Accounting record system

Account
It has a format similar to that of capital letter
T.
It has two sides, debit and credit

Debit side Cash Account Credit side
Accounting record system
1. Identifying a
transaction
2. Recording in Journal
3. Posting to Ledger
4. Balancing and closing
ledger accounts
5. Preparing original trial
balance
6. Preparing financial
statements
Steps in
formation of
accounting
records
Illustration - Journalizing
There is purchase of furniture for cash on
January 1, 2011 as per Bill No. 001 from
Modern Furniture for Rs. 1000
Journal Entries in the books of M/s
Date Explanation LF Debit
Amount
Credit
Amount
Jan. 1,
2011
Furniture account (Debit)
Cash Account (Credit)
(Being purchase of furniture for cash
from Modern Furniture as per Bill
No.001.)
10
11
1,000
1,000
Illustration
Date Transaction Rs.
January 1 Shyam starts business with cash 1000
January 8 Buys merchandise in cash and stores them 800
January 10 Receive order for half the merchandise from A 500
January 15 Delivered the merchandise, customer invoiced 500
January 17 Received order for other half of merchandise 500
January 31 Customer A pays 500
The following information relates to Shyams Enterprise for a month
Shyam Enterprises
Jan 1 Cash a/c (debit) 1000
To Capital a/c (credit) 1000

Jan 8 Inventory a/c (debit) 800
To Cash a/c (credit) 800

Jan 15 As a/c (debit) 500
To Sales a/c (credit) 500

Jan 15 Cost of Goods Sold a/c (debit) 400
To Merchandize inventory a/c (credit) 400

Jan 31 Cash a/c (debit) 500
To As a/c (credit) 500

Posting to Ledger Accounts
Illustration - Journalizing
There is purchase of furniture for cash on
January 1, 2011 as per Bill No. 001 from
Modern Furniture for Rs. 1000
Journal Entries in the books of M/s
Date Explanation LF Debit
Amount
Credit
Amount
Jan. 1,
2011
Furniture account (Debit)
Cash Account (Credit)
(Being purchase of furniture for cash
from Modern Furniture as per Bill
No.001.)
10
11
1,000
1,000
Illustration Journalizing and posting
Journal Entries in the books of M/s
Date Explanation LF Debit
Amount
Credit
Amount
Jan. 1,
20X1
Furniture account (Debit)
To Cash Account (Credit)
(Being purchase of furniture for cash
from Modern Furniture as per Bill
No.001.)
10
11
1,000
1,000
Debit
side
Cash
account
Credit
side
By furniture
account
1,000
Debit
side
Furniture
account
Credit
side
To cash
account
1,000
Shyam Enterprises
Jan 1 Cash a/c (debit) 1000
To Capital a/c (credit) 1000

Jan 8 Inventory a/c (debit) 800
To Cash a/c (credit) 800

Jan 15 As a/c (debit) 500
To Sales a/c (credit) 500

Jan 15 Cost of Goods Sold a/c (debit) 400
To Merchandize inventory a/c (credit) 400

Jan 31 Cash a/c (debit) 500
To As a/c (credit) 500

Posting in T accounts
Dr. Cash Account Cr.
Date Explanation Amount Date Explanation Amou
nt
Jan 1 Capital 1,000 Jan 8 Merchandize
inventory
800
Jan 31 Accounts
receivable
500
Dr. Capital Account Cr.
Date Explanation Amount Date Explanation Amount
Jan 1 Cash 1,000
Posting in T accounts
Dr. Account Receivable (Mr. A) Cr.
Date Explanation Amount Date Explanation Amount
Jan 15 Sales Revenue 500 Jan 31 Cash 500
Posting in T accounts
Posting in T accounts
Dr. Merchandize Inventory Account Cr.
Date Explanation Amount Date Explanation Amount
Jan
8
Cash 800 Jan
15
Cost of goods
sold
400
Dr. Cost of Goods Sold Account Cr.
Date Explanation Amount Date Explanation Amount
Jan 15 Merchandize
Inventory
400
Posting in T accounts
Dr. Sales Revenue Cr.
Date Explanation Amount Date Explanation Amount
Jan
15
Account
Receivable
500
Posting in T accounts
Balancing and Closing
Balancing T accounts
Dr. Cash Account Cr.
Date Explanation Amount Date Explanation Amount
Jan 1 Capital 1,000 Jan 8 Merchandize inventory 800
Jan 31 Accounts receivable (Mr. A) 500 Jan 31 By Balance c/d 700
1500 1500
Feb 1 To balance b/f
700
Dr. Capital Account Cr.
Date Explanation Amount Date Explanation Amount
Jan 1 Cash 1,000
Jan 31 To balance c/d 1,000
1,000 1,000
Feb 1 By balance b/f 1,000
Balancing T accounts
Dr. Merchandize Inventory Account Cr.
Date Explanation Amount Date Explanation Amount
Jan 8 Cash 800 Jan 15 Cost of goods sold 400
Jan 31 By balance c/d 400
800 800
Feb 1 To balance b/f 400
Dr Account Receivable (Mr. A) Cr.
Date Explanation Amount Date Explanation Amount
Jan 15 Sales Revenue 500 Jan 31 Cash 500
Jan 31 No balance
500 500
Dr Cost of Goods Sold Account Cr.
Date Explanation Amount Date Explanation Amount
Jan 15 Merchandize Inventory 400
Jan 31 By balance transferred to
income statement
400
400 400
Balancing T accounts
Balancing in T accounts
Dr. Sales Revenue Cr.
Date Explanation Amount Date Explanation Amount
Jan 31 To balance transferred
to income
statement
500 Jan 15 Account Receivable 500
500 500
Preparation of Trial Balance
Preparation of Trial balance
Trial balance as on 31
st
January, 2011
Accounts Debit Credit
Cash 7,00 -
Capital 1,000
Inventory 4,00 -
Cost of goods sold 4,00 -
Sales - 5,00
Total 1,500 1,500
Financial Statements
Dr. Income Summary for the month ended Jan. 31 Cr.
Amount Amount
Cost of goods sold 400 Sales revenue 500
Net Profit 100
Balance Sheet as on Jan. 31
Liabilities and
Owners Equity

Amount

Assets

Amount
Capital 1,000 Cash 700
Profit retained/retained
earnings
100 Merchandise inventory 400
1,100 1,100
1. Identifying a
transaction
2. Recording in Journal
3. Posting to Ledger
4. Balancing and closing
ledger accounts
5. Preparing original trial
balance
6. Preparing financial
statements
Steps in
formation of
accounting
records
Adjusting entries
5. Preparing original trial balance
6. Adjustment entries
7. Closing entries
9. Preparing financial statements
8. Adjusted trial balance
Steps in
formation of
accounting
records
Passing adjusting entry
In the month of august, on 15
th
August,
company paid rent for two months Rs. 6,00.
Accounting period: August, 2012
Journal Entry;
Rent account (debit) 6,00
To cash account (credit) 6,00



Dr Rent Account Cr.
Date Explanation Amount Date Explanation Amount
Aug 15 To cash account 6,00
Adjusting entry
Aug 31 Prepaid Rent a/c (debit) 3,00
To Rent a/c (credit) 3,00
Dr Rent Account Cr.
Date Explanation Amount Date Explanation Amount
Aug 15 To cash account 600 Aug 31 By Prepaid Rent account 3,00
Aug 31 By transfer to income
statement
3,00
6,00 6,00
Dr Prepaid Rent Account Cr.
Date Explanation Amount Date Explanation Amount
Aug 31 To Rent Account 3,00 Aug 31 By balance c/d 3,00
3,00 3,00
Adjusting entries cont..
Expenses paid in advance
Example subscription money paid in advance

Entry:
Prepaid Subscription a/c (asset)
To Subscription a/c (expense reduced)


Adjusting entries cont..
Incomes due/accrued but not received
Example Interest receivable.

Entry:
Interest receivable a/c (Asset)
To Interest a/c (Income)


Adjusting entries cont..
Expenses due but not paid.
Example Rent expense due but not paid

Entry:
Rent a/c (expense)
To Rent payable a/c
(liability)


Adjusting entries cont..
Incomes received in advance
Example Commission received in advance

Entry:
Commission received a/c (income reduced)
To Pre-collected Commission a/c
(liability)


Adjusting entries cont..
Asset decreases due to usage recognized as
expense
Example Depreciation on fixed assets.

Entry:
Depreciation a/c
To Accumulated depreciation a/c




Implicit adjustments
In the month of august, company paid
rent for two months (company closes
accounts on monthly basis)
Company raised loan form bank Rs. 4,000
@ 9% interest p.a.
Equipment purchased costing Rs. 10,000
with an expected life of 10 years.