Accounting Recording System

&
Corporate Accounting

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How to learn Accounting
Recording System ?

 Accounting is best learned by doing.

 Debit-credit mechanism provides an
analytical framework.

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The Accounting Equation and T-Accounts

Assets = Liabilities + Equity

Debits Credits Debits Credits Debits Credits
+ - - + - +

Debits:
INCREASE Assets and DECREASE Liabilities and Equity
Credits:
DECREASE Assets and INCREASE Liabilities and Equity

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The Equity T-Accounts

Total Contributed Retained

Equity = Capital + Earnings
Debit Credit Credit Debit Credit
s s Debits s s s
- + - + - +

Expenses are DEBITS Revenues are CREDITS

because they REDUCE Net because they INCREASE
income and Retained Net income and
Earnings. Retained Earnings.
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Acronyms to Help Remember Debits and Credits

D.E.A.D.
Debits increase Expenses Assets and Dividends

C.L.E.a.R.
Credits increase Liabilities Equity and Revenues

Based on Comprehensive Accounting Equation

A = L + CC +R – E -D

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Balance Sheet Equation and Accounts
 Expanded accounting equality could be written
as: A = L + C + R - (E + D)
Where, A = assets; L= liabilities; C = capital; R = revenue;
E = expenses; and D = dividends
 Rearranging gives: A + E + D = L + C + R
 This transposed equality is the basic
accounting equality
 Quantities on the LHS are normally referred to
as ‘debit’ or ‘Dr. in short
 Quantities on the RHS are known as ‘credit’,
or ‘Cr.’ in short
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Balance Sheet Equation and Accounts
 Accounts belonging to LHS terms, namely,
Assets, Expenses, and Dividends, their basic
accounting character being ‘debit’ have debit
balances
 For these accounts: Debits - Credits ≥ 0
 Similarly, in the case of accounts relating to
terms on the RHS of the equality: Liabilities,
Capital, and Revenues, normally have credit
balances
 For these accounts: Credits - Debits ≥ 0
 In any case, equal to zero implies no balance
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Information Accumulation Process
 In all accounts representing LHS terms, all
increases of those items are debited and all
decreases are credited in the same account
 In case of accounts representing RHS,
increase with respect to an item is credited
and decreases are debited to that account
 Actual balances as of a point in time would be
shown by the net difference
 The terms ‘debit’ and ‘credit’ in accounting
has no more practical significance than ‘left’
and ‘right’ of an account
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Steps in Formation of Accounting
Records

Identify Analyze and Recording

Transaction Classify the in Journal
Transaction

Transfer Ledger
Entries Posting

Financial Adjustment Preparing

Statements Entries Worksheet
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Account
 An account is a comprehensive and classified record of
transactions affecting one person, one kind of property or one class
of gains or losses arising out of expenses or incomes.
 Since the transactions can either increase or decrease these items
an account is structured into two parts like a capital T, denoted by
Debit on the LHS and Credit on the RHS
 Accounts are titled denoting the nature of information accumulated
in them viz. “cash account” or “receivable account” and so on
Debit Cash Account Credit

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 Classification of Accounts
Accounts Classified

Assets Liabilities Capital Income Expense

Ex. Land, Ex. Loans, Ex. Share Ex. Sales, Ex. Salary,
Stock, Cash Creditors, Capital, Interest Rent, Power
Bills Payable Proprietor’s A/c Earned

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Classification of Accounts
 The basic accounting equation reminds us that the accounts
can be divided into the following five broad categories:
 Assets or the resources which a firm is enjoying
 Liabilities or the obligations of the firm towards outsiders
 Capital or the amount invested by the owners, the increase in
such capital and the decreases in it.
 Income or expenses of the business affect the increase and
decrease in capital. Therefore, two more forms of account
 Incomes or the amounts earned by the business
 Expenses or the amounts expended by the business
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Indentify each one them as
either A, L, CC, R, E and D
 Interest received
 Gold
 Inventory
 Unsecured Loan
 Dividend paid
 Accrued salaries
 Debtors

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Indentify each one them as
either A, L, CC, R, E and D
 Interest received  Revenue
 Gold  Asset
 Inventory  Asset
 Unsecured Loan  Liability
 Dividend paid  Dividend
 Accrued salaries  Liabilities
 Debtors  Assets

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Correct following statements
1. Machinery is a liability
2. Sundry creditors represent an asset
3. Investment is a liability
4. Salary payable to employees is an asset
5. Discount allowed is an income
6. Capital is an asset
7. Discount received is an expense
8. Stock is an asset

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Correct following statements
1. Machinery is a liability-NO ASSET
2. Sundry creditors represent an asset-NO
CURRENT LIABILITY
3. Investment is a liability-NO ASSET
4. Salary payable to employees is an asset-
NO CURRENT LIABILITY
5. Discount allowed is an income-NO EXP
6. Capital is an asset-NO CC/LIABILITY
7. Discount received is an expense-NO REV
8. Stock is an asset-YES
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Rules for Debit and Credit

Accounting Equation

Assets = Liabilities + Shareholders Equity

Or
Assets = Liabilities + (Contributed Capital + Retained
Earnings – Dividends + Revenue – Expenses )

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Accounting Process……
 The Journal
 The Ledger/Subsidiary books
 Trial Balance
 Adjustments
 Profit and Loss Account
 Balance Sheet

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Illustration
Jan. 1 Sales for Cash Rs.3,000
Jan. 1 Purchases for Cash 1,000
Jan. 3 Rent paid in Cash 500
JOURNAL
Date Explanation Ref Dr. Cr.
Jan 1, 20X1 Cash (Debit) Sales 3,000 3,000
Sales (Credit) Invoice
(Being cash sales) no: 001
Jan 1, 20X1 Purchases (Debit) Purchase 1,000 1,000
Cash (Credit) Invoice
(Being cash purchases) no: 101
Jan 3, 20X1 Rent expense (Debit) Payment 500 500
Cash (Credit) Voucher
(Being rent paid in cash) no: 011
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Ledger Posting in T Accounts
Dr. Sales Account Cr.
Date Explanation Ref. Amount Date Explanation Ref Amount
Jan 1 Cash 3,000

Dr. Cash Account Cr.

Date Explanation Ref. Amount Date Explanation Ref Amount
Jan Sales 3,000 Jan 1 Purchases 1,000
1 Jan 2 Rent expense 500
Dr. Purchases Account Cr.
Date Explanation Ref. Amount Date Explanation Ref Amount
Jan Cash 1,000
1Dr. Rent Account
Cr.
Date Explanation Ref. Amount Date Explanation Ref Amount
Jan Cash 500 20
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Journal vs. Ledger
Points Journal Ledger
Nature Book of prime entry Book of final entry
Style Chronological record Analytical Record
Process Recording here is Recording here is known
known as 'journalizing' as 'posting'

Unit Unit of classification of Unit of classification of

data is transaction data is account
Final Accounts cannot Final Accounts maybe
Objective be prepared from this compiled with this
alone
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Trial Balance/Worksheet …
 Helps in systematically finalizing an entities
financial statement from its ledger account
balances
 Serves two purposes:
 Checks for arithmetical errors
 Results in clear allocation of individual
accounts to either of the two financial
statements viz., Balance Sheet or Profit &
Loss Account

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Suspense Account
 An account maintained till the trial balance is not matched
 A residual account to facilitate in the process of making the
books accurate and upholding the duality principle of accounting
transactions
 Amounts relating to all the errors that affect the trial balance are
transferred to this account
 As and when the errors are located, a corrective entry is passed
in the respective account with a corresponding entry to the
suspense account
 When all the errors are located and rectified, the balance in the
suspense account becomes nil
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An example…..

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An example…..

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Write the appropriate column the names of
the accounts to be debited and credited

Debit Credit
Issued shares for cash
Paid salary expense
Purchased an auto on credit
Received cash for professional services rendered
Paid a creditor
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 Debit Credit
Issued shares for cash Cash Capital
Paid salary expense Salary Cash
Purchased an auto on credit Auto Accounts Payable
Received cash for professional services rendered Cash Fee income
Paid a creditor Accounts Payabl
Cash e
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Fine-tuning Financial
Statements

Adjustments

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Adjustments
 Depreciation
 Amortization
 Closing Inventory
 Bad Inventory (Dead Stock)
 Bad debts
 Reserves

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Depreciation
 Various methods of depreciation
 No depreciation for Land
 No direct relation to cash outflows
 Higher depreciation amounts to cover
for Obsolescence
 Appreciation not be considered

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Amortization
 Depreciation on intangible
expenditure is called Amortization
 Intellectual Property such as
Goodwill, Patents, Design,
Trademarks, Copyrights etc
 Start-up costs such as Preliminary
expenditure, R&D, Market
development cost

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Closing Inventory
 As per AS-2
 Various methods of valuation
 FIFO
 LIFO
 Weighted Average

 Cost or Market which ever is low

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Bad Inventory
 Defective inventories, spoilages,
breakages, unserviceable and
obsolete items are identified from
time to time
 Reduced from inventory balances and
treated as cost in the period in which
such losses are identified

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Bad Debts
 Deals with the customer does not
paid
 The value of receivables is reduced in
B/S and such reduction is matched by
inclusion as Bad Debt in P&L

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Reserves
 Reserves on the B/S reflect the fact
that a part of the business assets
have been financed by past profits
(plough backs) and not by accessing
share capital or loans.
 It is healthy sign.

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Below-the-line adjustments
 It includes effects related to prior years (losing
an old court case), extraordinary losses or
expenses (eg. Expenses due to merger etc.)
 Tax effects relating to earlier years etc.
 Hints
 Not mix up these issues with current
operating expenses
 To convey the progression of numbers from
PAT to transfer to RE

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Further to do…………
 Read Accounting Policies or Notes to
Accounts in an Annual Report

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Thank You

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