SATYAKI
EDUCATIONAL ACADEMY and Accounting Services
1-103/2/R, Street-5, Bhavaninagar, Nacharam, Hyderabad-500076
Cell:9393999757
Need and Importance of Accounting:
We live in a world where people need things from the day
they are born to the day that they leave the world. Some of these "need" are physical needs, a
need for goods of various sorts, food, clothing, shelter, and so on. Some of
them are emotional "wants", a need for education, entertainment, or
recreation. In satisfying such needs businessmen perform useful services to
their fellow humans. In return they expect to earn a responsible reward for
their efforts in the form of profits.
"Cut
your coat according to your cloth"
- so goes the saying. Even a king becomes a pauper; if he fails to exercise
economy in his expenditures. In other words, every individual will have to plan
his expenditure according to his income. Obviously the question arises - why is
this planning necessary? The need for such planning arises as our wants desires
or needs for goods and services are unlimited, while the means, i.e. the income
with which to buy such goods and services are limited. Where, however, goods
and services are available free of cost, i.e. gifts of nature, such as air,
water etc. there is no question of economy. But the necessity of economy is
undeniable, where goods or services are not available free of cost and their
supply is limited.
A proper and fair planning of expenditures helps us to
ensure proper use of our income. Of course it is true that the quantity of
goods or money cannot be increased by making a proper planning. But certainly
we can ensure most economic use of goods or money at our disposal.
Most of us do maintain some kind of a written record of our
income and expenditure. The idea behind maintain such record is to know the
correct position regarding income and expenditure. The need for keeping a
record of income and expenditure in a clear and systematic manner has given
rise to the subject of "bookkeeping".
Some individuals do not recognize the necessity of keeping
accounts of their day to day expenditure, since they spend their own income and
are not required to account for it to anybody. But such an idea is wrong. A
family, however, small it may be, must exercise proper control over its
expenditures as to ensure future security. A family has two-fold
responsibilities - one is that of ensuring all round welfare of the family and
the other is the social responsibility. Needless to say, money is the most
essential pre-request for ensuring peace and happiness of a family, which each and every
member desires. The quantum of money must be adequate in relation to the needs.
But mere adequacy of money will not fulfill the desires; one has to take care
of its proper utilization. For this it would be necessary to exercise economy
and maintain proper books of accounts. On the other hand each and every family
must save a portion of its income for future contingencies. It is possible to
increase the amount of savings through proper management and effective control
of the family expenses. Through such saving the family helps materializing the
economic planning of the country.
It is all the more necessary for an organization or a
concern to keep proper accounts. At the end of the year the true result of the
economic activities of a concern must be made available otherwise it will not
be possible to run the concern. In case of a business concern the profit or
loss at the end of a year must be ascertained, because, the amount of profit
must be adequate in relation to that of investment made in the business. If it
is not so or if there is a loss, it is an indication of some defects existing
somewhere in the management of the business. All such defects need to be
detected and analyzed and appropriate measures taken for their rectification.
But it is only possible, if proper books of accounts are maintained in the
business concern. So, the importance of bookkeeping to a business is the
same as that of fresh air to a man to exist. Without bookkeeping records a
business would reach to a date of closure , though not immediately, but in a
short time.
Moreover, if proper books of accounts are not kept in a
business, the amount of profit cannot be ascertained and it will not be
possible to distribute the profit among the owners of the business. The tax
dues to the government cannot also be paid. In the absence of books of accounts
misuse or defalcation of money will remain undetected. The owner and other
parties interested will not be able to have any information about the condition
of the business. For the same reason in the case of non-trading concerns like
schools, clubs, colleges, universities, hospitals and societies etc. the need
for accounting is universally recognized.
Thus we see that the necessity of keeping accounts is not
only confined to business concerns but it is also useful for all classes and
grades of people and organizations.
Accounting as a Business Language:
Accounting is a language, a system that communicates
information. It is often referred to as the language of the business, although
it is just as important in the operation of government agencies, clubs, and
other kind of organizations.
You probably have some idea already of what the term
accounting means. It is frequently used in every day conversation to mean "answer for responsibility."
Managers of business concerns are answerable to owners, creditors, labor unions
and government agencies etc. Managers of government units are answerable to
chief executives, boards, taxpayers and others. In fact, accounting was
developed by people, who were seeking better ways together and report useful
information and organizations.
Some type of orderly system is needed to accounting for an
organization of any size and complexity. An accounting system is used to
collect process and report needed data about a business, government unit, or
other type of association. Information is usually collected, processed and
reported in financial terms, which simply means that 'money' is the bases of measurement.
Connected with a Money Event Or Transaction:
Accounting must be in relation to a monetary event or
transaction and the event or transaction must be measurable in terms of money.
In other words, no accounting is possible for an event or transaction which is
not measurable in term of money, e.g. passing an examination, delivering
lecture in a meeting, winning a game etc. There are events no doubt, but since
they are not measurable in term of money, there is no question of their
accounting.
Meaning of Accounting
Accounting is the art of recording,
classifying and summarizing in a significant manner and in terms of money,
transactions and events which are, in part at least, of a financial character,
and interpreting the result there of
As per the definition, accounting is
simply an art of record keeping. The process of accounting starts by first
identifying the events and transactions which are of financial character and
then be recorded in the books of account.
Why accounting is necessary?
The
main objective of any business activity is to earn profit. For this
it is quite necessary to maintain proper recording of day to day transactions
to know the correct result and the financial position of the business from time
to time. In any venture a correct analysis of financial indicators are crucial
for correct decision making. It is possible only the records are maintained in
a scientific and orderly manner.
1. Objectives
·
It will provide information regarding the
changes in financial position thru revenue transactions
·
It will provide trends in earnings
·
It will provide economic resources and
obligations of the enterprise
·
It will provide additional information necessary
to the accounting users in assessing its prospectus
2. What are the advantages of accounting?
·
It is useful for making economic decisions
·
It provides information to internal and external
users
·
The reports help the organization in judging the
management’s ability in running the enterprise, in utilizing the available
resources affectively in achieving the goals of the organization
·
The reports help the management in predicting,
comparing with other competitors and evaluating the units earning power
The
classification of accounts are mainly categorized into TWO
1. Traditional /Historical classification
According
to this approach accounts are classified into three.
1.
Personal
All accounts
related to Persons. ASgain it is sub divided into three
1. Real personal
accounts i.e. Rama account
2. Artificial
Personal accounts i.e. Rama Enterprises, Andhra bank Ltd etc
3. Representative
Personal Accounts i.e. all the expense O/S or prepaid, revenue in advance or
accrued.
2.
Real
It relates all the assets of the business
organization except sundry debtors. Real accounts relate to
the assets which are usually classified as “property, plant and equipment” but
it also includes intangible assets. In simple words, the accounts related to real assets
of the entity are called real accounts. As these accounts are not closed in a particular period rather
their balances are carried forward to the next accounting period and thus
remain in the accounting books forever, therefore, they are also called permanent
accounts. Examples include: land, building,
machinery, inventory/stock, cash in hand and cash at bank.The above category is
called as Tangible assets. Real assets are inclusive of Intangible assets.
Intangible assets are not seen but they will help business organization in
earnings. Examples: Patent rights, Copy rights and goodwill
3.
Nominal
Nominal accounts
are income
statement accounts and are also called
'temporary
accounts' in contrast to balance sheet
(asset,
liability,
and owners' equity) accounts which are called 'permanent
accounts. Nominal accounts are the accounts that report revenues,
expenses, gains, and losses. which is closed to Zero balance at the end of each
accounting period. It starts with a zero balance at the beginning of a new
accounting period,
accumulates
balances
during the period, and returns
to zero at the yearend by means
of closing
entries. The balances from the income statement accounts will end up
in the owner’s equity account, if the enterprise is a sole proprietorship. If
the business is a corporation, the balances will end up in the retained
earnings account.
After
observing the above classification we may express a doubt as why our elders
classified the accounts as THREE why not TWO or FOUR. To clear the doubt let me
explain why this was made by our elders.
To begin our dreamed project we require
some amount of money which may be called as capital. This may be brought in by a
person called Capitalist. After that to start functioning of our business
activity we require one premises, for that we have to take one building for
rent to start the show from a person called as Landlord. We have to keep our
amount which was brought in the shape of capital in a safest place i.e. Banker.
After establishing we have to choose some persons, Associations or
Organizations to purchase the required Raw materials, Tradable goods or Assets.
After that like above we have to attract some persons to sell our products we
produce or purchased for the purpose of sale. We require some legal and taxable
services from some professionals and we may require some additional financial
help to expand our venture from Bankers and Financiers. Like that we may
require cooperation and help from persons. That’s why Accounts related to
persons and organizations formed and managed by persons were classified under Personal Accounts.
With the cooperation of persons we will
start our venture .To run the show we require some assets to make use in the
business. For example Cash to start and run the business, Furniture to keep the
tradable goods in an attractive way, A/C, Fans, Lighting in the show rooms and
Machinery, transport vehicles in the manufacturing industry to transport the
products etc. So to run the business we require some assets. All the assets are
classified under REAL ACCOUNTS
Finally, we have
to discuss about the existence and classification of Nominal Accounts. As
explained earlier the main objective of any business activity is to earn money.
To earn profit some amount has to be spent in the shape of expenditure. Due to
some unforeseen happenings losses like damages thru accidents etc may occur in
the course of business and some gains may be added to the profits of business
like commissions, incentives and brokerages. Expenses, losses, revenues and
gains are common in the course of any business. So all the above were
classified under NOMINAL ACCOUNTS.
These accounts are otherwise called as name sake accounts and are temporary in
nature. These accounts cannot find place in the next year books of accounts.
The accounts related to Personal and Real accounts are permanent in nature and
will find place in the next year books of accounts.
I expect you might be satisfied
with my explanation about the classification of accounts by our elders.
Another advanced classification is Modern Classification of accounts:
Under
Accounts are classified into Five. This
is nothing but extension of Traditional classification.
1.
Capital/Owners Equity/Share Holders Equity
An account stating
the amount of funds and assets invested in a business by the owners or
shareholders, including retained earnings. A statement of the net worth of a
business at a given time
What do you mean by Owners equity?
At the start of a business,
owners
put some funding into the business to finance operations. This creates a liability on the
business in the shape of capital as the business is a separate entity
from its owners. Businesses can be considered, for accounting
purposes, sums of liabilities and assets; this is the accounting equation. After liabilities have
been accounted for, the positive remainder is deemed the owner's interest in
the business.
What do you mean by Share Holders
Equity?
When the owners
are shareholders,
the interest can be called shareholders' equity; the accounting remains the
same, and it is ownership equity spread out among shareholders. If all
shareholders are in one and the same class, they share equally in ownership
equity from all perspectives. However, shareholders may allow different
priority ranking among themselves by the use of share classes and options. This
complicates both analysis for stock
valuation and accounting.
2.
Liabilities
In financial accounting, a liability
is defined as an obligation of an entity arising from past
transactions or events, the settlement of which may result in the transfer or
use of assets,
provision of services or other yielding of economic benefits in the future. A
liability is defined by the following characteristics:
·
Any type of borrowing from persons or banks for
improving a business or personal income that is payable during short or long
time;
·
A duty or responsibility to others that entails
settlement by future transfer or use of assets, provision of services, or other
transaction yielding an economic benefit, at a specified or determinable date,
on occurrence of a specified event, or on demand;
·
A transaction or event obligating the entity
that has already occurred.
The accounting equation is the mathematical
structure of the balance sheet.
3.
Assets
In financial accounting, an asset is
an economic resource. Anything tangible or intangible that is capable of being
owned or controlled to produce value and that is held to have positive economic
value is considered an asset. Simply stated, assets represent value
of ownership
that can be converted into cash the balance sheet of a firm records the monetary
value of the assets owned by the firm. It is money and other valuables
belonging to an individual or business. Two major asset classes are tangible
assets and intangible assets. Tangible assets contain various subclasses,
including current assets and fixed assets. Current assets include inventory,
while fixed assets include such items as buildings
and equipment. Intangible assets are nonphysical resources and rights that have a value to the firm because they give the firm some kind of advantage in the market place. Examples of intangible assets are goodwill, copyrights, trademarks, patents and computer programs.
4.
Income/Revenue
In business,
revenue or turnover is income that a company
receives from its normal business activities, usually from the sale of goods and services to customers. In accounting,
revenue is often referred to as the "top
line" due to its position on the income
statement at the very top. This is to be contrasted with the "bottom line" which denotes
net income. For non-profit organizations, annual revenue
may be referred to as gross receipts. This revenue includes donations
from individuals and corporations, support from government agencies, income from
activities related to the organization's mission,
and income from fundraising activities, membership dues, and financial
investments such as stock shares
in companies.
In general usage,
revenue is income received by an organization in the form of cash or cash equivalents. Sales revenue or revenues is income received
from selling goods or services over a period of time. Tax revenue
is income that a government receives from taxpayers.
5...Expenses
In common usage, an
expense or expenditure is an outflow of money to another person or
group to pay for an item or service, or for a category of costs. For a tenant,
rent
is an expense. For students or parents, tuition
is an expense. Buying food, clothing, furniture or an automobile is often
referred to as an expense. An expense is a cost that is "paid" or
"remitted", usually in exchange for something of value. In accounting,
expense has a very specific meaning. It is an outflow of cash or other
valuable assets from a person or company to another person or company. This
outflow of cash is generally one side of a trade for products or services that
have equal or better current or future value to the buyer than to the seller.
Technically, an expense is an event in which an asset is used up or a liability is incurred. In terms of the accounting equation, expenses reduce owners' equity.
System of Book Keeping
Book keeping broadly divided into two i.e. Single entry and Double entry book Keeping System
A single-entry
bookkeeping system or single-entry accounting system is a method of
bookkeeping relying on a one sided accounting
entry to maintain financial information.
Most businesses
maintain a record of all transactions based on the double-entry bookkeeping system.
However, many small, simple businesses maintain only a single-entry system that
records the "bare-essentials." In some cases only records of cash, accounts receivable, accounts
payable and taxes paid may be maintained. Records of assets, inventory,
expenses,
revenues
and other elements usually considered essential in an accounting system may not
be kept, except in memorandum form. Single-entry systems are usually inadequate
except where operations are especially simple and the volume of activity is
low. Single-entry systems are used in the interest of simplicity. They
are usually less expensive to maintain than double-entry systems which require
a significantly larger amount of expertise
Double Entry Book Keeping System
The fundamental
concept underlying present-day bookkeeping and accounting. Double entry
accounting is based on the fact that every financial transaction has equal and
opposite effects in at least two different accounts. It is used to satisfy the
equation Assets = Liabilities + Equity, whereby each entry is recorded so as to
maintain the relationship.In the double entry system, transactions are recorded
in terms of debits and credits. Since a debit in one account will be offset by
a credit in another account, the sum of all debits must therefore be exactly
equal to the sum of all credits. The double-entry system of bookkeeping or
accounting makes it easier to accurately prepare financial statements directly
from the books of account and detect errors.
What are the types of accounting?
The types of
accounting are mainly divided into three
1.Fianancial accounting:
Financial
accountancy is the field of accountancy
concerned with the preparation of financial statements for decision makers,
such as stockholders,
suppliers, banks, employees, government agencies, owners, and other
stakeholders. Financial accountancy is used to prepare accounting information
for people outside the organization who are not involved in the day-to-day
running of the company. In short, financial accounting is the process of summarizing
financial data taken from an organization's accounting records and publishing in the form
of annual reports for the benefit of people outside the organization.
Objectives of Financial Accounting
- To know the results of the business
- To ascertain the financial position of the business
- To ensure control over the assets
- To facilitate proper management of cash
- To provide requisite information
Financial accounting is subdivided into Two i.e. Cash
Accounting and Accrual Accounting
Cash basis accounting is a very simple form of accounting. When a payment is
received for the sale of goods or services, a deposit is made, and the revenue
is recorded as of the date of the receipt of funds — no matter when the
sale was made. Checks are written when funds are available to pay bills, and
the expense is recorded as of the check date — regardless of when the
expense was incurred. The primary focus is on the amount of cash in the bank, and the secondary focus is on making sure all bills are paid. Little effort is made to match revenues to the time period in which they are earned, or to match expenses to the time period in which they are incurred.
Accrual basis accounting matches revenues to the time period in which they are earned and matches expenses to the time period in which they are incurred. While it is more complex than cash basis accounting, it provides much more information about your business. The accrual basis allows you to track receivables (amounts due from customers on credit sales) and payables (amounts due to vendors on credit purchases). The accrual basis allows you to match revenues to the expenses incurred in earning them, giving you more meaningful financial reports.
Sub Fields of Accounting
a)
Cost Accounting
: It is to ascertain the cost of units produced and sold and the services
rendered by the business unit with a main view to make an exercising control
over the costs to assess the profitability and efficiency of the business unit.
b)
Management
Accounting : It is mainly concerned with the internal reporting to the
management. It relates to planning, control and decision making which is useful
to the management in discharging their duties.
3. Who are the Users of Accounting?
The
users of accounting is mainly divided into TWO
i. Internal Users
Owner
of the business unit in case of proprietary concern
Partners
in case of partnership business
Board
of Directors in case of companies
Managers
Department
wise Officers
ii. External Users
·
Financing
Group
Bankers
Financial Organizations
Lenders
Suppliers of Raw materials and
Tradable goods
·
Public
Group
Government
side
Licensing Authorities
Income Tax Department
Employees
Customers
What are the rules to be followed while
passing entries?
The rules to follow while passing transactions under
Historical classification of accounts are explained here under
a. Personal accounts
Debit:
The Receiver from the
business
Credit:
The Giver to the business
b.
Real
Accounts
Debit:
what comes into the business
Credit:
what goes out of the business
c. Nominal accounts:
Debit:
All Expenses and Losses of the business
Credit:
All Incomes and Gains of the business
These are
called Golden rules of accounting
Note:
Losses : means the losses occurred not thru the trading
or processing but thru unforeseen incidents
Ex: Accidents
etc, discounts to debtors, loss on sale of assets, depreciation and
amortization etc
Gains: Gains thru other activities and promotional
bonuses like incentives, insurance claims, discounts on creditors payments, Tax
refunds etc
Our Accounting
system in usage is Double entry system
of Accounting. A double entry System of accounting is a set of rules for
recording financial information in a Financial Accounting System in which every
transaction or event changes at least two different ledger accounts. The system
was first codified in the 15th century. In modern accounting this is
done by using Debits and Credits within the accounting equation: Capital/Owners
Equity=Assets-Liabilities.
Accounting Entries
The Double
entry accounting system records financial transactions relating Assets,
Liabilities, Income or Expenditure related to it thru accounting entries
Any accounting
entry in the double-entry accounting system will result in the recording of
equal debit and credit amounts; that is, debits must equal to credits
If the
accounting entries are recorded without error, at any point in time the
aggregate balance of all accounts having positive balances will be equal to the
aggregate balance of all accounts having negative balances.
The
double-entry bookkeeping system ensures that the financial transaction has
equal and opposite effects in at least two different accounts.
Accounting
entries use terms such as debit and credit to avoid confusion regarding the
opposite effect of the accounting entry e.g. If an accounting entry debits a
particular account, the opposite account will be credited and vice versa
The rules for
formulating accounting entries are known as "Golden Rules of
Accounting".
The accounting entries are recorded in the "Books of
Accounts".
Let us pass some transactions using
the golden rules of accounting
1.
Ramana invested Rs 500000 as capital in Ramana Traders
2.
Paid rental advance of Rs 25000 to Hari
3.
Spent Rs 5000 towards puja and opening function
4.
Purchased stationery Rs 1250
5.
Opened Andhra Bank account with Rs 60000
6.
Purchased furniture worth Rs 12500 thru cheque
7.
Availed a loan of Rs 250000 from City Financiers thru
cheque
8.
Commission received Rs 25000
9.
Purchased computer worth Rs 15000 from T. Technologies
thru cheque
10. Purchased
goods for Rs 125000 from Venu for cash
11. Purchased
goods worth Rs 85000 from Anand on credit
12. Transport
charges paid Rs 13500
13. Sold
goods worth Rs 65000 for cash to Krishna
14. Deposited
the above amount in to Bank
15. Sold
goods worth Rs 100000 to Vijay on Credit
16. Returned
back goods worth Rs 12000 to Anand
17. Received
goods worth Rs 10000 from Vijay
18. Received
Rs 90000 from Vijay in full settlement of account thru cheque
19. Paid
Rs 73000 in full settlement of account to Anand thru cheque
20. Withdrawn
cash for meeting personal expenses by Ramana Rs 15000
21. Paid
office rent Rs 5000
22. Paid
staff salaries Rs 36000
Passing of all
the above transactions with narrations for each transaction
1. Cash
A/C Dr 500000
To Ramana
Capital A/c 500000
(Being
capital invested)
2. Rental
Advance A/C Dr 25000
To Cash A/C 25000
(Being
rental advance to Hari)
3. Opening
Function A/C Dr 5000
To Cash A/C 5000
(Being pooja
and opening function)
4. Printing
and Stationery A/C Dr 1250
To Cash
A/C 1250
(Being
stationery purchased)
5. Andhra
Bank A/C Dr
60000
To Cash
A/C 60000
(Being
Andhra Bank account opened)
6. Furniture
A/C Dr
12500
To Andhra
Bank A/C 12500
(Being
furniture purchased thru cheque)
7. Andhra
Bank A/C Dr 250000
To City
Financiers A/C 250000
(Being loan
availed)
8. Cash
A/c Dr 25000
To
Commission A/C 25000
(Being
commission received)
9. Computer
A/C Dr 15000
To Andhra
Bank A/c 15000
(Being
computer from T. Technologies paid thru cheque)
10. Purchase
of Goods A/c Dr 125000
To Cash
A/C
125000
(Being goods
purchased for cash from Venu)
11. Purchase
of Goods A/c Dr 85000
To Anand A/C
85000
(Being goods
purchased from Anand)
12. Transport
charges A/C Dr 13500
To Cash
A/C 13500
(Being transport
charges paid)
13. Cash
A/C Dr
65000
To Sale of
Goods A/C 65000
(Being goods
sold for cash to Krishna )
14. Andhra
Bank A/C Dr 65000
To Cash
A/C 65000
(Being
amount deposited)
15. Vijay
A/C Dr
100000
To Sale of
Goods A/C 100000
(Being goods
sold to Vijay )
16. Anand
A/c Dr
12000
To Purchase
returns A/C 12000
(Goods
returned back to Anand)
17. Sales
Returns A/C Dr 10000
To Vijay A/C 10000
(Goods
returned by Vijay)
18. Andhra
Bank A/C Dr 90000
To Vijay
A/C
90000
(Being
amount in full settlement)
19. Anand
A/C Dr 73000
To Andhra
Bank A/C 73000
(Being paid
Anand in full)
20. Ramana
capital A/C Dr 15000
To Cash
A/C 15000
(Being cash
with drawn for personal use)
21. Office
rent A/C Dr 5000
To Cash
A/C 5000
(Being
office rent paid)
22. Staff
Salaries A/C Dr 36000
To Cash
A/C
36000
(Being staff
salaries paid)
By my observations of the above transactions
it is clear that whenever the business unit received cash or cheque it was
debited and whenever the cash utilized thru cash or cheque cash and Bank was
credited. Thru this we can say one more thing i.e. all sources are credit natured
and all utilizations are Debit natured.
Thru the above entries and with the explanations in the classification
of accounts we came to know that all Capitals, Liabilities and Income are
Credit natured and all Expenses and assets are Debit natured. At any moment if you
want to decrease the value or close down the account the natural positions are
to be reversed, and if you want to increase the value of the ledger account you
have to honor the natural position. Remember and do well in Accountancy about
the classification of Revenue and Capital natured ledger accounts we do the
following.
1. Capital Credit
natural position
2. Liabilities
All Suppliers, Financiers, Service
Providers, Administrative Expenses
Payable, All duties and taxes to the Govt.,
Provisions, Credit
natural position
3. All Direct and Indirect incomes
(Revenue gross receipts) Credit natural
position
4. All Assets including Fixed
(Machineries, Land and buildings
Vehicles
having more than one
Years
life) and all current assets
(Cash, debtors, deposits, Investments,
receivables and Advances) Debit natured
5. All business related expenses
And losses (unforeseen and
unavoidable) Debit natured
Is there any easy and
Advanced way to recognize and pass the entries?
Why not, there is a way for you. To speed up the recording, Modern
classification was brought into practice. This approach is also called the
American approach. Under this approach transactions are recorded based on the
accounting equation, i.e., Assets = Liabilities + Capital. The accounting
equation is a statement of equality between the debits and the credits. The
rules of debit and credit depend on the nature of an account. For the purpose
of the accounting equation approach, all the accounts are classified into the
following five types. If there is an increase or decrease in one account, there
will be equal decrease or increase in another account. There may be equal
increases to both accounts, depending on what kind of accounts they are. There may
also be equal decreases to both accounts. Accordingly, the following rules of
debit and credit in respect to the various categories of accounts can be
obtained. The rules may be summarized as below:
Under this
Modern Classification the accounts are divided into FIVE
·
Capital
·
Liability
·
Assets
·
Income
and Gains
·
Expenses
and Losses
The rules of recording for the above
clasification
b. Capital : Credit to increase
the value and debit to decrease the value
c. Liability : Credit to increase
the value and debit to decrease the value
d. Assets : Debit to increase
the value and Credit to decrease the value
e. Expenses and losses : Debit to increase
the value and Credit to decrease the value
f. Income and Gains : Credit to increase the value and debit
to decrease the value
With this
explanation we can blindly remember that Capital, Liabilities and Incomes and
Gains will be always Credit as Natural Balances. Assets, Expenses and Losses
will be always Debit as natural balances. We have to make a note and remember
that to decrease the natural balances we have to reverse the original
positions.
In ledger
accounts the affects are clearly explained below
1.
Capital
Ramana brought
Rs1,00,000 as capital .Here capital increases. Hence capital will be credited. During
the course of business Ramana withdrew Rs 10,000 for his personal use. With
this the capital decreased. So the capital account Debited
2.
Liabilities
In the sales
bill Vat is added with the basic price. So the Vat liability increased. In the due date Vat was paid.
With this the Vat liability decreased. hence debited
3.
Assets
Furniture was
purchased hence the asset was increased. So the new furniture was debited.
During the course of business old furniture was sold out. With this the value
of the asset was decreased. So the asset account was credited.
4.
Expenses
Transport
charges paid hence the expenditure account was debited. The transport charges
were recovered in the sales invoice or reimbursed by the supplier. With that
the expenditure account was decreased and credited
5.
Income
Ramana received
interest on FDR. With this the income account was increased and credited.
During the course of business he paid interest on short term loan. With this
the interest account was decreased and hence debited
Under modern classification you
can easily pass entry if you read carefully and observe the affect of transaction
before you.
Equation of Accounting
Under Double
entry system the debit and credit of each transaction always equal and so the
assets and liabilities must be always equal. It is like balanced state of a
weighing machine. If one side gets heavier or lighter, the weight in the other
side must also increase or decrease to keep it balanced. The following examples
will help you to understand continuous flow and conversion of fund between
Assets and liabilities
1. Increase in
Asset means equivalent increase either in capital or liability or partly in bothEx.Rs.1Lakh
was taken as loan from Andhra bank. By this Asset in the form of Cash increased
and at the same time liability also increased with the same amount in the form
of Bank Loan. Another example is Additional Capital was brought in. With this
Asset in the form of cash increased and at the same time capital was also
increased in the form of Capital.
2. Increase in
one Asset may cause decrease in another Asset
Ex.: A loan of
Rs 50000 was given to Anand. With this Asset was increased in the form of Debtor
and at the same time cash (Asset) was decreased
3. Decrease in
Asset may cause equivalent decrease in Capital or Liabilty Ex. Withdrawn cash
for personal use. With this cash was decreased and at the same time capital was
also decreased. Another example is repaid Bank loan taken earlier. With this
liability in the form of bank Loan was decreased and at the same time Cash
(Asset) was also decreased.
4. Decrease in
one liability may also cause increase in another liability or capital Ex. Paid
Creditor Rs 50000 thru cheque from Bank of Maharastra OCC account. With this
One liability in the form of Creditor was decreased and at the same time Bank
loan (Liability)was increased Another example is repaid bank Loan bringing additional
capital. With this Liability (Bank Loan) was decreased and at the same
time Capital was increased.
Let us have look on the natural
positions of accounts
·
Capital Always shows Credit Balance
·
Liability Always shows Credit Balance
·
Income
and Gains Always
shows Credit Balance
·
Assets Always
shows Debit Balance
·
Expenses
and Losses Always shows Debit Balance
If you want to close the accounts or
decrease its value you have to reverse their position. Explanation
Cash and Bank
accounts always show debit balances. In the instances of every receipt
Cash and Bank
accounts will be debited and while making payments we will credit them
All Assets
natural positions are Debit. So while acquiring new assets the new asset will
be debited and while at the time of Finalization of accounts all Tangible
assets will be credited with depreciation amount to transfer the expenditure on
Assets in the shape of wear and tear to Profit and Loss a/c.
You know very
well the supplier account will be credited while getting supply from him on
credit. We will debit his account while making payment. Thru this we can
understand it as credit increases the supplier account and debit decreases his
account.
All the
customers will be debited while making a supply to them on credit. We will
credit their account while receiving payment. So thru this narration we can
come to an understanding as Debtors account will be increased with Debit and
will be decreased with a Credit.
Capital account naturally will be having Credit balance so
while bringing capital investment into the business capital will be credited
and while drawing cash or goods for his personal need his account will be
debited with the amount. So thru this we can understand it as Credit increases
and Debit decreases the value.
Why should you choose accounting job?
Rewarding: Careers in accounting and
finance are associated with very high salaries. A recent National Institute
study identified accounting as the most lucrative of all degree courses in
terms of graduates’ lifetime earning capacity The
role of an accountant can be considered as an indispensable part in many
businesses. Their role can play in smaller accountancy firm to big corporations
and even government offices. Accounting or accountancy is 1 of the best
careers available today. Accountants are always on demand and the fields or
jobs that you can choose from are huge in number. That means that there are a lot of opportunities
for having a career as an accountant and you also have a lot of career choice
to choose from. Numerous benefits, ranging from major
to minor, may be obtained from an accounting career. One is great pay; Pay is a
big concern for many, especially with the continuing financial crisis. However,
the level of accounting knowledge also determines the rate of pay. The higher
the degree, the higher the pay of someone who has a career in accounting. And
one more important thing is the duty and the necessity of accountant starts
before the business unit starts its real functioning and alive till its
activities closed
In accounting, you will see that
there are lots of things that you can learn experience and benefit from them. Another major advantage is the intangible experience one
gains from an accounting job which cannot be stolen and become useless
knowledge thrugh out the life time. While in the field of accounting the
accountant will be allowed to observe, interfere in the business activities
which other employees in the same organization cannot
do it. This kind of freedom of movement in the organization will be given only
to the person in accounting department. I will explain you all in clear.
Your knowledge in accountancy will help you
in gaining experience not only in
the field of accounting and also helps to
know a lot about the inner operation of business. It basically means
that it will show you on how to manage and run your own business if time and
money permits you to start your own. I can say one important thing here as that
the role of accountant will be very closer to the management and can see,
observe the way how the business owner is getting financial support in addition
to his capital investment from outside Financial Institutions and banks to
improve and raise the annual turnovers. So if you really want to taste the
above you are immediately required to add practical knowledge to your degree
both in accounting and taxation. To do that you
have to first concentrate in learning the Practical accountancy with
related Taxation thru the teachings from a Tax and Accounting Practitioner. The
Tax and Accounting practitioners only can teach you in such a way that others
cannot do it. Why because the practitioners will teach you thru real original
business documents available with them. Because of this you need not feel shy
to execute the work allotted to you when
get a chance of employment as were already in touch with similar documents at
the time of your training. Since today from the first class of commerce we
learnt the theory of commerce thru Books which were compiled with dummy
entries. It’s not enough to start your career as accountant. You have to start
practicing accounting taking the statutory obligations and the limitations into
consideration.
Some
accountants who were previously employed by a company eventually leave their
employment to establish their own business after they have learned the dos and
don’ts of the trade through the experience they have gained. If you are an
accountant, you will find that even after leaving an accounting job, the
knowledge and experience you have attained will be useful and beneficial to you
in the succeeding events of life. Now a day’s Tax consultants and accounts
practitioners are doing well thru giving part time services to the needy small
business units and are leading happy independent life with handful earnings.
More over engaging some personals as their assistants in the development of
their service
To
conclude ourselves it is the right and wise choice to learn in all corners of
accountancy and start a good beginning as Accountant
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