What is Accounting and how to make its journal entry ?

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What is Accounting and how to make its journal entry ?

What is accounting?

Accountancy is an ART of Recording, Classifying and Summarizing in a significant manner and in terms of money, financial transactions and events which are in part at least of a financial character and interpreting the result thereof.

“American Institute of Certified Public Accountant”

Fundamental Points of Accountancy.

 

  • In Accountancy “DEBIT” means ‘+’, ‘Addition’.
  • In Accountancy “CREDIT” means ‘-’, ‘Subtraction’.
  • In every transactions there is a ‘Receiver’ and there is a ‘Giver’.
  • In every transactions something comes IN the business and something goes OUT of the business.
  • In accountancy the ‘Transactions’ are recorded in the books of Accounts from the point of view of the BUSINESS only.
  • In Accountancy only Business transactions are recorded in the books of Accounts and the Personal transactions of the Owner are not recorded.
  • The amount which the owner invest into the business is known as CAPITAL
  • The amount which the owner withdraws from the business for his PERSONAL USE is known as DRAWINGS.

Types of activities

  • Economic Activities

Activities that involve money or the exchange of products or services are economic activities.

Business run for profit is example of economic activity.

  • Non – economic activities

Non-economic activity is an activity performed with the purpose of rendering services to others without any consideration to financial gain. Example Mother cooking food for children.

In accounting we only record Economic activities only. Therefore economic activities are considered in accounting hence we divide them into three parts as shown below.

 

Division of economic activities

PERSONAL ACCOUNTS

(Name)

REAL ACCOUNTS

(Feel and Touch)

NOMINAL ACCOUNTS

(All expenses losses gain and income)

  1. RAM
  2. SHYAM
  3. SITA
  4. GEETA
  5. COMPANY
  6. BANK A/C
  7. Capital a/c
  8. Drawing s a/c
  1. LAND & BUILDING
  2. PLANT & MACHINERY
  3. FURNITURE & FIXTURES
  4. CASH A/C
  1. EXPENSES
  2. INCOMES
  3. PROFITS
  4. LOSSES
Three golden Rules of Accounting
Personal A/cDebit (Dr.) The receiver

Credit (Cr.) The Giver

Real A/cDebit (Dr.)  What comes In

Credit (Cr.) What Goes out

Nominal A/cDebit  (Dr.)All expenses and Losses

Credit (Cr.) All gains and Income

Application of how to make journal Entry

 

There are four (4) steps in the construction of a journal entry

 

Understanding the transaction.
Identifying the accounts to be opened.
               

Classifying the accounts as per the division of the economy.

Applying the rules.

 

 

Example of Journal entry

DateParticularAmount Amount
  Account Dr.

   To Account

  

Xxxxxxxx

 

 

 

Examples of journal entry.

while making journal entry as we know we have identify the account and apply golden rule .

  1. Started business with cash Rs. 100,000.

Capital A/c (Personal)

Cash A/c (Real A/c)

 

 

DateParticularAmount Amount
xxx Cash A/c Dr.   100,000 
       To Capital A/c

( Being business started with the cash)

 100,000

 

  1. Deposited into bank Rs. 50,000.

Bank A/c (P)

Cash A/c (R)

DateParticularAmountAmount
xxxBank A/c Dr.

      To cash A/c

(being cash deposited into bank)

50,00050,000

 

  1. Purchase goods from Mohan Rs. 9000

(Note: when name is given in the transaction it means goods are purchased on credit from the party.)

 

Purchase A/c (Real A/c)

Mohan  (Personal)

DateParticular AmountAmount
XxxPurchase A/c Dr.

    To Mohan A/c

(Being goods purchased from Mohan)

9,000 

9,000

 

  1. Sold goods for cash Rs 9000.

 

Sales A/c (Real a/c)

Cash A/c ( Real A/c)

DateParticular AmountAmount
XxxCash A/c Dr.

    To Sales  A/c

(being goods sold for cash)

 

9,000 

9,000

5.Purchase goods by cheque Rs. 7000.

 

Purchase A/c (Real A/c)

Bank A/c (Personal a/c)

DateParticular AmountAmount
XxxPurchase A/c Dr.

    To Bank A/c

(being goods purchase by cheque) 

7,000 

7,000

 

 

6.Sold goods by cheque Rs 9000.

 

Sale A/c (Real a/c)

Bank (Personal A/c)

DateParticular AmountAmount
xxx Bank A/c Dr

To sales A/c

.being goods sold by cheque)

7,000 

 

7,000

 

7.Sold goods from Ramesh Rs 3000.

 

Sale A/c (Real A/c)

Ramesh (Personal a/c)

DateParticular AmountAmount
XxxRamesh A/c Dr.

    To sales A/c

(being goods purchase by cheque)

3,000 

3,000

 

8..Purchase Machinery for cash Rs. 20,000.

Machinery A/c (real A/c)

Cash a/c (real A/c)

 

DateParticular AmountAmount
 xxxMachinery A/c Dr.

    TO Cash A/c.

(being machinery purchased)

20,000 

20,000

 

 

9..Paid Rent Rs 8000.

 

Rent A/c (nominal A/c)

Cash A/c (real A/c)

DateParticular AmountAmount
 xxxRent A/c

   To Cash A/c

(being rent paid)

8,000 

8,000

 

 

 

10..Received Commission Rs 800 by cheque.

 

Cash A/c ( Real A/c)

Commission (Nominal A/c)

DateParticular AmountAmount
 xxxCash A/c

   To commission

(being commission received)

800 

800

 

 

 Trade Discount and Cash Discount

 

Meaning

Trade Discount

A discount given by the seller to the buyer as a deduction in the list price of the commodity is trade discount.

 

Cash Discount

A deduction in the amount of invoice allowed by the seller to the buyer in return for immediate payment is cash discount.

PurposeTo facilitate a bulk sales.To facilitate a prompt payment.
InvoiceIt is shown in invoice as a deduction itself.It is not shown in invoice.

 

 

When allowed?

Trade Discount

At the time of purchase.

Cash Discount

At the time of payment.

Allowed to all customersYesNo
Entry in booksNoYes

 

 Format of Bill or invoice under Trade Discount . Here trade discount is shown in the bill but not 

S.NOITEMPRICEUNITSTRADE

DISCOUNT

AMOUNT
1X100100!0%9000
Total amount9000/

 Journal entry of trade discount Example:

  1. Purchase goods from Mohan Rs 10,000 and trade discount received 10% .

10,000 X 10% = 1000

10,000 – 1000 = Rs 9000

Journal entry for the transaction will be

DateParticularAmountAmount
 Purchase A/c Dr.

        To Mohan       

( being goods purchased from Mohan)

 

9,000 

 

9,000

2. Sold goods to Disha Rs 20,000 and trade discount allowed 10% .

20,000 X 10% = 2000

20000-2000= 18,000

  • Journal entry of transaction will be.
DateParticularAmountAmount
xxxDisha      Dr.         .

To Sales A/c

( being goods Sold to disha)

 

18,000 

 

18,000

Journal entry of Cash discount .

Purchase Goods from Mahesh Rs 10,000

Purchase A/c (r)

Mahesh (P)

Purchase A/c       10,000

  To Mahesh                 10,000

(being goods purchased from Mahesh)

Paid cash to Mahesh Rs 9500 and received cash discount Rs 500.

cash discount is shown in the book of accounts.

Cash A/c (r )

Mahesh ( P)

Discount received ( N)

DateParticularAmountAmount
xxxMahesh  Dr..         .

To cash A/c

To discount received A/c  

( being goods Sold to disha)

 

10,000 

9,500

500

Sold goods to Varun Rs 20,000

Sale A/c   (r)

Varun      (p)

Varun Dr .      20,000

     To sales A/c         20,000

(being goods sold to Varun)

 

Received cash from Varun Rs 19,500 and discount allowed 500

  • Cash A/c ( r)
  • Varun ( P)
  • discount Allowed (N)
DateParticularAmountAmount
xxxCash A/c  Dr.

Discount Allowed A/c Dr.

To Varun

(being cash paid to Varun and discount allowed)

 

 

19,500 

500

20,000

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