Saturday 26 April 2014

Basics of Accounting for beginner Students

FUNDAMENTALS OF ACCOUNTING

   There are three types of accounts basically in the accounting, all the accounting entries shall be based on this accounts, these account types decides the nature of account and based on such nature of account treatment shall be available.
Types of accounts: -
1)      Personal account
2)      Real account
3)      Nominal account
Personal Account: it means names of the persons, firms, companies etc… thus names comes under this account, for example: Ramakrishna, XYZ Ltd, State bank of India, like this….
       According to this account Rule passing entries is:
Ø  Debit the receiver   and
Ø  Credit the giver

   For example:   Rama given cash to Krishna

           Here Rama and Krishna are the personal accounts, Rama is the giver so has to credit and Krishna is the receiver so has to debit their names respectively,
Real account: it means assets and liabilities thus all assets and liabilities come under this account, for example: cash, loan taken from bank, buildings, gold like this….
          According to this account Rule passing entries is:
Ø  Debit the asset  and
Ø  Credit the liability

   For example:  Building purchased by Sairam by acquiring bank loan from SBI
              Here Building is asset and bank loan is liability and comes under real account, thus Building is asset so has to debit it and Bank loan is liability so has to credit it.
Nominal account: it means all the expenditures and income. Expenditure means met by us and couldn’t recover the amount we incurred for this for example we salaries paid to Mr.X

means we paid cash to Mr.X as salary for receiving of his service to us so we couldn’t get back this so it is called expenditure,  In case if you paid advance to Mr.X then you can recover this advance paid amount from Mr.X in any form so it is not the expenditure. Income means we received the amount for providing our service and we need not the repay such amount at all for example in the above example salary paid is expenditure to us but it is income to Mr.X because of he received cash for the purpose providing his service and he need not to repay it back, In the case of advance received he has to repay it in any form so it is not the income to him. Thus all expenditures, incomes, losses and profits comes under this account.
               According to this account Rule passing entries is:
Ø  Debit expenditures or loss
Ø  Credit incomes or profits
                 For example: Salary paid to Mr.X
                                       Commission received from Mr.Y
                           Here Salary is expenditure (couldn’t recover) and commission is Income (need not to re-pay) thus Salary has to debit and Commission has to credit.

Before passing of entries followings are to be considering first:
1)      In whose books of account we writing and passing the entries
2)      The above rules shall be apply in the point of view of the writing of books of accounts party
3)      Find of the transaction and items comes under which account of the above types
4)      Apply the rule for the type of the account.

                 To construct any number of floors to a building we require the base pillar and beams in the earth or with attaching the earth like this to pass any type of entries in the accounts the passing of entry is depending on the above rules only without base beam you couldn’t construct even a single floor as well as with out applying above rule we couldn’t pass any simple entry.   One word we can say without base beam we didn’t have building as well as with out above rules we didn’t have accounting.
 Before passing entries we shall consider the nature of transaction, type of accounts involved and rule to pass the entry.

For your understanding following examples:
                             Assume we making the entries in the books of Rama
1)      Rama purchased goods from Krishna
  
      The entries are passing in the books of Rama so we need not to consider the name of the Rama because of while entries making in the books of Rama means all the entries in the books of Rama or related to Rama and transacted by him.

           Here Purchased goods (goods means some items so it is the asset) is asset so it comes under Real account and Krishna is the name so comes under Personal account.

      According to the Real account rule Assets shall be Debit  and according to the Personal account rule giver shall be credit thus  entry for the above transaction is

                 Purchased goods (Purchases) a/c  dr
                          To Krishna a/c
Note: If we purchased any items for the purpose of business means re-sale then such items is called Goods means Purchased goods means it is purchases to the trader so we uses purchases a/c instead of goods a/c while preparing of accounts.

Note: for your better under standing I provided detail explanation to the first example and this explanation may not be available for the next examples if any body required details explanation for any transaction then send request I will explain you.

2)      Cash/cheque received from Krishna

              Cash/Bank  a/c dr
                   To Krishna a/c


3)      Rama purchased goods from Krishna for cash

               Purchases a/c  dr
                    To Cash a/c

            Note: Here goods purchased by paying cash from Krishna means we didn’t have any due to Krishna so we need not to consider his account separately directly we can post to the cash account.

4)      Stationery purchased from Ramaiah & Co for cash
                               Stationery a/c dr
                                         To cash a/c
                 Like this number of examples can provide, but providing of such more example is very critical here,  so those who have any doubt regarding your transaction then provide the details of your transaction I will explain you for your clarification as level my best of knowledge.

Types of Entries:
                            Basically there are two types of entries  1) General Entries   and 2) Compound Entries.

1)      General Entries :   This entries contains only one debit a/c or credit a/c, means for a single transaction effects only one debit a/c and one credit a/c such entries called General Entries

                For example:      Rama Purchased goods from Krishna, it is one transaction in single transaction due to this transaction  Purchase a/c shall be debit and Krishna A/c shall be credit  means only one debit a/c and one credit a/c effected the entry is

                                Purchases a/c  dr
                                     To Krishna a/c

2)      Compound Entries:  This entries contains either of debit or credits more than one or both shall have more than one, means for a single transaction effects more than one debit or credit or both such entries called Compound entries

                 For example:   Rama Purchased goods for cash and cash discount received, here there is two transactions in a single transaction one is purchasing of goods for cash and second one is receipt of Cash discount.  The entry is as follows

                               Purchases a/c   dr
                                       To Cash discount a/c
                                        To Cash a/c

       If you want to pass this as a general entry then you have to pass two entries as follows

                         Purchases a/c   dr
                                To Cash a/c
                                   (For the value of payment of cash only)

                       Purchases a/c  dr
                              To Cash discount a/c
                                  (For the value of cash discount received amount only)


Either you passing above compound entry or general entries the effect of books and financial statements are same but the difference is only in passing of entries and presentation.

Why because we have to use compound entries:      We already discussed compound entries means more than one entry in a single transaction. For special identification and know about there is only one transaction but more than one entry means having only one voucher to know this fact and identification we should be pass compound entry.  In simple words we can say if the two transactions involved in a single voucher then we have to use compound entry.   For example

                           Cash receipt voucher contains the cash received option as well as discount allowed option means one voucher contains two transactions and if you passing two separate entries then this one voucher shall enclose for one entry of transaction evidence and for other  entry how could you enclose the voucher for evidence.   So to get perfection of accounts we have to use compound entry and this entry shall remove our doubts and confusion etc…..

                    In one word we can say compound entry means “ clubbing of more than one transaction and recognizing the same in a single entry shall called as Compound entry”.

              As per my experience many of the accountants and/or others(who making accounting) are not aware of the compound entry and  not using this compound entry, because of due to lack of knowledge.



Types of  Vouchers :

1)      Cash voucher   :   If  a transaction involved a cash transaction then we have to use cash voucher and has to pass cash entry
                   
                   For example : Cash paid to Krishna

2)      Bank Voucher :  If a transaction involved a Bank transaction then we have to use Bank voucher and has to pass Bank entry

                     For example : Cheque received from Krishna

3)      Contra Voucher/Entry:  If a transaction involved only cash and bank transaction means no other party or transaction involved then we have to use Contra Voucher and has to pass Contra Entry
                                     For example:   Cash deposited into the bank
                                                             Cash withdrawn from the bank

4)      Journal Voucher: If a transaction doesn’t involved either cash or bank transaction then we have to use Journal voucher and has to pass Journal entry
                                      For example:  Provision made for bad debts
5)      Purchases voucher:  If a transaction involved the purchase of goods(which shall be considered as inventory of the business) then we have to use Purchases voucher

                                  For example: Goods purchased from krishna/cash

6)      Sales voucher:  If a transaction involved the sale of goods(which shall effects the inventory of the business) then we have to use Sales Voucher

                               For example: Goods sold to Krishna/cash

7)      Receipt Voucher:  If a voucher indicating inwards of cash/cheque it is called as receipt voucher

                             For example: Cash received from Krishna

Note: If the receipt voucher involves Cash then it is called cash receipt voucher and if it involves Cheque then it is called Bank receipt voucher

8)      Payment Voucher: If a voucher indication Outwards of cash/cheque it is called as payment voucher

                             For example: Cheque given to Rama

Note: If the payment voucher involves Cash then it is called cash payment voucher and if it involves cheque then it is called Bank payment voucher

For your better under standing following examples:

1)      Cash paid to Krishna                                      -      Cash voucher, Payment entry                  
2)      Cheque received from Krishna                       -      Bank Voucher, receipt entry
3)      Goods purchased from Hari                           -      Purchases voucher
4)      Goods purchased from Hari for Cash             -     Purchases Voucher
5)      Goods sold to Sai                                           -     Sales Voucher
6)      Goods sold to Sai for cash                              -     Sales Voucher
7)      Vat tax payable for the month provided        -     Journal Voucher

                              

                         Apart of the above there are two other good topics which are “Debit note and Credit note”   Every one should have to learn about this and its uses and importance, I shall try to post regarding this very soon.

                                                OM SAI SRI SAI JAI JAI SAI

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