 Bought Machinery for Cash 8, 000
24 Withdrew cash from office for personal use 2, 500
27 Paid Rent 400
29 Paid Wages 450
30 Paid salary to Gopal 1, 200
30 Received Commission 200
Different Entries:
Discount
Discount is of two types:
• Trade Discount: The discount allowed by a seller to its customers at a fixed % on the
listed price of goods is termed as Trade discount. No separate entry is passed for the
trade discount, as it is deducted from the cash memo or invoice of goods.
• Cash Discount: This discount is allowed to customers for making prompt payment.
As the discount is allowed at the time of making payment, so the entry for cash
discount is recorded along with the entry for payment. Discount is a nominal account
and an expense to the company, hence debited.
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Opening Entry
Every firm starts its new books in the beginning of each year. Since the closing
balances of last year have to be carried forward to the next year, the first entry in
each year’s journal will be recorded the previous year’s closing balances of all assets
and liabilities. As it is the first entry, is called the opening entry. In this entry the
accounts of all assets are debited because assets always show debit balances and
the accounts of liabilities and capital are credited because they always show credit
balances. In case the total of liabilities exceeds the total of assets, the difference will
be treated as the amount of Goodwill and the same will be debited in the opening
entry.
Bad Debts
When the goods are sold to customer on credit, and if the amount becomes
irrecoverable due to his insolvency or for some other reason, the amount not
recovered is called bad- debts. For recording it, bad debts account is debited and the
customer’s account is credited.
Furniture purchased
Furniture A/c Dr.
To Cash A/c
Machinery sold
Cash A/c Dr.
To Machinery A/c
Salaries paid:
Salaries A/c Dr.
To Cash A/c
Rent received:
Cash A/c Dr.
To Rent A/c
Depreciation on furniture
Depreciation A/c Dr.
To furniture A/c
Interest on Capital
Interest on capital A/c
To Capital A/c
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Outstanding Expenses
Salary A/c (or any other expense A/c) Dr. 1, 000
To Outstanding Salary A/c 1, 000
Prepaid Expenses
Insurance Premium (or any other expense A/c) Dr. 1, 200
To Cash A/c 1, 200
Goods withdrawn
Drawings A/c Dr.
To Purchases A/c