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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