unit-4-accounting-process-and-rules

Unit-4 Accounting Process and Rules

This unit explains stages in accounting process, different classes of accounts, the principle of double entry, and the rules of debit and credit.

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Ram had the following transactions. Determine that accounts to be debited and credited:                                                                                                                    

a)Command business with cash                                                                        1,00,000

b)Purchased goods for cash                                                                               15,000

c)Paid for advertisement                                                                                      600

d)Bought goods from P & Co. on credit                                                             20,000

e)Sold goods for cash                                                                                          6000

f)Sold goods to Z on credit                                                                                 12,000

g)Paid commission                                                                                                900

h)Paid salaries                                                                                                        8000

i)Paid rent                                                                                                               600

j)Loan taken from Hirala                                                                                        50,000


From the following transactions determine the accounts affected, classify them and state whether it is to be debited or credited.                                                                                              Rs.

a) Purchased typewriter for cash                                                                                    5,000

b) Purchased furniture from R & Co. on credit                                                               50,000

c) Interest received                                                                                                         300

d) Paid wages                                                                                                                 800

e) Received cash from A                                                                                                 2,000

f) Additional capital introduced into the business                                                            5,000

g) Paid cash to B                                                                                                             1,500

h) Paid carriage                                                                                                               200

i) Purchased goods from F & Co. on credit                                                                    12,000

j) Sold goods for cash                                                                                                     1,400


What do you understand by the principle of double entry? Give the rules of debit and credit with suitable examples.

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Learning Pundits Content Team

Written on Apr 17, 2019 4:26:36 PM

Every business transaction involves a transfer and as such consists of two aspects: (i) the receiving aspect, and (ii) the giving aspect.

It is necessary to note that these two aspects go together, as receiving necessarily implies giving and vice versa.

For example, let us consider a transaction where machinery is purchased for cash. In this case, the receiving , aspect is machinery (as machinery comes in) and giving aspect is cash (as cash goes out).

Similarly, in a transaction where wages are paid to workers, the receiving aspect is the service of the workers and the giving aspect is cash.

The receiving and giving take place between two parties or the accounts representing those parties. 

Thus, in the first example discussed above, from the point of view of the business, Machinery Account is receiving the benefit and Cash Account is giving the benefit.

In the second example, Wages Account is receiving the benefit in the for of service and Cash Account is giving the benefit.

These two aspects are represented in every account by the terms 'Dr.' and 'Cr.'. The 'Dr.' represents the receiving aspect and the 'Cr.' the giving aspect. The record of any business transaction will complete only when both of these transactions are recorded.

This recording of the two aspects of each transaction is known as 'Double Entry' and the system is called 'Double Entry System'.

Every transaction affects two accounts and according to Double Entry system entries will be made in both of them on the debit side (left hand side) in one account and on the credit side (right hand side) in the other.

In case of the first example (machinery purchased for cash), entries will be made on the debit side of Machinery Account and the credit side of Cash Account.

In the case of second example (wages paid to workers), entries will be made on debit side of Wages Account and the credit side of Cash Account.

Hence, for every debit there must be a corresponding credit for an equal amount and vice versa. This is known as the 'Principle of Double Entry, and all business transactions are recorded in books of account according to this principle.

Every transaction affects two accounts and this effect will have to be entered in both of them, on the debit side in one account and on the credit side in the other account.

It is, therefore, necessary to find out which of the two accounts is to be debited and which is to be credited.

For this purpose, one has to first identify the class to which these two accounts belong i.e., personal, real or nominal; and then certain rules known as 'rules of debit and credit' are applied.

These rules are as follows:

For Personal Accounts: The account of the person receiving the benefit , (receiver) of the transaction (from the business) is debited and the account of the person giving the benefit (giver) of the transaction (to the business) is credited.

For Real Accounts: When an asset is coming into the business, the account of , that asset is debited. When an asset is going out of the business, the account of that asset is credited.

For Nominal Accounts: When an expense is incurred or loss suffered, the account representing the expense or the loss is debited because the business receives the benefit thereof. When any income is earned or gain made, the account representing the income or the gain is credited. This is because the business gives some benefit. 

Illustrations

Example 1: Paid cash to Ramesh & Co. Rs. 5,000. In this case the two accounts affected are Ramesh & Co.'s Account and Cash Account. Ramesh & Co.'s Account is a personal account and Cash Account is a real account. Ramesh & Co. has received the benefit (cash Rs. 5,000) from the business and, therefore, it has to be debited as per the first part of the rule for personal accounts 'debit the receiver'. As cash has gone out, Cash Account will be credited according to the second part of the rule for real accounts 'credit what goes out'.

Example 2: Received cash from Ajay Rs. 1,000. In this case Cash Account and Ajay's Account are the two accounts affected. Cash Account is a real account and Ajay's account is a personal account. As cash has come in, Cash Account will have to be debited according to the first part of the rule for real accounts 'debit what comes in': Ajay has given the benefit (cash Rs. 1,000) to the business and, therefore, his account will have to be credited as per the second part of the rule for personal accounts 'credit the giver'

Example 3: Paid rent Rs. 1,000. In this case, the accounts affected are Rent Account and Cash Account. Rent Account is a nominal account and Cash Account is a real account. As per the first , part of the rule for nominal accounts, 'debit expenses and losses', Rent Account will have to be debited as it is an expense to the business. As cash has gone out, Cash Account will have to be credited according to the second part of the rule for real accounts 'credit what goes out'.

Example 4: Received Rs 400 as commission. In this case, Cash Account and Commission Account are the two accounts affected. Cash Account is a real account and Commission Account is a nominal account. As cash has come in, Cash Account will have to be debited according to the first part of the rule for real accounts 'debit what comes in'. As per second part of the rule for nominal accounts, 'credit incomes and gains', Commission Account will be credited as it is an income to the business.



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