MODULE 1
INTRODUCTION
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What is an accounting transaction / entry?
1. A commercial event involving monetary payment or receipt.
Example: Purchase Payment / Sales receipt, Rent / salary paid etc.
2 Amounts due to be paid or received.
3 Besides, there are adjusting entries, rectification entries opening and
closing entries.
( Point number 3 will be explained in detail later ; For now focus on
Point number 1 and 2 only )
Only an accounting transaction will be entered in Books of accounts.
For example. When a person is appointed as an employee,there is no
obligation to pay immediately. Payment of salary will be made on the
due date of payment of only. So accounting entry will be generated
only on that day when payment is actually made or when it falls due.
JUST REMEMBER THAT :
!) The owner / proprietor is different from the Business. When the
owner invests money in the business, the business, being a separate
entity, has to return the money to the owner. Hence the capital
invested is a liability for the business.
2) We always think from the business point of view and not from the
owner’s point of view when we write the books of accounts. That is, for
the owner, the investment in his business is an asset. But, for the
business, it is a liability.
So, simply imagine that you are an accountant in the business, and not
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the owner of the business when you do accounting.
What is the concept of double entry in accounting Transaction?
We have learnt above, what is an accounting transaction.
Now. every accounting transaction has a dual aspect. For Example,
the owner invests money and starts his business. Now look at it from
the business point of view. The business is actually receiving the Cash
from the owner. At the same time, this amount is a liability for the
business and has to be returned to the owner at some point of time in
the future. So the dual aspect is Cash is received and a liability is
created for a single transaction.
Next Example : Payment of rent , Salary etc:
Cash Is paid { cash reduces} and at the same time, the said expense as
rent or salary increases.
Another Example : A sale is made on credit. That is, payment will be
received later. So cash is NOT received now. So what is the dual
aspect? Sale increases; and at the same time amount receivable also
increases.
Yet another example : Purchase of Machinery and amount paid by
cheque. Here, an asset ( machinery) increases and the amount at bank
reduces.
Hence just remember that, every accounting transaction has a DUAL
ASPECT. This is the basis of DOUBLE ENTRY in accounting transaction.
What actually is debit and credit?
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Now, this is something that has confused many. But it is very simple.
Just remember :
DEBIT TO WRITE IN THE LEFT SIDE
CREDIT TO WRITE IN THE RIGHT SIDE
All of you are familiar with NEWTON’S THIRD LAW OF MOTION.
Now, hear about the Fundamental Law of Accounting :
For EVERY Debit there is an equal Credit
Entering the accounting transaction in books of accounts:
We now come to the main part of our discussion: How do we go about
accounting or writing the transactions in books?
Our Basic course in accounting consists of 5 parts :
1. The Journal
2. The Ledger
3. Trial Balance
4 Statement of Income or the Profit and Loss a/c
5 Balance Sheet
We Start with the Journal. Transactions are first entered in the
Journal. Transactions are arranged Datewise in the Journal, from the
beginning of the year to the end of the year as and when they occur.
Page | 4 Suppose, on 1st jan we have made the following 3 transactions:
Purchased Stock worth Rs. 40000 ; Paid transportation Rs. 600.
Paid Salaries Rs. 15000.
These are entered datewise in the order of occurance.
However, we require to analyse the transactions category wise or
account wise. For Example we want to know the following:
1} What was our total purchases/ sales during the year?
2} What was the total Salaries paid for the year?
3} How much do we have to collect from our customers?
4} What is our cash balance or Balance at bank on any given date?
Questions such as these cannot be answered by studying the Journal.
To answer these questions, we post or transfer the Journal entries to
Ledger . So what exactly is a ledger?
Ledger is a Book consisting of a large number of individual accounts.
Only by studying the ledger, we can get the answers to the above
questions. In the ledger, the transactions are entered accountwise and
datewise. Whereas in the journal, they are entered datewise only.
Every account in the ledger has to be totalled and balanced. This will be
explained in detail in our practical problem.
Next is the Trial Balance. The Trial Balance is simply a list of all account
Balances found in the ledger book. The accounts may have either a
debit or credit balances ( Left or Right Excess). Due to the fundamental
Page | 5 law of accounting as mentioned in page 3 above, this List of Debit And
credit balances must match. That is, both the sides of the Trial Balance
the left and the right should be equal.
From the Trial Balance, we extract the Statement of Income or more
commonly called the Profit and Loss Account. This account will tell us
whether the firm has made profit or loss for a given period. This Profit
or Loss is then transferred to the next statement, THE BALANCE SHEET.
The BALANCE SHEET is the final statement we prepare from the Trial
balance. It displays all the assets and Liabilities of the business at the
end of a period under review.
Basic Accounting process is thus displayed as follows :-
JOURNAL
Transfer Journal to ledger or posting to ledger
ledger
Trial Balance
Profit and loss A./c The Balance Sheet
{Assets & Liabilities}