Accounting Knowledge

The word “Journal” has been derived from French word “jour” which means day. So Journal means daily. The book in which transactions are first of all recorded chronologically together with its short description is called journal. Journal is also called the Book of Original Entry. It is the first stage of accounting cycle. Different names of Journal Ø   Primary book Ø   Journal Ø   Chronological book Ø   Book of original entry Ø   Preliminary book Ø   Book of first entry Ø   Preliminary book Ø   Book of prime entry Ø   Day book Format of Journal What is meant by Journalizing? Recording a transaction in a journal is called journalizing. What is Narration? Short explanation of a transaction written below each entry in the journal is called narration. e.g. Transaction:                       Business started with cash $50000 Journal entry:  

What is Account? The term “Account” is a record in summarized and classified form of all business transactions that take place between particular person and things specified. Account is the root of accounting. Classification of accounts: To record a transaction in the books of account, the first thing to do is to ascertain which account is to be debited and which account is to credited. In order to ascertain this correctly, a clear idea about the different classes of accounts is essential. Accounts may be divided into the following classes. 1. Personal accounts: Accounts relating to persons or firms are called personal accounts personal accounts can take the following forms: i.                     Natural person’s accounts : for examples Ali’s, Aslam’s account etc ii.                   Artificial person’s accounts : for example HabibBanks A/c iii.                 Representative personal accounts : when an account represents certain person or persons then it is called a

Following are the rules of debit and credit:       Assets When Assets increase then Dr. When Assets decreases then Cr. Purchase Building for Cash $ 10000 Here Building (Assets) increase so Dr Building Account and Cash (Assists) decrease so Cr Cash Account Cr.         Expenses When expenses increase then Dr. When expenses decrease then Cr. We can say that When Assets and Expense increase they are debited (Dr.) and when decrease they are credited. (Cr.)         Liabilities When liabilities increase then Cr. When liabilities decrease then Dr.         Capital / Owner’s equity When Capital / Owner’s equity increase then Cr. When Capital / Owner’s equity decrease then Dr.       Revenues   When Revenues increase then Cr. When Revenues decrease then Dr. We can say that When liabilities, capital and revenues increase they then Cr. and when they decrease then Dr.

The person who invests money, Goods or any other Assets in the business, gives time, assumes risk and is entitled wholly to the profit or loss of the business is called owner or proprietor.   Capital or owner's equity The amount of cash, Goods r any other assets which is invested by the owner is called Capital or Owner’s equity. For example Mr.Z the owner invested cash Rs.100000, Goods Rs.80000 and building Rs.50000 in the business . So capital will be Rs.230000.   Drawings                                 The cash or goods taken away by the owner from the business for his personal use are called his drawings. For example capital invested by Mr.Z is Rs.230000 and he withdraws Rs.30000 from business for personal use then Rs.30000 will be treated as drawings.     Debtors or Accounts Receivables Debtors are the persons or customers to whom goods have been sold on credit basis and from whom the business is to receive the money in the near future. For example Business

S.No Financial accounting Cost and Management accounting 1 It is primarily for external purpose It is primarily for internal purpose 2 It provides information about the financial performance and financial position of the business It provides information of ascertainment of cost to control cost and for decision making about the cost. 3 It classified records, presents and interprets transaction in terms of money It classifies, records, presents and interprets in a significant manner the material, labour and overheads cost 4 It shows the profit or loss of the organization It provides the details of cost and profit of each product, process etc 5 Financial statements are prepared for a definite period, usually a year Its reports and statements are prepared as and when required.

1. Financial accounting:               Financial accounting is mainly confined to the preparation of financial statements for the use of outsiders like creditors, Banks and financial institution etc. the chief purpose of financial accounting is to calculate profit or loss and show financial position of the business. 2. Cost accounting: Cost accounting is part of accounting which is concerned with the accumulation and assignment of cost to units of production and departments. It ascertains the cost of unit produced and sold. The process of cost accounting is based on the data provided by financial accounting. 3. Management accounting: Management accounting is that part of accounting which is concern mainly with internal reporting to the managers of a business unit. It relates to planning, control and decision-making which is useful to the management in the discharges of its functions. Management accounting is “forward-looking” and generally includes cost accounting and budge

1.       Maintenance of records of business transaction firs record, then pay, records in useful for decision making etc. 2.       Calculation of profit and loss. 3.       Depiction of financial position 4.       Provide information to the users

Function of Accounting: 1.       Maintain the record: maintaining proper record of all the business transaction. 2.       Protection of business properties 3.       Legal requirements 4.       Communication of results Q: what are the characteristics of modern accounting? 1.       Accounting involves recording of financial activities which accompany the complexity and uncertainty of business. 2.       Accounting systems are prepared on cash basis or accrual basis of accounting 3.       Accounting is historical in nature. Q: State the advantages and limitation of accounting? Advantages of Accounting:                     1.       It provides information useful for making economic decisions. 2.       It provides information useful to investors and creditors for predicting, comparing and evaluating 3.       It provides information useful in judging the management’s ability to utilize enterprise resources effectively. 4.       It provides factual and interpretat

1. At first we will see, which accounts are affected by the transaction. For example “Purchased furniture for cash Rs. 50000. Two accounts are involved.  Furniture A/c  Cash A/c 2. Then we will see to which head these accounts belong. From the above example, both accounts are from the head “Assets”. 3. Then we will see, they have increased or decreased. From the above example: Furniture A/c has increased and cash A/c has decreased, that shows: One asset is increasing and the other is decreasing. 4. Then by applying rules of Debit and Credit, we will enter the transaction. Furniture A/c is increasing. When Asset increases it is debited (Dr.). As furniture is an asset so it will be debited. Cash A/c is decreasing. When asset decrease they are credited (Cr.) 1. Furniture A/c Cash A/c 2. Asset Asset 3. Increase Decrease 4. Debit Credit So entry will passed as Furniture A/c 50000 To Cash A/c 50000