What is Accounting and how to make its journal entry

What is Accounting and how to make its journal entry ?

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/c Debit (Dr.) The receiver Credit (Cr.) The Giver
Real A/c Debit (Dr.)  What comes In Credit (Cr.) What Goes out
Nominal A/c Debit  (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
Date Particular Amount Amount
   Account Dr.    To Account    Xxxx xxxx
     

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)    
Date Particular Amount 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)
Date Particular Amount Amount
xxx Bank A/c Dr.       To cash A/c (being cash deposited into bank) 50,000 50,000
 
  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)
Date Particular Amount Amount
Xxx Purchase 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)
Date Particular Amount Amount
Xxx Cash 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)
Date Particular Amount Amount
Xxx Purchase 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)
Date Particular Amount Amount
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)
Date Particular Amount Amount
Xxx Ramesh 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)  
Date Particular Amount Amount
 xxx Machinery 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)
Date Particular Amount Amount
 xxx Rent 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)
Date Particular Amount Amount
 xxx Cash 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.
Purpose To facilitate a bulk sales. To facilitate a prompt payment.
Invoice It 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 customers Yes No
Entry in books No Yes
   Format of Bill or invoice under Trade Discount . Here trade discount is shown in the bill but not 
S.NO ITEM PRICE UNITS TRADE DISCOUNT AMOUNT
1 X 100 100 !0% 9000
Total amount 9000/
 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
Date Particular Amount Amount
  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.
Date Particular Amount Amount
xxx Disha      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)
Date Particular Amount Amount
xxx Mahesh  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)
Date Particular Amount Amount
xxx Cash 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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