CHAPTER
2
ACCOUNTING PROCESS
UNIT -1 BASIC ACCOUNTING PROCEDURES –
JOURNAL ENTRIES
LEARNING OUTCOMES
After studying this unit, you will be able to:
♦ Understand meaning and significance of Double Entry System.
♦ Familiarize with the term ‘account’ and understand the classification
of accounts into personal, real and nominal.
♦ Note the utility of such classification and sub-classifications.
♦ Understand how debits and credits are determined from transactions
and events.
♦ Observe the points to be taken care of while recording a transaction
in the journal.
© The Institute of Chartered Accountants of India
, 1.
2.2 ACCOUNTING
2
UNIT OVERVIEW
•All documents in records which contain financial records and
Source Documents act as evidence of transactions.
•Purchase day book, Cash book, Sales day book and Purchases
Books of original
return book
entry and Ledger
•Accounts where information relating to a particular
Accounts asset/liability, capital, income and expenses are recorded.
•It contains the totals from various ledger accounts and act as
Trial Balance preliminary check on accounts before producing financial
statements.
Accounts
Personal Impersonal
Accounts Accounts
Artificial Real Nominal
Natural Representative
(Legal) Accounts Accounts
1.1 DOUBLE ENTRY SYSTEM
Double entry system of accounting is more than 500 years old. “Luca Pacioli” an Italian friar &
mathematician published Summa de Arithmetica, Geometria, Proportioni, et Proportionalita
(“Everything about Arithemetic Geometry and proportions”). The first book that described a
double entry accounting system. Double entry system of book-keeping has emerged in the
process of evolution of various accounting techniques. It is the only scientific system of
accounting. According to it, every transaction has two-fold aspects–debit and credit and both
the aspects are to be recorded in the books of accounts. Therefore, in every transaction at
least two accounts are effected.
For example, on purchase of furniture either the cash balance will be reduced or a liability to
the supplier will arise and new asset furniture is acquired. This has been made clear already,
the Double Entry System records both the aspects. It may be defined as the system which
recognises and records both the aspects of transactions. This system has proved to be
© The Institute of Chartered Accountants of India
, ACCOUNTING PROCESS 2.3
systematic and has been found of great use for recording the financial transactions for all kind
of entities requiring use of money.
1.2 ADVANTAGES OF DOUBLE ENTRY SYSTEM
This system affords the under mentioned advantages:
(i) By the use of this system the accuracy of the accounting work can be established,
through the device of the trial balance.
(ii) The profit earned or loss incurred during a period can be ascertained together with
details.
(iii) The financial position of the entity or the institution concerned can be ascertained at
the end of each period, through preparation of the financial statements.
(iv) The system permits accounts to be kept in as much details as necessary and, therefore
provides significant information for the purpose of control and reporting.
(v) Result of one year may be compared with those of previous years and reasons for the
change may be ascertained.
In view of the above, the advantages of double entry system has been used extensively in all
countries.
1.3 ACCOUNT
We have seen how the accounting equation becomes true in all cases. A person starts his
business with say, ` 10,00,000 as capital with corresponding balance of cash ` 10,00,000. For
example, transactions entered into by the entity will alter the cash balance in two ways, one
will increase the cash balance and other will reduce it. Payment for goods purchased, salaries
paid and rent expense paid, etc., will reduce the cash balance whereas sales of goods for cash
and collection from customers will increase it.
We can change the cash balance with every transaction but this will be cumbersome. Instead
it would be better if all the transactions that lead to an increase are recorded in one column
and those that reduce the cash balance in another column; then the net result can be
ascertained. If we add all increases to the opening balance of cash and then deduct the total
of all decreases, we shall know the closing balance. In this manner, significant information will
be available relating to cash.
The two columns which we referred above are put usually in the form of an account, called
the ‘T’ form. This is illustrated below by taking imaginary figures:
© The Institute of Chartered Accountants of India
, 1.
2.4 ACCOUNTING
4
CASH
Particular Increase Particular Decrease
(Receipt) (Payment)
` `
Opening Balance (1) 10,00,000 (7) 1,00,000
(2) 2,50,000 (8) 3,00,000
(3) 2,00,000 (9) 2,00,000
(4) 5,00,000 (10) 5,00,000
(5) 1,35,000
(6) 4,00,000 (11) 12,00,000
New or Closing Balance 1,85,000
24,85,000 24,85,000
Since, each T-account shows only amounts and not transaction descriptions, we record each
transaction in some way, such as by numbering used in this illustration. However, one can use
date also for this purpose.
What we have done is to record the increase of cash on the left hand side and the decrease
on the right hand side; the closing balance has been ascertained by deducting the total of
payments, ` 23,00,000 from the total of the left - hand side. Such a treatment of receipts and
payments of cash is very convenient.
Here we talked about only one account namely cash, now let us see how to make T-accounts
when assets as well as liabilities are effected from a particular transaction.
Now, let us take some more examples:-
Transaction 1:
Initial investment by owners ` 25,00,000 in cash.
This will effect two accounts namely cash and capital. The asset cash increases and the stock
holders’ equity paid up capital also increases.
CASH
Increase Decrease
(1) 25,00,000
© The Institute of Chartered Accountants of India
2
ACCOUNTING PROCESS
UNIT -1 BASIC ACCOUNTING PROCEDURES –
JOURNAL ENTRIES
LEARNING OUTCOMES
After studying this unit, you will be able to:
♦ Understand meaning and significance of Double Entry System.
♦ Familiarize with the term ‘account’ and understand the classification
of accounts into personal, real and nominal.
♦ Note the utility of such classification and sub-classifications.
♦ Understand how debits and credits are determined from transactions
and events.
♦ Observe the points to be taken care of while recording a transaction
in the journal.
© The Institute of Chartered Accountants of India
, 1.
2.2 ACCOUNTING
2
UNIT OVERVIEW
•All documents in records which contain financial records and
Source Documents act as evidence of transactions.
•Purchase day book, Cash book, Sales day book and Purchases
Books of original
return book
entry and Ledger
•Accounts where information relating to a particular
Accounts asset/liability, capital, income and expenses are recorded.
•It contains the totals from various ledger accounts and act as
Trial Balance preliminary check on accounts before producing financial
statements.
Accounts
Personal Impersonal
Accounts Accounts
Artificial Real Nominal
Natural Representative
(Legal) Accounts Accounts
1.1 DOUBLE ENTRY SYSTEM
Double entry system of accounting is more than 500 years old. “Luca Pacioli” an Italian friar &
mathematician published Summa de Arithmetica, Geometria, Proportioni, et Proportionalita
(“Everything about Arithemetic Geometry and proportions”). The first book that described a
double entry accounting system. Double entry system of book-keeping has emerged in the
process of evolution of various accounting techniques. It is the only scientific system of
accounting. According to it, every transaction has two-fold aspects–debit and credit and both
the aspects are to be recorded in the books of accounts. Therefore, in every transaction at
least two accounts are effected.
For example, on purchase of furniture either the cash balance will be reduced or a liability to
the supplier will arise and new asset furniture is acquired. This has been made clear already,
the Double Entry System records both the aspects. It may be defined as the system which
recognises and records both the aspects of transactions. This system has proved to be
© The Institute of Chartered Accountants of India
, ACCOUNTING PROCESS 2.3
systematic and has been found of great use for recording the financial transactions for all kind
of entities requiring use of money.
1.2 ADVANTAGES OF DOUBLE ENTRY SYSTEM
This system affords the under mentioned advantages:
(i) By the use of this system the accuracy of the accounting work can be established,
through the device of the trial balance.
(ii) The profit earned or loss incurred during a period can be ascertained together with
details.
(iii) The financial position of the entity or the institution concerned can be ascertained at
the end of each period, through preparation of the financial statements.
(iv) The system permits accounts to be kept in as much details as necessary and, therefore
provides significant information for the purpose of control and reporting.
(v) Result of one year may be compared with those of previous years and reasons for the
change may be ascertained.
In view of the above, the advantages of double entry system has been used extensively in all
countries.
1.3 ACCOUNT
We have seen how the accounting equation becomes true in all cases. A person starts his
business with say, ` 10,00,000 as capital with corresponding balance of cash ` 10,00,000. For
example, transactions entered into by the entity will alter the cash balance in two ways, one
will increase the cash balance and other will reduce it. Payment for goods purchased, salaries
paid and rent expense paid, etc., will reduce the cash balance whereas sales of goods for cash
and collection from customers will increase it.
We can change the cash balance with every transaction but this will be cumbersome. Instead
it would be better if all the transactions that lead to an increase are recorded in one column
and those that reduce the cash balance in another column; then the net result can be
ascertained. If we add all increases to the opening balance of cash and then deduct the total
of all decreases, we shall know the closing balance. In this manner, significant information will
be available relating to cash.
The two columns which we referred above are put usually in the form of an account, called
the ‘T’ form. This is illustrated below by taking imaginary figures:
© The Institute of Chartered Accountants of India
, 1.
2.4 ACCOUNTING
4
CASH
Particular Increase Particular Decrease
(Receipt) (Payment)
` `
Opening Balance (1) 10,00,000 (7) 1,00,000
(2) 2,50,000 (8) 3,00,000
(3) 2,00,000 (9) 2,00,000
(4) 5,00,000 (10) 5,00,000
(5) 1,35,000
(6) 4,00,000 (11) 12,00,000
New or Closing Balance 1,85,000
24,85,000 24,85,000
Since, each T-account shows only amounts and not transaction descriptions, we record each
transaction in some way, such as by numbering used in this illustration. However, one can use
date also for this purpose.
What we have done is to record the increase of cash on the left hand side and the decrease
on the right hand side; the closing balance has been ascertained by deducting the total of
payments, ` 23,00,000 from the total of the left - hand side. Such a treatment of receipts and
payments of cash is very convenient.
Here we talked about only one account namely cash, now let us see how to make T-accounts
when assets as well as liabilities are effected from a particular transaction.
Now, let us take some more examples:-
Transaction 1:
Initial investment by owners ` 25,00,000 in cash.
This will effect two accounts namely cash and capital. The asset cash increases and the stock
holders’ equity paid up capital also increases.
CASH
Increase Decrease
(1) 25,00,000
© The Institute of Chartered Accountants of India
